Smith, Frederick

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Smith, Frederick

(1944-)
Federal Express

Overview

Frederick W. Smith took a good idea and made it a reality, creating a company whose logo is recognized around the world. Millions of people every year solve the problem of how to get a letter or package to its destination in a hurry by using Federal Express. Established in 1971, Federal Express has grown from a small shipping company servicing fewer than 25 cities out of its home-base in Memphis, Tennessee, to a company whose cargo and information handling services now span the globe.

Personal Life

Frederick Wallace Smith was born in Marks, Mississippi, on August 11, 1944. He was named after his father, who made the family fortune by founding the Dixie Greyhound Bus Lines, which is now a part of Greyhound Bus Lines; Smith's mother was the former Sally Wallace. The elder Smith was always something of an achiever. In addition to his bus line, he and an older son founded the Toddle House Restaurant chain, which offers Southern-style cooking at locations throughout the United States. When he died in 1948, the elder Smith was able to pass along a tidy fortune to his two sons and two daughters. However, worried that young Fred Jr., then only four years old, and his siblings would squander their money and waste their lives because of reliance upon such affluence, the inheritance was placed into a trust fund, to be released when each child reached the age of 21.

Smith was born with a birth defect called Calve Perthes disease, which forced him to rely on crutches and braces to stabilize his hip joint sockets throughout elementary school. Fortunately, by the time he was in high school, Smith had outgrown the disease and became very active in interscholastic sports activities. As a teen, he was a U.S. Civil War buff and avid amateur pilot. He attended Memphis University prep school, where he excelled scholastically. Even in high school his interests veered toward business: Smith and a group of friends started a small recording studio, the Ardent Record Company, which went on to become a viable company several years later, although Smith ended his involvement when he left Memphis in 1962 to attend Yale University in New Haven, Connecticut.

At Yale, Smith planned a course of study in both economics and political science, although by his own admission he, academically, scraped along as a below-average student because of the range of available social activities. But one of his college achievements has become the stuff of American business legend: during his junior year, Smith wrote a term paper for an economic class outlining his idea for a company that could guarantee overnight delivery of small, time sensitive, goods like replacement parts and medical supplies to major U.S. cities. While the paper was not successful—Smith's professor, failing to be convinced that the scheme would work, gave the young man a grade of C. Smith, however, was undeterred.

Graduating from Yale in 1966, Smith enlisted in the U.S. Marine Corps, where he was commissioned as a second lieutenant who was sent overseas to fight in Southeast Asia during the Vietnam War. During his first tour of duty, he was promoted from platoon leader to company commander, and was part of 27 named operations. During his second tour, he enrolled in flight school and flew over 200 ground support missions over Quang Tri Province. By the time he left the Marines in July of 1969, Smith was ranked captain, and had earned many honors, among them a Silver Star, Bronze Star, and two Purple Hearts. A month later, he married Linda Black Grisham; the couple would divorce in 1977.

Upon returning stateside in 1970, Smith decided to invest some time, money, and hard work in making his dream a reality. His zeal was in part a reaction to being in Vietnam. Tired of seeing so much destruction, he had the urge to create. Beginning by purchasing a controlling interest in his father-in-law's aircraft maintenance company, Ark Aviation Sales, Smith began to flex his entrepreneurial muscle, expanding the small company into a clearing house firm that bought and sold used corporate jets. Even after annual revenues increased to $9 million and Ark began to turn a profit, the 27-year-old ex-Marine was still haunted by the possibilities in his college economics paper, and on June 18, 1971, Federal Express Corporation was officially created to put those ideas to the test.

Career Details

Federal Express, more recently renamed FedEx, got its name because Smith's initial idea was to get a contract to do work for the Federal Reserve System transporting, sorting, and rerouting checks. Planes picking up packages for delivery would be flown at night, when air traffic was minimal; packages would be dropped at a central location, sorted, and then sent by a combination of air and land transportation to their destination. While by his calculations the service would have saved the nation's banking system over $3 million a day, individual banks were still not convinced that Smith's delivery plan would work. While his idea—an overnight, door-to-door package delivery service—was both simple and practical, it presented several problems. Financially, the business required that the young entrepreneur invest a large amount of start-up capital: money for planes, pilots, and insurance. And logistically, Smith had to have in place an intricate system linking any two parts of the country: a package sent from any major city had to arrive at one of 100 other major cities within 24 hours of receipt or Smith's business would not be able to make good on its promise of overnight delivery, something yet unheard of in cargo delivery.

Although Smith was unable to convince the Federal Reserve his plan would work, he decided to spend money on heavy-duty advertising to convince everyone else. He enhanced the original "hub and spokes" system he developed for the Federal Reserve, using Memphis' major airport as the hub due to its moderate climate and available work force. Rather than relying on passenger planes—the traditional means by which packages had been transported via air—to transport goods, Smith developed a system that used both freight planes and trucks to move cargo. Because packages did not have to take the most direct route, as long as they made it to their destination within 24 hours, a web of interlinking plane and truck routes soon covered the United States, providing service to smaller cities and thus increasing its customer base.

