Author: Shubham Sinha 11 min read
In a product’s journey from production to the customer’s doorstep, the last mile of delivery refers to the final part of the process. It is also the most important part of the journey, not just because it is a key to customer satisfaction, but also because this is the most expensive and time-consuming part of the shipping process – last–mile delivery costs comprise 28% of the total transportation costs. This piece talks about the challenges in last–mile delivery, new technologies being adopted for smoother delivery of goods, and how businesses around the globe can use them to optimize their operations.
Until just a couple of decades ago, last–mile delivery was mainly the purview of postal and courier services, not attracting much attention to focus on any innovation in the field. In recent years, however, the growing ubiquity of the internet and the subsequent boom in the e-commerce industry, has changed that equation drastically. This rise of e-commerce has obviated the need for brick-and-mortar stores and highlighted the importance of direct-to-customer strategies. The demand has upset the entire supply chain system and companies are facing a monstrosity of an issue – how to tame the last mile beast and turn it efficient.
The challenges with the last mile faced by logistics companies can be as varied as the geography and demography of the region in which they cater. Last–mile delivery is a highly dynamic market growing at the rate of 7-10% in industrialized countries such as the United States and Germany and up to 100% in developing nations such as China, India, and Africa. Since it is part of the supply chain that directly interacts with the customer, organizations must keep in mind that they understand the background and culture of that region. For example, a Cash-on-Delivery (COD) option is integral to any successful business strategy in the South East Asia market. 55% of e-commerce transactions in Thailand are still paid via COD and 62% of Indonesians remain unbanked. In India, it is the offering of free delivery and COD that has buttressed the growth of e-commerce. In China, the click and collect concept has become widely popular, in which customers can collect their packages from parcel locker facilities. E-commerce in Africa is gaining traction at a rapid pace and the purchasing power of the African population is on a rising high, but a lagging logistics infrastructure poses new challenges.
Shipping products to urban areas amidst the traffic congestion and chaos is as daunting a task as in remote areas where the large distances and safety are major concerns. With around 28% of all transportation costs related to the final mile, it is the most inefficient. Frequently, companies face delivery issues like incorrect delivery address, difficult to locate places, customer unavailable to receive products, etc. making the last mile extremely inconvenient and time–consuming. And all this boils down to increased costs. In developing countries, this problem is aggravated due to a lack of robust infrastructure, leading to inevitably long journeys, inefficient routes, inefficient transportation technologies, insufficient parking, and other accessibility issues, driving the cost even higher. Now, these are hurdles faced in all parts of the transportation process and not just during the last mile. However, in the case of B2B delivery, the extra costs and time may still be worth the effort considering the cost benefits gained in a single delivery; whereas, in the case of last–mile deliveries, the cost of fuel and time wastage must be borne for each package individually and economy of scale is difficult to achieve.
The final mile is also all–important from the consumer experience perspective. The customers’ increasing expectations of free, same–day, scheduled delivery, etc. are not making it any easier for the logistics companies. Customers nowadays expect after-delivery setup and other value–added white-glove services as part of their delivery experience, adding another dimension to the challenges faced by the carriers.
The situation becomes even less manageable during holidays and festive season, and more so during huge online sales like the Black Friday or the Big Billion Day sales, when e-commerce companies witness a sharp surge in orders. According to Internet Retailer, online orders saw an increase of 17% during holidays over the non-peak season and the number of visits to online retail websites exceeded 1 trillion. And yet these are statistics just from the United States. Because of this, and more recently due to lockdowns across the globe owing to the COVID-19 pandemic, the e-commerce industry and consequently the logistics industry have received a huge impetus. The onus thus lies with both the e-commerce and the logistics industries to solve the last mile riddle.
The plethora of challenges has given rise to several innovations to solve the problem of the last mile through the use of technology.
In the last part, we saw what last-mile delivery is and why it is the biggest thorn in the side of logistics companies. We now look into how the industry is responding to this problem through technology and innovation.
According to Statista, retail e-commerce sales worldwide amounted to USD 3.5 trillion in 2019, and this figure is projected to grow to USD 6.5 trillion by 2023. No wonder companies are pouring in big money in technology and innovation to improve the biggest liability in supply chain logistics that the last mile delivery is. New avenues are being identified to improve the convenience and flexibility of delivery choices and offer more premium services to the consumers. While it is perceived that click and collect although has been a cost-effective model by making the customer shoulder part of the cost of last–mile delivery, it would not be something the major logistics companies would truly rely on. As the demand and growth for logistics increases, many companies have already started looking at the future.
Earlier in 2013, Jeff Bezos announced Prime Air, Amazon’s new drone delivery system. Amazon said they are testing a new delivery system by air which would have the capacity to carry packages up to 5 pounds. This was quite enough as 86% of Amazon’s retail deliveries weigh less than 5 pounds. This along with the fact that the drones would be capable of delivering within 30 minutes of placing the order, held great potential to change the last mile delivery landscape, and not just for Amazon. It was estimated that drones cold help slash delivery costs to less than $1 a package by eliminating fuel and labor costs. However, the use of drones for delivery poses several challenges, primarily the unfavorable regulation laws in many countries for the commercial usage of drones. Among major concerns are trespassing, the right to privacy, and issues with long term surveillance. So, unless proper laws are implemented governing the use of drones, this potential holy grail of last–mile delivery will not be able to be fully exploited.
