While store closures grab headlines and pundits ruminate on the “death of the department store” and the pending “retail apocalypse” — all due to the explosive growth of e-commerce — another transformation has been underway: the reconfiguration of ground transportation, fulfillment and retail logistics.
Long before trade wars with China and the coronavirus crisis impacted the sourcing end of the supply chain, retail logistics has been mired in inefficiencies, untested technologies and hasty investments as well as cut-throat competitors vying to win market share as online sales soar. And while the trucking industry and fulfillment centers try to keep pace with the growing volume of e-commerce, it is the so-called “last mile” of delivery that is presenting the most hiccups and pain points for brands, retailers and carriers alike.
What makes the last mile so critical is that it serves as the lynchpin holding together shopper satisfaction, brand reputation and repeat conversions. In today’s market, a single typographical error can not only divert a package from the correct address but sour a retailer or brand’s reputation — and erode customer loyalty. And while online sales only account for about 13 percent of total sales, poor experiences online can translate to shoppers shunning a brand’s physical store.
Taylor Smith, chief marketing officer of Honeywell’s productivity products business, told WWD if the “delivery is bad, the item is broken or delivered to the wrong place, the result could be an angry post on your social media brand site or worse — a lost customer. Delivering packages correctly the first time means not only happier customers, but also reduced costs for businesses.”
Smith described modern supply chains as “tremendously complex, so it’s vital that companies ensure visibility throughout. Honeywell’s internal research shows that last-mile delivery makes up 50 percent of all logistical costs. What’s more, the delivery process is key to ensuring that the overall experience for the consumer is a positive one.”
“Deliveries to hard-to-find locations and incorrect delivery addresses are inevitable, but they do continue to be one of the top challenges faced by logistics organizations,” Smith said. “This, coupled with lengthy traffic and damage to the products themselves, causes companies a lot of wasted time and money.”
Revving up the RPMs
Last year, the American Transportation Research Institute examined consumer behavior data and overlaid it with retail sales trends and current transportation models to discern the impact of online shopping on the transportation industry. The report paints a complicated, multidimensional logistics model that was once simple and linear, and is now being reshaped by omnichannel retailing.
“Consumers, particularly in densely populated urban areas, now expect a broad inventory of goods to be readily available to them both in-store and online,” authors of the report noted. “Consumers also expect that these products can be picked up or delivered to them at little to no additional cost in much shorter delivery windows.”
The ATRI report also found that the retail industry “has had many difficulties adapting to these consumer-driven changes. Business models that revolved around centralized distribution networks and a substantial brick-and-mortar store presence are evolving into flexible omnichannels that are defined by varied consumer interfaces, points of sale, and modes of order fulfillment.”
The report went on to state that while motor carrier operations have been affected by e-commerce and omnichannel retailing, “the extent to which these emerging consumer trends will affect industry operations and the industry’s most critical issues is not fully understood.”
What is clearly understood, though, is the changing workforce. While employment in traditional retailing has significantly declined in the past five years, non-store retailing has soared. These are jobs that have been created by a “hub and spoke” network that composes today’s retail logistics ecosystem, according to the ATRI.
“Given the variety of fulfillment options and delivery windows, the complexity of ‘behind the scenes’ distribution/fulfillment operations have increased,” authors of the ATRI report noted. “These intricate, hub-and-spoke networks of robotic sortation, distribution and fulfillment facilities bridge the ‘last mile’ between retailers and consumers to facilitate reliable deliveries.”
And it continues to evolve. The report revealed that the average distance of fulfillment center deliveries have dropped to between six and nine miles, from more than 12 miles prior. And average distances are continuing to shrink — thereby transforming fulfillment operations. “In addition to boosting demand for general warehouse space, the omnichannel needs of the retail industry have changed how warehouse space is being utilized,” the ATRI stated. “For instance, smaller facilities in urban industrial zones are being repurposed to facilitate the growing volume of ‘last-mile’ deliveries.”
The researchers said in the report that these smaller fulfillment centers “serve as the satellite ‘spokes’ of re-engineered hub-and-spoke distribution models, and represented sizable proportions (73 percent) of the industrial warehouse market in 2017.”
In the hub and spoke model, products that land in ports are then shipped to large, regional distribution centers. From there, the products can be shipped to smaller fulfillment centers (owned by retailers or third-party firms) by truck, air or rail. From there, the products either go to individual stores via retail store truck fleets or are delivered directly to consumers by carriers such as FedEx, UPS, DHL and others.