Amassing over $91 million in startup capital through bank loans, venture capital loans from independent investors, and $8 million in family capital, the company lost almost a third of its cash during its first three months of operation. In fact, on its first night of business, the fledgling company shipped only 186 packages onto its 14 Falcon jets routed to 22 cities. It was a discouraging start that proved to Smith that publicizing the service offered by Federal Express was key to his company's future. The company would continue to lose money due to high advertising costs and escalating prices for aircraft fuel and gasoline as a result of the Arab Oil Embargo of 1973. Other factors made the company's first few years an uphill battle. Outdated federal restrictions on aviation and various demands from the International Brotherhood of Teamsters caused FedEx to lose $29 million in its first two years of operation. Unlike rival United Parcel Service (UPS), FedEx is considered an airline and must negotiate national contracts with its Teamsters employees. Nonetheless, by 1978 FedEx had gained enough confidence from investors to begin selling shares on the New York Stock Exchange.

Throughout the 1980s and into the 1990s, FedEx has continued to adapt to advancing technology and increased demand for speed. In 1984 Smith devised Zap-Mail, a satellite-based system of linked stations, each containing an ultramodern facsimile machine, whereby customers could send documents to any part of the United States. Unfortunately, this new technology never caught on with consumers and was discontinued a few years later, but not before losing $300 million. The company also moved aggressively into the package business, taking on such rivals as UPS and Emory Air Freight. In 1989 Smith surprised analysts when he expanded his company into the largest all-cargo airline in the world by acquiring Los-Angeles-based international freight carrier Flying Tigers. He followed with acquisitions of several trucking companies in a bid to make the company a diversified freight and parcel powerhouse. The company was renamed FDX Corporation to reflect this diversification. By 1997 the company had expanded its international traffic to the point where it had over 560 planes—19 Boeing 747s, 24 DC-10s, six DC-8s, and 114 727s—flying out of three hubs, while its domestic business was enhanced by the introduction of InterNetShip, which allows customers to coordinate deliveries via Internet-linked computer software, and BusinessLink, a marketing service that provides businesses an online catalogue of their goods directly linked to FedEx's guaranteed next-day delivery. In 1997 alone, the company's 120,000 employees delivered an average of 2.5 million packages a day in 211 countries and territories.

Chronology: Frederick Smith

1944: Born.

1959: Began flying lessons.

1966: Graduated from Yale and began four-year stint in U.S. Marines.

1969: Returned to United States and joined Ark Aviation Company.

1971: Incorporated Federal Express in Delaware.

1973: FedEx began doing business with general public.

1977: New federal legislation allowed FedEx to add larger cargo planes to fleet.

1978: Issued shares of FedEx stock on the New York Stock Exchange.

1983: FedEx became the first U.S. corporation to reach the $1 billion mark during its first decade of operation.

1985: FedEx ranked among the top 10 employers.

1989: FedEx purchased its main international competitor, Flying Tiger International, to expand parcel service.

1997: Received Peter Drucker Strategic Leadership Award.

Smith's hard work and perseverance, even in the face of great economic losses during the company's early years and increasing pressures from competition from newcomers entering the field he created, have allowed him to not only preserve but increase the family fortune he inherited from his father. In 1997, Forbes listed Smith among the 400 wealthiest people in the United States. That same year, more than 37,000 trucks bearing the bold orange and purple FedEx logo hit the road each day, continuing the service and upholding the guarantee of next-day delivery Smith created decades ago.

Social and Economic Impact

From its hubs at major international airports in Tennessee, California, and Texas, FedEx has not only become the standard by which overnight carriers are measured; it has changed the way the world does business. Days formerly lost from productivity due to transporting goods-everything from machine parts needed for a repair, returned manuscripts from a typesetter, or a unique pair of shoes for a last minute party—can now be had within a day of requesting them. Such speed of delivery has always been the core of the company's success, a response to what Smith predicted would be the broad reach of business headquarters around the nation, as well as manufacturing firms' increasing reliance on small, high-technology parts like computer chips and motherboards that would cause significant "downtime" in production lines if not replaced in a hurry.

However, Smith was one of the first to foresee such changes; it took U.S. business owners, who were used to waiting up to two weeks for packages, a little longer to recognize the opportunities for cost savings, increased productivity, and improved efficiency that overnight delivery could provide. As Smith told a reporter for Nation's Business, "Steamboats and trains were the logistics arm of the Industrial Revolution's first stage. Trucks became a good logistics arm later—and still are because of their flexibility. But moving the parts and pieces to support the Electronics Age requires very fast transportation over long distances." Smith's foresight proved accurate; the rise of computers and the Internet in an increasingly global economy have linked businesses and their expectations for information and products in a whole new way. While the Internet can transmit data, delivery services like Federal Express move objects.

In addition to benefiting businesses around the country, Federal Express has also provided employment for thousands of people—many of them college students—who earn generous hourly wages working part-time, six nights a week between the hours of 11 p.m. and 3 a.m. to keep the packages on schedule. For his foresight and skill as a risk-taking entrepreneur over several decades of operation, Smith was awarded the Strategic Leadership Forum's Peter F. Drucker award in 1997. The award served as an acknowledgment of Smith's willingness to accept new technology, and to "single handily change . . . the way global business functions," according to John Geci in Strategy & Leadership. Smith achieved this, Geci continued, "not because he happened to be in the right place at the right time, or because he had access to a new groundbreaking technology, but because he had a vision of how to combine existing technologies and develop new processes to realize new possibilities."