Autonomous Guided Vehicles (AGV) is another concept under development that holds the promise to revolutionize last–mile solutions. Many warehouses and distribution centers have implemented the use of AGVs for transporting goods within large warehouses. As for their use in last–mile delivery, conceptual prototypes of AGVs fitted with lockers are already being developed. Buyers would be notified of the exact arrival time and would have access to the locker containing their parcel. This would be similar to the click and collect model, with the only difference that the lockers would come at the customer’s doorstep. However, at the moment, this technology too is far from commercial deployment because of concerns cited with regards to traffic safety and AGV regulations as well as the safety of lockers and the vehicle itself.
Although AGVs and drones are promising technological advances to address the last mile problem, they come at a high cost of implementation and their own set of challenges and risks. Such options can take time to enter the still–developing market and there is a need for an immediate solution. This gap can likely be addressed by motor-bike couriers, especially in South East Asian countries as well as India and China, where labor charges are quite low. Moreover, in highly dense urban settlements, motorbikes are the quickest mode of transportation over short distances, with greater accessibility through narrow streets and little parking concerns. Many restaurants and supermarkets provide home-delivery service using motorbikes. But despite the convenience and low cost of this transportation method, it is yet to be tapped by big logistics companies.
Another highly effective model of last–mile delivery is crowdsourcing. This gig economy model involves sourcing the common citizens for delivering parcels to customers through a mobile application, much like how Uber and Lyft have been using crowdsourcing to transport people. Food delivery applications such as Swiggy, Uber Eats, and Grubhub and in-city courier delivery applications like the hyperlocal application Dunzo have been using crowdsourcing extensively to deliver – in fact, that is their business model. Many logistics companies have identified this option as a viable cost-effective way to solve the last mile problem, also bringing in a high degree of flexibility. This model is also very feasible since it requires very low initial capital to develop an application and the logistics companies do not have to own assets. However, one major drawback of this model is the unpredictability and availability of the local people to deliver, making it a rather less reliable option.
In the last part, we saw what business and technological innovations are underway to address the last-mile problem, what are their merits and demerits, and why they cannot be immediately deployed. In this part, we explore what are the best ways available today to tackle the issue of last-mile.
The adoption of these new practices and technologies by major logistics companies, however, amounts to a significant change in their business model – acquiring new assets, building new capabilities, and not to mention the hurdles posed by the legality and the regulatory requirements of their deployment. Challenges faced by the logistics companies today can be tackled through innovation by leveraging technology in the business process by integration and enhancement of automation across industries. There are several Transportation Management Systems (TMS) already in the market that which been aiding large logistics companies and lately, small and medium ones as well. An advanced TMS establishes structured processes that can be managed manually as well as automated. The bottom line of these TMS solutions is to reduce freight expenses and fulfill faster deliveries by making smarter management of resources. Route optimization is at the core of these TMS solutions. A traditional TMS without route optimization can bring down freight costs by 10-20%, but with route optimization, freight spend can be reduced by up to 30%.
Amazon uses its home-grown TMS solution to handle its end-to-end supply chain operations. However, not all carriers and logistics companies have such enormous resources at their disposal to develop tailor-made solutions for their needs, instead, most of them prefer to use third-party solutions, with SAP and Oracle being the leading players in the market. These TMS solutions offer a system of record, responsible for managing transportation mainly in the B2B supply chain, from acquiring materials to order & contract management to domestic & international transportation and customs. However, the last mile of the B2C landscape is a different story altogether. What a good final mile delivery solution shall include are inbound and drop shipping, increased traceability, less than truckload, presence of an omnichannel returns strategy, improved warehouse processes, subcontracting to 3PLs and 4PLs, and most importantly continuous optimization of delivery routes. Interestingly, SAP’s TMS solution offers all these capabilities in its basket of features. Its planning optimizer is one of the best that is available. Other players in the market too provide stiff competition in all these areas, especially Oracle, but one area in which SAP shines and others lag is the advanced interactive freight tendering feature, where carriers can be ranked and their automatic selection is done based on cost, performance, past record, etc. A collaborative portal can be set up where shippers and logistics service providers (LSPs) can interact to buy and sell freight services.
A major challenge in using these TMS solutions is the rising complexity of supply chain management with different systems for handling warehousing, ERP, and transportation. Using multiple systems can improve efficiency, but it can also open the doors to risk (because of the integration required between these otherwise scattered systems) such as loss of data integrity, delays in securing available capacity, risk of missed or failed deliveries, etc. To eliminate these risks, SAP has introduced an entirely new generation of business suite, the S/4HANA. It does not require the maintenance of different systems but instead provides all the capabilities under one single roof owing to its embedded architecture and can be deployed both on–premise and on the cloud. The SAP HANA landscape provides a host of features that include data security, single unified database management, advanced analytics, and simplified application architecture among others, making it a rather lucrative solution for major shippers as well as logistics companies.
With most of the suggested new technologies still years away from getting widespread adoption, unified TMS capabilities come to the forefront of the last mile problem. With more and more options available, the demand of consumers will only grow. With all the technological advances and TMS solutions for addressing the last mile delivery problem, the most important factor remains cost–effectiveness and customer satisfaction. Businesses need to consider the impact of the final mile and the indispensable role of building the fastest, most affordable, and most enjoyable last–mile experience for customers to remain ahead in this fast–changing game.
Author: Shubham Sinha