Tucker Taylor joined Federal Express in 1973 and held senior management positions in customer service, ground operations, industrial engineering, and national sales. Taylor is currently a board member of Supply Pike and an associate for Leaf Logistics.
Dan Sanker is the president and CEO of CaseStack (now Hub Group’s Retail Supplier Solutions). CaseStack is nationally recognized by leading publications as one of the fastest-growing private companies. Sanker also serves as the chairman of the board for SupplyPike. In this episode of the Be EPIC Podcast, Matt sits down with Taylor and Sanker to discuss the beginning of FedEx and how companies can learn from their strategies and achievements to grow.
Episode Transcript
0:00:06.8 Matt Waller: Hi. I'm Matt Waller, Dean of the Sam M. Walton College of Business. Welcome to Be Epic, the podcast where we explore excellence, professionalism, innovation and collegiality, and what those values mean in business, education and your life today. I have with me today Tucker Taylor, who is on the board of SupplyPike, which is located in Northwest Arkansas. And Tucker worked for Federal Express for nine years, and he also has lots of other rich experience in logistics and supply chain management. I also have with me today Dan Sanker, who is the founder of CaseStack, and he is also president at CaseStack Retail Supplier Solutions, which is a part of Hub Group now. He's also chairman of the board of SupplyPike. Thank you both for joining me today.
0:01:10.0 Dan Sanker: Thank you for having us.
0:01:12.0 Tucker Taylor: Great to be here, Matt.
0:01:14.1 Matt Waller: Tucker, you were a part of FedEx during the early years of FedEx. And really, that's the most interesting years of FedEx. For one thing, no one thought I would be able to make it. So many things had to come together and work out just right, and you got to be on the front end of that. Tucker, when you joined FedEx back in 1971, it must have felt a little bit uncomfortable, because what they were trying to accomplish had never been done in the history of the world. Did you have any trepidation about it?
0:01:51.3 Tucker Taylor: Well, yeah, it certainly was chaotic. The way I got down there is that Fred Smith, the founder, had retained me and my partners to do a little study about would this crazy concept of connecting a bunch of cities with the little airplanes, would that work. So we did some research on it, and we concluded that maybe it'll work. But when we were done, Fred Smith said, "Well, I have no money to pay you for the study, but if... I can hire you, if you'd like to come down here." So the three of us went down there. And that was Art Bass, who became the president, Vince Fagan, who was the driving force between the... Behind marketing and absolutely, positively overnight, and myself. And I played several roles in both operations and sales. And so I had a little insight to what was going on when I got down there, but I didn't have an insight into how chaotic it was gonna be and how many mistakes were gonna be made, and that the sheriff was gonna show up and try to take the airplanes, and there'd be lawsuits and all that stuff. But it was an experience.
0:03:01.6 Matt Waller: So, Tucker, in those early years, you were working directly with Fred Smith, who is a well-known leader, really being able to... He's an entrepreneur and a leader. A lot of times, entrepreneurs can't form something and then run it to that level. What is it about Fred Smith that you've observed that really has enabled him to be able to do that?
0:03:30.4 Tucker Taylor: Well, you're right. The American business is littered with entrepreneurs who started companies and stayed on too long. Smith is a absolute chameleon. He was able to create in himself what was required to make the company work. And first of all, there's no harder working person in the world. He's 24/7 every day. So the hard work combined with his intelligence and his sort of dedication to the company, he managed to do it. It's quite surprising. Those of us who were in the original management team were all gone after eight years. We had no place there, but he managed to do it. And there's another example who's on this call, Dan Sanker, who did a start-up and then ran it into this very large, successful company with, I don't know, hundreds of employees. So he's got that whatever that magic...
0:04:21.6 Matt Waller: Absolutely.
0:04:23.2 Tucker Taylor: Whatever that magic juice is, he drank some of it.
0:04:26.8 Matt Waller: Yeah. So, Dan, of course, I've known you since you moved here, I think it was about 10 years ago, maybe a little more.
0:04:32.6 Dan Sanker: 15 years now.
0:04:34.1 Matt Waller: 15. Oh my goodness.
0:04:34.8 Dan Sanker: Yup.
0:04:36.0 Matt Waller: And I met you, I think your first year here.
0:04:38.4 Dan Sanker: You had met me before I moved out.
0:04:40.9 Matt Waller: Oh, yeah, 'cause you came to the CSCMP Roundtable meetings?
0:04:44.4 Dan Sanker: Yeah. And also the Center for Retailing Excellence back in the day.
