Last-mile distribution is a highly complex industry massively dependent on the local environment. City infrastructure varies from the crowded streets of Mumbai via the less densely populated environment of Munich to the sprawl of Los Angeles. Local regulations, the availability and cost of labour, traffic density, shopping behaviour, and so on all depend on where companies need to reach their customers and ensure that deliveries are met on time without damages and in a cost-efficient manner. There simply is no one-size-fits-all approach.
Like in many allied industries, the last-mile sector is experiencing a massive transformation driven by increasing customer requirements enabled by technological progress. Today’s customers demand more immediate or same-day deliveries. While same-day deliveries are at 5% penetration in Europe today, they are 10% in China and expected to be 15% in the US by 2025. Customers need to know where their packages are and want convenient delivery options. Having a positive delivery experience is important as it heavily impacts brand loyalty and repurchasing behaviour. Yet as overall willingness to pay is limited, more and more such services are seen as table stakes, rather than differentiating factors.
E-commerce boom
E-commerce has been a major driver of this change. According to the World Economic Forum, e-commerce sales ratios nearly tripled globally between 2014 and 2019. In particular, the B2C market has grown stronger than the B2B market. Main drivers for this development are urbanisation and the increasing purchasing power of the global middle class as well as an ever-increasing product range that is available online.
E-commerce also opens up D2C (direct to customer) as a new distribution channel for manufacturers, who then effectively become retailers. With fast and painless delivery, the number of parcels being shipped has increased rapidly, yet the revenue per delivery has decreased while the number of delivery locations continues to proliferate. In a fiercely competitive industry, this translates into additional pressure on limited margins.
Key capabilities to succeed in this turbulent environment are leading edge technology understanding and the ability to manage complex partnerships
The recent COVID crisis has acted as a catalyst that increased the speed of change dramatically. Industries that were previously solidly brick-and-mortar-based like groceries moved to e-commerce in a matter of days. Technologies that enable contact-less drop off and delivery became even more crucial. Delivery via the gig economy kept essential supply and lifelines going. The user experience has, by and large, been positive and a return to the status-quo-ante is highly unlikely.
Tech’s helping hand
What then are some of the challenges that the industry faces and what are the implications for fleets, OEMs and service providers? Above all, cost containment is a major consideration. A large part of the operating cost of last-mile companies is labour. Efficient use of labour and a high drop rate is crucial to ensure positive financial returns. Vehicles must be optimised for easy ingress and egress with clearly thought through positioning of steps and handles. As vehicles are less likely to cube out or weigh out due to decreasing package size, the focus must be on designing vehicles that allow easy access to load and are otherwise optimised for cost.
Beyond this, OEMs and fleets need to focus on software solutions that allow for dynamic route allocation based on delivery needs and real time traffic conditions. Help in finding parking spaces is crucial to optimise time. These systems need to be integrated with the capacity management and tour optimisation systems of freight and courier, express, parcel and postal carriers. Automated loading technology and robotics supports faster turnaround times at depots and again needs to be integrated with software solutions that allow the driver to find parcels and packages quickly. All these approaches improve driver productivity while also optimising other cost factors such as fuel and maintenance.
Labour cost is a challenge, but the availability of labour is also cause for concern. With increasing volumes and a limited pool of resources, companies need to focus on the well-being of drivers.
This automatically translates into ergonomically designed vehicles that people want to drive, a task for OEMs. In principle, it also drives the case for further automation in the form of drones or autonomous delivery robots. The endgame could be a delivery vehicle that has an integrated cockpit and operating system to launch drones and autonomous delivery robots while parked in a major delivery area. These concepts exist in the context of agriculture with swarm bots and drones integrated into the tractors operating system. However, replicating this approach in an urban environment is challenging due to regulatory issues, lack of space and user acceptance. Immediate relief to driver shortage due to autonomy does not seem to be at hand.
Customer behaviour drives a lot of cost in the last-mile, such as via missed deliveries and returns. Dynamic delivery appointment scheduling can address the first point, reduce cost, maximise delivery capacity and eliminate unfeasible deliveries early on. Returns are typically two to three times higher in e-commerce versus brick-and-mortar and the returns process has become a critical driver for customer satisfaction. While 95% of shoppers who are happy with the return process say that they will purchase from the same retailer again, unhappy shoppers are three times more likely to change retailers.
