Optimizing the last-mile transportation trade-off

In our Last Mile blog series, we explore the current trends and developments and explain crucial elements that managers, retailers, and e-commerce companies encounter in shaping the last-mile. Our first blog examined various handover methods and the customer’s preference to have a broad range of last-mile delivery options. To ensure these preferences are met, companies need to have efficient and high-quality transportation processes in place – which in turn lead to several multiple transportation challenges to overcome. These challenges and the potential solutions to tackle them will be explained in this second blog of our last-mile series.

Challenges

Today’s e-commerce sector faces several challenges when it comes to last-mile transportation. Looking at transport as the biggest cost driver in the supply chain, we see that it takes up to 41% of all costs. Offering free delivery puts pressure on the profit and has even led Zalando to scrap free delivery for orders below 25 euros in the UK, Spain, and Ireland. A second challenge is to meet customer demand for sustainable transportation. In addition to next- or same-day delivery, consumers increasingly ask for sustainable delivery. Initiatives to decrease CO2 emissions and to monitor the use of ecologically responsible transportation arise. Tools such as “Bewust Bezorgd” show customers how much CO2 is emitted by their order. Other companies are investing in packaging to fit more packages in one vehicle. By providing sustainable delivery, companies provide significantly more customer value.

There is a clear trade-off between delivery speed, transportation cost, and sustainability. To choose a last-mile transportation strategy that best deals with this trade-off, two main decisions should be made: First, companies should choose a mode of transportation to use for order delivery. Second, the delivery network needs to be optimally designed for the transportation methods to function properly.

Modes of transportation

Electric vehicles are on the rise. Due to a rather short range, they are mostly used for grocery and package delivery in (large) city centers. This makes non-electric trucks still necessary for long-distance delivery. Cargo bikes offer a zero-emission alternative (and thereby contributes to a sustainable company image), but their load capacity is considerably smaller. Drones are also becoming increasingly popular. Amazon is experimenting with drones in the US, but it is currently only used for long-distance delivery in remote areas. Additional testing is needed, especially since in Europe legal issues prevent the rise of drones as they interfere with other air traffic. Other solutions can be provided by autonomous, unmanned vehicles in cities with a high population density. An interesting innovation coming up are lockers driving through packed streets. Overall, companies need to consider whether and where to use electric vehicles, thereby considering both benefits and disadvantages, and how to incorporate them in their network design.

Network design

To optimally design the transportation network, companies must drive data-driven decision-making to align (production) facilities, warehouses, and transportation methods in current and future market dynamics. As the transportation of packages in city centres becomes increasingly important and complex, it is important to think about operational and strategic decisions. With 25 cities in the Netherlands striving to reduce traffic and become emissions free by 2025, an opportunity emerges in the bundling of B2B and B2C transport flows, which could lead to cost savings (Shopping Tomorrow). Bundling can be performed in a hub at the edge of a city: companies transport their deliveries to the hub, consolidate them, and then distribute them by electric vehicle to B2B and B2C customers in the city. These so-called city hubs offer a smart mobility solution, but also entail challenges when it comes to costs, vehicle availability, charging infrastructure, and chain collaboration between parties. Also, the impact on customers should be considered, as the package is no longer delivered by a specific brand but via “white-label” delivery. E-commerce companies should also explore opportunities for incorporating the city hub into their existing delivery chain. In the end, the customer decides when and how his/her package should be delivered, and companies will have to cooperate with the right partners to make this happen and thereby meet customer expectations.

After establishing a delivery network designed to fulfill customer needs, companies need to make the strategic decision to either in- or outsource last-mile transportation. This decision focuses on having sufficient delivery capacity and the ability to offer valuable last-mile transportation, which is a capacity-, quality-, or cost-driven decision. Several companies offer solutions for outsourcing last-mile transportation. Traditional options include PostNL and DHL, whereas newer options (crowdsourcing delivery models) are offered by startups, such as Deliveroo and Deliv. These can easily add flexible capacity to existing transport volume, ensuring that packages are delivered on time in peak periods. We foresee that customer demand will differ among regions and types of customers, resulting in different needs for either in- or outsourcing transportation. In the end, we suggest companies to make the strategic in- or outsourcing decision for last-mile transportation based on the value they want to provide to their customers, and whether this decision helps them reach this goal.

In conclusion, to be able to make an optimal decision for the trade-off between sustainability, costs, delivery speed and quality, companies must realize that these challenges should be addressed with a holistic and customer-centric approach, as all components are connected and interlinked.

In the next episode of our Last Mile series, we will deep-dive into globally offered last-mile propositions.

In the meanwhile, we would love to hear your views on last-mile transportation challenges and how to cope with them. Contact us at: wendy.coster@capgemini.com

This blog is written in collaboration with Tom Snijders, Chloë Smid, Maarten Blonk, Door van der Wiel, Ilse van Outersterp, and Maurice Smulders.