Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

E-Commerce Growth Brings Last Mile Headaches

China | By •

ecommerceDuring the second half of 2014, Clint Reiser and I worked on an extensive survey examining the omni-channel commerce landscape. One of the key findings from that research was on the growth of e-commerce. According to our research, the lion’s share of revenue is still driven by the store. Brick and mortar locations accounted for approximately 67% of all revenue for our survey respondents. However, when looking at revenue growth, our research tells us a different story. Over the last five years, survey respondents indicated revenue growth of 6% from the brick and mortar channel compared to 47% for e-commerce. Looking ahead, respondents forecasted flat growth for their brick and mortar channel compared to 40% growth for e-commerce. This is a pretty dramatic shift in the retail landscape. It shows that the convergence of channels will be more important as omni-channel operations continue to evolve. It also poses a significant problem for retailers: how to deal with the last mile.

Fedex_ups_uspsLast mile delivery is the final leg of the supply chain. It is the moment the customer finally receives their order. And it is generally the most expensive, least efficient, and most problematic part of the overall delivery process. In the US, last mile deliveries have their own unique set of challenges. Mostly they come down to cost issues, and a retailer’s desire to control the final moment of the brand interaction. There are a few main categories for last mile deliveries. First, is parcel delivery. UPS, FedEx, and the Postal Service are the three main players in this area. These companies are delivering thousands and thousands of packages daily from retailers around the globe to customers front doors and offices. The shipping rates have gone up recently, and these companies provide very little control over the last mile for retailers.

Amazon FreshAn alternative to typical parcel deliveries is in use by Amazon. To control the last mile, and to utilize its massive distribution centers, Amazon has rolled out its own private fleet of trucks to make deliveries. For Amazon, it creates more flexibility in delivery timeframes and reduces overall shipping costs (as Amazon is no longer paying UPS, FedEx, or the Postal Service for deliveries). This is not the first time Amazon has looked for creative ways to complete deliveries. As recently noted in Logistics Viewpoints, Amazon is one of a few companies testing drones for deliveries. The company has also experimented with bike messengers in New York City for small deliveries as well as delivery lockers for customers to pick up items at their convenience.

Another alternative to using the big parcel companies that has taken off is the use of crowdsourced delivery services. Deliv, for example, is a crowd sourced delivery option that stretches across multiple retail segments. This company uses a smartphone app to alert pre-qualified drivers of a pending delivery. The driver picks up the merchandise from the retailer and delivers it to the customer. Instacart is another example of crowdsourced delivery. Based in San Francisco, this company connects personal shoppers with customers to deliver local groceries. Both of these companies are proving that the crowdsourced model is growing. And all of these models show that while they may be expensive, they are doing a good job of satisfying the customer during the last mile.

last mile indiaBut outside of the US, it is another story. The growth of the e-commerce economy is great for retailers, and allows more people to shop for the goods they want, but it poses significant challenges to the last mile. The world’s two most populated countries, which bring an awful lot of buying power, face significant challenges. In India, for example, Morgan Stanley estimates that Indian online sales will hit $100 billion a year by 2020, up from $3 billion in 2013. The difficult part is figuring out the infrastructure to make home deliveries viable. Trucks have a difficult time navigating the crowded streets and the postal service is notoriously slow. One new option in India is the use of couriers to deliver goods purchased from Flipkart, Snapdeal, and Amazon India. But, in order to actually deliver these products, couriers are turning to smaller modes of transportation. In many places, delivery trucks are simply too big to navigate. Instead, couriers are using motorcycles and scooters to carry giant backpacks filled with 100 pounds+ of merchandise. These drivers navigate narrow streets, potholes, and erratic drivers to deliver everything from soda to laser printers. Most people agree that without the use of couriers to deliver these goods, the e-commerce market as a whole would grind to a halt in India.

