Final delivery is not profitable

Recent on-line orders for the home address of Learn About Logistics have not been delivered at all; delivered to an incorrect address or not delivered on-time. And only one had an immediate communication concerning the error.

Based on articles and social media comments, these experiences are not uncommon. But, as consumers are reluctant to pay the full cost of delivery, final delivery organisations are under cost pressures; so find it difficult to improve services.

However, it is unlikely that final delivery (also called last mile’) can be profitable, given the structure of the logistics service. As noted in the 2016 McKinsey article ‘Parcel delivery-the future of last mile “… tapping into additional sources of revenue that subsidise delivery cost will likely prove a differentiating factor…”

Challenges of final delivery

As packages ordered on-line by consumers get closer to the end user, the more scattered are the delivery points. As there is no consistency about the delivery addresses, so delivery routes continually change, depending on the orders to be delivered. This is the logistics challenge of attaining ‘delivery density’ and a reason why the final delivery stage can exceed 50 percent of the total parcel delivery cost.

In a low population density city, common in North America and Australia, a delivery van driver could have about 25 deliveries to make in an eight hour day when operating from a single distribution centre (DC). This performance is to be achieved in spite of some adverse factors: traffic congestion, access restrictions for commercial vehicles, incorrect delivery address, access to individual properties and delays in acceptance. Added to these is the short delivery time sometimes promised. With this set of challenges, the control of performance and cost is a challenge.

Conversely, in a B2B environment, an importer, wholesaler or agent develop their clientele list e.g. catering establishments, by geographical areas. This enables deliveries for an area to be on fixed days (with some allowance for emergencies) to known addresses, enabling effective route planning and controlled costs.

In higher population density countries, service providers have adapted operations to suit the conditions. Rising land costs require high rise DCs and couriers riding motorcycles and scooters are used extensively in cities and towns. The riders carry backpacks or have panniers attached containing the package orders. They are able to access narrow streets and lanes, get through congested roads, while evading potholes and erratic drivers.

Current situation

While there is talk about drones and automated guided vehicles (AGV) as ‘solutions’ for the challenges of final delivery, Logisticians should evaluate the current situation using principles, facts and risk based future events.

• Final delivery is a ‘point to point’ event, due to the erratic nature of orders and their destinations. The McKinsey article calculates the range of acceptable delivery for a ‘point to point’ delivery from an area distribution centre is between 5 and 10 kms
• In developed economies, it is estimated that delivery trucks and vans can currently use up to 25 percent of road capacity. Restrictions on use will most likely be imposed in the (near) future

Restrictions and delays

• Access and parking restrictions for commercial vehicles are increasing
• Waiting time of a delivery vehicle in a designated parking space (which could have time restrictions) can be affected by:
  • The parking space may not be close to the delivery address; unfamiliar buildings; building security systems; waiting for signatures or attempting acceptance when the customer is not available
• Environment regulations will restrict the activities of internal combustion engine (ICE) vehicles, encouraging the use of electric vehicles (EVs) or other non-polluting engine. Electric bikes, motorcycles and scooters will become more common

Software for the traditional ‘bus route’ distribution model

• Route planning is difficult, due to the short time horizon and arrival of new orders that may change the route up to the cut-off time for orders on that route. Effective planning software must re-plan routes dependent on incoming data concerning traffic congestion, vehicle collisions and incidents and road and services repairs
• Order and returns management and inventory availability needs to be integrated (not interfaced) with the warehouse management system (WMS) and preferably back to the ERP system.

Changes to the logistics model

A concept in customer service is ‘moments of truth’, when a customer in a services encounter meets a representative of the business. It considers that the final five steps of the customer or representative to the handover of the service provides a lasting perception by the customer of the provider and the industry. An old marketing consideration was that a customer tells up to 13 people of a bad experience and about 5 people of a good experience (these figures can be multiplied many times for people using social media).

The previous blog discussed the location options for warehouses and area distribution centres in cities and conurbations. Each area DC becomes a collection point for orders and returns. In addition, customers could elect at the time of order, to pick-up from more convenient locations in their area, such as post offices, convenient stores, petrol (gas) stations or ‘smart’ lockers. Deliveries to these locations in a five to 10 km radius would be from the area DC.

For customers that require home or work location delivery, these would be ‘point to point’ deliveries within the 5 to 10 km radius of the DC, using electric bikes or scooters and crewed by people representing the order generating business.

This model requires an increase in area DCs, or the use of shared area DCs, managed by a 3PL. An extension of this approach would be to use shared trucks that pick-up from warehouses of different businesses and deliver to area shared DCs (which could be high rise). To provide shared truck capacity and DCs, a 3PL would need to be digitally networked with clients to provide the visibility and details of orders.

From a consumer perspective this approach provides three option for collection (and potential charges); it allows for local interaction with representatives and removes some of the complexity and customer concerns that appears to be built into the current logistics model. Just a thought!