Fed Ex Case Study in supply chain management.

Strategic Sourcing and Supply at Federal Express1
Prepare a set of detailed responses to the following questions after reading the case:
1. What are the key elements that must be completed at each stage of the
strategic sourcing process?
2. How does the governance structure for supply chain management at Federal
Express support the strategic sourcing process?
3. Are there elements of the strategic sourcing process used at Federal Express
that apply to other companies?
Background – Federal Express
FedEx Corporation is a $20 billion market leader in transportation, information,
and logistics solutions, providing strategic direction to the five main operating
companies. These include:
 FedEx Express: The world’s largest express transportation company.
Leveraging its unmatched air route authorities and extensive air/ground
infrastructure, FedEx Express connects markets, within just 1 to 2 business
days that comprise 90% of the world’s economic activity.
 FedEx Ground: North America’s second-largest ground carrier for businessto-business small-package delivery. Provider of innovative new residential
delivery service – FedEx® Home Delivery – in key U.S. cities and a pioneer
in applying advanced information technology to meet customer needs
 FedEx Freight: A $1.9 billion leading provider of next-day and second-day
regional LTL freight services. FedEx Freight is comprised of two independent
yet complementary operating companies, American Freightways and Viking
Freight, known for exceptional service, reliability and on-time performance.
 FedEx Customer Critical: North America’s largest time-specific, criticalshipment carrier provides exclusive-use, non-stop, door-to-door delivery
throughout the U.S. and Canada and within Europe – 24 hours a day, 365
days a year.
 FedEx Trade Networks: A full-service customs brokerage, trade consulting,
and e-clearance solutions organization designed to speed shipments through
customs using advanced e-commerce programs.
 FedEx Services: Provides customer access to the full range of FedEx
transportation, logistics, e-commerce and information services by integrating
sales, marketing and information technology
1 This case was developed by Robert Handfield of NC State University based on interviews with Federal
Express associates, working with Brenda Liker and Jaymie Mitchell in developing best practices in
sourcing for the Bank of America.
FedEx Center-Led Initiative
Prior to the purchase of the Ground, Freight, and other non-express based
services, Federal Express had re-organized all of its major indirect spend in
information technology, aircraft, facilities/business services, vehicles/fuel/ground
service equipment, and supply chain logistics groups under the “Strategic
Sourcing and Supply” group, led by Edith Kelly-Green. After the purchase of
these different businesses occurred, the supply management function was reorganized into a Center-led Supply Chain Management sourcing model. Over
the last two years, FedEx Supply Chain Management has been focusing on
leveraging sourcing and contracting for all of the Fedex family of companies. For
office supplies, instead of having each company run a contract, SCM has a
single corporate contract for all of the negotiation effort, but allowing for different
transactional approaches. It has been a gradual migration to getting to a
centralized view to how procurement will happen. It is central for the larger
spend areas, and different policy requirements.
A big component of this model is the integration of Ariba Buyer – expanding the
use of it to other operating companies, and processing requisitions within the
SCM group. Most of the best practices discussed in this case are associated
with FedEx Express, but is slowly being migrated across all of the operating
companies.
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ILLUSTRATIVE
FedEx is much more than your typical air express carrier
The world’s largest express transportation company. Leveraging its unmatched
air route authorities and extensive air/ground infrastructure, FedEx Express
connects markets, within just 1 to 2 business days, that comprise 90% of the
world’s economic activity.
North America’s second-largest ground carrier for business-to-business smallpackage delivery. Provider of innovative new residential delivery service –
FedEx® Home Delivery – in key U.S. cities and a pioneer in applying advanced
information technology to meet customer needs
North America’s largest time-specific, critical-shipment carrier provides
exclusive-use, non-stop, door-to-door delivery throughout the U.S. and Canada
and within Europe – 24 hours a day, 365 days a year.
A full-service customs brokerage, trade consulting, and e-clearance solutions
organization designed to speed shipments through customs using advanced ecommerce programs.
Provides customer access to the full range of FedEx transportation, logistics, ecommerce and information services by integrating sales, marketing and
information technology
A $20-billion market leader
in transportation,
information, and logistics
solutions, providing strategic
direction to the five main
operating companies
FedEx Freight is a $1.9 billion leading provider of next-day and second-day
regional LTL freight services. FedEx Freight is comprised of two independent
yet complementary operating companies, American Freightways and Viking
Freight, known for exceptional service, reliability and on-time performance.
