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Home Business Analysis | FedEx Can Do More to Subdue a Contractor Revolt
Analysis | FedEx Can Do More to Subdue a Contractor Revolt

Analysis | FedEx Can Do More to Subdue a Contractor Revolt




Many recipients of packages from FedEx Corp. probably don’t realize that the driver with the FedEx uniform in the truck with FedEx’s logo on the side may not actually work for FedEx but for a small independent company. (Note: The key is to look for the small company’s logo, usually at the bottom of the driver-side door.)

This often-overlooked detail is the crux of a burgeoning feud between FedEx and the thousands of contractors that deliver packages for its Ground unit. As with most fights in business, this one is over money. But it also shines a spotlight on inefficiencies at FedEx Ground that have exacerbated the problem. The financial dispute is also part of industry-wide upheaval that has transformed parcel delivery from a sector that served businesses five days a week to one that’s now dominated by residential e-commerce consumers who expect fast free delivery.

The contractors are holding a gathering in Las Vegas this weekend, with expectations that half of these 6,000 small delivery companies will attend. They are threatening to band together to demand more money amid rising costs. FedEx is refusing to negotiate with them as a group. The Memphis-based courier could ease some of the discontent by operating more efficiently in two areas that would smooth the handoff of packages to its delivery partners. A third move would involve recalibrating fuel surcharge payments. The first two are about correcting FedEx Ground’s poor incentives to operate efficiently, and the third is just about being fair.

Before the rise of e-commerce, both FedEx and its contractors made good money, especially if these small entrepreneurs were sharp operators. E-commerce disrupted that cozy relationship because residential deliveries are more costly. Fewer packages are left at one stop compared with commercial service, and more driving is usually required. Package volume is also harder to predict for residences than it is for businesses, which often have regular delivery patterns.

To turn around a steady decline of profit margins at Ground, FedEx in 2019 forced a flurry of operational and financial changes on its delivery partners, such as extending service to seven days a week and tweaking payments to favor a rate for each stop instead of for each package. These changes have upset contractors to the point where there’s now open talk of just walking away from the business.At the same time, FedEx is feeling pressure from shareholders who want Ground profit to go back to the days of 18% margins a decade ago. Margins are now 10 percentage points lower. Investors unhappy with that decline paved the way for activist investor D.E. Shaw to muscle its way to the bargaining table just as Raj Subramaniam was set to take over as chief executive officer from legendary founder Fred Smith in June. FedEx named new board members, increased the dividend by 53% and pledged less capital spending.

Smith revolutionized the logistics world in the 1970s by founding the airline that became FedEx Express and delivering packages overnight. FedEx Ground was formed from a company he bought in 1998 that used contractors to deliver packages to the final customer. In the early days, a FedEx Ground contractor consisted of one person who owned a van. The model morphed into the contractors being proprietors of small logistics businesses that hire drivers and operate from as few as five to more than 200 delivery trucks.

While drivers for the Express unit are on payroll and FedEx owns the planes and trucks used to ferry around packages, Ground doesn’t own any vehicles. Its only direct employees are workers who sort packages, engineers who crunch numbers to determine how much the contractors should be paid for deliveries and, of course, management.

The conflict with contractors has been brewing for a couple of years, especially after Ground quickly moved to seven-day service, took in-house packages it had been giving to the US Postal Service for final delivery and accepted more large packages. The company also rushed to introduce a new routing software that contractors say has been trouble since the beginning. The change in payments to emphasize stops was a cut in pay, according to more than a dozen contractors.

The brewing storm was masked by the surge of package volume during the pandemic and the government support for small businesses through the Paycheck Protection Program and now the Employee Retention Credit, which most contractors have tapped into. FedEx also paid contractors a six-month stipend to cover additional Covid costs during the height of the pandemic.

The strained relations flared up after FedEx’s volume forecasts for peak holiday season were too high. That caused many contractors losses because volume didn’t hit levels to earn surge payments and the delivery companies added too many extra trucks and drivers in anticipation of heavy volume.

If FedEx were more efficient at handing off packages to its contractors, the courier might have a buffer of goodwill that would help quell anger among contractors. That’s not the case, contractors say. The vast majority of contractors incur extra costs because FedEx doesn’t have packages scanned and loaded properly on trucks so that drivers can show up at a consistent time to start their routes. The inefficiencies at the terminals are dumped on the contractor.

Any recourse for contractors is nullified by a section in FedEx’s contract labeled “Right to Ensure Service.” The contractor can refuse to deliver a late dispatch, but FedEx can also opt to assign that route to someone else and even take the route away permanently. And FedEx doesn’t define a dispatch. The bottom line is there are no penalties or incentives for FedEx terminal workers to load trucks properly or on time, so they often don’t.

The second significant problem that most contractors complain about is that FedEx often misses by a wide margin the forecast for the next day’s number of packages that need to be delivered. If it’s too high, the contractor is short-handed and must scramble to find a driver. If it’s too low, the contractor may have to send a driver home and hope this worker shows up next time. Again, FedEx faces no penalty or has no real incentive to get their forecasts right.

In an e-mailed statement, FedEx said it recognizes that changes to deal with e-commerce have “added complexity” to the Ground network and that “the efficiency of some preload operations has been challenged.” It added that many facilities have made progress on fixing the snags. FedEx Ground is also tweaking its work schedules to improve retention of package handlers.

“We are providing our frontline managers with more advanced tools and robust training specifically focused on effective preload start times, load quality and the importance of enabling a smooth dispatch for service providers,” the statement said.  

New tools and training, though, won’t make up for the lack of incentives. As long as FedEx’s front-line terminal managers get packages delivered on time, the bosses are happy. If deliveries aren’t meeting service levels, it’s easy for frontline managers to blame the contractors.

Finally, to the fuel surcharges. As the name implies, it’s a fluctuating payment in which the companies that ship goods cover increases for gasoline or diesel fuel. These surcharges are standard for the freight transportation industry. The payment varies by contract, and FedEx keeps a percentage it does not disclose. The company said in its June earnings call that fuel surcharges were the largest driver of “revenue quality,” or price per package. But the money should go to whomever is paying the higher fuel bill. That would be the contractor in the case of FedEx Ground.

With the changes in FedEx’s rules and increased delivery demand from e-commerce, the contractors are not out of line in asking for some cooperation on improving the efficiency of their operations, which could have the add-on benefit of improving the FedEx experience for the customers who don’t realize who’s truly delivering their packages.

More From Other Writers at Bloomberg Opinion:

• FedEx Finds If You Pay Them, They Will Come: Brooke Sutherland

• The Great Resignation Gives Unions a New Advantage: Conor Sen

• A Solution to Small-Item-in-a-Big-Box Problem: Brooke Sutherland

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

More stories like this are available on bloomberg.com/opinion

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