0:04:47.2 Matt Waller: Yeah, that's... That is right. And yeah, the same thing is true. I had the pleasure of seeing you grow something into a really remarkable company over that time, which was eventually acquired by Hub Group. But you're still involved and president, but you've also started another company, SupplyPike, and you're Chairman of the Board of that. Given your experience in doing that, what is your insight into that kind of different sets of skillsets that are needed for those different stages?
0:05:24.1 Dan Sanker: Yeah, it's an interesting topic. Sometimes I've said the words, Just in time management skills. I think some people have a certain narrow set of skills, and even along the way when we started CaseStack, I saw that. So there were certain people that were great at certain stages, but were just inappropriate at other stages. And then I do think that sometimes people make the assumption that the person who starts the company can't be the person who runs the company. But just as much as we have examples of that not working, I think you probably could find a lot of examples of it working. And sometimes I think the examples of it working are pretty stellar. They're the ones that you remember.
0:06:09.0 Matt Waller: Walmart's one of 'em.
0:06:10.3 Dan Sanker: That's right.
0:06:12.1 Matt Waller: Well, Tucker, there's a lot of things about FedEx that make it complicated. You had to have a hub-and-spoke system, but you've gotta have a dense enough network to where it really can work. You can't just start with two points. That just seems like an overwhelmingly complicated, impossible task.
0:06:35.2 Tucker Taylor: Right. So what you said is true. However, we didn't know that. Federal Express started long before this whole idea about network and their growth and exponential growth by adding new nodes, that... We had to all sort of invent that. The first day we opened for business, we had connected like, I don't know, six or seven cities, and we had like six shipments. Well, in retrospect, that might have been a 30% market share. We simply didn't know. We didn't understand. Back then, we just... Connect some cities and provide good service and people will flock to it. So while it was complicated, some of that was lost on us. I don't wanna overstate that. Clearly, Smith had this analogy in his mind about moving freight the way a bank clearing house works or the way a telephone exchange works. So he understood networks, but none of us really understood the ramifications of it.
0:07:34.8 Matt Waller: So, Tucker, you worked there for a couple years before you were even open, right?
0:07:40.3 Tucker Taylor: Yeah. A year before our first day. Yeah. One year. And we were in Little Rock, you'll recall, and we did a lot of planning. And that's when Smith was putting up these barriers to entry by finding the airplanes, locking them up, going to Little Rock Airmotive, getting the STC supplemental type certificate for the door, getting it installed, all that stuff took place in Little Rock in preparation for the big night when we had six shipments.
0:08:11.1 Matt Waller: So, Tucker, I would like you to elaborate, if you wouldn't mind, on the notion of barriers to entry, and how... Give us specific examples of barriers to entry that were created.
0:08:23.8 Tucker Taylor: Yeah. So there's really three. Number one is the airplane. So just to summarize that very quickly, under the Civil Aeronautics Board, which regulated all air commerce back in those days, what was exempted was an air taxi. And an air taxi required that the airplane was small, and there was a very definition of small. So the first thing that happened is that Fred Smith went to Congress with his great delegation. You remember Little Rock back then, it was McClellan, Fulbright, they had the strongest delegation in Congress, and got that law changed a little bit, so the criteria was raised so that a corporate jet could perform that service. So that's number one. Number two, then he went and owned the corporate jet market. The only airplane that could really do that was this Avion Marcel Dassault Falcon, and he found 23 of 'em, bought 'em all, or put options on all of 'em. So that was barrier number two. Now we had the airplane.
0:09:35.1 Tucker Taylor: Then barrier number three was, he filed through Little Rock Airmotive for the supplemental type certificate to put the door in that airplane so it could be in service of cargo. So there's a barrier, and no other entrepreneur could come in and operate an airplane... Well, under the exemption, because they were all owned by Federal Express. Even if they could find them, they couldn't get a door put in it. And then overall, there was the protection of the Civil Aeronautics Board, who wouldn't let anybody compete with a large airplane. So they had an absolute fortress against competition that lasted three to four years. And without that, as Fred Smith, and both Fred Smith and Art Bass said, "We were dead in the water." If these big guns had decided to compete with us, it would have been like taking candy from a baby. But they couldn't.
0:10:31.9 Matt Waller: Talk about for a moment your pre-FedEx experience that helped prepare you for this.
