Strategic Alliance Partnership: FedEx and Cardinal Health
Business to Business Marketing
Johns Hopkins University
December 2, 2014
Natalie Julich,
Stacy Kleber,
Lisa Iannarino,
Varun Sastry,
Shishi Zhang,
We chose to investigate the recent alliance between FedEx Corporation and Cardinal Health, formed on October 28, 2013. Though the official alliance is in the early stages, the two firms have worked in tandem for more than 10 years. The alliance is interesting because it combines two companies with very different, distinct expertise - one in transporting and shipping, and the other in specialized healthcare solutions (FedEx, 2013). Together they “can create tailor-made supply chains for the healthcare industry” (FedEx, 2013).
Background
FedEx Corporation is an international shipping company, and has long been in the business of providing superior service to their customers. On their very first night in operation, they became the “first transportation company dedicated to overnight express package delivery” (Birla, 2005). FedEx has four divisions: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. They also acquired Supaswift in 2014 (New York Times, 2014). Though Cardinal Health and FedEx may seem like an unlikely alliance, FedEx has an entire section of their web site dedicated to HealthCare Solutions, which highlights the special temperature control and security offered for sensitive health care packages (FedEx HealthCare Solutions).
Cardinal Health is a health care services company that reduces cost and increases efficiency for clients in the health care industry. Founded in 1971 as Cardinal Foods, and made public in 1983 as Cardinal Health, they have since become a major player in drug distribution (Cardinal Health [Our History], 2014). Cardinal Health is divided into two segments - pharmaceutical and medical. The pharmaceutical segment “consolidates pharmaceuticals from hundreds of manufacturers into site-specific deliveries to retail pharmacies, hospitals, mail-order facilities, physician offices, surgery centers and long-term and other alternate care facilities”, while the medical segment focuses on “high volume, replenishableproducts” like gowns and scrubs (Cardinal Health [Our Businesses], 2014).
This alliance operates within the Healthcare Global Supply Chain industry. Other major players in this market include UPS, who recently “allocated 30 of its 130 global distribution facilities in China to cater to the fast growing Asia-Pacific pharmaceutical market” (Team, 2013). Global healthcare is one of the fastest growing industries in the world today (Beeny, 2014) According to Forbes, the Global Supply Chain market will grow 10% each year through 2017 (Team, 2013). These statistics, along with growing healthcare needs, make this a very lucrative industry for an alliance.
Evaluation
While the formal alliance between FedEx and Cardinal Health is just over a year old, early returns suggest it is a successful partnership for both companies. After more than ten years of partnership, the alliance is meant to take their relationship into the next phase, providing a stronger, more competitive third party logistics (3PL) offering to customers of both companies (FedEx, 2013).
There are steps we can take at this stage of the partnerships to gauge the alliance’s success. For instance, in reviewing financials of each company, we see a steady growth from October 1, 2013 through the end of November 2013 (Exhibit 1). FedEx’s stock price rose slowly but steadily from $114.78 on October 1, to $134.65 the day of the alliance announcement. After a slight dip overall the week following the announcement to $132.57, stock continued to rise through the month of November, closing at the end of the month at $138.70 (Yahoo! Finance [FedEx], 2014). Cardinal Health’s stock followed a similar trend, with a slow rise from $53.25 to $60.25 the day of the announcement, and then a continued rise through the end of November to close at $64.60 (Yahoo! Finance [Cardinal Health], 2014). From this data, we infer an anticipation for the partnership announcement from investors, followed by a general endorsement of the alliance, as seen by the continued though limited growth. Today, both stock prices are healthy, with FedEx at $179.28 on November 28, 2014 and Cardinal Health trading at $82.57. Though the health of the market overall is better than it was one year ago, the continued growth of each of these stocks reflects the health of the companies and in turn their partnership.
Customers, employees and industry experts alike are satisfied with the alliance, with Cardinal Health named #1 HealthCare Supply Chain Company by Gartner Research for the fourth consecutive year. This ranking is based on Cardinal’s continued focus on reducing supply chain inefficiencies while improving the quality of healthcare provided. Cardinal received the award in part due to peer and analyst votes, along with its continued development of its Innovative Delivery Services group (Gartner, 2014). Cardinal’s alliance with FedEx allows it to serve its customers effectively and efficiently, with a wide reach, secure shipping, and one point of contact. Both companies were named to Inbound Logistics Top 100 3PL Providers List for 2014, due to the range of services provided and its market and geographical reach (Thomas Publishing Company, 2014).
