last-mile-delivery

Last-Mile Delivery: The Anti-Network Effects And Why It’s Such A Hard Problem

Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Quick intro to last-mile logistics and why it matters so much

Last-mile logistics, or the so-called “last-mile” comprises the activities that need to be done in order to provide a service to the final customer. The last-mile problem is a very hard one, now on the priority list for many organizations (Amazon, Uber Eats, Instacart, Grubhub and many others).

Each of those companies is trying to solve the last-mile problem in different ways, and industries. And yet, once tackled this can change the whole supply chain for good. That is why last-mile delivery is so important and strategic.

Let’s see what are some of the components that make up the so-called last-mile problem.

Outside the network

In a platform business model, or in an organization managing a vast supply chain, there are advantages of scale. Those advantages of scale usually come from the fact that the whole platform or supply chain network benefits from managing things at scale.

There is an exception to this rule, and that’s the last mile. Indeed, the last-mile falls outside the network, as it is the last leg of the supply chain and the point of connection with the final customer, that last mile is not scalable (at least not in conjunction with the network itself) and it falls in a logic that can’t be comprised in the overall network.

Imagine the simple example, of a set of packages that have gone through an extremely well-organized sorting, and storing center, where, perhaps, packages have been shipped even before the expected time, in the center outside the urban area, and are now ready to be delivered to the final customers.

The delivery person – which is usually in charge of the last mile – has to ship several packages in an urban location, perhaps in the center of an extremely busy city. All can happen in that last mile: delays, traffic jams, accidents, and worse.

Thus, for as much the supply chain has been organized to run at an optimal level. The last-mile will have the potential to disrupt the whole supply chain, as it might cause substantial delays to the final shipment to customers.

Consumer-facing

One of the key elements of last-mile logistics is also the fact that this is the consumer-facing part of the supply chain. As such, customers might attribute most of their experience to that single touchpoint.

Therefore, if the delivery person will, for any reason, get to the final customer later than expected, or to say, deliver the wrong package, the whole experience would be ruined.

The most expensive part

The last-mile is also the most expensive part of the supply chain. As organizations can’t leverage on economies of scale, the last-mile poses important challenges to the overall supply chain.

Therefore, as highlighted so far, the primary reason last-mile logistics gets counterintuitive as it usually does not benefit from economies of scale. Therefore, the last mile sits outside the network effects created by the organization, as the last step – required to get to the final customer – is disconnected from the rest of the network.

The consequence is that the last-mile is the most expensive (most of the costs of the supply chain lie in that last mile), hard to tackle (it requires a degree of customization that can’t be canceled out), and yet extremely important (consumers see the face of the delivery person as the only “physical connection” with the company).

Let’s see now, how are companies trying to figure out the last-mile problem.

Decentralizing the last-mile

Amazon has been among the companies trying to figure out the last-mile problem. That strategy for a company that founded its success on customer obsession.

Amazon Flex

Amazon has been trying to tackle this problem in several ways. With Amazon Flex it tried to crowdsource delivery by tapping into gig workers at local level:

what-is-amazon-flex

As Amazon Flex highlights “most drivers earn $18-25 an hour,” the mechanism of Amazon flex is pretty much similar to how other companies have been tackling the same problem in other industries.

Where Uber and Lyft applied the last-mile problem to ride-sharing. Grubhub, DoorDash, Instacart, and Uber Eats applied it to food delivery, Amazon applied it to the delivery of everything.

Indeed, Amazon Flex comprises the delivery of all the items coming from Amazon.com, Prime Now and Amazon Fresh, Store Orders, Instant Offers, and else.

While the concept seemed quite interesting, it also posed substantial pressures on the last-mile flex workers (which only enriched the militia of gig workers born in the platform era).

Amazon DSP

Yet, this system didn’t seem to work extremely well and Amazon instead doubled down on its Delivery Service Partners. As Amazon explains:

DSP owners are responsible for hiring, training, developing, and retaining a team of 100 high-performing, hardworking employees, operating with up to 10-40 vans. We are looking for candidates who love building and growing a team, have the grit and leadership required to roll up their sleeves to get work done, enjoy operating as a part of a larger community, and have a can-do attitude that inspires their team to handle labor-intensive delivery work. We look at a wide range of information on each applicant, including work history, education, and financial information, to determine eligibility for the program. Please note that this is a highly competitive program with a limited number of available openings.

Therefore, instead of turning directly to drivers, Amazon is trying to solve the last-mile problem by helping to start delivery businesses that will handle drivers locally. A decentralized approach, which is local enough to make it manageable and yet cheap for Amazon, as those companies would run their own P&L, independently.

This works as a sort of a franchise model, where Amazon helps in the initial set-up and it guarantees business to its franchisee business owners, as long as they meet the quality standards set by Amazon.

Yet those are independent contractors.

Amazon Prime Air

Another solution that will help tackle, part of, the last-mile problem is the use of drones, where for objects with specific characteristics and in certain areas (rural areas perhaps) the drones are already in use as a valid test to tackle the last-mile problem.

Autonomous vehicles

Another solution that might help solve, part of, the last-mile problem is the use of autonomous vehicles. Amazon itself has been looking into the possibility of acquiring and expanding more and more into the autonomous vehicle space, which also would help solve part of the problem in the next decade.

Key takeaways

  • The last-mile is the final step in the supply chain and yet critical as it’s consumer-facing, thus, often, the only physical touchpoint between the consumer and the company. At the same time, this is also extremely expensive, inefficient, and hard to scale.
  • The last-mile delivery then poses a last-mile problem that several companies are trying to tackle, as this is the key to unlock online-to-offline experiences and create a consistent end-to-end journey.
  • Companies like Amazon have been trying different solutions. For instance, Amazon tried Flex, a formula that enabled anyone to become a delivery person.
  • Amazon, however, started to abandon that program in favor of Amazon Service Partners, which attempts to create a whole new ecosystem of independent startups that run their business on top of Amazon’s last-mile supply chain. If this model works, it might, in part, solve the hard problem of last-mile delivery.
  • Other potential solutions are the use of drones and autonomous vehicles. While those seem technically viable, they pose substantial regulatory challenges that might make them viable in the coming decade.

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Vertical vs. Horizontal Integration

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Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Supply Chain

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

AI Supply Chain

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An AI supply chain starts with the sourcing of data, which is produced by consumers. As this data gets stored on hardware, it goes through a first refinement process via software. Then it’s further refined, and repackaged by algorithms, and stored in data centers, which work as the fulfillment centers.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Entry Strategies

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When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

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