0:10:40.5 Tucker Taylor: Yeah, so my pre-Federal Express experience with regard to that is, number one, I went to Yale, and Fred was there, and I knew Fred Smith at Yale. Then when we both graduated, I went to work as a sales representative for Pan Am, who was selling the Falcon. So I was a salesman on the Falcon, and I knew it fairly well. In the meantime, Fred came back to Little Rock and started getting into the business of buying and selling used airplanes, where he started to understand this Falcon and started to see its capabilities. So that was the two threads that led him then to come to me and my partners and say, "Write a little study on the possibilities of doing this hare-brain scheme."
0:11:28.0 Matt Waller: So who were some of the other early people with you?
0:11:32.5 Tucker Taylor: My partners in New York were Art Bass and Vince Fagan. Art Bass came down and joined and eventually became the president and chief operating officer. Vincent Fagan came down and became a real leader in marketing and sales with all that wonderful advertising that the company did. Roger Frock joined from AT Kearney, and Mike Fitzgerald was recruited from UPS, who was a dirty fingernail, no-nonsense, how you run a bunch of couriers and keep 'em non-union. So that was kind of the... That was kind of the group.
0:12:13.5 Matt Waller: Well, you have a quote in your paper from Shopify, and many listeners are familiar with Shopify, since it's powering a huge percentage of the e-commerce stores online. But the quote is, "When starting a business, evaluating all potential barriers to entry is a crucial step in deciding whether or not to enter a chosen market." How did you know that was so important, or did you know it early on?
0:12:44.1 Tucker Taylor: Certainly I didn't, but Fred Smith figured it out. Some of those barriers, he took advantage of circumstances, some of those barriers he created. But none of them were by accident, that's for sure. And he knew what he was doing. And it saved the company. So what... Everybody who could potentially compete with Federal Express heeded Shopify's advice and said, "We're not going there. We'll use our assets some place else."
0:13:19.0 Dan Sanker: Man, I think it's always easy for people to lose track of what it was like in the beginning and what the market looked like. So you talk about the barriers to entry, and when we look at companies, we often look at them in retrospect, as successful companies, you don't really look at the ones that aren't successful. And it's hard to understand... 'cause they actually change the market, and FedEx is a great example of a company that fundamentally changed the market, so it changed what the barriers to entry were, and what the barriers to entry are.
0:13:53.7 Dan Sanker: And I think that's one of the interesting things about this story. If you go back, none of us even can relate to the story anymore of what the air freight market looked like when you all started Federal Express. It was not at all like a market that we're familiar with. I think it would be interesting to hear, Tucker, a little bit about what was the market when you got there. Because it's so different, because right now, even... Supply chain and logistics have become consumer topics now. They weren't even when I started CaseStack. It was a strange alien topic. When you go back to when Federal Express started, you didn't hear people talk about supply chain. Everyone has become an expert on, well, everything probably now, but especially supply chain and logistics. They all feel like we have some level of consumer expertise now. This air freight overnight market, from a consumer perspective, back when Federal Express started, it didn't really exist in anything like what we see now.
0:15:00.8 Tucker Taylor: Yeah. So, here's what the market look like back then; parcels under 100 pounds moved in the bellies of the airlines. The airlines, of course, served passengers, so they flew around during the day, which is of no help to cargo that wants to... High priority stuff that wants to move at night to be there in the next morning. So it all flew around during the day, and then you had this critical issue about who is gonna pick it up, and who was gonna deliver it after it got off the airplane. And so there were some 800 companies called domestic freight forwarders, who would accomplish that. So that's how it worked. The chances of getting something overnight would almost certainly require a courier who would buy an airline seat, and put it in the baggage hold and carry it. It was virtually impossible. And the market was very small, so the reason Federal Express were so disruptive is, by putting in this hub-and-spoke thing... Of those 800 freight forwarders, there'sprobably four left. They just were a completely inefficient intermediary once you broke the code of how to move cargo instead of moving passengers. You're right, Dan, it was totally different than what we see now.
0:16:19.0 Dan Sanker: I think I would liken the market, that the understanding of that market, air freight market, a little bit to what currently, you'd probably consider the knowledge base people have of the International market. So if you had to ship something from Singapore to Wisconsin, your average person does not know how to do that. It's so complicated. So imagine having that amount of complexity in having to ship a 30-pound box overnight to your grandmother's house. That's what you would have been dealing with, I think, back when you contemplated this concept of Federal Express.
