Your company's back-end supply chain may be so efficient that you are the envy of all your competitors. But what about the customer-facing portion? Taking a look at the "last mile" in your supply chain may be what it takes to ensure your customers come back to you and not your competitors time and again.
Although the "last mile" of a company's supply chain is the final and critical link between the company and its customers, it has historically been a neglected segment of a corporation's supply chain strategy. At the last mile, merchandise is delivered from regional distribution centers to local branches or directly to end customers. While most companies have optimized their supply chains up to the store front, surprisingly few have focused on last mile deliveries.
It's surprising because, on average, 28 percent of transportation costs are incurred in the last mile, according to the Council of Logistics Management, which greatly impacts a company's bottom line.
The last mile is also a major influence on a customer's perception of a company's brand. Because the last mile is the final point of contact with customers, their good or bad experience with inventory availability or delivery directly impacts brand loyalty. Customer questions such as, "Is the merchandise I want in stock now?" "Will my order arrive on time and undamaged?" and, "Is delivery fairly priced in relation to my purchase cost?" are all answered at the last mile.
There are new solutions, such as outsourcing, which will be crucial in unlocking inefficiencies in the supply chain. But in order to fully address the needs of the last mile, we must first examine its unique challenges.
Challenges in the Last Mile
The last mile encompasses numerous geographic markets and widely varying customer needs. This makes it difficult for logistics professionals to forecast delivery costs and control quality.
Though a flood of new technologies and services have cropped up in the past 10 years promising to streamline companies' supply chains, few solutions have specifically addressed the last mile. As a result, companies have adopted several different practices though none fully address the unique requirements of the last mile:
Assign last mile logistics management and purchasing decisions to the local level
The upside to this option is that local decision makers, who closely understand local needs, can custom-tailor solutions to address the local needs. The downside is that decisions are sometimes made that address specific local interests at the expense of a company's broader business goals. Corporate management often gives up control over quality and cost of delivery services, and can't take advantage of economies of scale.
Invest in a proprietary delivery fleet
Hiring employee drivers and operating a fleet of branded vehicles is a surefire way for a company to own its last mile delivery operations. This is a good alternative for companies with high delivery volumes, consistent utilization within markets, and/or highly specialized delivery needs.
However, building a fleet requires a substantial upfront capital investment, and the ongoing carrying costs of driver salaries and benefits, vehicle costs and maintenance, and insurance become a financial burden if the fleet is not utilized to capacity.
Ironically, some companies also find that a proprietary fleet actually limits flexibility, since it's difficult and costly to build a fleet large enough to cover all locations and diverse enough to address all last mile delivery needs.
Contract different vendors for each geographical area or line of business
This is a viable option if a company's local operations and P&L centers are completely separated (as with some franchise operations), if the company has a very low volume of deliveries or if delivery needs vary greatly from region to region.
Unfortunately, the time and effort required to manage dozens to hundreds of carriers can drain resources from the core business. These include escalating costs, inability to forecast and control, and the hassle of dealing with multiple points of contact. Pricing, service terms and support levels can also vary by market. While companies have the option of leveraging technology to streamline this process, the substantial investment to develop proprietary systems are typically cost prohibitive.
Other Attempts to Service the Last Mile
In the past decade, several new models arose in attempt to tackle the challenges of this space.
The "Build from Scratch" model first drew attention when companies like Webvan, Kozmo and Sameday.com became media darlings by combining Internet technology, retail, and logistics/distribution operations. However, this business model was too capital intensive due to, among other issues, the high cost of building delivery fleets from scratch, expanding geographical coverage and maintaining profitable vehicle utilization rates. As a result, the business community learned a few important lessons when it came to last mile delivery. Namely, successfully running retail, logistics and technology companies requires different core competencies, and no one company can do all of these successfully and compete with the existing leaders in each space. Also, the high cost of building a nationwide delivery fleet from scratch is a slow process that creates a drain on resources. Unless vehicles maintain utilization rates of 70 percent, it quickly becomes a money-losing operation. At its peak, Webvan served 30 markets far less than the footprint required to service a major retailer.
Other companies attempted the "Consolidated Model," where local delivery companies tried to build a national footprint by acquiring other delivery firms in additional markets. However, they came up against several factors that offset the perceived potential benefits of consolidation. As it turns out, the economies of scale are minimal in this industry, and replacing local owner/operators with remote corporate managers dramatically decreases service quality.
The Last Mile Outsourcing Advantage
Outsourcing last mile delivery services through a nationally-scaled local delivery provider has the potential to emerge as the victor in this game. The ubiquitous adoption of the Internet over the last decade and the availability of sophisticated supply chain management software make this new model a viable option. With a network of independently-owned, local delivery service providers, companies can provide customers with the quality service of a locally-managed operation with national reach, plus the benefits of a centrally managed one-vendor service.
For example, shippers can gain reductions in operational costs by eliminating fixed assets and overhead, and paying only for deliveries as used. They have the ability to scale "virtual delivery fleet" to meet variations in shipping needs due to seasonality, promotions or product mix. It is virtually unlimited capacity. Shippers can have central reporting and control by integrating last mile management systems with existing back-end supply chain systems. There is also only one source for last mile management (billing, contracts, support, account management).
As with any outsourcing decision, make sure a checklist for a sourcing a last mile service provider measures the right parameters. Verify that the providers have nationwide coverage, logistics expertise, services that meet your business' needs, cross-dock and warehouse capabilities, and dedicated account management to provide the highest levels of service to your customers.
How do you know whether outsourcing the last mile is the best option for your company? This is best answered by your need to own your own delivery brand versus your need for scalability and ease of management in your delivery operations. Shippers with a compelling business need to own their own delivery brand, or those with highly specialized product delivery needs (e.g.: hazardous materials, perishables, etc.) may be better served by using a proprietary fleet to manage the last mile.
However, for many companies, delivery is a means to an end: getting products in the hands of customers period. For those companies, outsourcing the last mile to nationally coordinated local delivery professionals will bubble up as a more efficient solution.
About the Author: Chris Mannella is the president and CEO of Ensenda.