Last Mile: The New Frontier in the Retail Supply Chain

E-commerce sales have become ubiquitous. According to e-marketer, worldwide e-commerce sales will increase 20% this year to reach $1.5 trillion. Fueling retail’s expansion into untapped markets, the e-commerce fire is putting immense pressure on retailers to seamlessly meet customers’ expectations across devices, platforms and locations on a global scale.

Further fanning the flames is a driving need to offer expanded delivery capabilities, while increasing convenience without passing along any visible price increases to the customer. Whether consumers are researching, evaluating, or purchasing products online or in a store, their expectations about product availability, delivery charges and flexibility, return policies, and payment options are on the rise. To complicate matters, these preferences can vary by region, demographics and a myriad of other factors that will continue to evolve over time.

Behind this e-commerce conundrum lies a mass of fulfillment, inventory deployment, supply chain network design and omni-channel distribution challenges. Even gargantuan high-profile e-tailers—while having succeeded in offering customers inexpensive and same-day delivery options—are still struggling to maintain efficient last-mile solutions in a cost-effective and profitable manner.

As retailers strive to offer a near-perfect shopping experience, leveraging the right data and information across multiple channels becomes paramount as reliance on their network’s last-mile capabilities and efficiencies is amplified. And since each retailer varies in the value and range of SKUs offered online vs. in-store, there is no one-size-fits all solution to implement across the industry to prepare for this new frontier.

Despite retailer-specific last-mile delivery nuances, there are steps all companies can take to determine what supply chain strategies will make the most financial sense in the race for an effective and efficient last-mile experience.

Six Elements to Consider Across Your Last-Mile Frontier

If your strategy includes last-mile delivery, your success will begin with an extensive review of how your end-to-end supply chain network is designed and how your inventory is deployed, postponed, configured and distributed across channels to meet 21st century customers’ shopping and delivery preferences. The six considerations below are the tip of the iceberg. But they can aid you in your strategic decision-making and provide insight into the real cost impact of last-mile delivery so you can frame an efficient last-mile solution and get your supply chain network headed in the right direction.

1. Never lose sight of what actually matters to the customer.

First and foremost, you need to start with a full understanding of your customers’ requirements and expectations and how these subsequently influence their buying behaviors. According to comScore’s 2014 “Pulse of the Online Shopper” survey (commissioned by UPS), a whopping 93% of shoppers have taken some type of action while shopping online to qualify for free shipping. But consumers change both their online and in-store shopping patterns and preferences based on value-added benefits that range from low or no-cost shipping to loyalty programs to generous returns policies.

Keeping your finger on the pulse of customers’ wants and delivery preferences and offering them flexible and appealing shopping options—from specific delivery windows to certain zip codes, to in-store pick-up or convenient nearby drop-off and pick-up locations where items can be left securely—will prove beneficial. For example, return preferences vary dramatically across geographies with European consumers (66%) preferring to ship return items directly to the retailer compared to Brazilian consumers (71%), who prefer to return items directly to the store. Tying customer behavior, marketing data and metrics back into your supply chain network strategically can produce revenue-generating results.

2. Explore innovative approaches, like bundled product shipments.

Last-mile delivery introduces a whole new layer of complexity to a product’s sales margins and exacerbates the “shipment density dilemma” that has challenged shippers for decades. Fifty eight percent of customers abandoned their online shopping carts because shipping costs were more than expected, and half abandoned because they didn’t qualify for free shipping. Traditionally, high-margin items like cell phones and laptops can justify traditional small parcel courier costs; but low-margin SKUs cannot easily recover or absorb these costs and still remain profitable.

The main issue is how to alter customer expectations to make last-mile deliveries profitable. To compensate for customers’ free shipping preferences, retailers may want to consider consumer incentives to bundle products—say a phone with household items or clothing—to raise revenue per order and density per shipment. If possible, postponing orders until multiple products can be shipped together to generate enough revenue and density to justify free delivery is an option to offset last-mile transportation cost impacts. Until delivery density can be maximized to ensure profitability, managing customer expectations is an excellent interim measure to make last-mile deliveries profitable.

3. Explore non-traditional distribution capabilities.

Retailers who have grown through brick-and-mortar store sales have an imperative to ensure these assets are leveraged to their fullest in the face of e-commerce. Consumers value brick-and-mortar stores for the physical shopping experience, instant gratification and the ability to see, touch and feel merchandise before making final buying decisions. However, there are substantial real estate and labor costs associated with a store’s operation.

Your last-mile strategy can be designed to maximize your existing brick-and-mortar assets and capitalize on in-store inventory. By incorporating stores into distribution nodes or fulfillment points within your retail distribution network, you can make same-day fulfillment a viable and cost-effective option offering potential savings in transportation costs.

