When analyzing shipping invoices, you might suspect the cost is high. But without the right information, it’s difficult to truly understand where that cost is inflated. Packages might have a long journey, but what part of that journey is driving up your costs? Without the right tools, it’s hard to know. One area that is getting a lot of attention is last mile logistics.
On the surface, that last mile of delivery doesn’t look all that difficult. Transport the goods from a regional distribution center to its destination. Mission accomplished. Take a closer look, however, and there are large costs associated with that “last mile.” What’s more, you can influence many of these factors and drive down costs. And this is critical, because there are more shipments than ever circling the globe. In fact, e-commerce is expected to reach $2.4 trillion worldwide by 2018, which is a 26 percent jump from 2016.
Yet what is “last mile logistics,” and how can you influence and ultimately decrease that cost? Let’s take a closer look.
Understanding Last Mile Logistics
The transportation of goods from one community to another isn’t anything new, but the methods by which goods are transported are evolving. A large volume of goods might be going from point A to point B, but when there are fewer goods moving in that direction, the cost can be higher. What’s involved in that last leg of the journey is what we call “last mile logistics”.
The details of last mile logistics might appear straightforward at first glance, but upon a closer look, many are surprised by how much of the total shipping cost resides in this single category. But, again, what is last mile logistics, and how does it work?
Last mile delivery is the movement of goods from the transportation hub to its destination. In other words, it’s the last leg of a shipment’s trip before it arrives at its final destination. Even though the name implies the final mile of the delivery trip is in play, the actual distance traveled is variable. For example, the last mile might be a few blocks or it might be present at the end of 100 miles or more. The reason why this last mile concept is so complicated and costly is that not all last miles are created equal. Sometimes the journey is simple, such as traveling on highways and major roads with a large number of shipments. But other times, it’s more complicated, such as navigating a crowded and bustling city or reaching the depths of an isolated and rural area.
Understanding the last mile of delivery doesn’t only lead to cost savings — it may also provide a competitive advantage. The cost of getting products to their final location factors into the pricing of products and, ultimately, profit. When you drive this cost down, you gain flexibility due to reduced costs. As a result, you achieve a competitive advantage and you can stay a step ahead of the competition.
The first step to successfully tackling these costs is understanding the cost of that last mile of delivery and, equally important, what you can to do to lower it. Let’s take a look.
Understanding the Costs of Last Mile Delivery
The last mile of delivery might appear simple, but in many cases it’s expensive and complex. This can be the most difficult part of a shipment’s journey. Last mile shipping can make up 28 percent of a shipment’s total costs. For example, if your shipping costs are $1,000, about $280 (nearly a third) of the cost would be dedicated to that last mile. What would happen if you could slash that cost to 20 percent? The savings could be significant.
For example, if you send an average of 10 large shipments per month with a shipping cost of $1,000 each and reduce last mile costs by a mere 8 percent, the savings on these shipments alone would be $800. But what would happen if you decrease the last mile costs to 14 percent instead of 28 percent of the total cost of shipping? Costs would drop by $140 per shipment, which would be a $16,800 annual savings. As you can see, savings on last mile shipping can quickly multiply and create large long-term gains.
What’s more, last mile delivery will become increasingly important as growth in the number of shipments around the globe continues to rise. In fact, e-commerce sales are expected to reach $1.35 billion by this year, an increase of 28.8 percent from 2013. Increases are expected to span a variety of industries and products, impacting everything from electronics to technology to beauty. As a result, retailers must get prepared to handle ongoing and steady increases in sales.
Achieving maximum last mile savings requires a close understanding of all the factors that influence shipping as a whole and then understanding how those last mile costs fit. Costs can fit into several basic categories, including the following.
- Warehousing: This includes things such as the space used, storage facility, geographic location, and total number of locations in play.
- Fulfillment: Fulfillment includes packing needs, fulfillment time, and the number of orders.
- Delivery: This includes the time frame, size of the order, scope of the delivery and mileage.
- Technology: This includes the technology that you’re using for supply chain visibility. When you have transparency so you can truly understand all the true costs of shipping, including that last mile, then it can positively influence your costs.
In addition to the above factors, there are hidden costs that are important to uncover, depending on your shipping needs. For example, an article appearing on Supply Chain Dive showed one example of hidden costs in the last mile.