An issue of supply and demand
From a human capital perspective, the growth of fulfillment centers and last-mile delivery has caused a shift in the workforce from traditional retail jobs to those of packers, pickers and truck drivers. And due to product returns, reverse logistics has also blossomed as an industry and created demand for new jobs as well.
In trucking, an aging fleet of drivers along with the demands of e-commerce has created periodic shortages of drivers. Last year, the American Trucking Associations’ Bob Costello, chief economist and senior vice president, and Alan Karickhoff, research analyst, penned a 17-page report outlining causes for the shortage, and noted that over the past 15 years, “the trucking industry has struggled with a shortage of truck drivers.”
“The shortfall was first documented in a 2005 report,” Costello and Karickhoff said. “At that time, the shortage was roughly 20,000. During the Great Recession that started in 2008, the driver shortage was erased, but only because industry volumes plummeted, resulting in fewer drivers needed.”
The authors said that industry volumes experienced a recovery in 2011, and then the driver market began to tighten, and the “shortage skyrocketed” to over 50,000 by 2017. “In 2018, the industry suffered a greater shortage, largely due to robust industry freight volumes,” the authors said. “As this report highlights, the driver shortfall is expected to fall slightly by the end of 2019 from a combination of slower economic growth and a small bump in supply. However, the combination of a tight labor market and an aging truck driver population is expected to keep the shortage near its peak in 2018.”
New data from the American Trucking Associations is expected to be released later this year.
It’s important to note that the trucking industry is internally fraught with contention. When trucking industry trade magazines, business publications and bloggers take on the topic of driver shortages there’s usually backlash from the drivers themselves. Last year, the Owner-Operator Independent Drivers Association, through its nonprofit foundation arm, produced a video aimed at “dispelling the myth that there is a shortage of truck drivers in the United States.”
Norita Taylor, director of public relations at OOIDA, said in a statement that the organization “created this video because we are concerned that messaging in mainstream media is missing the mark on the issue of high turnover. The real problem is driver churn caused by low pay and poor working conditions.”
Taylor said the idea of a driver shortage “has been around for decades and is typically used as an excuse to push other agendas that are not beneficial to small-business truckers.”
Meanwhile, in a separate report by the Bureau of Labor Statistics, researchers concluded that the trucking industry — from a supply and demand perspective — is similar to many business segments. The BLS said its findings “suggest that the market for truck drivers works about as well as that for other blue-collar occupations, and that, broadly speaking, we should expect that if wages rise when the labor market for truck drivers is too tight, the potential for any long-term shortages will be ameliorated.”
Mapping it out
Either way, the last mile has a host of other issues that still need to be ironed out. Mapillary, which describes itself as a “street-level imagery platform that uses computer vision to scale and automate mapping,” released a report last week noting that billions of dollars are lost due to “extra miles, idle time, wages, missed delivery windows, and unnecessary parking tickets” — all due to outdated, and inaccurate maps.
The solution provider found that drivers driving extra miles, missing delivery windows, not finding available parking, and being hit with parking tickets costs the last mile logistics industry $6 billion annually. “The report estimates the industry is racking up $2.5 billion in wasted salary alone and $611 million in extra miles due to drivers not having better maps,” Mapillary said in a statement. “A third of drivers stated they could save upwards of five hours each week if they had access to detailed and up-to-date maps, saving companies $2.6 billion annually.”
Jan Erik Solem, Mapillary cofounder and chief executive officer said the growing demand for “ever-shrinking delivery times has created tremendous pressure on maps being more detailed and up-to-date and, as we see in the report, broken maps create inefficiencies across the board. Better maps will result in more deliveries at a faster pace every single day, saving millions of dollars each year for individual companies and dramatically improving their bottom lines.”
Jonathan Hessney, founder of OnRout, which he describes as a “financially and environmentally sustainable” e-commerce shipping solution, said lowering costs is top-of-mind for retailers, brands and carriers. Hessney said the last mile is the “most expensive and complex piece” of the supply chain.
“Retailers are looking for ways to improve last-mile delivery to lower their costs,” Hessney said while cities need “better last-mile options to reduce congestion and pollution” and carriers work to improve the last mile “to raise service levels, and reduce costs.”
The current solutions in the market, Hessney explained, include routing programs that help carriers deliver items in the most efficient way possible. The other primary solution is based on alternate delivery locations, which he said could be a Target or Walmart store, for example, “encouraging you to buy online, pick up in-store to eliminate the need to send a package to your door, or Amazon deploying lockers in your neighborhood so they can make a consolidated delivery to one location rather than many.”