0:17:01.9 Tucker Taylor: Right. Just a couple of technological issues here that I think are relevant of the Federal Express. Number one, the thing that made it all possible was large-scale integration, and the jet airplane. So large scale integration meant the replacement parts became smaller and smaller, urgent parts became smaller and smaller, but the advent of the jet aircraft, you actually... Was feasible to connect all these cities overnight. So those two technology things, are what created the demand that Federal Express ended up supplying. The other technology thing is interesting, this is an anecdote that demonstrates it, how one technology has to wait for the other, and here's how it works. Federal Express, in 1978, or there abouts, had figured out how to scan a package and know where it was at any given time, and be able to have this wonderful database of every... What they had to wait for, though, was laser printing, because you couldn't do that unless someone figured out how to produce an air bill, every one of which had a different code. So you can print a zillion air bills with the same Universal Product Code, but what good would that do? So the laser printing was the thing that kept... That backed up Federal Express for two years until they could actually [0:18:32.6] ____ this information. As Smith famously kept saying, "The information that goes with a shipment, is important as the shipment itself."
0:18:44.5 Matt Waller: You know, your point about technology preceding advancements, and other technologies and in business practice, it reminds me of just how important it is for a given country to really be very deliberate about trying to produce new technology to innovate. Would you mind speaking, Tucker, a little bit to 1, early routes you selected, how you selected them. 2, the type of product you were shipping compared to what's being shipped today, primarily. And 3, I would like to talk about brand equity a little bit. But let's start with the early routes.
0:19:28.1 Tucker Taylor: Sure, so the first eight cities that occurred in March, whatever it was, March of... Or I guess it was April 28th of 1970. They were selected because we wanted cities that were kinda close, we wanted cities where the weather was good because our pilots weren't that well trained. We selected them for all the wrong reasons, right? When we re-initiated the service one month later, we started to understand this network stuff and decided they actually should be big cities. [chuckle] So we redid the network, and I think that night we opened and there was like 250 packages, which again, in retrospect was probably a 70% share. With regard to the products, it was simply replacement parts. That's all that Federal Express was in the business. Now before that, its whole concept was the Federal Reserve, that's why it was called Federal Express. It was gonna clear checks because that was gonna save a zillion dollars, and everybody said, "That's a great idea." But actually, once the venture capital money was in, we sat around and said, "This probably really isn't a very good idea." Having a single customer and the single customer is the US government is probably a terrible [chuckle] idea, so. Then the products became, as I said, replacement parts. So here is the reason that Vince Fagan was able to convince the board and start spending this huge amount of money on television.
0:20:58.7 Tucker Taylor: It goes like this, Federal Express had a repurchase rate that was really high simply because structurally, the service was so good. And if you invest dollar in advertising, the return on that investment is huge 'cause of the lifetime value of the customer, they use it, they try it, they like it, they grow the business. With regard to the large freight forwarders who controlled the rest of the business, their service was deplorable. So there was no incentive for them to run television ads to just buy a disaffected customer so they could just push a bowl wave of marketing costs in front of them. So it just was a structural advantage, and hats off to Fagan and Smith to figuring that out because by the time deregulation came in, everybody knew who Federal Express was, right? [chuckle] UPS for their side, just with regard to their brand equity, UPS was an anonymous. UPS's whole strategy was, "Don't let regulators know who we are." And for years, the logo on the side of a UPS truck wasn't visible to the human eye. They were absolutely shunned branding.
0:22:12.2 Matt Waller: So getting back to barriers to entry, when we think about economies of scope, the hub-and-spoke system is really the epitome of economies of scope because you're running everything through a single node in Memphis. And so, you're able to spread your fixed cost over more services, if you will, which is one of the keys to FedEx's success. I took a group of students, I actually did it multiple times, to Memphis to see the FedEx operations. When we... We'd do it late at night. You're standing out there at the airport and you see all of a sudden these lights coming from every direction, 360 degrees. And all of a sudden, they start landing and landing and parking on the sides. And then trucks go out and unload them, and they take them in and they sort them. And then they go back out and they put them back on the planes, and then the planes start taking off. And it's all done in a very short period of time. But I do think that is the best and clearest example of the kind of economies of scope that lead to this insurmountable barrier to entry once it's established.
0:23:37.4 Tucker Taylor: Absolutely. So let me put some metrics on your observation there. From the very first day, that window to do that, sort in Memphis was always two hours. So with that two hour window, here are the numbers. The first night it was six packages, the next month it was 258 packages, when de-regulation came in, Federal Express was doing about 28,000. Today, they're doing 9 million. So you can see the engineering feat, the stuff that went on beyond the curtain to try to make that work.