The Sourcing Process
FedEx established a seven step sourcing process.
Step 1: First step is an assessment of the category that profiles that industry and
commodity. The team will ensure that they are clear on the user requirements from the
corporation, and try to define what that category amounts to. For example, on
promotional items – where should the boundaries be drawn? How does the team define
these? This involves doing a lot of research on the nature of existing purchasing activity,
how much, who is it with, what are the issues with existing suppliers, how does the
marketplace function, what are drivers of competition.
Step 2 Based on this research, the team goes into a process to select the sourcing
strategy, in essence taking all of the information they have and deciding how they will
approach that marketplace. Is a Request for Proposal appropriate? Do they need to
maintain existing relationship and re-visit negotiation, develop a strategy regarding the
sourcing strategy.
Step 3 Assuming they are going beyond a negotiation, they do an in-depth research
with suppliers in that area, including qualification of the suppliers. Can the suppliers
satisfy user requirements, service aspects, etc.? The end goal is to develop a list of who
they would like to send RFP’s to. The team will conduct a supplier portfolio analysis.
Step 4 A second phase of this implementation pass is to re-visit this strategy, and have
the team take another look at it – have they uncovered something that will cause them to
change negotiation – they develop a strategy for negotiation, do they want to use a
reverse auction or use a conventional RFP, as well as criteria for supplier evaluation. Is
this still something they want to do?
Step 5 is the negotiation and supplier selection. The team sends out the RFP,
negotiates with suppliers, and selects supplier(s).
Step 6 Once the team has made the selection, they need to do the integration. This is
done by applying the Ariba toolset with the supplier, and identifying integration conflicts
to be solved to make the contract workable.
Step 7 Benchmark the supply market – on-going monitoring of the supplier(s) through
the FedEx Supplier Scorecard system.
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ILLUSTRATIVE

Benchmark the Supply Market
Select Sourcing Strategy
Generate Supplier Portfolio
Select Implementation
Path
Negotiate and Select Suppliers
Operationalize Supplier
Integration
Profile the Sourcing Group
Sourcing Process
The sourcing process applies a rigorous, proven methodology to categories
selected during an opportunity diagnostic
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ILLUSTRATIVE
1. Assessment 1. Assessment
The Center Led Sourcing process includes documented business cases that are
scrutinized by Stakeholders, Legal, and Finance and approved by the FedEx
Corporation Sourcing Council
• Finance, Legal,
Stakeholders, CSO,
and CFO review
and validate
Business Case
assumptions and
results
• Business Case
Review Team
• Approve business
Case
• Authorize
implementation of
sourcing results
based on Business
Case (or)
• Recommendations
to SMC
• Corporate Sourcing
Council
2. Sourcing 2. Sourcing 3. Business Case
Review
3. Business Case
Review
4. Sourcing Council
Approval
4. Sourcing Council
Approval
• Detailed market
assessment
• Define sourcing
strategy
• Identify potential
suppliers
• Execute sourcing
strategy to exploit
opportunity
• Cross-functional,
cross-OpCo
Sourcing Team
5. SMC Update 5. SMC Update
• Move CSC issues
beyond impasse
• Support
implementation
• Applause
• Strategic
Management
Committee
Center Led Sourcing Process
• Evaluation of
spend category
and marketplace
to determine
savings
opportunity
(FedEx spend,
supply market
dynamics, FedEx
specs, etc)
• Assessment Team
of FedEx
sourcing, finance,
and stakeholders
6. Implement &
Manage
6. Implement &
Manage
• Integrate with
selected
supplier(s)
• Communicate
new suppliers,
benefits, and
process changes.
• Report benefits.
• Continuously
monitor the
supplier and
marketplace
• Stakeholders and
Supply Chain
Management staff
Membership
Functions
Two aspects of how this is done are important: first, a central sourcing group leads
company-by-company specific sourcing initiatives. This is a team of sourcing analysts
who lead these sourcing initiatives, and once they get through the process – this hands
off from the sourcing advisor to a supply chain associate. These associates are spendcategory associated (e.g. aircraft components, IT contracts, etc.) Their role is to take the
arrangement with the supplier and ensure that it is implemented and see that it goes on
within that marketplace. They are responsible for completing the scorecard with the
supplier to ensure that it is completed thoroughly and accurately. This handoff occurs in
Step 6 during integration.
