There’s a glaring gap in today’s omni-channel world. Or perhaps it’s best described as a blind spot. In either case, as manufacturers, retailers and 3PLs invest millions of dollars to provide a truly seamless, fully integrated buying experience, many continue to overlook the significant costs and complexities of the “final mile” between DC and the consumer’s front porch.
While integration of supply chain, inventory management, marketing and point-of-sale is critical to success in an omni-channel environment, final-mile delivery is often the most “customer facing” step in this chain and, as such, can severely impact the consumer’s brand experience. Will the product be delivered when and where he or she needs it? Will the cost of delivery be reasonable? Will delivery include installation and setup, in the case of an appliance or electronic item, and will the delivery team have the necessary equipment, tools and skill? Failure to meet consumers’ ever-increasing expectations can undermine the brand experience and, ultimately, harm your relationship with the retailer or other shipper.
There’s financial risk, as well. It’s not unusual for final-mile delivery to comprise up to 33 percent of the total cost of moving a product to the end customer. Moreover, consumers who prefer premium brands and products are likely to expect a premium level of service beyond what is available from FedEx, UPS or USPS. Therefore, the underlying cost must be mitigated or built into a truly comprehensive delivery strategy that aligns the shippers’ service and financial requirements with the demands of the customer.
With so much riding on this vital step, it’s surprising that so many shippers and delivery providers spend so little time – so late in the process, no less – considering final-mile logistics. As a matter of fact, I can’t recall seeing this topic on the agenda of any of the several omni-channel conferences I have attended in recent years. The blind spot endures.
Forcing ourselves to think differently
In reality, solving the final-mile puzzle requires every participant in the omni-channel value chain to change the way they view the challenge and their role in solving it. Rather than address this step last as part of their go-to-market strategy, as might seem logical, shippers need to craft a final-mile strategy much earlier in the planning cycle, certainly at the same time product and delivery pricing models are finalized. It also requires a willingness to think less like a shipper or 3PL and more like a dedicated or private carrier, which look at final-mile logistics in the context of number and types of trucks and number and skill sets of drivers required to offer multi-stop home delivery.
With this in mind, let’s look at the considerations and corresponding tools that can help turn final-mile logistics into a competitive advantage for each participant in the value chain.
Quoting delivery in real time
In an ultra-competitive space, “per mile” pricing for delivery won’t allow a retailer to remain competitive with the same product available through a brick-and-mortar store or with other omni-channel final-mile options. As a result, the delivery provider will need to perform a comprehensive analysis of delivery trends for each geographical area and then develop route structures that will support the required service levels. From this analysis, pricing models can begin to take shape.
In this basic example, any delivery customer within the yellow circle will place less strain on the fleet and, thus, lower operational expense. This cost saving ultimately must be passed on to the customer to remain competitive.
How do we determine preferred delivery times for a specific region/zone/area and the cost offset if a customer requires you to deliver outside that optimal window?
If we are really going identify and recapture the true cost of final-mile delivery, we need to further subdivide our delivery regions by time of day, thus providing delivery options and corresponding prices to the customer at the point of sale. For example, if a delivery vehicle is going to your neighbor’s house at noon on Monday, a delivery to your home at 12:01 p.m. should come at a reduced cost. Conversely, a delivery request for 4:00 p.m. might carry a dramatically higher cost.
There are typically two approaches to accomplishing this:
Option #1: Analysis of historical data can be further sub-divided into zones with optimal time buckets.
For this option, let’s look at our yellow area again:
In this example, based on historical order data, final-mile delivery runs most efficiently and at the cheapest cost to the customer if it is run in a “horseshoe” pattern with delivery windows following the optimal path of delivery. You now have the information needed to present the consumer with an optimal delivery window. If the customer requests delivery to a location inside the blue box, their optimal delivery window is between 8 a.m. and 10:30 a.m. This window ensures the lowest possible delivery cost.
You also have the information needed to estimate a cost to deliver outside of the optimal windows, and present this as a pass-through cost to the customer. For example, if a customer in the purple box wants a delivery at 11:00 a.m., this will pull your truck off the optimal delivery path, on average, by X miles at a cost of Y dollars. The resulting cost penalty is communicated to the customer at the point-of-sale.
Option #2: With the use of today’s best modern routing and optimization solutions, this planning and pricing can occur dynamically, as orders are received. Basically, the software continually performs the same analysis of historical data based on where and when delivery packages are received.
Either option can garner necessary improvements in the service provided to a customer, and at the lowest cost possible to remain competitive.
Final-Mile considerations like those above are essential to being competitive and delivering a true omni-channel solution at the most important point in the chain – where the product physically meets the customer.
Brian Larwig is General Manager, Appian Software at TMW Systems. With 10 years of transportation management experience and a background in Analytics, Operations Research and emerging technologies, Larwig has made organizational analysis and efficiency the focus of his efforts in logistics. He holds a bachelor’s degree in Management Information Systems from Oklahoma State University.