china last mileChina faces its own set of challenges. The e-commerce market is growing exponentially in China and vast improvements have been made to establish more operations centers across the country. These improvements have made it possible for residents in rural China to shop online and receive orders in a timely fashion. But the last mile still remains an issue. One of the biggest roadblocks for Chinese retailers is the government policy banning freight vehicles and gas-fueled and electric tricycles in downtown areas. This poses a number of problems. First, delivery people can be detained, have their vehicles seized, and receive fines for violating regulations due to the pressure of making a delivery timeframe. Secondly, to combat the costs of tickets and seized vehicles, many companies are simply driving up their delivery costs. These costs can certainly be burdensome to the customer, but at the same time, they are necessary if they wish to receive their package. And third, if the last mile problem is not solved, and vehicles are seized or delivery personnel are detained, the packages may never be delivered. According to the operator of one such delivery service, “if the last mile problem is not solved, up to 1 million packages awaiting delivery could be stockpiled in cities around the country.” This shows just how serious the last mile problem, and the associated challenges are in China.

In conclusion, the global e-commerce market is growing. In fact, according to eMarketer, global B2C e-commerce will reach $2.3 trillion by 2017. This explosive growth brings about new opportunities, new customers, and new challenges. One of the biggest challenges will be controlling the last mile. Logistics infrastructure, economic and political regulations, and competition have proven to be roadblocks for many companies. But as the market grows, the solutions will too.

This Week in Logistics News (March 21 – 27)

This Week in News | By •

Robots 2C3PO. R2D2. Johnny 5. Optimus Prime. Voltron. HAL 9000. Wall-E. Terminator. Rosie the maid. Bender. You might notice a theme here. This a short list of some of my favorite robots. These robots can do lots of things: help save the galaxy from evil, understand mortality, travel through time to kill (or protect) Sarah (or John) Connor, control space crafts, clean houses, or be the life of the party. What’s one thing you won’t find in this list?  A robot that pick items from shelves and packages it safely in a box. So Amazon is working on that for us. At ICRA 2015 in May, Amazon will host a contest where contestants will build their own robots with the sole purpose of deftly picking and packing items from shelves. According to Amazon, the challenge combines object recognition, pose recognition, grasp planning, compliant manipulation, motion planning, task planning, task execution, and error detection and recovery. The robots will be scored by how many items are picked in a fixed amount of time, with $26,000 in prizes being awarded. The introduction of more automation into the warehouse can certainly lead to cost savings from a labor standpoint, but we are still a ways away from fully replacing human workers. It may not be as exciting as time traveling robots protecting mankind, but it is certainly a step ahead of Rock ‘Em Sock ‘Em Robots.

And now, on to the news.

instacartInstacart, the one-hour grocery delivery company based in San Francisco, is introducing a new pricing model during peak delivery times. Named “Busy Pricing”, the new structure would charge a minimum fee of $1, although the fee could be higher. The customer will have full transparency into the pricing, and can choose to pay the additional fee or choose another delivery time. This move is being implemented to guarantee that specific delivery times will be available. Due to its popularity, the site can sometimes be overwhelmed with requests for certain times, such as Sunday nights. This gives Instacart a little bit of wiggle room. It is also a proven business model, as Uber has implemented surge pricing during busy times (although not to everyone’s liking).

Part of Zulily’s business model was to hold zero inventory. This kept inventory costs minimal, and the savings were passed on to the consumer. The company would purchase merchandise only after their customers ordered it. The problem with this model was the time it took to ship merchandise to customers. According to the Wall Street Journal, the average time it took for an order to leave a Zulily warehouse in Q4 of 2014 was 13.7 days. While their flash sales may have saved customers money, it certainly didn’t win anyone over when they would have to wait two weeks or more to get their order, especially considering their competition could fulfill next day (and in some cases, same day). So Zulily has abandoned this model and will stock inventory in warehouses that will be owned by vendors until it is sold. It may drive prices up a bit for the end consumer, but in today’s instant gratification world, sometimes a price increase just makes sense.