FedEx customers and employees have found benefit in the alliance as well. When speaking of the FedEx Healthcare Shared Network, a pharmaceutical company logistics official shares that with the move to the new system, he doesn’t worry about his deliveries on a daily basis like he did before, and truly believes they are offering a “best-in-class solution” (FedEx Supply Chain [Providing...Shipments], 2013). A transportation official for a global biotech company agrees stating: “The FedEx Healthcare Shared Network gives our customers more control and predictability over their receiving process. This high-value service adds to the image of our products” (FedEx Supply Chain [Enhancing...Deliveries], 2013).
We believe the alliance between FedEx and Cardinal Health is successful. It makes use of the existing technologies and systems of each company, to enhance their services and offerings. Financially, each partner company is doing well, with growth seen since the alliance creation, and customers, industry execs and employees alike see the value in the partnership.
Analysis
Fedex and Cardinal Health each have individual strengths and weaknesses that add to or threaten the stability of the alliance.Both firms have a strong business history and healthy bottom line. They have consistently sought out new and innovative ways to improve service, decrease overhead costs, and expedite distribution. This is one of the main reasons why we anticipate this alliance to be fruitful.
FedEx has been on the forefront of web and satellite based tracking solutions as well as more energy efficient ways todistribute orders, like electrically powered vans (Baldwin, 2013). Cardinal Health has been innovative in providing an end to end delivery model for pharmaceutical delivery (Wartenberg, 2014). These companies have made numerous strategic alliances that have added to their breadth of service offerings. Most notably, FedEx purchased Kinkos in 2004, and Cardinal became a joint venture with CVS in 2013. Both of these relationships further empowered the consumer and resulted in an improved and relevant range of services available (printing and shipping/generic pharmaceutical program). Both companies have mastered the art of distribution and mainly focus on business to business relationships. However, FedEx does have an increasingly strong consumer base that itmarkets to quite often.
Although each company looks strong in terms of business growth, they face (and have faced) some major setbacks with red tape. First and foremost, these companies employ about 350,000 people in total. Employing this type of labor force is not always easy. In fact, both companies have had strained negotiations with union workers (Leadership, 2014). This causes dissatisfaction amongst union members, a riff between employers and staff, as well as a negative sentiment from the public (which may not always be accurate). In FedEx’s case, this also led to a large tax audit from the IRS regarding the way they categorized their employees (Risher, 2009).
Yet, the largest threat to the strength of this alliance is two separate but equally concerning legal issues revolving around drugs. Two notable investigations and fines have been issued by the DEA onto Cardinal Health (Leger, 2012) for the over-prescription or ordering/distribution of Oxycodone. Most recently (in July 2014), FedEx was indicted over a similar issue. They were accused of conspiring to distribute controlled substances to those who had no legitimate need for the drugs, possibly for the purpose of misuse, or selling illegally. To date, FedEx has contested the claims stating that they are not law enforcement, and that they only serve to deliver goods (Moyer, 2014).
These two issues combined are a great threat to the future of these companies. Their competitors (UPS, USPS, and various health distribution companies) have some opportunity to gain market share. However, FedEx and Cardinal Health have a strong foundation and experience, and we have confidence that the companies will continue to make good decisions and gain ground over their competition.
Advantages
The clear and primary benefit for both FedEx and Cardinal Health is the ability to reap rewards from reduced third party logistics costs. With efforts focused in capturing a larger slice of the healthcare supply chain market pie, integrating their 3PL capabilities allows for margin improvement while being able to provide more customized solutions to consumers (Solomon, 2013).
Forming an official strategic alliance with FedEx gave Cardinal Health access to expanded international and domestic outlets. Whereby FedEx was previously a transportation service that Cardinal Health simply used, Cardinal is now able to leverage FedEx’s global logistics network enabling reach across international borders. Of particular note and benefit, China is Cardinal’s primary market outside the U.S. (Cardinal Health, 2014). The collaboration also allows the firms to deploy inventory now from over 40 distribution points across the country, deepening and solidifying their domestic reach as well (Solomon, 2013).
To the benefit of both firms, this strategic alliance finally helps them compete with the UPS-TRIOSE partnership. UPS is Fedex’s largest rival and had the first mover advantage in the healthcare logistics segment. It partnered with TRIOSE, a global healthcare solutions provider, to form a well established position in the market in early 2012. While the business models of both alliances are similar (offering scalable solutions using technology and economies of scale to improve supply chain) Cardinal’s brand recognition in the healthcare field is stronger than TRIOSE’s, indicating news of its partnership with FedEx could carry more weight than its rivals’ (Team, 2013).
Disadvantages
FedEx’s currently offers a variety of temperature monitoring and sensitive services that are well poised to take favor with the current trend in the healthcare shipments market. However, they could potentially be at a disadvantage if they need to increase their pricing to accommodate increased “ground-based operations” (Team, 2013). Essentially, as cold chain shipments of pharmaceutical and medical products grow, the service offerings in the healthcare logistics segment need to be expanded as well. If FedEx does not have the infrastructure to support this, then additional investment is required which would reduce earnings early on in the alliance.
