A Brave, New World of Home Delivery
By Dan McCue, July 2014, World Trade
The toughest part of the supply chain just became the front line in the battle for the consumer.
The push of e-commerce and changes in how we all live in the early 21st century — some dramatic, others less so — are altering the face of home delivery and recasting the role of the big-box store around the corner.
In an environment in which consumers now take it for granted that they can “want” and “have” in virtually the same breath, major retailers are striving to sate that appetite by getting as close to “pizza delivery” style service as possible, no matter what their customer has ordered.
What that has done, the experts say, is turn local delivery — once perceived as the sleepy end of the supply chain — into, in many respects, the front lines of the retail sector.
And in the process 3PLs are increasingly being asked to take a traditionally fragmented, mom-and-pop dominated segment of the logistics chain and make it act — and more importantly, respond — like a deeply integrated whole.
The main driver in this space, of course, is Amazon, the online retailing behemoth that over the past 20 years has become the most hated — and in equal respects, copied — competitor to retailers large and small.
In 2013, Amazon’s sales revenues topped $74.5 billion, and many market analysts predict the company will have revenues exceeding $100 billion by 2015.
This growth has been accompanied by the development of an extensive network of order fulfillment centers. As of March 2014, the company operated 108 fulfillment centers, including 55 in North America.
And according to several published reports, Amazon is likely to add a dozen more centers to its North American portfolio by the end of the year.
But there’s more to Amazon’s distribution strategy than the velocity with which it can break ground on new order-picking facilities — and the strategy in place is rapidly evolving, something that no doubt keeps many e-commerce and retail executives up at night.
When the company was founded by Jeff Bezos in 1994, its distribution model was relatively simple, relying on two fulfillment centers, in Seattle and Delaware, and on the parcel carriers FedEx and UPS. As Amazon grew, it added distribution centers, choosing the sites based on sales tax considerations rather than the new or prospective locations’ proximity to markets served.
The ability to avoid charging customers sales tax was initially a huge competitive advantage to the company. However, as more states introduce Internet sales tax laws, that advantage is evaporating.
So Amazon has adopted a new distribution strategy based on allowing same-day delivery as an option in all major metropolitan areas in the United States. Making that plan a reality has been the tailwind driving the pace of fulfillment-center construction.
As part of this new paradigm, Amazon has announced its intention to move in a significant way into the grocery sector. Called “AmazonFresh,” the service — enabling the customers to order groceries for same day delivery — is already in operation in a few West Coast cities.
In response, the big-box retailers are striving not only to catch up and match Amazon, delivery to delivery, but to do something with tangible goods that Amazon has so far been unable to accomplish — getting it into the consumers’ hands not in a day, but within hours.
“Consumers want immediate gratification,” says Ken Kellaway, CEO and president of RoadOne IntermodaLogistics and chairman of E*Fill America.
“So the pressure is to expand the web of distribution and migrate away from the mindset where you can establish three or five regional distribution centers and handle all your orders from them,” Kellaway says.
“Now it’s imperative to have multiple smaller locations around the country so that you can offer that same-day or second-day ground transportation delivery capacity,” says Kellaway.
People are responding in a number of ways, but the responses essentially boil down to these: either investing in expedited service from existing distribution facilities or, on the brick-and-mortar retailer side, adopting an “omni channel” approach to order fulfillment in which e-commerce deliveries are actually handled directly out of their stores.
“In this case the distribution center still exists, obviously, but in the scheme of online order fulfillment, their role is to feed into the store networks,” Kellaway says.
What happens on the store level is certainly evident to people who venture into one of the stores. While moving from aisle to aisle, they’ll encounter a “shopper” who somehow doesn’t really look or act like one.
“It’s actually someone from the back room ‘picking’ an e-commerce order, which is then going to be tendered to a local trucking company to try to get it to the customer that same day,” Kellaway says.
