Trailer Imbalances Worsen FedEx Costs and Service Problems
The cost and service challenges facing FedEx Corp. faces go beyond the two most visible suspects: a significant labor shortage and an unprecedented increase in parcel delivery volumes. A third factor, and perhaps just as important, is a persistent imbalance in the use of domestic trailers, particularly to and from Southern California.
For three packages that leave the region to the rest of the FedEx network (NYSE: FDX), only one package returns, according to Rob Martinez, founder and co-CEO of consulting firm Shipware LLC. The same ratio applies to the use of trailers, Martinez said.
For FedEx, the problem arises when it tries to reposition unloaded equipment without enough cargo to make a return trip profitable. It costs about $ 2,000 just to haul each trailer, and about 1,500 trailers leave FedEx facilities in Southern California each day, Martinez estimates. So operating empty trailers becomes a waste of cost and a service issue, Martinez said.
“This is a huge problem, and perhaps an even bigger problem than increasing the volume versus the performance of the service,” he said.
Last week, FedEx reported below-average results for the first quarter of fiscal 2022 largely due to a $ 450 million year-over-year increase in costs. The company is experiencing a severe labor shortage that has hampered the fast and efficient movement of goods. About 600,000 of the daily volumes at its FedEx Ground unit in the United States, or about 5% of the unit’s total volumes, are affected by operational issues, the company said on its conference call with analysts. FedEx shares have fallen more than 16% in the past month.
The dilemma for FedEx, and for all those who transport things, does not diminish. The crash of eastbound goods continues as retailers remain desperate to stock onshore shelves exhausted by the supply chain’s inability to meet pandemic demand and replenish the weak inventory before the holiday buying cycle. The more goods and trailers that go 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 bring equipment back to filling points, said Walter Kemmsies, a longtime executive and supply chain management consultant and head of his own business.
Martinez likened the current situation to a ski slope: the slow lift lines combine with the fast skiers to the bottom of the slope to give even longer lift lines.
The situation has reached a point where FedEx is paying some of its large customers who can use their own trailers, according to Martinez. The company is also considering using the railways to transport empty trailers, he said. The option would reduce unit costs by more than one sixth. However, that would put the assets out of service when they return to load centers, Martinez said.
“The paradox is that the cheapest solution only serves to make these assets unproductive for a longer period of time,” he said.
Archirival UPS Inc. (NYSE: UPS) was not affected as much because it owns more trailers than FedEx and has older relationships with the railroads than FedEx, Martinez said.
The overriding dilemma has been the staggering spike in consumer spending in the United States which has outstripped the response capacity of the country’s supply chain. According to Kemmsies, spending on goods and services, excluding gasoline and automobiles, is up 20% year-over-year. This is almost seven times the typical increase in retailer sales.
Supply chains used to operating in static environments with pockets of short-term crisis are able to increase capacity by 3% to 5% per year, Kemmsies said. To put the data in a historical perspective, consumer spending excluding gasoline and automobiles was set back about six years, according to his estimates.
Additionally, the seasonal lull that typically occurs during the December-February period that allows supply chains to reset did not occur during the 2020-21 period, Kemmsies said. The country’s shipping and distribution network has been operating in peak condition for 17 to 18 months, and there is no end in sight, he said.
Meanwhile, international containers, once unloaded from ships that have been backed up for weeks at US ports, will then remain in ports for long periods of time as there is no room to put them. Waterside warehouses and distribution centers are filled to the brim and vacancy rates in seaport markets are 2-3%, an all-time low.
At the same time, retailers are grappling with inventory levels as low as they have been for two or three years. The current chaos is not the result of a rapid replenishment of inventory, but of massive consumer spending, Kemmsies said.
Kemmsies, who has worked in the trade for decades, said he had never seen anything like it. “What’s going on there right now is absolutely crazy,” he said.