It appears there may be some complexities when it comes to collaboration between the two organizations. Employees at Cardinal Health, both past and present, report their office culture has a very good work/life balance (Cardinal Health Reviews, 2014). This is in stark contrast to reports by FedEx employees, again - both past and present - that their office environment is consistently high pressure,competitive, and metrics oriented (FedEx Reviews, 2014). These competing values create an environment in which collaboration between Cardinal Health and FedEx alliance employees may be difficult. Without proper awareness of each other’s work cultures misunderstandings amongst the collaborating staff occur.
Additionally at Cardinal Health, middle management frequently changes either through rotation, attrition, restructuring or layoffs (Cardinal Health Reviews, 2014). This may cause difficulties in relationships between the two firms when executing tactical priorities of their supply chain management. If incoming/outgoing managers have very different communication styles, tactics may be executed with differing effectiveness.
Marketing Forecast & Objectives: FedEx
According to experts from Forbes.com (2013), FedEx’s supply chain revenue is expected to grow 10% annually begininthe year 2013. As a market leader in the U.S. logistics and transportation industry,FedEx holds around 50% of the market share. With its recent alliance with Cardinal Health, FedEx entered the fast-growing healthcare product logistic market. However UPS, their top competitor, had the first mover advantage in the niche healthcare logistic market (Team, 2013). In 2012, FedEx’s supply chain revenue of $1.21billion was significantly lower than the $6.7 billion generated by UPS. Optimistically, due to expected annual logistics revenue growth of 10%-15%, FedEx’ total market share is projected to remain steady over the next 5 years
Marketing Forecast & Objectives: Cardinal Health
After implementing the 3PL service with FedEx, Cardinal will reduce the costs associated with warehouse management, inventory holding, transportation and customer service. Historically, the firm has achieved 5% of the gross profit margin because of their superior “cost control” information management systems(Cardinal Health [Our Businesses], 2014). As long as the alliance continues to optimize supply chain systems, their annual costs will continue reduce and their profit margin will increase.
However, Cardinal cannot overlook the next step of its biggest competitors in the healthcare logistics industry. Recently, McKesson Specialty Health, a division of McKesson, announced the launch of its enhanced 3PL service that includes comprehensive order to cash service, simplified and streamlined warehouse operations and guaranteed lower freight cost for all manufactures (Crye 2014).We project thatCardinal will still achieve a minor annual increase (1%-1.5%) of its market share over the next five years due to its lower costs and early mover advantages in the 3PL service offering.
Marketing Strategy and Marketing Mix
To achieve the forecast outlined above, FedEx and Cardinal Health will need to strengthen its alliance through shared value propositions and strategic goals, leveraging each other’s core competitive advantages, and confronting challenges. Cardinal’s clients will further enjoy the faster and more convenient shipping service from FedEx’s guaranteed overnight delivery and broad coverage of logistic networks across all zip codes in the U.S. Also, FedEx’s innovative “Healthcare Solution-cold chain service” matches Cardinal’s value proposition of “increased efficiency, innovated service” to meet their clients’ needs. Ultimately, the alliance will implement its strategic plan to offer clients customized service& solutions in order to maintain and gain competitive advantages (Solomon, 2013).
To achieve the sustainable growth of each firm, the alliance must optimize their price, place, products and promotion.
Price:Cardinal will apply customer-value based pricing procedure by quantifying value-added service into price-adjusted decision making. With FedEx’s faster and extensive shipping service, Cardinal will reduce its warehousing and inventory cost dramatically and provide its clients with value-added service. Cardinal could charge its clients, including drug stores and hospitals, lower prices based on cost-volume relationship and demand estimates. This will better satisfy its customer needs and strengthen customer loyalty while boosting profits and sales volume.
Place:FedEx will focus on improving its logistic networks, especially on ground-based operation, to extend coverage of Cardinal’s U.S. distribution points. According to market research from Forbes.com (2013), customers today prefer the longer and cheaper modes of transportation as opposed tofaster, more expensive airfreight service (Team, 2013). This illustrates a shortfall in FedEx’s business model. The firm will need to collect consumer preferences via social media and surveyson their transportation preferences so as to adjust the shipping methods (ground or air freight) flexibly. By focusing on these customer needs, FedEx will stabilize its market share and best competitor UPS.
Product & Service:Cardinal aims on further utilizing its health service expertise to help FedEx facilitate its logistics service. For example, Cardinal will further innovate the unit-dose customized packagingto maximize its one-time transportation volume and improve JIT systems. Specifically, Cardinal will need to mix large sized packaging with smaller sized, or identify customers who have special preference for packaging or not so to act accordingly by applying CRM data mining to further reduce its holding/ inventory/ warehousing cost.