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Last-mile delivery model under pressure; paradigm shift inevitable

Rising e-commerce sales are driving up demand for parcel deliveries. Good times for logistics carriers, you might think. However, the parcel delivery sector has been under pressure for some time now: PostNL saw its operating results drop in the third quarter. In Germany, DHL made a significant (downwards) revision to its profit forecast for 2018. Where have things gone wrong, and is there a way up?

Currently, most parcel carriers are facing major operational challenges. For example, delivery personnel (mostly freelancers and subcontractors) regularly complain about high working pressure and underpayment. Yearly events such as Black Friday and Singles Day cause enormous spikes in delivery volume, which are in turn difficult to process on time. In Chinese postal depots, we saw parcels literally flying around. The danger of strikes always lurks. Recently, in the Netherlands, there were threats of strike action by delivery personnel around the time of the Dutch Sinterklaas festivities.

External pressure is also increasing; local authorities are restricting access to the city centre and are banning diesel cars. Political parties and trade unions are on the lookout to tackle bogus schemes. Well-known retailers such as Amazon and Coolblue are building up their own delivery network. They are drawing on an increasingly scarce pool of logistics personnel.

In the meantime, the number of online consumers is growing, and they have high demands! Same-day delivery planned right down to the minute and even when you are not at home. Whether it’s a new phone case or a washing machine installed on the attic, all is possible.

Where did it go wrong?

Some of the problems in the parcel sector are caused by the traditional focus on volume. The idea prevails that delivering more parcels to more addresses leads to a higher drop density, resulting in an improved bottom-line. What is insufficiently taken into account, however, is that not every type of volume leads to scale effects. In recent years, bringing in large 2C volumes has mainly led to more complexity. To only a limited extent, parcel carriers have incorporated this into their pricing models. Price differentiation (away from the averages) is important, but difficult as it requires more complex calculation models and large amounts of data.

Problems are also caused due to the fact that the delivery operations are largely outsourced. This should ensure a flexible cost structure, but in practice it means that some of the rising costs have been shifted to the delivery personnel. As a result, they are forced to constantly focus on higher productivity. Due to the ongoing pressure on margins, it is difficult to provide them a fair compensation. Consumers are noticing this too. Parcels are not always delivered as agreed, and often also by inexperienced drivers in white vans without a logo. That is a pity, because for web-shops, the moment of delivery is a crucial factor for high customer satisfaction.

Necessary impulse: innovation and data

Innovations will play an important role in making the parcel sector more robust and sustainable. For example, there are experiments with drones, autonomous vehicles, smart parcel boxes (instead of letter boxes) and crowd-sourced delivery already happening. However, all of these innovations still need time to reach maturity and will therefore not have a valuable impact on results in the short term.

Meanwhile data seems to be a key word. There are countless possibilities to reduce costs through advanced analytics. For example, you can predict when someone is not at home, preventing drivers to stop by unnecessarily. Another example is the use of dynamic delivery routes based on demand expectations. This leads to fewer vehicles on the road and therefore lower costs and CO2 emissions. Data can also be used to develop new services for consumers. The current apps of the major parcel carriers have a lot of potential to further build a loyal customer base.

The new way up

The real way up, however, requires a fundamental reorientation. A paradigm shift is inevitable: from the cost of the Last Mile to the value of the Last Mile. Retailers and parcel carriers will have to enter into a dialogue to create sustainable partnerships. This is luckily already starting to happen. For example, several web-shops in the Netherlands have made an agreement with PostNL to spread out their discount campaigns over several days. This seems to be a fundamental shift in the relationship between the two parties where the logistics partner enters the commercial domain of its client.

Therefore, despite today’s fragile situation, we should embrace that an era of new opportunities has dawned. By focusing on innovation and advanced analytics and by developing an integrated perspective on the Last Mile through renewed relationships, we can see that there is a way up. Parcel carrier companies will then better be able to meet the high expectations of consumers, and lay a strong foundation in a sector which is still growing exponentially.


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