E-Commerce, Last Mile Delivery and 3PLs

Rampant need for last mile delivery due to increased use of e-commerce leads to new collaboration with 3PLs

Setting the Stage for the 2021 Continued Growth in E-Commerce and Last Mile Delivery

Fueled by COVID-19 lockdowns and consumers working from home, the explosion of online shopping caused the demand for same day and next day deliveries to escalate. It probably comes as no surprise that e-commerce has driven 90 percent of the growth in the parcel market and last mile delivery services in the United States. How do all these online orders get to their ultimate destination? It is not magic. 95 percent of all e-commerce orders in the United States are delivered by the USPS, UPS, or FedEx. In 2020, final mile delivery giants UPS and FedEx both posted double digit revenue growth while large couriers including LaserShip, Purolator and OnTrack reported significant revenue increases. Despite this, there has been a noticeable increase in the need for last mile delivery service providers as consumers have become accustomed to faster, low or no cost delivery.

In the past few years, last mile delivery service providers and platforms have sprung up, with varying value propositions. DoorDash, Postmates, Shipt and Instacart leverage the gig economy to provide delivery services. On the horizon, drones, and automated guided vehicles (AGVs) are envisioned as the wave of the future with Matternet and StarShip leading the way.

New Collaborative Last Mile Delivery Partnerships

In 2021, the Transportation Intermediaries Association and Customized Logistics and Delivery Association collaborated on a white paper to showcase how shippers and 3PLs can develop relationships with last-mile transportation providers to form strategic partnerships to help meet the expectation for same day delivery. The strength of the argument is these relationships can be leveraged to target customers that have higher service requirements and the desire for more customized delivery experiences with on-demand freight. In this way, local last mile fleets are not competing directly with Amazon, UPS and FedEx and filling a vital need in the transportation industry.

Third party logistics providers now have new opportunities and need to focus on the optimization of their use of local, short haul fleets. This can be done by forming and nurturing relationships and leveraging technologies during the final mile of the delivery process. The last segment of delivery is the costliest part of supply chain operations, one valued tremendously by customers.

3PLs are critical to last mile delivery. Many people may not realize this, but UPS, FedEx, DHL and Amazon are actually a type of third-party logistics provider, one that is transportation-centric. These, and other 3PLs, provide the essential services that enable online retailers to efficiently and cost effectively ship their customers’ orders. 3PLs provide services such as warehousing, inventory management, transportation and logistics, shipping management and order fulfillment for multiple customers (shippers) within the four walls of the same warehouse.

Using third party logistics providers enables shippers to extend the reach of their brand internationally and scale as needed. It also helps to keep overhead and operating costs under control. 3PLs have established relationships across the supply chain logistics industry and have the experience and technology needed, freeing up shippers to focus on their core business.

Third party logistics providers typically offer add-on services including:

Contract Logistics
Customs Brokerage
Returns Processing/Reverse Logistics

Did you know that about 15,000 registered US 3PLs generate nearly $90B in annual revenue mainly by managing LTL freight and truckload transactions? Third party logistics providers have found that they can expand their supply chain service offerings by building partnerships with local freights in primary markets including e-commerce, medical lab logistics, and B2B. Special projects, such as the breakdown of large-volume truckload and LTL shipments into smaller shipments for urban deliveries on repeat schedules are another way of expanding services. 3PLs can also collaborate by providing warehousing services to last mile carriers as a means of closing the loop on end-to-end freight management services for shipper customers.

The Nitty Gritty of Transportation and Logistics

Servicing the supply chain, the transportation industry pioneered the “hub and spoke” network model. This centralized warehousing and shipment system utilizes warehouses or distribution centers that are strategically situated within a heavily populated area. Multiple delivery locations within an urbanized area are then possible, enabling the consolidation of drivers.

All daily shipments are usually picked up from a designated hub. This simplifies the planning of daily dispatches as well as delivery duties. Shipments are loaded and unloaded from the centralized point and adequate stock levels are maintained to fulfill orders. Delivery partners and transportation operators can more easily plan daily delivery routes around one hub. This makes it more manageable to complete deliveries in a particular geographic region. Resources can then be allocated for on-demand or extra deliveries from another hub.