“Alternate delivery location strategies are great at reducing congestion and lowering costs, but require a change in customer behavior,” Hessney told WWD. “OnRout takes a third approach. We help carriers consolidate multiple deliveries going to the same address to a single carrier.”
Hessney, who was previously a consultant with Accenture’s supply chain strategy group, said a consumer may have their Amazon order “delivered by as many as four different carriers on the same day because each one had a better price for a different package.” For his solution, “carriers bid in real-time, so if a carrier sees they’re already going to your house for a delivery, they can lower their bid for the next package going there.” This consolidation of deliveries to a single carrier reduces traffic and cuts costs for retailers.
“This is the greener, cheaper and more efficient way to deliver the mass of packages being created by the growth in e-commerce,” he added.
Competing against giants
Time will tell if solutions such as Hessney’s and others gain widespread adoption. In the meantime, the demands of consumers continue to pressure last-mile logistics.
Syed Asghar, founder and chief executive officer of The Hire Street, said as a result of “increasing expectations of consumers for fast delivery, the competitive landscape of last-mile delivery logistics has become fierce.” The Hire Street is an event and catering services and equipment delivery firm based in the U.K. with clients such as the BBC, Laura Ashley, Coca-Cola and the Sherbrooke Castle Hotel, among others.
“The primary driver is simply supply and demand,” Asghar told WWD. “With Amazon setting the standards and a host of other players playing catch-up, the pressure is intense. All factors relating to this such as costs, availability, staff turnover are all adversely impacted.”
From his firm’s point of view, he believes that in “this situation, largely driven by fierce competition, the only option is to not compete but rather to differentiate on non-core aspects of the last-mile delivery such as out-of-hours deliveries, pursuing a lower failure rate, better branding on packaging and reporting.”
“Furthermore, we believe that rather than penalizing for failure rates, given that drivers can easily switch to a host of other companies, it is much more productive to incentivize high success rates,” he told WWD. “To simply compete for resources against Amazon, Deliveroo, et al. on price and speed — cannot be won. The key is to differentiate on aspects where you can and outsource where you can’t.”
From the consumer’s perspective, they likely care more about getting their package on time rather than who delivers it. Online shoppers also want to know the status of their package. Michael Osadon, cofounder and chief revenue officer of Bond, which describes itself as the “urban infrastructure for the convenience era” said Amazon has set the tone “for today’s retail landscape — consumers now expect, and demand, that their purchases will be delivered in two days or less without issue.”
“One of the biggest challenges facing last-mile delivery experiences for brands, carriers and logistics companies is the lack of transparency and communication with the customer once a package has left the warehouse,” Osadon told WWD. “If a package is late and a customer wants to track its status, the customer only has visibility on three viewpoints — if the package has been prepared, if it’s en route, and if it has been delivered. And if a package is lost, there is no way to track its location.” Osadon, whose company offers post-purchase and last-mile delivery solutions, also noted that traffic is another “pain-point impacting the last-mile experience.”
“The increasing number of trucks and vehicles on the road, in the push for customer convenience, leads to more congestion on the roads which impacts the speed of delivery for customers who expect on-demand everything,” Osadon said. “Returning clothing purchases or other items also proves to be a hassle in the post-purchase experience. Many customers do not want to go through the trouble to stop by a UPS or FedEx location to return an item; nor do they want to wait long periods for pickups or print return labels.”
Osadon said offering solutions that let online shoppers schedule returns “where the carrier will produce the shipping label, pick up the item from the customer’s location, and bring back to the vendor source lifts a huge burden off the consumer’s shoulders.”
“From our own experience as a business, we’ve found that enabling functionalities such as real-time tracking and communication between the carrier and the customer at all points of the delivery process allows for full transparency of package statuses that leave the shopper at ease,” he explained. “We’ve also found that, when delivering in high-density cities such as Manhattan and Brooklyn, N.Y., using alternative vehicles such as electric trikes has proved to be much more efficient in delivering high volumes of packages quickly compared to trucks.”
Pennie Ayers, senior vice president of supply chain services at Radial agreed with Osadon that greater visibility is required today. “When purchasing an order online, customers seek out brands that are able to provide more visibility and transparency with their deliveries at every step of the order journey,” Ayers told WWD. “This demand to deliver a seamless customer experience can often be difficult for retailers to meet and requires companies to have a system in place that shares this visibility not only internally, but directly with the customer.”
Ayers said a “multicarrier network” offers both economical and express services to retailers “as well as speed and a customer-tailored experience to consumers.” She noted that this “optionality will improve the customer experience while reducing transportation costs and strengthens the reputation of the brand in the last-mile delivery experience.”