The new wrinkle is the greater emphasis on speeding goods to the consumer. If the plan is to feed the goods into the retail store and fulfill online orders from there, that’s going to come with one set of requirements.
If the plan is to fulfill e-commerce orders from the distribution center, there are going to be a whole other set of considerations — do you need to be next to a big FedEx or UPS hub, or does it make sense to use a regional player?
“There really isn’t a one-size-fits-all approach to dealing with e-commerce yet, and there may never be,” Kellaway says. “But what there is, is a balancing act.
“You need to be fairly close to the port so your inland costs aren’t too high on your inbound goods or materials, but you also have to determine who your preferred outbound carrier is going to be, and that’s very customer specific.”
While Amazon is certainly a driver in the local delivery space, other macro trends are also propelling change.
One is personal vehicle size. According to several analyses, the average American vehicle is about 20 percent smaller than it was 15 or 20 years ago. What that means is that the average person doesn’t have the ability to throw a new chair or table in the back of his car, let alone a Stairmaster, or something along those lines.
In short, home delivery is becoming more in vogue simply because it has to be.
Another factor driving home and local delivery dynamics is families in which both adults work. Given the demands they already feel on their time, they don’t want to expend time and energy going to buy a product and then taking it home and setting it up.
“As a result, there’s a huge and growing demand for value-added home delivery in which a consumer orders a good, has it delivered, and then has the deliverer actually set it up in his or her home,” Kellaway says.
“Ten years ago home delivery was at much more of a stage of infancy,” Kellaway says. “The quality of the service simply wasn’t as strong as it is today.
“Now, with the dramatic expansion we’ve seen in e-commerce, consumers are getting a much higher service level, much more visibility as to when the driver is going to be there and even instances where we can ping the customer to let them know if we are running late. In addition, there are all kinds of customer service surveys to help us identify where improvements can be made.
“In short, we’re now in an environment where customer demand is driving the expansion of home delivery, and the improvements that need to be made to meet that demand are the customers’ experience and further increasing demand for the service,” he says.
Another person striving to make sense of all this is Rob Howard, CEO of Grand Junction, a company founded ten years ago to manage local delivery programs for others — “almost like a 3PL for local delivery,” he says — and has since gone on to create a technology platform that gives his clients a single point of contact for scores of carriers in previously disparate markets.
“The vast majority of our clients are large companies that have a significant need for local delivery but historically had little integration with local carriers,” Howard says as he describes the scope of need and opportunity in the local and home-delivery sector.
Office Max, had 20 percent of its sales volume moving through local trucking firms, but essentially let it leave its facility blind — with no visibility of the status of the order, and effectively no quality or cost control.
“We went in and took the 60 or so local carriers that they were using and put them all under the Grand Junction umbrella, and with that, the first thing Office Max was able to do was rank those carriers on quality: which had the worst on-time performance? Okay, now that we know, let’s get them out of here. And, which were the most expensive? Okay, let’s get them out of here,” Howard says.
“Most importantly, we were able to empower visibility so that their call center was able to look in real time and see what was going on in every local movement across the country. That was important because, prior to that, it was a black hole.”
“So now Office Max, in terms of the last mile, says, ‘Wow, I’ve got this figured out. I’ve got a national platform. I’ve got a high-quality delivery experience. I have really good visibility. And I feel good that I’ve got the best market-based price,” he says.
As great as that example is, Howard admits getting to the point where a 3PL could offer such a solution — and where a client realized he needed it — was a long time coming.
“This industry is very vibrant, but it’s also very fragmented,” he says. “There are 4,000 different local delivery companies in the U.S. alone.
“As you can imagine, it takes a lot of effort to integrate these local carriers into a cohesive system, particularly because they don’t have a lot of technology,” Howard says. “So as we work with a client to create this cohesive system for them, we build technology — customer relationship management (CRM) systems and GPS alerts — that the local carriers would have a hard time building for themselves.”
