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How Can Companies That Offer Free Shipping Offset Last Mile Delivery Costs?


Modern-day consumer expectations have evolved rapidly. Perhaps, one of the areas where the impact of this can be seen most is the Logistics and Distribution industry.

With eCommerce giants like Amazon ratcheting up the success of the delivery-model business, and other new-age success stories like Uber taking the “instant gratification” concept to a whole new level altogether, today’s consumers are used to everything being “online”, “immediate”, and “personalized”. In today’s times, free- shipping is another such consumer habit.

However, Manufacturing Companies and Logistics Companies that now offer such free-shipping services need to plan and execute their operations very carefully to make sure that this cost is successfully absorbed within their profit margins. Failure to do so would have catastrophic consequences.

Offering free shipping: how can companies offset the cost of Last Mile Delivery?

The rapid proliferation of eCommerce – and, the home delivery model that it has brought about – has forever changed consumer behavior and habits. The (unfortunate) arrival of the pandemic further propelled the widespread adoption of this home delivery model.

However, just like eCommerce has brought about this change it has created another significant change in consumer habits i.e. the super fast delivery times of today! Delivery options like Same-Day delivery and 24-hr delivery – unheard of till recent times – are now not only vastly prevalent but have also rapidly become the New Normal in terms of consumer expectations. Importantly, Amazon’s “free shipping” feature, coupled with these super fast delivery times, is now the growing benchmark for delivery schedules that consumers not only look for but also use in their assessment of their preferred brands and companies.

Here’s where the supply-side firms and Logistics Companies of today are faced with a severe conundrum i.e. offering free shipping but having to pay for their last-mile delivery costs – if the consumer doesn’t see a free-shipping option he may switch to a competitor but if the company cannot absorb (manage) the cost of delivery, it would result in poor profitability and company losses.

Don’t forget, either, that the cost of last-Mile Delivery – the most complex and challenging part of a supply-chain network – is typically 50% of the entire delivery cost!

Under such a complex and high-pressure scenario, Manufacturers and Logistics Companies have been forced to come up with innovative ways to not only reduce their cost of last-mile delivery but also to offset this cost through smart collaborations, partnerships, and the use of new technology.

9 ways that companies are offsetting the cost of last-mile delivery:

1. Sharing transport vehicles: An innovative way of reducing operating costs for companies is by managing a shared-vehicle program for delivery and logistics. Interestingly, this strategy for sharing delivery vehicles to is even done with competitors and not just with other (dissimilar) companies.

2. Using 3PL Partners: Using 3PL partners to manage a company’s delivery operation is an increasingly popular way of reducing costs. While it is typically beneficial for companies that have a certain level of scale, those that benefit from it can use it to mitigate cost, maintain delivery efficiency, and develop a strong base of loyal customers.

3. Elaborate warehouse network: Using an elaborate network of well-located warehouses and fulfillment centers is an effective way of reducing last-mile costs. Orders can then be sent to the warehouse nearest to the customer so that transit times and transport costs are kept at a minimum.

Another advantage of an elaborate warehouse network is that last-mile delivery times being kept minimum, allows companies to offer their consumers expedited delivery options like Same-Day delivery and 24-hr delivery.

4. Optimize inventory management: Extending the point above, supply-side companies, as well as logistics firms, must absolutely ace their inventory management. This helps in shortening order fulfillment times, reducing carrying costs, cash-flow requirements, and receiving payments for completed deliveries as early as possible. All this, in turn, reduces the cost of operation and maximizes ROI margins for the business, enabling firms to absorb/offset the cost of last-mile delivery that is offered to customers free of charge.

5. Crowdsourcing: Modern-day VC-funds are increasingly investing in companies deploying innovative technology, crowdsourcing, or gig economies. Companies like Uber upload their delivery jobs which are executed via independent drivers.  And, while this model is not as efficient as a fully-orchestrated delivery system, it offers flexibility and reduces cost. Operating a hybrid model is another great option to offset costs.

6. Cross-selling and Upselling: While the practice of Upselling and Cross-Selling to increase share-of-wallet has been in practice for a long time now, its insertion into the delivery process has gained ground only in recent times. Modern data analytics and AI enable firms to assess additional products that a customer could possibly want and then prompt the user with them at checkout. Similarly, using past history as a reference, delivery drivers can maintain an inventory of products (e.g. in their trucks) that the customer has ordered in the past as well as related products that he may require. Segments, where this could be particularly useful, would be pharmaceutical, groceries, and consumer packaged goods. Others could include apparel, small gadgets, and daily electronics.

7. Delivery process visibility: Modern customers want to track the progress of their orders from start to finish, and, today’s technology has enabled logistics companies to provide tracking information in real-time to their customers. This is a good way to ensure that customers are present to receive their parcels, or can provide necessary updates like changed timings, and make their payments (if remaining). Otherwise, missing customers, incomplete deliveries, or failed payments result in additional trips made to complete the same order – all this adds to operating costs.

8. Data-Analytics: Data analytics of our times is a hugely capable tool. It has the ability to mine through massive amounts of data and come up with deep insights that help in efficient decision-making. For example, by using predictive analytics, companies could predict orders around tent-pole events like Black Friday, or Superbowl Sunday. Companies can now plan their inventory (e.g. pre-ship to local warehouses) and other resources accordingly. This not only helps in rapid order fulfillment but also to maximize their order intake. This adds to annual profits, which again, helps to absorb the cost of free shipping.

9. Self-driven vehicles: companies have started to experiment with NextGen technology such as drones, self-driven vehicles, and robots. Such new methods go a long way to reduce cost and increase efficiency, and although, a complete migration to such technology is some ways in the future, its gradual adoption will certainly help in offsetting the cost of last-mile delivery for supply-side companies.

Conclusion:  Clearly, the challenges of offsetting the cost of last mile delivery are significant and need judicious use of current trends across innovation, analytics, and technology.

Fleetroot plans optimal routes to improve first-time success in last mile delivery with last mile delivery management software.

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