Demand-driven supply chains, new customer service models, and Omni-channel/free delivery are all driving up the cost of transportation. So what does last mile really cost?
Full Article Below -
Cyber Monday—a day when we hear proclamations about which channel has had more sales: Ecommerce or bricks and mortar. It’s all about how virtual will win the day. Yet Cyber Monday is a day when people are still buying things to be delivered to their ownbricks and mortar—their homes. A bit of an irony here.
After decades of virtual, asset free, and cloud, it appears that whether retail or industrial, things and locations matter more than ever. As interest and projects heat up, users need to consider many factors to be successful at last mile delivery.
We would argue that the economics of home delivery—the same-day and free variety— have not been fully thought through at Amazon. No doubt, some of Amazon’s lack of profit is not just due to their bold investments in distribution, but other business ventures. But the heart and soul of Amazon is ecommerce. Here, they must dominate.
We have written about Rakjuten before, noting they are buying their way into the US market. They have also leveraged their Japanese high-tech culture to launch their own electronic products.
Illustration by Sean McCabe- Fortune Magazine
So many sites, so much to buy! American shoppers are still turning to their favorite retailer where they have channel options: See it, taste it, try it on. Maybe buy it. Retailers are fighting back and making sure they can compete against ecommerce sites like Amazon, and they’re leveraging liquidation sites as preferred partners.
Building up their presence in their core markets using all the latest techniques to acquire customers. We recently talked about them here.
Not a factor in the US market. But Amazon is planning on taking the fight to Alibaba’s home turf. With the electronic ‘great wall,’ it will be interesting to see how well Amazon fares.
Home at Last
The art and science of getting to that last mile (the exact location) and then being really smart (context aware) about it has seen an explosion of interest, investment, innovation and implementation in the last year. And no wonder. Channels, though unique, all have action stemming from the packed malls,1 promotional mail and advertising of all forms, catalogues, websites, and mobile shopping. Of course, same-store sales will not rise as much as ecommerce and mobile do, but don’t write off the store. It is just finding its place in the Omni-channel world.
Last week, between the retail catalogue dump at our house and the packaging and parts manufacturers who send their catalogues to the ChainLink office, there must have been at least a tree’s worth of paper!
It appears, B2B or B2C, everyone wants their share of the spend from those locations. (Or they want savings, in the case of repair, utility companies and so on, who spend their time and dollars on service expenses. Very little goes towards the cost of the part that is needed for that little fix.)
Whether to make it or save it—serving that last mile is critical.
But it’s a long journey from the vision of Always On, as we recently wrote about,2 to learning how to master this new reality. The economics and issues are different (see below). Those endeavoring to provide last mile services need to learn quickly or lose out—on customers as well as profits. Being always on takes commitment and expertise.
Customer behaviors differ by channel—think about the face-to-face pressure. We kind of want to make that salesperson happy by buying. Online shopping lacks that pressure, so it’s easier to abandon the shopping cart. However, online shopping cart abandonment is high for many reasons. One of these is not having inventory and the delivery preference. Having inventory and preference costs money and requires the smarts to rethink the delivery process to make money at it.
Consider the economics of the deal. When the shopper comes to the store and picks up the item, the margin is generally higher—much higher (see Figure 1: Supply Chain Costs, below). The customer is paying for the last mile and the return, if that is a factor. In contrast, ‘free’ or even same-day delivery economics are not fully understood yet. Even Amazon has been challenged by their own bold moves.
Last Mile Economics
As distributors and retailers clamor for last mile strategies, the overall implications and cost of the supply chain have not been fully grasped—neither by the enterprises3 nor the municipalities in which customers reside. Japan was an interesting case, when lean first became in vogue, as smaller delivery trucks clogged the roads with those just-in-time deliveries. Talk about traffic! In general, we have not grasped the full implications of this societal and business change. Even Amazon has not done so (see side bar).
Below we offer a first glimpse of what home delivery actually costs to businesses and to the communities in which they operate. We hope the dismal science of economics can offer a more accurate picture.4
So what does home/last mile delivery cost and what impact does it have on profits? Let’s quickly walk through the supply chain (Figure 1) with a primary focus on transportation costs. Transportation costs vary from month to month, with particular volatility as this time. (We have not included warehouse or 3PL costs.)
Figure 1: Supply Chain Costs for One Blouse
According to our humble calculations, transportation costs (by ship, including import duties) are $1.82; so the supply side (manufacturing and transportation) cost of $6.82 on our $30 blouse is 22.7%.