Another client that’s benefitted from this approach is I-O Metro, a retailer that’s a significant presence in a dozen markets in the Midwest.
In I-O Metro’s case, pre-paid delivery orders are automatically sent to the Grand Junction platform, from which they are routed to a local carrier who then arranges for pickup from the store or distribution center and then delivers it directly to the customer.
“Along the way we’re getting updates from the carrier.” Howard says.
Lessons for the Future
Omni-channel shipping can be as much of a challenge as it is a solution, according to retail consultancy Kurt Salmon.
In a recent report, the consultancy analyzed the fulfillment performance of 70 retailers on orders placed on Cyber Monday (December 2, 2013), the biggest online shopping day of the year. Among its findings was that of the retailers who promised Christmas delivery, only about 80 percent got the presents under the tree in time.
According to the study, top performers excelled in quick turnaround, especially during crunch time, with the top five retailers on the list averaging 1.6 delivery days for multi-unit orders placed on Cyber Monday. The average delivery time across all retailers examined in the study during peak season (between Black Friday and Christmas) was nine days — including 3.4 days for processing and 5.5 days for shipping.
“Many retailers are still playing catch-up with the omni-channel movement; they are investing heavily in their in-store Black Friday promotions but aren’t similarly preparing for an influx of online shopping over the course of the Thanksgiving weekend,” says Michelle Bogan, a partner in Kurt Salmon’s Retail and Consumer Products Group. “For the past two years, online sales have outpaced in-store purchases during Thanksgiving weekend, and while Cyber Monday remains the biggest online shopping day of the year, Black Friday is quickly catching up.”
Most of the purchases examined in the study were shipped from a retailer’s fulfillment center; only 14 percent of orders were shipped directly from stores. When retailers did ship from their stores, the average delivery time tended to be significantly shorter.
In the study, 38 percent of orders originated from two or more shipping points (including stores and distribution centers), indicating that some retailers did not have the necessary inventory or systems in place to efficiently fill orders. While most of these multi-location orders were filled across two or three shipping points, nearly 10 percent came from three or more locations.
“What we are seeing is a trend to leverage store inventory to ‘save the sale’ and maximize margins when a fulfillment center or a single store might not have the inventory to support the entire order,” Bogan says.
“I know it’s a cliché, but we really do have to understand our customers’ business and where they are going with it, because if we don’t understand their business, we can’t react properly, and we can’t build our network properly,” Kellaway says.
Putting an even finer point on this, he explains, “The most important thing is understanding what their ultimate end game is and what the overall trends in the marketplace are; those are key for us all the time, because in the 20 years we’ve been doing this, we’ve seen dramatic swings in concepts and methodologies.
“Fifteen years ago, for instance, everybody was using one distribution center that was simply feeding into retail stores; Now, with the advent of e-commerce, it’s a multi DC distribution point feeding into retail stores that are really designed now to carry out order selection and home delivery.”
What does that mean for the logistics services provider?
“It means you have to follow the macro trends in the marketplace and then partner with your customers to make sure all parties are on board and understand the direction things are headed in,” Kellaway says.
Right now, the experts agree, Amazon is setting the baseline for everybody, in terms of both price and service.
“This is very challenging because, as we know, Amazon has decided to operate at aggressive price points,” Kellaway says. “Some would argue they are not making any money at what they are doing today in order to build density and acceptance in the market, but that puts tremendous price pressure on other retailers who are trying to compete and who might have dramatic erosion if Amazon were allowed to simply pursue this course unchallenged.
“The big challenge is how do these existing big-box retailers use the existing assets they have at the highest and most optimal way possible,” he continues.
“Interestingly enough, when we first started talking to the big retailers about morphing over to e-commerce, it was looked at as taboo to do fulfillment out of the retail stores,” he recalls. “But what’s happened is they’ve since realized they already have 1,000 to 3,000 distribution centers in their system — they just happen to be called retail stores.