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ILLUSTRATIVE
The FedEx Center Led Sourcing organization combines central sourcing with
Opco-specific supply chain management

Strategic
Sourcing (Center
Led Sourcing)
There is also a set of reviews that takes place within the sourcing process. When the
team arrives at the fifth stage, one of the requirements is that they define the business
case for the strategy. The team will summarize the work done in the initiative – business
case goes into an extensive review. Initially, it goes to finance and legal – and validate
assertions of savings, working with finance to ensure that savings are valid, with legal
chiming in to ascertain that the assumptions used are acceptable. If the strategy is
approved, then it proceeds to the final step, which is a review by a corporate sourcing
council, consisting of high level execs from each of the divisions (COO, CFO from each
business unit) – chaired by Chief Sourcing Officer. The council will review and/or reject
the strategy for additional work, or approve it. If they approve, the council has an
obligation to help the sourcing team implement it. They have some strong advocates to
help with the implementation and ensure compliance with the terms of the agreements.
Dollar thresholds on deals that go to the sourcing council tend to be larger dollar items,
or also occur when there is an impact based on the nature of spend, or level of impact
on the brand image or other areas. Fuels, contract trucking (more than $10 million
range) goes to the Sourcing Council. Things like a change in the nature of the supplier
for FedEx boxes involving a specification change may not necessarily provide a big cost
impact ($2M cost savings) but may go before the council for other reasons (to ensure it
doesn’t affect other things such as market image or customer preferences). This is a
largely a judgment call on the part of the Chief Sourcing Officer (Edith Kelly-Green).
FedEx does not have any Service Level Agreements in place. They have informal
agreements – each of the SC groups has a director, matrixed to the primary user vice
president. Facilities director is matrixed with the VP of Properties and Facilities – dotted
line reporting relationship.
Supplier Scorecard
For the scorecard, FedEx has employed a generic scorecard that pertains to most of the
supply relationships – they have the capability to add some unique metrics (see
Appendix). The SCM group determines the threshold limits for the scorecard – but most
items are NOT part of the contract. Instead, the scorecard is viewed as a way to
manage the relationship, and award future business. An SCM associate will manage the
performance assessment for a given supplier, and convert it into a score of 1 through 5
based on available data and input from user groups.
The idea behind the scorecard was to adopt a methodology that could be applied to
compare “apples to apples” across the supply base. Associates tasked with managing
the supplier are given the authority regarding where to draw the lines – relating
percentage weights to different elements of the scorecard, and converting it to a 1
through 5 metric. The user requirements are incorporated into the contract through the
statement of work. Factors that may or may not be included in a specific scorecard may
include the following: overall strategy, resources, customer service responsibility, gratis
service, number of complaints, post sales support, knowledge of Fedex, of product,
upgrades, return time on warranty, bad from stock items (don’t meet quality),
certification, cost trends, discrepancy rate, financial stability, mean time between
failures, on-time delivery, delivery cycle time, cycle time improvement, their use of
diverse suppliers, frequency of value of cost reductions, etc. These items are tied into
the scorecard, with SCM associate responsible for converting raw data and input from
users into a score based on the supplier’s performance associated with that contract.
The scorecard is tied to certain business rules. If the score on a scorecard becomes
very low, FedEx has established different stratifications for the scorecard. If they fall
below 350 on the scorecard, then the team will seriously re-evaluate their supply
strategy in that market. This occurs particularly at the end of certain agreements. There
are no specific criteria on guidelines, other than monitoring the scorecard and reevaluating it on a periodic basis as necessary. The decision tends to come up on a
three-year cycle, which is when most commodity groups are re-evaluated by a sourcing
team. Each category has a sourcing evaluation approximately every three years, with
most contracts lasting three years with an option for a three-year extension. This can
vary; for example, on PC’s Fedex will re-visit the strategy much more frequently,
because the dynamics of that market change much more frequently. The nature of what
PC purchases may change over the course of a single year!
Supplier management is based on the SCM teams and individuals that have been
established for each role. For each supplier and contract, there is an individual assigned
responsibility for managing that relationship. There is rarely just one supplier – but often
there is only one FedEx associate responsible for all ground support, janitorial contracts,
etc. Their job is a mixture of strategic and tactical elements. For example, an associate
may be responsible for catalog updates into Ariba, but also responsible for updating
pricing changes. This poses a challenge to the organization: should individuals focus
on the day in- day out functioning of the contract? Do they get involved in strategy-level
work? How do they get involved in strategic-level issues? Associates are responsible
for keeping track of what is happening in that market – so they may re-initiate a
negotiation with that company, and re-visit what is happening and how that contract is
set up. They are responsible for business process issues – if they have a unique
element with that supplier, they may be responsible. They get into specification
management as well. This may not involve a lot of high-level strategic work, but may
require a good deal of coordination work between the supplier and the engineering
group. The challenge of how to skill/deskill associates in this area remains problematic.