With home delivery (using $6.50, which was the UPS charge for my recent purchase) transportation costs are a whopping $8.32, with home delivery being 78% of the transportation costs. I have seen numbers for home delivery average as low as 28% of the transportation costs. Even so, that is still a bundle. Given my figures, this makes the supply chain cost for the $30 blouse $13.20!!! Over one third of the cost. Something’s gotta give.
Total Sourcing Costs
Many moons ago, my colleague, Bill McBeath, created a total sourcing cost model (see Figure 2). (Leave it to someone who worked outside logistics to provide a better, more insightful view of the costs.5 )
Figure 2: Example Total Cost Sourcing Analysis
Note the relatively low transportation costs. Although this model was created a while ago, that cost still holds true for customer pick-up. But once home delivery enters the equation, things change. If they intend to get into the last mile/same-day delivery game, firms need to rethink their optimization models to determine how to get maximum value for the expense.
Last-mile logistics is tricky business requiring different math and real-time location6 information in order to mitigate real-time problems such as construction, traffic, weather, etc. that won’t show up on a static Google map.
What about the Rest of the Cost?
The question must also be asked, what is the impact on facilities, both public and private? Distribution centers and supply networks are already being redesigned, with a cost of millions, to accommodate ecommerce and expedited/express shipping. One retailer we talked to said they had already spent eight million on building Omni-channel-ready DCs and planned to do more.
Municipalities are another issue. In Thornton Wilder’s play, Our Town, which quite frankly reminded me of my own town, home delivery was a common thing. One of the main characters delivered milk.7 Of course, he knew his customers very well (very context-aware). Often, the owner or relatives did the deliveries themselves. Yes, those were the days when doctors made house calls, food was delivered to the home...and people came to repair your electronics (TV). Oh, wait, that is today! (Today’s doctors do an updated version of a house call—I recently Skyped with an emergency room doctor.)
But towns are different today. The population of the US has doubled from when I was a kid and tripled since Thornton Wilder’s time. Pollution, congestion and crime are all issues which towns have to contend with. Goods delivery is important to homes and businessmen—stores, businesses, restaurants, schools, hospitals, you name it. But it has to happen in a way in which all the ‘users of the road’ can safely have their place—from kids on bicycles to joggers and pedestrians. Can the town’s roads, traffic management, and air quality handle the load?
Crime is also a factor. Can you leave your ecommerce delivery on the front steps? Can the delivery truck park safely in front of your building while the driver leaves the motor running to run into the building and back to the truck?
Business Will Carry the Load
Most municipalities today do not have the budgets (or maybe space) to widen thoroughfares, create new public parking lots close to drops, or redo traffic flows (creating one-way streets that allow a lane for parking, dropping and so on). Nor do they want to incur the wrath of citizens. (However, getting in front of this issue would be a good idea. City/town managers may be able to learn from larger city managers who have successfully grappled with this problem.)
Business will ultimately wind up paying the freight, so to speak, on the costs. Parking permits and fees; special loading zones; new, smaller trucks that fit into those narrow streets (but carry a lot fewer deliveries per driver); and more, are all costs that will probably be incurred. As well, there will probably be new fuel-efficient vehicle regulations.
Transportation costs, I conjecture, will have to go up. Many editorials across the logistics press are talking about the low driver and maritime (on board ship) worker pay. Exactly what that will add to the overall transportation cost I am not sure, but it has to change. In addition, risk and compliance costs will also rise. Governments, that is the citizens—your customers—are asking for it. They want safe and secure. That will mean more technology, more compliance and more security of various types. So the figure we presented above could be the lowest point that costs will be for a long time. That is why it is imperative for shippers to maximize the value they get for the cost.
In short, to join the ranks of those for whom same-day delivery is profitable will require a shift in the way delivery is approached. Success will require software that is much more agile and responsive, and provides real-time data and visibility. There may need to be a change in the approach to distribution centers—their location and design.8
And as more and more companies put same-day delivery into action, they will also be changing the environment in which they operate. There may be more congestion along some routes. At some point, they may be asked to be part of a municipal solution to accommodate their new delivery model. In other words, success will not occur in a vacuum. The impact of same-day delivery will be felt beyond the delivery destination.
At the end of the day, the genie is out of the bottle—customers want it and service providers are committed, so make sure that the end of the day shows profit and performance from your last mile.