“Once you realize that, the question become one of how best to take advantage of that fixed asset, and time and again the conclusion has been, ‘if the customers aren’t going to come into the store, let’s bring the product to them from the store,’” Kellaway says. “To me, that’s been the interesting migration we’ve seen over the past couple of years, and it’s changing the way business is done from what we all think of as the traditional retail store.”
How does the situation look from an international perspective? The closest example of what we’ve been talking about is, of course, Canada, where Purolator International is a major player servicing U.S. companies that sell into that market.
Canada is the United States’ number one export destination, and typically e-commerce companies and direct marketing firms that are expanding outside the U.S. turn to Canada or to Canada and the United Kingdom first, due to the commonality of the language and the ease of transitioning their materials, marketing and even their websites to those markets.
“As a result,” says John Costanzo, Purolator International’s president, “while focusing on Canada may sound limiting to some, for what we do, which is helping U.S. companies exporting products, Canada is a pretty good position to be in.”
But that’s not to say there aren’t also challenges that come with the cross-border aspect of local and home delivery.
“The assumption a lot of folks who are new to the Canadian market make is, ‘Well, it’s a common language, similar culture, its adjacent to the U.S. and, in many cases, some of the largest Canadian markets are closer to their home markets than some U.S. cities, so it looks like an easy entry,’” Costanzo says.
“Now, it’s easier to enter than some other countries in the world, but it is another country and there are complexities to getting shipments into those markets cleared and delivered. Even more importantly, I think something people don’t often take into account when they first enter Canada is how you get returns back to the U.S. market, because you have to get through U.S. customs in a seamless way.
The typical product being sent into Canada for local delivery is a consumer product, and on the surface there’s nothing inherently complex about them. But Costanzo says many people are surprised by the requirements attached to such innocuous products such as perfume and cosmetics.
“You have to make sure Health Canada is satisfied that what you’re importing satisfies all of the regulatory concerns and issues they have — and in a case like that, having the right classification of entry for the product destined for home delivery is very important,” he says.
“One of the things we do for clients is we help classify their shipments for them up front, before we handle one, to make sure all of the regulatory issues that may impact the delivery are handled and dealt with,” Costanzo says.
“Another one that people often forget is that most goods today are not manufactured in North America. The majority of goods sold and shipped between the U.S. and Canada are likely manufactured someplace else … so the origin country is another criteria to establish up front. Canada and the U.S. have great agreements in place related to goods manufactured in North America, to encourage trade, but if the product is manufactured someplace else, some of those benefits don’t exist.”
In May 2013, Purolator and Canada Post — the two entities that together handle about 70 percent of Canada’s small package deliveries — combined the strengths of their networks, integrating the IT and the clearance system for low-value items, and created PuroPost, a product that targets e-commerce shippers in the United States.
“It’s been very, very successful,” Costanzo says.
One reason is that the density of home deliveries in many parts of Canada is much less than what is typically found in the United States, and many parcel deliveries are made into community mailboxes.
“I think the goal of Canada Post is to get 65 percent of parcel deliveries through those boxes, which make home delivery very convenient for consumers because they know if they are expecting a package, they will find it in that box when they get home at night rather than finding a little note on their door,” Costanzo says.
“Now, with the combining of our two networks, which gives us access to the community mailboxes, the clearance system that we offer and all the assets we have now in the States, that project has really taken off — particularly in regard to e-commerce,” he says.
Like their American counterparts, Canadian retailers are also trending toward an omni-channel model of delivery, using their brick and mortar stores as vehicles to pick and fulfill online orders placed by consumers.
Typically the logistics chain begins with a large distribution center in the U.S., which transfers goods destined for home delivery to a secondary distribution center in Canada. From there, orders are either fulfilled directly, or the goods are sent on to the store or outlet closest to the consumer and shipped from there.
“There are multi-channels for delivery, and it’s really important to be on top of that,” Costanzo says.