droneThe Amazon drone saga continues. Weeks after the FAA released its proposed drone guidelines, which essentially killed Amazon’s drone plans for the US, Amazon is urging the FAA to speed up the approval process. On Tuesday, an Amazon official told a senate panel “the Federal Aviation Administration is so slow to approve drone permits that the aircraft become obsolete while waiting.” Amazon was granted approval for a test drone, but the months-long wait for regulations made that drone obsolete. As a result, Amazon applied for a new permit for an updated aircraft. At the heart of the matter is Amazon’s view of the drone versus that of the FAA. Any changes to the proposed regulations will have a significant impact on drone deliveries states-side.

Oly Torch Relay X TrainWhen it comes to freight shipped between US cities, the rail is still king. In fact, railways carry more than 40% of the freight shipped throughout the country. Due to its profitability, the international community is taking notice. Over the last few years, Europe, Russia, Brazil and Australia have all sent representatives to the US to gather information about the US rail system. International delegates are also interested in safety technology, as freight rail’s safety record has improved, with the accident rate down by 42 percent since 2000.

MHI and Deloitte released the results of the second annual MHI Annual Industry Report at this week’s ProMat show. The study is based on interviews with more than 400 supply chain executives and explores the current state of the supply chain to identify key trends and technologies that will continue to make an impact. One of the major findings, which we’ve written about on Logistics Viewpoints, is that 1/3 of the companies surveyed are concerned about finding skilled talent to use new supply chain technology effectively. The report also indicates that Innovations like predictive analytics, 3D printing, and wearable technologies are changing the supply chain landscape as the workforce shortage intensifies.

And finally, according to the Department of Energy, the national average for a gallon of on-highway diesel fell 5.3 cents in the week ended March 23 to $2.864. This is the second consecutive weekly price drop, after five weeks of increases. The U.S. average also remained $1.124 lower than the same week last year. All regions in the U.S. also experienced a price drop, led an 8-cent drop in the Central Atlantic and a 7.9-cent drop in the West Coast (less California).

That’s all for this week. Enjoy the weekend and the song of the week, Dan Mangan’s Robots.

Amazon, Google, and Crowdsourcing: The Battle for the Last Mile

Logistics Outsourcing | By •

There has been a lot of talk lately as it relates to “last mile” deliveries, and how retailers can delight their customers at the actual moment of fulfillment. As more retailers venture into the omni-channel space, last mile has taken on more importance. Two behemoths have taken center stage in the battle for perfecting (or at least improving) the last mile for customers: Amazon and Google.

For many people, Amazon is the end-all, be-all for their shopping needs. With nearly 60 (and counting) distribution centers in the United States, Amazon can fulfill orders quickly to nearly every square inch of the country. With Amazon Prime, and its $99 a year price tag, customers can receive these orders in two days, guaranteed. But two day delivery isn’t the only perk of Prime. Amazon Prime customers have access to a growing catalog of e-books, and streaming digital music and video, including a new partnership with HBO.

Amazon Fresh

But controlling the last mile is more important than ever. So Amazon is rolling out its own fleet of delivery trucks. These trucks become a true competitor to UPS and FedEx, which will surely miss the Amazon business. For Amazon, it adds control over the last mile, and who is actually delivering the merchandise to customers. It also creates some additional flexibility into delivery timeframes, which can increase customer satisfaction. At the same time, it offers a way to reduce shipping costs, which have been increasingly as a larger percentage of revenue every year since 2009.

GoogleEnter Google, and its desire to play in the last mile game. Google’s model is different than Amazon. Google does not have distribution centers around the country, nor does it want to. Instead, Google contracts directly with local stores to provide same-day delivery (mostly). The advantage for Google here is that it can keep adding new partners without worrying about inventory carrying costs. As part of Google’s Shopping Express, customers can sign in through their Google account, use their Google Wallet to pay for the purchase, and select a delivery timeframe. Overnight deliveries are offered in select areas where same-day delivery is not offered.

