As you think about your first FedEx route investment, you are probably also thinking about how large you can (or want to) grow that investment.
We talked previously about how all businesses, including FedEx Ground businesses, benefit from scale. As your business sizes up, your per unit expenses decrease.
When you think about scaling a FedEx routes investment, however, you also need to think about P&D scale requirements outlined by FedEx Ground.
What Does Scale Mean?
Every FedEx Ground terminal serves a defined geographic territory. FedEx Ground closely monitors—and prevents via scale requirements—any contractor/entity from growing too large or too small within a single terminal. They do so by prescribing the number of daily stops an entity can make as a percent of all terminal stops.
An average FedEx Ground terminal makes about 15,000 stops per day. As an example, if a terminal has a scale cap of 12% then no entity operating from that terminal should be making more than 1,800 stops in a day.
Every FedEx Ground terminal has a unique scale cap based on the size of the terminal and the geographic composition of the service area. Each FedEx terminal attempts to limit operations out of their terminal to between 8 and 20% of terminal stop volume.
There is also a scale minimum. In most terminals, you must complete at least 500 stops per day.
Scale is not a suggestion in FedEx Ground terminals. It is a strict cap and FedEx Ground will take it seriously if an entity exceeds scale. Back to our example, if a terminal’s scale cap is 12%, then FedEx Ground views an entity completing 12.1% of the terminal stops as a concern.
Some FedEx Ground terminal managers are more intense about scale than others. Their jobs are on the line if a contractor materially exceeds scale guidelines and then causes major service failures in a market.
Why Scale Requirements Exist
Scale regulations exist for an excellent reason: FedEx Ground strives to prevent operational failure of one entity from impacting deliveries for an entire region.
History offers good reason to worry about scale. In the early 2000s DHL had a large presence in the United States and actively competed with FedEx Ground and UPS. However, a number of their contractors grew too large and when those contractors experienced failures, entire cities paid the price. After several high profile failures and the start of the economic recession, DHL pulled the plug on all US-based operations in 2008.
If your entity regularly exceeds scale in a terminal FedEx Ground will likely require you to sell a portion of your routes so that you come back under the scale cap.
Where Can You Get Scale Details?
Each terminal has its own scale requirements and these numbers are not publicly available. The senior manager of each FedEx Ground terminal knows and monitors scale for their terminal.
As you conduct due diligence on a route you will want to talk to the operation’s current owner about scale requirements. Additionally, you may want to work with a buyer-side consultant to work through possible growth opportunities.
If you move forward with the purchase of a FedEx Ground operation, you can get into scale details with the terminal’s senior manager at your AIM meeting.
What About Linehaul?
The percentage guidelines we discuss here are specific to P&D operations.
FedEx Ground caps linehaul operations by allowing no more than 15 assigned runs per entity per district.
How Do You Plan for Scale?
Knowing all of this about scale, what can you do as you plan for a FedEx routes investment?
Plan your first investment with scale in mind.
Be cautious about the size of your initial operation and consider your opportunities for growth before you acquire your first routes. If after time you want to grow larger, how can you do so?
Approach grandfathered operations with caution.
Some current operations exceed their terminal’s scale cap. Their entity received a pass during the ISP transition because of their historical size and performance. If you consider purchasing an operation that exceeds its terminal cap, know that if your operations give your terminal manager any cause for concern FedEx Ground can (and probably will) force you to sell a portion of your routes to meet present-day scale requirements.
Do not plan for FedEx Ground to increase scale percentages.
FedEx’s recent actions indicate that they intend to strictly enforce scale requirements and, if anything, may lower scale percentages as time goes on. Do not purchase an operation hoping FedEx will allow you to exceed scale in the future or believing a terminal will increase its cap.
If you want to understand more about scale and how to strategically plan for your investment, work with our team.