Business Rules: Controlling Maverick Spend through EProcurement
There are several different avenues regarding how purchasing occurs across FedEx.
From a services perspective, there may be several different purchase methods. For a
product purchase, there are currently three different methods of buying that prevail
across all of the operating companies.
1. The most simple is a convenience purchase – an individual goes into a local store
and buys something on their badge, takes the invoice back to their manager, and sent in
for a repayment. There is not a lot of control, and the manager MUST give approval
prior to purchase.
2. The next area (preferred) is the Ariba buyer system. This is set up so that users have
an online catalog for contracts that are in place – several thousand office supplies are
established on the catalog. Requisitioners can find they want, and once submitted, it is
bounced against a purchase approval policy.
For example, if a FedEx associate needs a PC in their area, they will select a PC online,
and requisition it. Depending on the threshold, they may need a supervisor’s
authorization, and may need a higher level as well. If the spend goes into capital range,
there are another set of approval rules to ensure that people who approve capital
purchases sign off. The process also draws on the business rules from the IT group,
which may be contradictory in some cases. Business rules can be enforced within the
Ariba Buyer system depending on the category of spend taking place.
19 1083 _Macros
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ILLUSTRATIVE
Supply chain technology solutions complement the Center Led Sourcing process
enabling gre ater savings, improved data management, and transaction processing
at ‘e’ speed
Center Led Sourcing Process
3. Business
Case
Review
3. Business
Case
Review
4. Sourcing
Council
Approval
4. Sourcing
Council
Approval
5. SMC
Update
5. SMC
Update
Enabling Technology Tools
1. Assessment 1. Assessment

2. Sourcing 2. Sourcing
6. Implement & Manage 6. Implement & Manage
The value of this approach is that if FedEx supply management establishes a change on
the control levels, it is easy to do. For example, if the CEO mandates a spending freeze
(i.e. “No PC’s without VP level approval”), SCM can change the business rules on the
system. (SCM does not handle travel authorization, although it has that capability.
FedEx is tied in with airline agreements, so the nature of travel agreements are based
on a different set of contracts.) FedEx also has another information system for temp
labor, contract programmers (ELAMS). The Elams system allows online requisition for
contract programmers or temp labor person based on contracts that are in place –
FedEx control the rate and type of individual sent out by the supplier, and can approve
the invoices online. They have issues with a temp labor contract – Clerk1 or Clark2 at a
higher rate – and can ensure that if they request a Clerk 2, once they send the individual
out, they can come back and tell them that they are only going to pay at a certain rate
and for certain hours based on performance. This enables users to control the type of
person that they actually pay for (in the past, this wouldn’t catch this until much later in
the process).
All of FedEx’s spending is indirect – due to the nature of their business. A lot of their
focus is on indirect materials. However, in MRO and facility parts, they struggle in terms
of controlling spend in this area. Depending on product area, they have a greater or
lesser ability to control maverick spend. The information they have about spending or
indirect items tends to be something that is based on how much they know about the
company they are purchasing from, and the length of our contract with them. They have
a consolidated contract with paper, so they have good data on this spend. On MRO,
they have only done our first set of national contracts, it has been out of control for us, it
is difficult to get a handle on our baseline spend. They need to do more in terms of
understanding this, by linking into internal accounting codes and understand what is
represented by that spend.
FedEx will often do an RFI before they initiate the sourcing process. One of the first
things they will do is get a handle on our accounts payable information, who are the
largest suppliers, and please give us your sales to FedEx with information on line items.
They are doing that with MRO, and have contracts established with MRO contracts. If it
goes through Ariba, they have great information on that.
Areas where they have had the most problems are with convenience purchases (Joe
Mechanic buys it over the counter at the hardware store). To control this, FedEx is now
going to a monthly electronic report by purchase by avenue. If Grainger gets 600 orders
from Ariba, 100 from invoices, they have a purchase summary that shows all of them.
(Convenience means that the individual has an account with that store, and it goes on
their account. FedEx does have a p-card that has not been extensively implemented –
their internal controls group still has a lot of issues – even though they have convenience
purchase problems.