0:24:13.6 Matt Waller: It's such a remarkable achievement of mankind and so many people really don't know it. FedEx's technological advancements in terms of economies of scope through a hub-and-spoke network allowed for E-commerce to be possible.
0:24:32.5 Tucker Taylor: Yeah. That is the... And Dan and I talk a lot about this so, let me just give you an economic number here. To carry a, I don't know, one-pound package from Los Angeles to St. Petersburg, Florida through that hub system, the air cost is... I'm gonna round up now, zero. It's pennies. All the cost now is on the pick-up and delivery and that's why this whole thing about this sort of the last mile stuff is agonizing so many people. It's where all the cost in a system is once you've established this technology of hub-and-spoke.
0:25:10.7 Matt Waller: Yeah. And so that's the other fascinating thing about extreme economies of scope like this. It's really all a fixed cost.
0:25:20.8 Dan Sanker: You also have to put into consideration the concept of raising money at the time that you started Federal Express. There are companies now that the financial markets enable. At the time that Federal Express started, you didn't really have that. So you had this concept of trying to explain the network effect that required huge capital potentially, but you didn't have a financial market that was accustomed to that sort of thing. They were more accustomed to small successes, so it's shave two cents off of a widget. And now we're used... This is another thing we're all used to now is that, somebody can actually launch a company and have billions of dollars in capital. So, sometimes that goes wrong, like a WeWork. Those opportunities didn't exist then, that was a lot harder.
0:26:16.9 Tucker Taylor: Yeah. That's a very good point. One of the things I quote Smith in my article saying, "No one will ever know how miserable my life was during those two years." I mean, trying to raise that money, and facing bankruptcies, and law suits it's just... As I said in my article, it actually makes me feel guilty that I was having so much fun there. And Dan's right, today this idea about spending a billion dollars to put it in a network that will reap benefits down the road. "Oh, I get that." Here it was like, "Let's say what."
0:26:52.1 Matt Waller: There's so many examples of where... You really don't wanna talk about how the sausage... You just pay. Entrepreneurs like to talk about how the sausage is made because they're enamored with it, but no one else is.
0:27:05.6 Dan Sanker: I think often times, like what you're referring to, when you talk about how the sausage is made, it scares everyone because it sounds impossible. And then, once you actually succeed, the opposite obviously happens. And I know Tucker, you've talked before about how one of the things that Federal Express had done in the earlier years, was just make it so easy that people would use FedEx instead of a less expensive alternative that maybe was all they really needed. And they would pay more for this service because it was just so easy.
0:27:39.6 Tucker Taylor: Yeah, that's very good. So as this thing evolved, especially when you got into courier packs, the service was so easy to use that someone would pay $10 or $8 rather than a 13-cent stamp for no reason other than it was easier to use than going to the post office, so that's why all those ads, "Federal Express is so easy to use, all you have to do is pick up the phone."
0:28:05.6 Dan Sanker: And I had an example of that with FedEx. When I started in my career, I was in Corporate Finance at KPMG in New York. So I was in a big building on Park Avenue, and there were a lot of companies that were relevant to what we did in there. So we would wrap up companies for sale in mergers and acquisitions, put a book together, and then we would mail out the books to hundreds of different firms that might be interested. And often times, we would FedEx envelopes to people who were in the building, so that is an envelope that may have gone to Memphis and then come back the next morning to someone not only in the building, but maybe on the same floor in the building. Tucker knows me as fairly frugal, so that... I always found it, it was definitely an example of FedEx's promiscuous use, because there was something that I... I used to go talk to people and say, "Well, I could just... I could go drop these off in the building." And everybody would say, "It's just easier to FedEx it. Just put it in the pile."
0:29:15.2 Tucker Taylor: And, Matt, here's one other anecdote that might be of interest. Five or six years ago, I met Morley Safer, the late Morley Safer, who was on 60 Minutes, and he told me a story about... At the early stages, 60 Minutes did a thing about this overnight stuff. And so they asked Federal Express, Emery, and Airborne to send the reel, their advertising reel, so we could do it. And he said, Airborne sent it to him via Federal Express, which I think is pretty telling.
0:29:50.4 Matt Waller: Thanks for listening to today's episode of the Be Epic podcast from the Walton College. You can find us on Google, SoundCloud, iTunes, or look for us, wherever you find your podcast. Be sure to subscribe and rate us. You can find current and past episodes by searching "BeEPIC" podcast, one word, that's B-E-E-P-I-C podcast. And now be epic.
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