Other options to explore include using a third-party logistics provider (3PL) for fulfillment or last-mile capabilities and assessing minimal lease requirements to ensure your network can remain flexible. And of course, you’ll want to innovate in the delivery options you offer over time to adapt to consumers’ changing needs and maintain the highest possible margins.

4. Optimize transportation solutions to meet last-mile demands.

The most uncertainty and opportunity lies in the nuts and bolts of how a product/package’s chain of custody is outsourced and moved throughout the last mile. This is truly where we see total cost-to-deliver dynamics and innovative approaches make the most sense. New, small experimental entrants like Uber, Instacart and Deliv are emerging at the forefront. However, as we move away from traditional carrier delivery models there is a need to provide more extensive tracking and beefed-up package security to meet customer expectations, perception, consistency and quality. As a result, route auctions and technology that offers increased visibility into network options will become extremely important over the next few years.

For their part, small-parcel couriers like FedEx and UPS have traditionally optimized their freight movements and density as freight travels from many origins to like zip code destinations, but are now faced with the large hurdle of trying to efficiently optimize what is known as many-to-one freight movements (picking up from a distribution center and delivering to a single residential or other address). The burden of cost for these one-to-one shipments is shifting to the shipper and, by default, to the customer, evidenced by the recent dimensional weight pricing changes enacted by FedEx and UPS in 2014.

These unsustainable last-mile freight costs will eventually be shared among all supply chain participants by some combination of having them pay directly for the costs, through package optimization or order consolidation, or by creating demand density through time-definite deliveries or sweep distribution. Until innovation on the product side happens and density can be efficiently factored into the equation, though, having some type of customer incentive will help to offset these transportation costs.

5. Consider inventory’s form, function and placement within your supply chain.

Visibility into forward-distribution based demand signals will become critical in this new frontier, as retailers seek to literally think outside the box to manipulate and repurpose inventory as close to the point of need as possible. To ensure the best inventory deployment, configuration and strategy, advanced inventory planning and scheduling will present the opportunity for more dynamic forecasting than we’ve ever seen, along with inventory regulations, rules and structure that will accompany success.

Traditional inventory management helped to hedge supply and demand’s peaks and valleys, using safety stock as a buffer. With today’s short shipping windows, social shopping, online reviews and price matching, inventory placement will become a major cost driver if not done right. Keeping inventory flexible and generic up until the actual point of need will become a strategic advantage.

Eventually all inventory will need to become “ubiquitous” as in-store inventory availability and specific packaging requirements fall to the wayside to gain the necessary flexibility to allow visibility and deployment across multiple distribution channels. Rethinking inventory policies, repurposing traditional channels, harnessing unstructured data and connecting it into global inventory systems in near-real-time with accurate points of inventory availability will result in better inventory placement and deployment throughout the supply chain network.

By circumventing point–of–sale (POS) systems—and replacing them with systems that provide inventory points of availability and/or points of presence—and tying that data back to the points of distribution will help to create a truly omni-channel inventory planning system. Maintaining ubiquitous inventory across every network “node” will help you determine the optimal location from which to source the order and ensure your last-mile success.

6. Focus on returns management efficiency.

Most companies have focused on the forward distribution struggles this last-mile equation provides, and rightfully so. Historically, resources spent on returns have been viewed as unrecoverable losses. But returns management really need to be a core part of your last-mile strategy, not only to provide your customers with a simple, no-hassle returns experience but also so your inventory flows smoothly and efficiently back into your network.

At the end of the day, the only way to make the returns process efficient is to reduce the number of touch points. Returns efficiency can be addressed by having drivers who are located near customers pick up returns on their return routes or by encouraging customers to return items back to storefronts or strategic drop-off points.

If all of this sounds overwhelming, that’s because it is. Some forward-thinking companies are plowing ahead with supply chain strategies that include real-time visibility into inventory across every channel or “node,” accessing both in-store and online inventory assets for fulfillment, as well as exploring alternative last-mile delivery methods.

Despite these advancements, most companies still have at least some unanswered questions regarding their own last-mile frontier.

Few things are certain as we approach this new frontier. However, one thing is for sure—last-mile networks will be in flux for the next three to five years. Those companies who want to begin—or continue—to build out their last-mile capabilities will need to analyze and model different distribution scenarios to better understand their true cost to serve and gain core last-mile competencies, all of which will require ongoing supply chain network modeling and inventory optimization to adequately define new distribution points.

There is a clear link between supply chain proficiency and confidence in revenue growth. It all comes down to having inventory at the right place, in the right form, at the right time; an innovative flexible network as close to the point of need as possible; and a transportation solution that delivers to customers’ high expectations, with the most product and revenue in each delivery as possible, along with a simple and accountable returns process and methodology to keep them coming back for more.

Burton White is vice president of the industry supply chains at Chainalytics. His specialization includes transportation management/sourcing, network optimization, supply chain sustainability and complex supply chains, with a focus on high-value, service-centered industries and durable goods and manufacturing.