There is also a third option for retailers to deliver their goods to the end consumer, without going the traditional route of using UPS, FedEx, or USPS: crowdsourcing. Crowdsourcing has taken off in recent years. Companies like Uber and Lyft are changing the livery market, and making life more challenging for traditional taxi companies. Crowdsourced hospitality sites like Airbnb and VRBO are changing the way people travel. And now retailers can jump on the bandwagon too.

Companies like Deliv and Kanga are expanding delivery options for retailers. Deliv, for example, uses an API to create a same day shipping option for e-commerce customers. At check-out, there is a new question – “would you like this order delivered?” The price for same day delivery is the same as standard 3 – 5 day delivery in most cases. The big thing for retailers is to ensure safe delivery of the merchandise. That’s why these companies have a rigorous screening process prior to certification, including background checks, interviews, insurance coverage, and vehicle checks.

The last mile is the last chance retailers get to influence the final leg of the customer experience. Offering same day delivery to customers is one more way to leave them with a good taste in their mouth about the experience as a whole. Amazon and Google have entered into an arms race to roll out their own fleets to provide this last touch-point. And while customers have taken notice, so have enterprising minds. The rise of crowdsourced options for the last mile is the next logical step in ensuring quick, efficient deliveries. It also shows that consumers are willing to pay for same day delivery. In those markets where Google and Amazon do not offer same day delivery, the opportunity for a crowdsourced model is huge. And as these models grow, it will be interesting to see how Amazon and Google respond. Will they turn to innovation mode or acquisition mode? Only time will tell.

Alibaba Details its Logistics Capabilities in a New IPO Filing

Logistics Outsourcing | By •

The Chinese e-commerce behemoth Alibaba Group Holding Ltd. released fresh insights a couple of weeks ago on its logistics capabilities ahead of what’s expected to be one of the largest tech IPOs in history. In an updated security filing, Alibaba included additional details, including new insights on its approach to logistics, that were missing in the initial documents filed in May.

Investors had, among other things, asked for more details on how the Alibaba was going to ship goods effectively based upon China’s underdeveloped logistics infrastructure. In the initial financial document, Alibaba had mentioned that “China has an increasingly extensive and rapidly improving logistics infrastructure.” Investors did not find this to be fully credible.

Alibaba is unlike Amazon.com in that it does not take ownership of inventory. It’s e-commerce sites connect buyers and sellers. Clearly, that makes achieving fulfillment reliability more difficult.

In Monday’s filing, Alibaba argues they have a good deal of control over 14 key logistics partners, who delivered 5 billion packages to consumers on behalf of Alibaba. “We believe orders from transactions generated on our marketplaces represented a significant portion of our logistics partners’ total delivery volumes in 2013.” They also work with logistics partners to develop solutions that are tailored for product categories that require special handling, such as perishables, frozen items, large appliances, home improvement products and furniture.

Further, recent investments they have made are improving the reliability of the deliveries. In May 2013, they formed a joint venture with five major express delivery companies in China, as well as some firms specializing in real estate development (the real estate companies expertize is getting land grant contracts for the location of future logistics hubs). The JV is known as China Smart Logistics and Alibaba has a 48 percent stake in it.

The development of a central logistics information system was one core driver of this venture. The logistics platform connects sellers, buyers, and LSPs with the pertinent real-time information needed to improve service. The system is up and running. Their express delivery carriers relied on this system to deliver an average of 13.7 million packages per day last year.

For consumers, the logistics platform provides delivery time prediction; real-time package tracking through both their website and mobile interfaces; self-service pick-up, where the buyer chooses a convenient location for pick-up from the participating network of convenience stores and other locations, allowing buyers to pick up packages at a time and place convenient for them; and logistics service evaluations, where the buyer can provide feedback on the logistics service, enabling sellers and logistics service providers to improve their services.