The hub and spoke network facilitates delivery route optimization, giving due consideration to such issues as peak traffic hours and ground restrictions which directly impact on time last mile delivery efforts. Route optimization is crucial in keeping fuel costs and labor hours under control, speeding up last mile deliveries, reducing miles traveled and other factors.

As consumer expectations for fast, low or no cost delivery continue to rise, shippers and retailers are moving away from airfreight deliveries to ground deliveries. This necessitates the decentralization of distribution and fulfillment networks so that inventory can be positioned much closer to consumers to reduce transit time. Like dominoes, this has resulted in changes to the trucking industry. Today, transportation has transitioned away from long haul trucking to more regionalized deliveries.

For many years, most transportation and logistics operations were designed to handle long distance deliveries using trucks and large commercial vehicles. As countries became more urbanized, different types of vehicles were needed. It simply was not practical or cost effective to deliver along routes with many stops using large commercial vehicles. Handling last mile delivery requires that transportation and logistics service providers consider traffic congestion, weather, one way and narrow streets, parking availability, etc.

How Last Mile Delivery Has Changed

Both B2B and B2C Customer Expectations Have Changed

Consumers have become increasingly demanding. Still largely working from home, consumers are eager to transition away from the limitations of home delivery and curbside pickup to more options involving retail. The new retail model encompasses not only online mobile and digital channels but also brick and mortar. This omnichannel retail model is strengthening the demand for a seamless brand experience, bridging the physical store, digital world, payment, and pickup/delivery options.

There is still a gap in omnichannel retail, however, as shippers often remain agnostic in terms of the companies that deliver their goods. Although shippers want maximum flexibility, they typically remain unwilling to pay for shipping but are often found to be willing to pay a premium with additional or higher value services such as faster delivery of high value goods. In addition, shippers do not expect shipping costs to fluctuate, no matter the market conditions, seasonal capacity restraints, or imposition of surcharges for specialized or faster delivery services.

On the B2B side, manufacturing customers expect more efficiency and top-notch performance and depend on this to improve their products’ speed to market as well as to decrease product defect rates. For example, another major shift is that of customers’ desire for product customization. 3D printers help with many products, from customized insoles and sandals to products with consumers’ names emblazoned on them. Other technologies including networked production, high-speed data transmission, shopping apps and smartphone scanners are also used to enable mass customization.

Niche manufacturers as well as legacy manufacturers that have embraced the wave towards customization are seeing great success. Today, mass-customization is so popular that there is even a database with links to companies that facilitate the production of individualized goods, approximately 1,360 in 17 industries. Consumers love ordering online and value the ability to get exactly what they want.

Why does the mass customization trend matter to last mile logistics? This changes supply chains, cost structures, the need for technology and much more. No longer are factories producing mass goods with huge numbers of lots. Manufacturers are now producing goods with a lot size of one, and by one, we do not mean “one size fits all”. These goods can be ordered online, often directly from manufacturers.

Factors Contributing to High Cost of Last Mile Delivery

Fuel

Typically, anywhere from 10 to 25 percent of the total fuel bill can be attributed to last mile delivery. It is important to note that fuel prices are volatile, making fuel cost projections challenging to accomplish at times.

Labor

The labor cost for delivery drivers has been calculated to be 50 to 60 percent of last mile delivery expense. According to the U.S, Bureau of Labor, the hourly wage of delivery truck drivers ranges from $9.43 to $29.39 per hour with an average rate of $15.12 per hour. On average, local delivery providers (messengers) are paid $16.74 per hour. For businesses providing express delivery, an average rate of $25.10 per hour is charged.

Other Miscellaneous Cost Factors

Failed deliveries
Repeat delivery attempts
Idling costs
Replacement expenses
Storage costs
Rescheduling costs
Vehicle maintenance costs
Tolls and fees
Technology costs (TMS and routing software, hardware, etc.)

Amazon, the 400 Pound Gorilla in the 3PL World

According to 3PL market research firm Armstrong & Associates, Amazon dominates the 3PL market, having reached 60 percent of market share in the U.S e-commerce 3PL segment for 2020.

Amazon’s Transportation and Delivery Solutions

Today, Amazon delivers to 72 percent of its Prime customers within 24 hours of order receipt. If it sounds daunting, it is because it is an overwhelming challenge.