From a technology perspective, Lisa Kalscheur, chief marketing officer of Kibo, said retailers and brands can better leverage data to improve the last-mile experience for consumers.
“Many retailers have invested heavily in improving last-mile delivery, from adding ‘buy online, pick up in store’ to offering free white-glove installation or same-day delivery,” Kalscheur told WWD. “In order for retailers to accomplish this, it requires a strategic shift to omnichannel retailing, as well as incorporating a new layer of data and data analysis.”
“For example, knowing that a customer lives in a cramped fifth-floor walk-up will make white-glove delivery of a large couch harder and require additional planning on a retailer’s behalf,” Kalscheur explained. “As well, picking up on the trend that many parents are purchasing the same school supplies required by the local school system, having the logistics in place to restock quickly will only help improve the retailer’s last-mile delivery strategy.”
Kalscheur said customers may have quickly “readjusted to advanced last-mile offerings, but retailers need to embrace data and machine learning across an omnichannel retail system to readjust along with them.”
What makes the last mile so troublesome is its inherent complexity, which is due to the relative simplicity of delivering a single package to a single customer. And Nicholas Farhi, partner at global consulting firm OC&C Strategy Consultants, said retailers and brands essentially face three challenges for meeting the consumer demand for cheap and inexpensive delivery in this complex part of the supply chain.
First, Farhi said the old modality involved retailers and brands using a single carrier for most of the e-commerce deliveries. Today, Farhi told WWD that “retailers now need to interface with many more carriers: for international delivery, for quicker delivery, for unusual packages (heavy/large, which are becoming more commonly delivered), and for different pick-up solutions [for example,] to lockers or to stores for click-and-collect.”
He said as a result, this requires more sophisticated software aimed at selecting “the right shipping options for each item and each delivery address, in real-time, cleanly presented to the shopper at checkout.” Farhi said it also requires “relationship management with more shippers.” But using solutions to manage multiple shippers can be costly, and erode the bottom line.
Secondly, Farhi said shorter lead-time deliveries require “more, smaller warehouses, in more expensive locations close to consumers.” He said Amazon, for example, “is aggressively building these out, and letting other retailers use them under its Fulfilled By Amazon [FBA] proposition.”
But Farhi said Amazon rates for FBA are “high for retailers unwilling to also list the product on the Amazon marketplace.” He said retailers and brands simply can’t compete with Amazon’s warehouse location footprint, “and retailers’ stores are generally poorly set up to act as combined store/warehouses, in particular with respect to accurate stock management.”
The third challenge, according to Farhi, is cost. “Consumers love the idea of rapid delivery but are not willing to pay as much as it costs to fulfill it,” he explained. “Ten to 15 years ago, free delivery paid for itself in increased basket conversion. But now everyone offers it, the expansion in conversion from free delivery is smaller, and moreover, e-commerce is now large enough as a share of sales that it significantly cannibalizes store sales.”
So, as these challenges and consumer demands have reshaped the logistics segment, the growth of e-commerce and the demands of the last mile have also forced retailers and brands to transform themselves internally.
Paul Magel, president of the applications division at CGS, which offers BlueCherry enterprise software that is specific to the fashion, apparel and retail industries, told WWD he is seeing “many of our customers being forced to make such fundamental changes as eliminating the walls between the wholesale and retail divisions.”
“They are also having to navigate how to effectively work with Amazon and other e-commerce sites as well as run their own web sites,” he noted.
Magel said brands are shifting from moving large shipping cartons and pallets of goods “to transporting one or two items at a time; this requires a major overhaul of a company’s distribution network.” As a result, RFID technology and “rate shopping” platforms are being deployed along with more efficient “picking systems” inside warehouses.
“Finally, one way in which brands are addressing the last mile is by opening new distribution centers that are closer to their customers, or leveraging existing retail stores to fulfill online orders,” Magel said. “Added sites that are closer to the consumer residence will improve the speed of delivery, while also lowering the cost of shipping. Yet, the challenge is all of these changes require not only capital but new systems and technology to be deployed by the organization.”
The opening of new distribution centers is also impacting commercial real estate. Rich Pedott, a partner at Columbus Consulting, told WWD that as the demand for faster last-mile delivery grows, “we’ve seen an increased demand for and shortage of warehouse space adjacent to major urban centers like New York City and Boston.”
Pedott said, for example, in the New York Metropolitan area, locations such as Long Island City or Middle Village, Queens, has seen “a move to revitalize old warehouse and distribution space to help increase capacity and achieve same-day delivery more efficiently. This includes utilizing smaller 10,000 to 30,000 square foot facilities.”
