The last-mile density challenge

Over a couple of particularly busy days recently, we had deliveries from the United States Postal Service (USPS), FedEx, UPS, Amazon Prime and FedEx Ground.

It occurred to me that the cost for each of these firms must have been high to reach my little island in the southeastern portion of the United States. Recent articles and announcements speak to the growing challenge for less-than-truckload (LTL) and express carriers to fulfill the one- and two-day promises of marketers in B2C and B2B commerce.

While some websites have membership fees or a minimum spend of $49 for “free delivery,” these requirements seem hardly enough to generate a margin that will cover the residential or storefront delivery cost of a small item. Indeed, merchant shippers have to have very low freight prices for the free delivery that we have come to expect. It begs the question: How do they make all this work?

About 10 years ago, the first wave of solutions to the growing last-mile dilemma was “co-opetition,” or cooperation with competition. The USPS gained substantial volume of parcels by handling UPS and FedEx deliveries as they are at nearly every home in the country six days a week. This brought in needed revenue with only slight increases in variable costs for USPS.

But then the USPS began advertising their own capabilities to consumers and small businesses, and this drove more customers to their post offices and took away a bit of volume from the big national parcel carriers. Recognizing the threat, the national carriers continue to search for low-cost, last-mile solutions that they can keep in their network.

The second wave was the entrance of the major shipper—in this case, Amazon. At first regionally, and more recently nationally, Amazon Prime has jumped in with huge investments in distribution centers, airplanes, trucks and most significantly, delivery vans. They did not just challenge the carriers, but also the retail competition with one-day and even same day delivery.

The economics of van operating entrepreneurs is the same as a carrier, but with more manageable numbers. They have fixed costs in the van payment and insurance and variable costs of fuel, maintenance, and perhaps a driver. In a van, none of these is equal to operating a panel truck, terminals, dispatchers, unionized personnel or health and pension benefits.

FedEx has announced its last-mile ground team will be taking on some express service deliveries in an obvious attempt to increase density for the ground folks and save money for the express division. The difficulty in cross-docking express to ground trucks on a schedule will be determined as the process unfolds.

Competition from the four players discussed here, as well as freelancing van owners, is having the effect of lowering prices for short-haul LTL and package delivery. The real money is in being the “origin carrier” that’s able to optimize pickup, line-haul and last-mile portions.

Of course, the challenge is in density. With enough packages paying a few dollars, an independent driver can cover costs and take home some pay for themselves. Many Amazon Prime operators are contracting for several vans in the hopes of taking home a decent paycheck in the same way larger fleet operators do.

The equation continues to be volume over miles driven or revenue over expenses—or, in the transportation vernacular, operating ratio (OR). Entrants to the transportation market learn the importance of OR metrics very quickly.

For shippers, the importance of “know your service provider” has never been more relevant. You must understand how your freight will be delivered. You are the one who promises “free next-day service,” and the buyer assumes you have figured out how to do this.