The beginning of 2020 marked a drastic increase in ecommerce. Although brick-and-mortar operations are making a comeback, ecommerce growth is here to stay. After a year of continuing to rise to customer expectations, supply chains and carriers remain under strain as they work to optimize the last mile, delivering product to customers faster and more efficiently while also managing cost.
Now that we are well into 2021 and looking toward a fast-approaching 2022, what has changed about last mile constraints, and how can supply chains retain a competitive advantage through last mile operations?
While supply chains and shippers have faced similar constraints for many years now, they are only being exacerbated as the years go on. Key constraints to keep in mind are:
- Spend management
- Security
Spend Management
Spend management in the last mile is influenced in several ways, and it is only getting more complex. Two areas that are causing the most difficulty in managing spend are cost to serve and capacity.
Cost to Serve
Cost to serve of the residential last mile is rising as carriers continue to raise rates, whether via general rate increases or more egregiously through surcharges. Carrier pricing is largely predicated on activity-based cost modeling. The largest impact to the cost model is delivery density, particularly for residential shipments.
This can create issues for retailers, as many do not have the necessary purchasing patterns from customers to increase the quantity of packages delivered per truck. It is very difficult to get to more than one package at a time going from a shipper to a residence, so the overall cost model on a per-shipment basis is hard to drive down, which in turn impacts price. Keeping package density in mind is critical when managing transportation costs.
Capacity Constraints
Capacity constraints are not new to shippers and are continuing to contribute to the overall last mile cost of ownership. With global retail ecommerce sales nearly reaching $5 billion in 2021, capacity has only continued to tighten, creating barriers to successful omnichannel fulfillment.
Often, less profitable, lightweight freight will get bumped as carriers chase margin and reliability from shippers, so negotiating a contract that fits with your type of freight, meets service-level agreements (SLAs) you have promised to your customers and maintains cost is crucial.
Successfully Approaching Spend Management
When creating a carrier strategy, start with developing a strong network strategy, always keeping the end in mind and the customer at the forefront. To develop a network strategy that will differentiate your business with carriers, focus on three areas:
- Geographical location: Where are your key distribution centers, and how will that impact the SLAs you have promised to your customers? Do you have other distribution nodes like stores or partner networks where you can drive customers to pick up shipments rather than paying for full residential delivery?
- Inventory: Are you splitting your inventory between distribution centers? How will this impact package density and inventory carrying costs?
- Demand forecasting: Do you understand where inventory should be placed in order to meet specific customer demands? Do you have full inventory visibility that enables you to maximize operational margin?
Once you have successfully established a strategy around these three areas, you will have stronger carrier negotiations and more success in gaining capacity.
Security
Package security continues to be a challenge for shippers and carriers. Customer satisfaction incentivizes shippers to ensure the safety of their customers’ products. Anything from porch piracy to rain-soaked packages can negatively impact the customer experience. Conversely, integrated carriers are incentivized to deliver a package on the first attempt. So how can the two meet in the middle?
Omnichannel fulfillment is probably the most effective solution to this challenge, as it offers your customer more options for receiving their package. Consider a few options when looking to mitigate package security risks:
- Can I offer omnichannel fulfillment options such as buy online, pick up in store (BOPIS) to convenience my customer?
- Can we hold our customers’ packages in a third-party location for pickup at a later date if they are not home to receive it?
- What would we need to enable these new processes?
Creating contingency plans around fulfillment and delivery to better service your customer will pay off with customer loyalty and trust.
Next Steps
Shippers should take a holistic approach to transportation management to set themselves up for a successful last mile. Developing a strong inventory analysis and network strategy will make you more attractive to carriers and provide more security in capacity. And developing a total cost of ownership (TCO) baseline will mitigate any impact to your bottom line.
Then, continuing to leverage your data to create a spend management cycle will ensure your strategies are never out of date and your customer is always delighted.
Deanna Kaufman is Vice President of Sales for enVista