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FedEx CEO Frederick W. Smith (part 1 of 2)

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Well-known member
Mar 3, 2006
On the record: FedEx CEO Frederick W. Smith

Sunday, February 22, 2009

Frederick W. Smith, the founder, president, chairman and CEO of FedEx, built the first overnight express delivery company in the world, starting in 1971. Today, FedEx, based in Memphis, has service in more than 220 countries and territories.

Like most other businesses, FedEx is encountering economic turmoil and is operating by Smith's belt-tightening orders. He cut his own salary by 20 percent.

Legend has it that Smith, 64, outlined his concept for FedEx in a paper in an economics class at Yale University for which he earned a C. (He corrects the record in this interview.) At Yale, he was a friend and fraternity brother of former President George W. Bush, to whom he believes history ultimately will be more kind.

In the Marine Corps in Vietnam, Smith received the Silver Star, the Bronze Star and two Purple Hearts as a platoon leader and forward air controller. It was there that he observed military procurement and delivery procedures and thought he could improve on them.

Smith is unwavering in his belief that U.S. corporate tax policy must change, but practical enough to know that the new administration and Congress will not go along with the idea. He still believes one aspect could be enacted - accelerating the expensing of capital investment that would put money into corporate hands sooner.

He visited San Francisco on business recently and sat down with The Chronicle. This interview has been edited for length and clarity.

Q: Tell me about the sophomore year economics class paper you wrote that outlines the concept of FedEx - and did you get a C?

A: Well, that's the popular take on it. I don't really recall what I got on the paper, but let me just put it this way: I would have been very happy to get a C. That would be a good grade for me. The story is a bit exaggerated over time, and it wasn't a sophomore paper, it was later than that; I think it was a senior paper. And the myth is that I came up with this idea for FedEx and it got a bad grade. The paper was on a very specific subject and it was really dealing with what would end up being the demand side of FedEx. And it was a paper about the effects of automation on society - that once things are automated, the people that built these machines and the people that use them have a very simple problem: If it didn't work, they're out of business. Now the ultimate example of that is today when we all have PDAs and laptops and our entire institutional personal memories are in those devices. If they go dark, you can't work anymore.

(In) the Marine Corps in Vietnam, I really watched the logistic systems, which were a push-type of logistic system - in other words, you pushed all of the supplies that the military needed out, as opposed to a system that pulls things in as needed. And so that really led to the synthesis of the idea of a new kind of transportation system that would move these high-tech and high value-added parts of a more automated world in a different way. And the two essential features of it were the fact that it wasn't point to point, it was hub and spokes.

Now, I didn't think that was particularly creative, because it had been used in a lot of industries like banks. You know, you have a bank clearinghouse and you have 10 banks, and the methodology of connecting those banks is you have one person that goes from the bank to the clearinghouse. If you didn't have that, let's say you had 10 banks, the number of people involved in clearing banks would be 10 times nine, it'd be 90 people if you went point to point.

And the second thing was it was an integrated air/ground network. Nobody had ever done that before, where you had the trucks and the planes together. So we were able to go in to the people and say, "You can ship from any place in the country, to any point in the system" - to use our famous initial tagline and our advertising - "absolutely, positively overnight."

It just revolutionized the shipping world. And then we invented the barcode things to let people track things as they were in motion. And that was very profound, because what that did was let you have visibility of your inventory, whether it was in motion or at rest. And the only reason you have a warehouse is to put something so you know you got it.

Nobody had ever thought about taking that barcode and making sequentially numbered items, and then out in the industrial world track them, and send that information back so you can have it on a real-time basis. That was the innovation, the centralization of that.

Q: Let me move the calendar up to last December when you announced that the company was being challenged by some of the worst economic conditions in its 35-year history. You've slashed salaries and you cut off bonuses. I'm sure that was a difficult thing to do, because you have such a culture at FedEx. Are you on your way, though, toward that billion-dollar savings?

A: The answer to that is yes, we've taken a huge amount of cost out of the company. We have two categories of personnel expenses, like most industrial companies. One is the managerial and professional group, and the other is the volume-related group: pickup and delivery people, sortation people, functions like that. They're driven by volume - if we have the volume, then we need the people, if we don't have the volume, then we can flex that to some degree using technology and scheduling and so forth.

But the fixed cost of management and professional people, the way we dealt with that historically is we have for our professional and managerial people a high percentage of their compensation that's based on incentive, on bonuses. For the first-line manager that might be 15 or 20 percent of their base compensation; for me, it's 90 percent, and that's the way it should be. So if you don't do well as a corporation, you don't get your incentive compensation.

We didn't get an incentive compensation for our last fiscal year, nor certainly will we get it for this year. But we had to do something to take fixed costs down further, and what we did is we reduced all management and professional salaries by 5 percent, and we - at the top office ranks - between 20 and 10 percent, 20 percent in my case.

We felt that that was what we needed to do before we took more draconian steps. And of course we have four reportable segments: services, which is our retail and supply chain units, our retail stores; FedEx Express, which is our worldwide express network, the original company that we were just talking about; FedEx Ground, which is a ground parcel company; and then FedEx Freight. The different businesses have been affected differently, because they're coupled with different segments of the economy.

In the case of FedEx Office, for instance, its core business of digital printing and copy and business services is heavily tied into financial services, mortgage, home-building and things of that nature, so it has definitely felt it. And then on the other end of the spectrum, FedEx Freight is tied into automotive, industrial production and so forth.

Express is tied into the high-tech, high value-added trades, semiconductors, auto parts, aircraft parts, precision machinery, operates in 220 countries around the world. And then you have FedEx Ground, which is heavily tied into the retail sector - Walgreens, CVS, Wal-Mart, Costco.

So we are across the spectrum, but our different operating units have different impacts depending on what segment of the overall economy they serve.

Q: I used that word culture a minute ago ... I'd like to know what your definition or concept is of the FedEx culture, and whether that's being tested in this downturn.

A: The definition of the culture is laid out in our philosophy statements: People, service, profit. As far as the customer goes, we describe it as keeping the purple promise, which is to try to make every FedEx experience outstanding. That's a very clear statement, what we want everybody to do today. We don't have to give them an instruction booklet of 100 things; if you just keep in mind what I just said, you'll make the right decision for the customer.

In terms of the philosophy of the company, no, I think quite the contrary; it's actually being reinforced, partly because of what we just talked about. We've always understood that the main ingredient to our success is the frontline people who are dealing with the customer.

Our job, as we see it in the top management, is to try to make their job easy. So when the downturn came, to answer your question, that's why management had to take the first hit. So I think our culture is very strong. Is it being challenged? Of course it is, but we're very confident that we will come out of this thing stronger. In fact, we benefited from the demise of one of our smaller competitors, DHL.

Q: How did you benefit?

A: We picked up a fair amount of additional business from their withdrawal from the U.S. market.

Q: Now you have 290,000 employees?

A: It's actually more than that if you take the people offshore that we license that are our business partners. If you go to Israel or South Africa, there's FedEx there, but it's a licensee. But it's actually north of 300,000 people in the whole system.

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