Saturday, November 19, 2005

Two Smiths Think Alike

“Vietnam vet has used lessons learned in combat to build Fedex into a global empire, writes David Litterick” in today’s Daily Telegraph (UK), 19 November.

“The military efficiency of the operation would come as no surprise to anyone who has met Fred Smith, the chairman and chief executive who founded the company and an entire industry 30 years ago. A former marine, he has testified to how his time in the military developed his leadership skills and helped him build the firm into the second largest aircraft fleet in the world.

It's all a far cry from the company which started one night in 1971 with just 14 aircraft carrying a measly 184 packages, but then at the time few thought his new venture would succeed. Smith is not keen on talking about the past, particularly the Yale thesis which has now become legendary. But the story shows how ahead of the curve he was when he argued that an ever more computerised world would demand a reliable overnight delivery service.”


Fedex at $30 billion is one of the world’s largest parcel delivery services in the world, along with DHL, UPS, Deutsche Post, TNT, and numerous other state-owned postal services. It is now opening its second global air-hub after Memphis, USA, in Southern China.

"The growth in trade has been the engine that has increased the wealth of the world - no question. It's been tough on individuals who are in professions and in locations that get far more efficient competitors, like Delphi or GM, but that's what Adam Smith figured out two centuries ago.”

Adam Smith considered the future of the ‘carrying trade’ important enough for it to be an economic sector in its own right, after the home trade and foreign trade.

“All wholesale trade, all buying in order to sell again by wholesale, may be reduced to three different sorts. The home trade, the foreign trade of consumption, and the carrying trade. The home trade is employed in purchasing in one part of the same country, and selling in another, the produce of the industry of that country. It comprehends both the inland and the coasting trade. The foreign trade of consumption is employed in purchasing foreign goods for home consumption. The carrying trade is employed in transacting the commerce of foreign countries, or in carrying the surplus produce of one to another.” (Wealth of Nations, II.v.24, page 368)

Fred Smith, FEDEX CEO, makes a point about physical products that is significant for his business:

“Alan Greenspan likes to point out that the US economy has grown by factor of five since the end of World War Two but that the aggregate weight produced by the economy hasn't increased at all. Everything is getting lighter. An increasing percentage of manufactured goods are high-value-added and technology products and these tend to be easy to transport.”

Whereas Adam Smith remarked on the weight to value problems of the 18th century carrying trade acting to inhibit production for distant sale (hence his support for publicly funded programme of road, canal and harbour improvements), the modern global economy has a reverse relationship between weight (important in air transport) and high-value per unit freighted (important in modern business).

Today the main problem is not technology, but institutional barriers to trade with heavy restrictions on air travel aimed at protecting national sensitivities as seen in foreign ownership regulations, the ‘five freedoms’ rules about entering foreign airspace and in outright ‘closed sky’ national laws. Fred Smith (like Adam Smith) has come to the correct conclusion:

The more trade barriers can be brought down the better.”

Read the full article by David Litterick on Fred Smith of FEDEX at: (free subscription)


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