If you’re like me, you’re probably shopping more online - making smaller orders more often and at the same time expecting fast and free delivery, even if it’s not urgent. The growth of eCommerce has fueled increasingly challenging delivery options for both retailers and major parcel carriers alike. For consumers, tomorrow is just not fast enough and most are not prepared to pay for the true cost of delivery. As a result, retailers are suffering from profitability problems and parcel carriers are experiencing financial challenges in providing last mile delivery.
eCommerce makes Logistics Far More Important
In the traditional distribution system prior to eCommerce, consolidated bulk loads were shipped to retail stores which resulted in the efficient utilization of trucks and resources. The last mile transport was conducted by consumers’ passenger trips to stores. In the case of eCommerce, the ability to consolidate truckloads is limited due to smaller order sizes that are shipped directly to people’s residences.
To further complicate matters, consumers are expecting more from retailers in terms of speed (same-day, next-day) and flexible delivery options (time-windows, delivery points) which adds a significant layer of complexity to the logistics infrastructure.
eCommerce Logistics Impact on Major Stakeholders
Retailers - eCommerce has added technology and logistics infrastructure expenses while at the same time cannibalizing sales at their physical stores. For many brick and mortar retailers, revenues have stalled while costs have gone up and the gains have shifted to their online counterparts. Consumers increasingly expect free or low cost rapid delivery which present a difficult economic problem for the overwhelming majority of retailers. Offering the option likely results in a loss for each order and not offering results in cart abandonment. Without the massive scale and logistics acumen required to succeed with same-day and next-day delivery, it is likely a losing proposition for most retailers.
Major Parcel Carriers - There has been a tremendous shift in package volumes from delivery to the consumer versus to the business. Delivering to individual consumers’ doorsteps is far costlier than delivering multiple packages to one location, as is the case for deliveries between businesses. In addition, the logistics infrastructure required to compete in rapid eCommerce deliveries is vastly different from traditional parcel carrier networks, namely that the old structure’s network and cost model are focused on businesses and overnight or several days delivery. Major parcel carriers are sitting in the middle of a transformative change to retail, but they can’t take full advantage of it without a major re-design or retrofitting of their existing networks.
Consumers - Consumers have been the biggest winners from online shopping - more choices, easy price comparison, convenience, and lower costs. In the U.S., Amazon is largely responsible for setting the baseline for consumer expectations and continually innovating on delivery speed, ease, and the low cost of delivery. However, there have been negative effects related to several different carriers making deliveries, the inconvenience that arises from mis-deliveries, and the inflexibility of delivery times due to parcel carrier’s existing networks.
Society- All of this convenience comes at a cost - increased CO2 emissions, traffic congestion, safety, and the fact that urban areas and neighborhoods are simply incompatible with the proliferation of delivery trucks on our streets.
Today’s Same Day Delivery Market
Point-to-point is effective when moving a relatively low volume of packages a short distance (under 10 miles) and certainly makes sense as a niche option for consumers who wish to pay extra for the service. The model, however, leaves little room for optimization of same-day delivery at scale. Major parcel carriers adopted the hub-and-spoke model in the 1970’s as it is the only way to cost effectively deliver large volumes of packages to/from many destinations. Route density is crucial to parcel delivery and point-to-point was never a viable solution for overnight express delivery and will not prove to be a sustainable solution for most same-day delivery.
Uber and Airbnb have revolutionized the transportation and hotel industries through sharing economy business models that allow individuals to rent or use assets owned by someone else. Are there any opportunities to share logistics assets that could open up new business models in same-day and next-day delivery? Currently, last mile deliveries in many urban markets are carried out by a handful of parcel carriers or by the national post office. Parcels from multiple carriers could be delivered to the same address on the same day and this is not an uncommon sight in some neighborhoods:
Today, eCommerce only represents about 9% of total retail sales globally and is growing at a rate of 6% per year. Will the existing last mile delivery model make any sense when eCommerce is 20-30% of retail? That’s going to be a lot of packages.
Shared Micro hubs and the Shared mobility Concept
A shared micro hub is a flexible consolidation point located in and around medium to high-density areas close to the consumer that allows for deliveries to specific post code groups to be consolidated for last mile delivery. Micro hubs have been experimented with in various cities in different forms, but not with a sharing economy business model in mind. In the sharing economy model, parcels are consolidated from multiple carriers. The micro hub serves a radius appropriate for the density of the area and close enough to allow for packages to be delivered to the consumer, say within about a 15-20 minute bike ride from the hub. Micro hubs are located within close proximity to urban consolidation centers and trucks are dispatched on regular routes throughout the day to the micro hubs in order to make time definite delivery windows.
The logistics infrastructure is similiar to the hub and spoke model that parcel carriers already depend on, except this is a highly localised version which allows for same-day and next-day deliveries.
