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FedEx Corp. is revamping its operations to hand off some deliveries from its overnight division to its separately run ground business, in an effort to wring more profit from surging e-commerce.
The arrangement is part of CEO Fred Smith’s strategy to tackle the flood of residential packages from online shopping, which can be more expensive to handle because fewer are left at each stop. By having Express hand off less time-sensitive parcels to its ground unit for final delivery, the company will reduce cases in which a driver from both units visits the same customer.
“We are duplicating efforts and diluting our delivery density, including the number of packages delivered at each stop,” Chief Operating Officer Raj Subramaniam said in a letter to employees. “This move is an effort to make costly last-mile deliveries more efficient.”
In the past year, FedEx has rolled out several changes, including seven-day deliveries, later pickup deadlines and more capacity to handle large packages, to capture more e-commerce business and stem a drop in profit margins. FedEx predicts that 90% of growth in the parcel industry from 2018 through 2026 will come from e-commerce.
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Unlike competitors UPS Inc. and Amazon.com, FedEx operates two separate networks for overnight and ground deliveries. Its ground business uses contractors who hire their own employees to operate delivery vehicles. The more packages delivered to the same place by one driver, the lower the per-parcel delivery cost will be.
FedEx will start the initiative in Greensboro, N.C., with Express products that have less strict delivery deadlines, such as standard overnight and second-day service. The plan is to roll it out to other U.S. cities in phases, FedEx said in a statement.
“We continue to flex our network to stay ahead of e-commerce growth, and that includes adjustments to better handle the demand for residential deliveries while lowering our cost to serve,” Subramaniam said in the statement.
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