Convenience purchases are still not well controlled. Because of the diversity and
geographic dispersity of FedEx locations, it is still the most popular and easiest way of
buying things. This has been a problem within the operations side of the business, who
insist that the sheer simplicity of the process is a good reason for them to continue with
the status quo. Convenience purchases has, however, become a number that has
grown and caught the attention of senior management. The individual transactions are
low, but many, many transactions, particularly in the MRO area, have grown to epidemic
proportions. The total convenience spend is about 5 to 10 percent of all purchases, but
25-30% of all total number of transactions.
Guidelines for Controlling Maverick Spend
Although FedEx has not yet established a defined spend limit for all categories, certain
category limits have been deployed. In office supplies, 60% compliance was the initial
number, with a target of 80% first year, (achieved 78% compliance in 2002). This was a
concerted effort to go after businesses that were not complying.
One SCM associate noted that “If our corporate program is at Corporate Express, it is
easy to see when the spend is going to Office Depot. Getting support from business
people was key in reducing maverick spend. It started off with having SCM people
responsible for that area make some calls to purchasers that were using different
suppliers. Depending on the nature of their response, different actions would follow. In
many cases, the problem may have arisen due to a training issue, as people didn’t know
how to use Ariba. In other cases, people had a competitive purchase, and didn’t wan’t to
go through Ariba to purchase those items.”
Continuing, this associate commented that “The approach to influence business units
through the Sourcing Council is less of an autocratic approach, but has been moving
more to a mandate approach. In the past this has been done on a product by product
area basis, but the level of maturity of the program we have had in place is increasing.
PC’s have been on Ariba for some time, so there hasn’t been a lot of volatility with
respect to who they buy from. It has been taken to a mandate level, whereby accounts
payable can actually agree NOT to pay the invoice. That mandate becomes something
that affects the supplier – so they must take the risk when they send something to supply
management for payment. If they have an agreement with Dell, and someone buys from
IBM, they are in trouble. That individual may be responsible for paying this with their
own personal funds! (This has been announced, but not yet deployed!)
Different mandates have gone out with different people. How do you determine if
something is worth addressing at all, or worth putting a strategy around? There is a
dollar criteria – is it worth putting a resource on this initiative? In presenting the sourcing
process, there are different levels on how extensive the process should be. If FedEx
has large spend in a particular area, they will put more resources on doing an in-depth
market assessment. For something that turns out to be a $2M per year spend – the
payback on it may not be worth the resources required to do it. So it becomes a minisourcing initiative done by the Supply Chain group.
System tools can really help in this area. We need to ensure that a solid business case
is put together before presenting to the Sourcing Council. We can also ensure
compliance on smaller purchases through Ariba Buyer, which is the avenue for receipts.
Users must follow-through on receiving of goods at many different geographic locations
worldwide; yet Ariba Buyer can ensure compliance. When an order is received, users
have an obligation to enter it into the system, which generates an acknowledgement and
an invoice matching on the system. If an individual does not receive it, Ariba will
develop email reminders that will escalate eventually to senior management.
Moving Forward
Most of the sourcing dashboards to measure performance going forward are primarily
cost-focused based metrics. The group tracks the results from sourcing initiatives: cost
savings, performance relative to market pricing (fuels relative to market pricing),
monitoring at an individual, director, and CSO savings, including diverse supplier
development, savings amount, and ROI based on staff and budget. These results are
compared in terms of generating savings from one group relative to other directors.
Another metric is sourcing timeframes – how long is it taking to implement the sourcing
initiatives.
The associate c oncluded: “One of the biggest challenges in the Center-Led Initiative is:
How to get people involved? FedEx had an extensive communications campaign where
the strategy is communicated to people, including the long-term vision on where FedEx
SCM is headed in the longer term. Within the original FedEx organization, there were
not dramatic changes in how things were being done. However, for each of the new
operating companies acquired, we are still going through a transition period in which we
are allowing people to continue doing business through localized contracts. However,
this is changing, as we are slowly moving towards a homogeneous approach from an
operating standpoint. Many of the newly acquired operating companies have not done
this type of communication, training in core supply chain skills, and other elements.
Most of these people are totally unfamiliar with the seven-step process. Making this
change is probably going to be our biggest challenge in the next five years.”
Prepared by Robert B. Handfield, North Carolina State University
Appendix: Supplier Scorecard

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