Pedott said another challenge also presents itself “when retailers choose to use stores as distribution centers. Retailers who have used stores as courier points to accomplish same-day delivery have seen a negative impact on the in-store customer experience, as well as labor-scheduling challenges.” He said this has prompted the interest in “lighter, faster warehouse operations, like the ones we’re seeing outside New York City, that are strategically located near customers.”
Beyond the U.S.
Another challenge is with cross-border e-commerce. Generally, overseas consumers face lag times in getting packages — even when shipments are prioritized. Luckily, consumers in Canada can enjoy the same, quick delivery of their U.S. counterparts noted Paul Tessy, senior vice president of Purolator International. “U.S. online retailers are finding the welcome mat is definitely out among Canadian consumers — so long as shipments arrive on time, with the same high standards afforded to U.S. consumers, Tessy told WWD. “In other words — how do you put a package in a Canadian consumer’s hands within a couple days of an order being placed?”
Tessy said to make it work, e-tailers need to follow a “Canada-specific logistics plan.” He noted that it’s an “open secret” that most U.S. logistics companies don’t maintain extensive distribution networks in Canada. “Instead, they rely on Canadian providers,” Tessy said. “But, since most Canadian carriers only provide regional service, a U.S. retailer may find its shipments spread across multiple regional providers.”
Multiple carriers mean several potential pain points, such as “numerous hand-offs, delays, increased risk of damage or loss, inconsistent service levels, and all-around loss of accountability and visibility.” To succeed, Tessy said U.S. brands and retailers need to partner with the right logistical provider. For its part, Purolator can deliver in two to three days, which is because the company works with brands and retailers to create a customized solution, Tessy said.
The last-mile delivery is done via the firm’s distribution network of couriers. “Another option is to utilize Canada Post’s distribution capabilities, whereby last-mile delivery is made via a familiar Canada Post truck or van,” Tessy explained. “In either case, consumers benefit from full visibility and tracking capabilities, and can have confidence that shipments will arrive on time, as promised.”
Beyond the horizon
From here, industry experts see various technologies continuing to help facilitate an efficient and cost-effective last mile. Jim Hull, senior industry strategies director at Blue Yonder (formerly JDA Software), told WWD that technology and the gig economy “have melded together to enable the Uber-ization of the last-mile delivery, and this trend is likely to continue to grow for the foreseeable future.”
Hull said driver shortages and labor cost pressures “will also continue for the next several years — two of the main underlying forces that are driving automation and the crowdsourcing of deliveries.” From a solutions perspective, Hull sees automation as key. “The rise of robotics will continue in this space as drones and autonomous vehicles keep making their way into the supply chain,” Hull said. “The concept of an ‘address’ will continue to morph with mapping systems like what3words, allowing for the extremely precise delivery of materials to any location on the planet. This will be more and more prevalent in remote areas, as well as highly congested areas with confusing architecture.”
Hull noted that this type of technology will make “in-transit deliveries much easier, such as having a pizza delivered in the middle of Central Park.” He also expects third- and fourth-party logistics firms to “continue to grow as the demand for niche products rises, driven by the growing abilities of retailers to precisely place highly curated assortments in front of mobile shoppers.”
“The democratization of AI-enabled forecasting will enable companies to pre-position product in market, and the ‘Airbnb-ization of Warehousing’ will enable even the smallest companies to establish a foothold in major markets,” Hull added. “I suspect we will continue to see the expansion of models where the provider and the customer ‘split the difference’ related to the last mile. An example of this is the delivery locker, where the provider makes the first half of the delivery to an agreed-upon location, and then the customer swings by and picks up the product to complete the last half of the delivery.”
And what of reverse logistics? “I also believe, over the next year or two, someone will finally solve the on-demand returns challenge,” Hull told WWD. “For example, it’s common knowledge that the soft lines space has a pretty high return rate for online purchases, but it’s not the most convenient process. We see things like the Amazon/Kohl’s partnership making it somewhat easier to do returns, but it still involves driving to a location to process the return. I can easily envision someone cracking the code (probably for a fee), making it so that you can just hand off a return product at your porch, a parking lot or on your morning train, and they will package and process it for you — easy.”
Honeywell’s Smith said the future of last-mile delivery will likely “focus even more on the customer expectation and companies will need to use analytics to guarantee accuracy and more personalized experiences.”
“Using a combination of technologies will ensure consumer expectations are being met,” Smith said. “There should be no excuse for a failed delivery.”