The platform also provides sellers with critical information: performance analytics on their logistics partners (including delivery performance), customer satisfaction ratings, and complaint statistics. Sellers can use a shipment fee calculator tool and then place shipment orders with express providers directly through the platform.

Logistics partners also get information from this proprietary platform that allows them to improve their operations. The information includes key operating metrics (such as warehouse utilization rates), route planning data, and order volume forecasts. In short, their importance to their logistics partner and their logistics platform allow them to improve the quality of their fulfillment services.

But Alibaba believes that because of China’s underdeveloped retail sector, particularly in Tier 2 and 3 cities, they could grow very rapidly. To support the expected growth, China Smart Logistics plans to build a network of key logistics hubs and warehouses across China. Its goal is to enable the delivery of over 100 million packages per day – up from the 13.7 million per day previously mentioned – anywhere in China within 24 hours of an order being placed. That really is very ambitious, particularly considering that they currently “average” 3 day deliveries. I put “average” in parentheses because while 3 days sounds pretty good for a nation like China, the word “average” can hide a long tail of much longer deliveries.

China Smart Logistics has prioritized a list of key cities where key hubs will be located. This was based on a detailed analysis that included the data they had access to from their logistics hub; economic data, such as population and GDP; forecasted e-commerce penetration rates; and an analysis of the existing logistics infrastructure. At this point they are in the process of developing hubs near 8 key cities.

Currently, if you compare Alibaba to Amazon, Alibaba is far, far more profitable despite being a much smaller company. In part, this is because Amazon is aggressively building a network of distribution centers. But the China Smart Logistics build out, of which Alibaba is a 48 percent owner, could be hugely capital intensive. Alibaba is a fascinating company with terrific upside potential. But many investors might not be paying close enough attention to potential future logistics network expenditures.

This Week in Logistics News (April 19 – 25)

Automotive Industry | By •

It’s been a busy week here at Logistics Viewpoints as we get ready to head to Las Vegas next week for JDA Focus, and Hollywood, FL the week after for Manhattan Momentum. There’s a bit of everything in the news this week, so let’s get right to it.

Amazon is testing its own delivery network for the final leg of a package’s journey to a customer’s home in San Francisco, Los Angeles, and New York. The goal is to get Amazon closer to fulfilling the “same day delivery model” that shoppers are seeking. It also gives Amazon more control over the customer experience, as they can manage the time frame that orders are delivered, and even expand delivery hours if necessary. It also means that Amazon employees and contractors are the face of the delivery. This news should ruffle some feathers at UPS, FedEx, and the USPS as they lose out on Amazon shipments. For Amazon, the “last mile” is the key to their strategy.

“Last Mile is the solution to this. It is a program which is going to revolutionize how shipments are delivered to millions of customers.”

Bob Dylan, among many others, has covered the folk classic “Freight Train Blues.” Auto makers may be taking a closer listen to the song in the coming months. New cars and trucks, including some of the season’s best sellers, are currently sitting outside US factories due to delays brought on by terrible winter weather and the rise of production outside the Midwest. There have also been delays due to the expanding crude by rail business, US auto exports, and by a lack of necessary equipment to haul the freight.

“The concern some shippers have is longer-term equipment availability and new production hubs that require rail cars. When the auto industry began shrinking in 2008, the size of the auto rail car fleet did too. Investments in new auto carriers haven’t been enough to replace those taken out of service and scrapped, according to industry data.”

Formula One (F1) technology will no longer just propel single seat cars around race tracks. Projects incorporating F1 technology into buses and diggers are to benefit from a joint £1 billion government-industry fund. This fund is designed to feed cash into projects for the “next generation” of vehicles. This new technology will be used to reduce fuel consumption and carbon emissions in diggers and develop new stop-start diesel engine technology for buses. British Secretary of State and Business, Vince Cable says “The next generation of cars, buses and diggers will be powered by radically different technologies and I want them to be developed here in Britain.” These new technologies will create 30,000 jobs linked to producing engines and creating “many more” in the supply chain.