In apparel, the product category with the most frequent returns, approaches include click-and-collect options that allow trial of merchandise while they are picked up at the store. Other ideas include augmented reality supported shopping experiences. Customer steering, such as by offering ‘eco-friendly’ delivery options or by using dynamic pricing to charge for faster or more precise delivery windows, are ways to improve overall financial viability by reducing cost or increasing revenue. Increasing revenue can also be achieved by selling value-add services such as installation or easy returns. Last but not least, investments in predictive consumption allow inventory and delivery time optimisation which improves cost as well as enhancing customers satisfaction.
Emissions
Service providers and consumers are not the only key stakeholders in the last-mile. According to a recent WEF report, increasing last-mile traffic will lead to a 36% increase in the number of delivery vehicles, a 32% increase in emissions and a 21% increase in congestion in the world’s top 100 cities by 2030 if no countermeasures are taken. Cities need to take action to ensure that they remain liveable.
From an environmental perspective, cities drive the electrification of the last-mile via access restrictions. Given the low margins in the industry, OEMs need to find ways to offer vehicles for last-mile distribution that have an acceptable and ideally lower total cost of ownership versus internal combustion engine vehicles. This requires careful optimisation of drive cycles, battery sizes and charging management, ideally in close co-operation with customers.
Delivery via the gig economy kept essential supply and lifelines going. The user experience has, by and large, been positive and a return to the status-quo-ante is highly unlikely
Congestion can be tackled in several ways. Centralised parcel lockers that are brand agnostic are a potential opportunity to manage last-mile distribution. However, for customers to pick up their packages and drop off their returns in these lockers on foot or by bicycle, a relatively high density of lockers would be required which could strain available city real estate.
Practical issues, such as the time-in-locker of packages due to bad weather, would need to be addressed as well. If final distribution is done via bicycles or tricycles, a standardised load carrier approach would be needed across carriers. Bicycles would need to be able to fit in the existing bicycle infrastructure of cities and cost issues due to lower delivery speeds would have to be addressed. In addition, situations in which a player would invest heavily in locker infrastructure and dominate local markets would need to be guarded against. In such a situation, dominant players could charge premiums to competitors for using their locker infrastructure and de facto establish local monopolies.
Load pooling is another option available to cities where carriers would consolidate their loads outside of the city into vehicles and optimise their overall load factor. Such a solution reduces congestion and emissions but would also reduce brand recognition for companies such as Amazon, FedEx and others. Interoperability of data management systems between carriers would be needed as well as standardisation such as for packaging labels.
Finally, cities can implement curb side loading and unloading zones and corresponding charges. They can impose night time delivery, especially as the noise pollution would reduce with electric vehicles. All of these measures would have significant impacts on carriers and should be discussed extensively with ecosystem participants.
Competitive intensity
The last-mile industry’s transition is profound. Key capabilities to succeed in this turbulent environment are leading edge technology understanding and the ability to manage complex partnerships. Consequently, there is room for new players to enter the fray. From an OEM perspective, DHL’s effort to develop its own vehicle and transport solution with StreetScooter is a clear indication that major customers face unmet needs and are willing to address those in any way possible. Amazon’s investment in Rivian is another example of the same phenomenon.
Last-mile carriers face new entrants both from a start-up as well as TL/LTL carrier and e-commerce perspective. Large transportation companies such as J.B.Hunt, Werner, Schneider and XPO Logistics are investing in last-mile solutions for bulkier items to participate in this growth while exploiting the fact that bulkier items are a challenge for the business systems of a FedEx, UPS or USPS. LTL carriers are trying to adapt their business model and leverage their infrastructure for last-mile delivery. Amazon with its 390 warehouses and more than 20,000 vans globally, as well as its Amazon Locker infrastructure which, for example, has 3,000 lockers in 50 German cities alone, maybe in the process of dropping its major service providers UPS and FedEx. It is likely to leverage its scale and technological capability to use excess capacity to provide transportation services for others including competitors.
As competitive intensity and complexity increase, players in the last-mile ecosystem need to identify their core capabilities and understand how to leverage them with the right partners in an ecosystem approach that includes cities to ensure customer satisfaction. Besides agility, the ability to create sustainable win situations is likely to differentiate the winners from the also runs.
About the authors: Walter Rentzsch is a Principal in Roland Berger’s Detroit office while Wilfried Aulbur, Frank Pietras and Thomas Fang are Partners in Roland Berger’s Chicago, Berlin and Shanghai offices respectively
