The cost and service challenges confronting FedEx Corp. go beyond the two most visible suspects: a meaningful shortage of labor and an unprecedented surge in parcel-delivery volumes. A third, and perhaps just as important a factor, is a persistent imbalance in domestic trailer utilization, especially to and from Southern California.
For every three parcels that leave the region bound for the rest of the FedEx (NYSE:FDX) network, only one package returns, according to Rob Martinez, founder and co-CEO of consultancy Shipware LLC. The same ratio applies to trailer utilization, Martinez said.
For FedEx, the problem surfaces when it tries to reposition unloaded equipment without enough goods to make a return trip cost-effective. It costs about $2,000 just to haul each trailer around, and about 1,500 trailers depart FedEx’s Southern California facilities each day, Martinez reckons. Operating empty trailers thus becomes a cost drain and a service issue, Martinez said.
“It’s a huge problem, and perhaps an even bigger issue than the volume surge relative to service performance,” he said.
Last week, FedEx reported subpar fiscal 2022 first-quarter results due in large part to a $450 million year-over-year spike in costs. The company is experiencing a severe labor shortage that has impaired the timely and efficient flow of goods. About 600,000 of its FedEx Ground unit’s daily U.S. volumes, equaling about 5% of the unit’s total volumes, are being affected by the operational issues, the company said during its analyst call. Shares of FedEx have dropped more than 16% in the past month.
The dilemma for FedEx, and for everyone else that hauls stuff, is not abating. The crush of eastbound goods continues as retailers remain desperate to stock shore shelves depleted by the supply chain’s inability to meet pandemic-related demand, and to replenish low inventories ahead of the holiday buying cycle. The more goods and trailers that head east, the more complicated it becomes to manage the return of empty or near-empty equipment.
The problem is compounded by the shortage of drivers to haul equipment back to the fill points, said Walter Kemmsies, a longtime supply chain management executive and consultant and head of its own firm.
Martinez equated the current situation to a ski run: Slow lift lines combine with fast skiers to the bottom of the slope to result in even longer lift lines.
The situation has reached a point where FedEx is paying some of its large customers that are able to use their own trailers, according to Martinez. The company is also considering using railroads to transport empty trailers, he said. The option would cut per-unit costs by more than one-sixth. However, it would take the assets out of commission as they return to load centers, Martinez said.
“The paradox is that the cheapest solution only serves to make those assets unproductive for a longer time period,” he said.
Archrival UPS Inc. (NYSE:UPS) has not been affected as much because it has more trailers than FedEx, and it has more long-established relationships with the railroads than FedEx, Martinez said.
The overarching dilemma has been the mind-boggling surge in U.S. consumer spending that has overwhelmed the nation’s supply chain’s ability to respond. According to Kemmsies, spending on goods and services, excluding gasoline and autos, is up 20% year-over-year. That is nearly seven times the typical increase in so-called retailer sales.
Supply chains accustomed to operating in static environments with short-term crisis pockets are able to expand capacity by 3% to 5% per year, Kemmsies said. To put the data in historical perspective, consumer spending ex-gasoline and autos has been pulled forward by about six years, according to his estimates.
What’s more, the seasonal lull that typically occurs in the December-February period that allows supply chains to reset did not occur during the 2020-21 period, Kemmsies said. The nation’s shipping and distribution network has been operating in peak conditions for 17 to 18 months, and there is no end in sight, he said.
Meanwhile, international containers, once they are offloaded from ships that have been backed up for weeks at U.S. ports, will then sit at port locations for extended periods because there is no place to put them. Waterfront warehouses and distribution centers are filled to the brim, and vacancy rates in seaport markets are at 2% to 3%, which are all-time lows.
At the same time, retailers struggle with inventory levels that are as low as they’ve been in two to three years. Today’s chaos is not the result of rapid inventory restocking, but of massive consumer spending, Kemmsies said.
Kemmsies, who has worked in the trade for decades, said he’s never seen anything like it. “What is going on out there right now is absolutely insane,” he said.
mrbigr504
FedEx is it’s own worst enemy it seems! And as far as the so called driver shortage, it’s all about economics! You gotta pay for quality professional drivers that will get the job done & won’t wreck up the equipment & raise insurance premiums even to more ridiculous heights! I just recently sold my rig to get back to a local or short haul gig but man these people don’t wanna pay but want you to do everything & then some for these 2’s & fews & that’s not gonna work! Especially since EVERYTHING has gone up in price! Also you have people on jobs that they haven’t a clue about what they’re doing. Like I put an application in for FedEx Freight here in Atlanta & remember I was an independent contractor, so I did have to move my truck around to keep making money right? But the person checking the application is looking at it from a W2 perspective & not a 1099 perspective & kicks that application out. Not looking at what all that experience and endorsements and clean mvr & csa that driver has! And what’s up with these companies that only pay straight time but want you to max out you clock every day? COVID has changed everything and exposed a lot, so folks are doing a reboot on their careers & most have come to know the value of their services. Companies wanna offer all these huge signing bonuses but when that bait runs out, it’s back to the low wage. Just pay me what your supposed to pay me and everything else will fall in line! They wonder why all those container ships are sitting out the ports? Yeah COVID played a part in the beginning but now we’ve got some vaccinations under our belt, that’s excuse is moot! It’s about paying the drivers to move those cans! That’s what I was doing up until I sold my truck here in Atlanta & I tell you there’s waaaay too much pimp’n going on in the intermodal industry! The worst part about it is that when I try to tell the owner operators now the time to get this money right & everything all out on the table, I damn near get into a fight or they just look at me like I don’t know what the hell I’m talking about! Geesh man I swear🤦🏿♂️. But it’s all about the numbers and the gotta pay a person for they’re skills & treating us like you don’t need us but YES YOU DO! Those shelves are getting thin again huh?
Tcs53
This is a stupid article. There always has been an imbalance of freight. That’s why freight companies use the railroad and brokers. Nothing new here. Duh!
Troy Dahm
FedEx is having a problem with expenses after record profits last year and not giving their veteran drivers a raise while Fred Smith gets a $54 million payout. Something doesn’t add up.
Albert F.
This country imports so much from Asia into the West coast and makes so little on the old industrial rust belt East coast that FedEx has a problem making money? Boo hoo.
nick
Sounds like another delusional sore loser from maga land.
Nobody wanted their "Change"
Fedex burned their bridges with “Working Class White America” a long time ago. They shouldn’t even be in business anymore.
I hold a Class A Commercial License and would never consider working for “their Woke middle & upper management Bidenettes”
I sincerely doubt these New illegal Haitians are going to be helping them. Fedex the Loser Corrupt Corporation that didn’t die when it was supposed to.
Snowflake tears are juicy
HAHAHAHAHA