The micro hub itself, is a mobile storage container that could be located in a wide variety of private or public spaces - parked on the street, in a parking garage, or in the parking lot of existing retail stores. A micro-hub is loosely analogous to public car-sharing initiatives where an existing public space is used for parking cars and the effect is to take private cars off the road, amongst other benefits. It's a win-win for the users of the service and society. Similarly, under the micro-hub scheme, private and public space is allotted for the micro-hubs and the effect is the reduction of delivery trucks in our neighborhoods while providing improved convenience and delivery options to consumers. At the same time, the model makes crowded urban environments more liveable, productive, and ultimately, sustainable.
A micro-hub could be un-manned, mobile, and can vary in size depending on the demand density for a given area. Inside the micro-hub is a robotic shelving system that allocates a shelf location to each package when a driver inducts packages into the hub. When a courier or customer collects the package, a code is authenticated via the app and the package is dispensed automatically.
The Last Mile
Customers are notified in advance when their packages arrive at the micro-hub and have the option of rescheduling to a different delivery address within the zone, amending the delivery time, or opting to collect directly from the micro hub. Couriers make deliveries via low or no emission vehicles (bicycles, electric cargo bikes) that are more suitable for navigating busy urban streets and neighborhoods. A courier could be from a major parcel carrier, local courier, or crowd-sourced. In the not too-distant future deliveries could be made by robot, like a Starship robot or via a drone, like a Matternet drone. A recent Mckinsey report suggests that 80% of final mile deliveries will be done by autonomous vehicles within 10 years. Robots and drones could also use the micro-hub as a base station for charging or maintenance. Importantly, packages from multiple retailers and carriers could be consolidated at the micro hub for a single delivery to the customer.
Retailers - By plugging into the micro-hub platform, retailers can gain access to a cost effective same-day delivery network that enables them to compete with large eCommerce players without making the massive upfront investment and recurring expense of operating a same-day delivery network. The platform is ideal for national chain stores, local retailers, and online retailers that have no other choice but to offer rapid and flexible delivery options in order to compete in eCommerce. The vast majority of retailers will never have the economies of scale to offer profitable same-day or next-day delivery options to their customers. Retailers can use their biggest asset, proximity to customers, to offer same-day delivery without having to focus on the challenges of logistics.
Parcel Carriers - This model allows major parcel carriers to compete in the same-day / rapid delivery market operating under a familiar business model - i.e. hub and spoke, fleet and route optimization.. Carriers have the potential to minimize the cost of operating a fleet of short-haul trucks for bulk transportation and outsourcing shared mobility for last mile deliveries. It can also be argued that parcel carriers have no other choice if the trend of same-day delivery continues to grow.
Consumers – Consumers could expect improved accuracy, consistency, and flexibility in delivery times. The friction over delivery could be removed so that consumers frankly don’t even have to think about it.
Couriers - Under a point-to-point model it is difficult to make more than two deliveries in an hour which limits the earnings of a courier. Under the micro-hub model, the courier has the potential to make multiple deliveries on each run and would be far likelier to increase earnings.
Society - Reduction in emissions, pollution, and congestion are the primary quality of life benefits that could be expected. In addition, improvements in safety for pedestrians and commuters would ultimately make our cities more sustainable and liveable.
A shared network of micro hubs and last mile couriers may not be the answer but alternatives clearly need to be explored as the volume of packages delivered to urban residences continues to rise. By 2050, 70% of the world’s population will reside in urban areas. In addition other technological advancements will make it more likely that inventory could be held or created very close to the demand. Advances in artificial intelligence will enable retailers to accurately predict demand 1-2 days out in a specific post code group and the hubs could be used by retailers to temporarily store inventory close to the consumer. The micro hubs could also be outfitted with 3D printers which could convert the hubs to micro-factories to print products on demand.
Shared logistics infrastructure and networks need to be explored as it simply won’t be feasible for each retailer and carrier to run separate networks and their own facilities. In addition, governments need to incentivize logistics providers that implement sustainable last mile delivery solutions and encourage greener last mile delivery. Setting up a network such as this would be an extraordinarily expensive proposition and would be a slow burn city by city. But, if the network and infrastructure can be shared and the government can subsidize unused or underutilized public spaces, there could be a path forward. As self-driving car technology evolves, there will be a freeing up of space currently dedicated for parking that could be re-purposed for many new uses, one use could be micro-hubs.
Ultimately we need to get to the point where the industry consolidates all of the individual packages from multiple carriers into one daily delivery. From a consumer perspective, delivery should just work with no need for intervention. It’s a hard problem to solve and requires an effective public-private partnership and collaboration amongst retailers and carriers to ensure that the interests of all parties are considered, but it's a problem that needs to be solved as the growth of eCommerce is not going to slow down anytime soon, if ever.
I cover forward-looking topics that are relevant for everyone that is interested in the future of the logistics industry. You can read more articles here or sign-up for a free monthly newsletter here.