“Research shows that out-of-route miles account for 3% to 10% of a driver’s total mileage at $1 an hour. Every mile-per-hour increase above 55 mph reduces fuel mileage by .1 miles per gallon. Vehicles that average 7 mpg at 55 mph will average less than 5 mpg at 75 mph. And most class 8 tractors will consume 1.25 gallons per hour when idling.”
In this example, out-of-route miles are a huge cost, considering the number of miles a driver logs daily, and these out-of-route stops can use up to 10 percent of his or her daily mileage. Other factors can include heavy traffic and routes that lack maximum efficiency. But these aren’t the only factors influencing the last mile and driving up costs. Let’s take a look at a few more.
Factors That Affect the Last Mile
There are many challenges that create high shipping costs, and when trying to minimize those costs, it helps to understand the entire picture. A few factors that affect last mile logistics were highlighted previously, but there are a few more to consider.
Quicker fulfillment times are becoming the norm
Retail has picked up its pace in recent years. On the consumer side of the equation, customers can get their products the same day in some scenarios. And while freight shipping is a different situation, the trend of “getting things fast” is unchanged. For example, let’s say that you’re shipping a large number of items to a physical retailer that is out of stock on a popular item. Customers expect retail items to be in stock now, or else they’ll find the item on the shelf of a competitor. As a result, shippers must move more product at a faster pace.
New technology is disrupting last mile logistics
Innovative solutions are changing the shipping landscape, but not all of these innovations have staying power. More players will enter the market to solve the last mile challenge, but selecting an established partner, one that has a history of reliability, is key to successfully managing these costs.
Analytics are driving last mile logistics costs down
Understanding shipping analytics can give shippers greater visibility into the exact location of costs. Through shipping analytics tools, they can pinpoint where the highest costs reside and create plans to tackle and reduce these costs.
Autonomous vehicles, robotic delivery and drones are entering the market
The future of delivery may look much different from today’s picture. That future may include drones and robots that drive down last mile costs even further. On the horizon may also be self-driving vehicles, which could further affect shipping and delivery costs.
Understanding last mile delivery is the first step to influencing these costs, but once you have the knowledge, what comes next? The key is to figure out which solutions will provide the greatest efficiency while keeping the customer satisfied.
Finding Solutions That Drive Down Costs
A famous adage says “You can’t manage what you can’t measure,” and this is true for decreasing the cost of the last mile. You must get greater visibility into those costs and what is making them so high. Another key is to get closer. Leverage facility space and the capability of trucks, and look for creative methods for getting closer to the final destination to drive those costs down.
For example, perhaps you’re using FedEx, UPS, or a less-than-truckload carrier. If so, the chances are high that you’re overspending on shipping. With the right partner, you can get to the bottom of where you’re overspending. Submit shipping invoices, uncover where you’re overspending, and realize the benefits of savings. For example, Shipware has negotiated thousands of FedEx, UPS, and LTL contracts, saving clients an average of 19 percent. Sometimes these high costs are at the last mile, and effectively identifying and managing these areas can make a big impact on the bottom line.
In addition, you can use already established services such as FedEx SmartPost or UPS SurePost that focus on reducing these last mile costs. These services use the U.S. Postal Service, which already visits most addresses daily, to drive down last mile costs and optimize logistics.
The Future of Last Mile Logistics
Disruption leverages technology to not only change how things are done but also accomplish those tasks with greater efficiency. And in the future, disruption has the power to affect that last mile of shipping. For example, Uber was a major disruptor in the transportation industry. It discovered the back seat of many cars was empty and that people wanted more options for getting to their destinations. Technology was the disruptor that opened the doors to additional options.
This example isn’t all that different from last mile shipping. For example, FedEx and UPS found that USPS already visited many addresses daily, so why not piggyback on those routes, decrease costs, and pass those savings on to customers?
The key is linking strategic thinking with technology to make those last steps more efficient and cost-effective. For example, a one- or two-delivery drop-off can be more expensive than a delivery that has five to ten stops that are logically planned. So how can we become more efficient? Technology has the power to disrupt the status quo and create maximum efficiencies for last mile logistics. The key is to identify those solutions and find the right ways for your business to maximize efficiency and create additional savings.
Shipware delivers volume parcel and less-than-truckload shippers intelligent and innovative distribution solutions and strategies. Whether you ship with FedEx, UPS, USPS or regional carriers, our contract audit and negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption of current operations. Our team of experts has over 200 years of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts and saved our clients an average of 19 percent.