In 2018, Amazon launched its Delivery Service Partner (DSP) program. To be able to compete head-to-head with FedEx and UPS, Amazon began contracting with local delivery service providers on an enormous scale. To grow its DSP program, Amazon provided start up business opportunities, and offered considerable discounts to individuals for delivery van leases, insurance, mobile devices, uniforms, and advanced delivery technologies. Today, the Amazon DSP program encompasses over 1,300 delivery firms with 20,000 delivery vans working across five countries, distributing goods from over 390 warehouses.

Even with its growth, the DSP program has been unable to meet the needs of many short-haul fleets. These fleets have been able to locate better opportunities elsewhere in the market. Numerous DSPs built up their operations only to experience how easily Amazon cuts contracts and have their businesses go bankrupt.

The Evolution of Couriers to 3PLs

Traditionally, delivery companies operating with local fleets servicing on-demand, same-day delivery needs were considered and referred to as couriers. Couriers handled pick up and delivery of medical samples, life science testing materials, auto parts, florals, legal documents and more recently, began to shift to delivery of products purchased online.

Typically, the packaged goods transported by a courier company are less than 150 pounds to an end destination that is local. Courier services are used over express postal services as they tend to be faster (same day delivery service that can be provided at a specified time of day), efficient and usually offer door-to-door service. Couriers are also used for package delivery any day of the week rather than only during normal business hours.

By comparison, logistics companies (3PLs or third-party logistics providers) plan, execute and manage the movement and storage of goods, services and information within supply chains starting at the point of collection through to the point of delivery. Logistics service providers typically handle larger amounts of goods and may use airplanes, trains, ships, and trucks in the process.

Seeing the shift in online shopping, many couriers have evolved their business models. By expanding their service offerings to include warehousing and distribution as well as other services such as freight brokerage and expedited air forwarding, these companies have morphed into third party logistics providers. By their nature, third party logistics providers specialize in warehousing, logistics and order fulfillment. Adding localized last mile delivery capabilities enhances a 3PL’s ability to attract e-commerce and online retail business.

Third party logistics providers manage the entire process of delivery including the warehouse facility, labor and resources involved from the point of collection to the point of delivery.

Conclusion

Ecommerce had been on a steady growth trajectory for years, prior to COVID-19. Multiple experts, including Forrester Analytics, the U.S. Department of Commerce and McKinsey have reported that the COVID pandemic compressed ten years of U.S. ecommerce growth into a period of three months. According to Capgemini Research Institute, e-commerce, and the work from home (WFH) trend, accelerated the growth in last mile logistics, which now makes up 41 percent of B2C supply chain cost.

The last mile delivery industry has embraced the trend of collaborative working. Current market leaders maintain dominant positions within the industry, partly by standardizing shipment sizes as well as labeling and systems. This also means that the terms of logistics and delivery become as customizable as the goods themselves.

As the wave of the COVID-19 Delta variant continues to overshadow the global economy, consumers are again concerned about encountering others who have been infected, even if they themselves have been inoculated. The popularity of curbside pickup and minimal contact remains, and e-commerce still is the dominant force of change. The transportation and logistics industry is continually changing. Amazon has persisted in pushing the envelope, elevating customer expectations to increasingly shorter time intervals. This, in turn, increases the need for more last mile delivery service providers.

Efforts have been made to unite last mile delivery companies with shippers and 3PLs, key to carving out a niche in the market that big parcel delivery companies may find challenging to penetrate. Third party logistics service providers frequently partner with home delivery contract carriers to extend their service offering.

Although 3PL customers have been pushing for the expansion of last mile delivery offerings, there is somewhat of a technology gap with many disparate systems in a segmented last mile delivery market. Last mile delivery companies often lack infrastructure, especially that needed to scale.

Change is coming. From transportation hubs to transportation networks, autonomous vehicles, drones and fulfillment centers, the supply chain logistics industry is pioneering new collaborations, innovations, and strategies to help meet the biggest challenges in getting parcels directly to the customer. Rapid order fulfillment is a necessary evil in ensuring the brand loyalty of consumers, but it must be done in a manner which reins in delivery costs.

There is more to the final mile delivery world than Amazon Prime. With some creativity, a service-oriented mentality towards maintaining a high-quality delivery experience and efforts to contain operational costs, 3PLs, couriers, shippers and last mile delivery service providers should be able to meet these challenges now and in the future.