The contribution of the upstream oil and gas supply chain to the UK economy has been calculated at £35 billion in 2012. In a report EY said the sector’s turnover grew by £11.4 billion between 2008 and 2012, with an increase of 290 companies. The report said there were 1,585 UK firms involved in the upstream supply chain in 2012, employing a total of around 200,000 people, and between 2008 and 2012 the number of employees increased by more than 21,000.

And finally, companies involved in international trade in the United States, Mexico and Canada put more of their volumes in trucks in February, the Department of Transportation reported April 24. While total cross border freight among NAFTA partners rose just 1%, the truck-borne component rose 2.6%, which was the highest growth among any transportation modes. Cars and light trucks were the most carried commodity by trucks across borders. Based on the news earlier in this post, it’s a good thing they weren’t waiting for the freight trains.

That’s it for the news this week. Enjoy the weekend and the song of the week, The Grateful Dead’s Truckin’

Following Holiday Season Delivery Debacle, Amazon Revamps Its U.S. Delivery Network

Private Fleet | By •

Following the Christmas holiday debacle in delivering packages in a timely manner to customers, it was apparent that Amazon needed to make changes.  Amazon Prime was a contributor to the mess, and the fees for Prime have been raised which may help damp down the last minute rush during the next holiday season.

amazonDC

A very good article in DC Velocity outlines other changes that are planned:

  • UPS, who has been the primary carrier, will be replaced by a network of regional carriers.
  • “The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business” (Amazon Fresh).  This means there will be a big expansion from the three metro areas currently served by Amazon Fresh.
  • The private fleet network will “comingle groceries with general merchandise.”
  • “Orders will be routed through Amazon’s 55 fulfillments centers, with deliveries made the same day, the next day or, at most in two days.”

The article makes the point that many of these changes were planned before the Christmas debacle, but clearly delivery failures should give Amazon incentive to move faster.

One way to read the article is that the top 40 markets will solely be served by an Amazon private fleet. I don’t believe that could possibly be correct. I think it more likely that general merchandise will be primarily served by regional carriers with general merchandise opportunistically placed on Amazon Fresh trucks when the trucks are not fully loaded and a grocery/general merchandise route is synergistic.

Further, in my opinion, very few general merchandise orders that are not loaded on the private fleet will be capable of being delivered in the same day.

In a conversation with Ross Merritt, who is in charge of Marketing & Product Strategy at Grand Junction, he pointed out that different types of regional carriers have different capabilities based upon their network design and technological capabilities. Grand Junction provides a SaaS software platform designed for tendering loads to local delivery and courier companies. UPS would rarely be capable of same day deliveries because their vans once loaded at an Amazon distribution center (DC), their vans go back to a UPS sort center, which may be many miles from the Amazon DC, and then sort the orders on to numerous trucks that then make the last mile deliveries.

In short, the distance of the parcel carrier’s sort center from an Amazon DC, the length of time required to sort orders into numerous delivery vans, and the distance of the sort center from a population center, can all work against same day deliveries.  If a regional carrier’s network is well aligned with an Amazon DC and a metro area, Amazon might be able to take an order in the morning in that urban area and deliver it at the end of the day.

Couriers would be able to reliably deliver not just in the same day, but even within a few hours.  Couriers work in a point-to-point manner where a courier goes to a store, picks up one customer’s goods and goes directly to the customer and delivers them. Even in a big city, this methodology can lead to deliveries within 90 minutes.  However, courier deliveries are more expensive and Amazon competes in part on price. It seems unlikely Amazon would extensively use couriers.

Regional parcel carriers are less expensive than a UPS or FedEx, but performance has to be carefully monitored. The Grand Junction solution is capable of tracking the performance of regional carriers.

In conclusion, from a supply chain perspective, Amazon continues to be the most interesting company in the world. But robust same day delivery general merchandise capabilities is not something that Amazon’s competitors need to worry about any time soon.

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