“The thing to remember about home delivery is, on a lot of levels, customer experience is going to drive the decisions customers make, and [in terms of the future] our customers are already showing us that what they are looking at is what method of delivery can provide the fastest order fill rate,” he continues. “That’s going to be a dynamic that gets more and more important over the next few years.”
The other dynamic at place in the home delivery space in Canada revolves around the issues of returns — a reality Costanzo believes is often overlooked.
“Returns can be as low as 2 or 3 percent and go as high as 20 to 30 percent, depending on the nature of the commodity and the ability to get those returns back, to make sure you’ve cleared them and to make sure they are in good shape to be restocked, or perhaps not, and need to be sent back to the U.S. or destroyed … that’s a factor that I think is going to become a pretty important one,” he says.
In response, Purolater International maintains a returns center in Toronto and has launched a logistics division that will handle warehousing and inventory of returns for customers and will inspect material and so on, rather than having to send those items back down to the U.S.
“I think that’s going to become a bigger and bigger part of this whole home delivery operation,” Costanzo says, adding, “Our partnership with Canada Post will play an important role in this as well.
“That’s because with the PuroPost product I mentioned, a consumer can simply return a product they received via home delivery to their local store, and it will be returned directly to the e-commerce company providing that shipment in the U.S.
“That’s an easy way to return a shipment for sure, and I think that’s going to be a key part of this emerging business,” he says.
Domestically, Grand Junction’s Howard says, returns currently make up about 8 percent of the firm’s business, and the return of a large item, like a washer or dryer that’s been swapped out for a new model is simply considered a second delivery.
“We don’t do repackaging or repair,” he explains. “So what we do is gather items at the local carrier, and then the shipper or a third party will come and collect them over a predetermined period of time,” he says.
The key to managing home delivery as it is in other aspects of the supply chain is managing exceptions, those instances when things don’t quite go as planned.
“Frankly, in our world, the ones that go through and go well are not the ones we care about,” Howard says. “We’re happy, of course, but it’s the deliveries that don’t go well that we really hone in on.
“Whenever there’s a contact, it’s in our CRM system, so our client can see every driver associated with every delivery, and can respond whether there’s a one-off event or a developing trend,” he says. “What we want to know in both cases is, ‘why’?’
“For instance,” Howard says, “‘Why is driver 44 constantly getting complaints?’ or ‘Why is his on-time performance so bad?’ Having a platform that provides visibility into your local delivery processes empowers the client to make a change, or, if it is a small carrier company, you could suggest that to keep your business the company might want to retrain that driver.
“The goal, always, is to make sure the exception is removed,” he says.
All of this may raise the question, “What about the cost of all this visibility?” Given the disparate nature of “local” delivery, how can a big-box retailer reduce or effectively manage its expenditures while going toe-to-toe with Amazon and other e-tailers?
“Well, let’s go back to the Office Max example,” Howard says. “Traditionally, each distribution center the company operated had gone out and found a local carrier, and then the bill would be sent from the local carrier back to the local distribution center.
“As you can imagine, it is very difficult to audit these bills,” he continues. “They come in and it’s for a delivery that happened two weeks ago, and you have no way of knowing whether the rate was appropriate or if it even actually happened, and you’ve got 56 different people auditing or not auditing those invoices. So that’s the first-level problem — the audit.
“In our environment, the rates are entered into our system and the payment is direct-deposited into the local carrier’s checking account. So we don’t deal with invoices. We control the rates, and there’s no possibility for overcharging. That’s the first cost saving.
“The second one is making sure you have an effective price across markets,” Howard continues. “For example, why is a delivery in Lake City twice the cost it would be in San Antonio? You can’t do that kind of comparison with a platform in place that allows for visibility into disparate markets, and once you have that you can make constructive decisions that will allow you to manage those costs.
“Lastly, I’d add, better quality also improves the cost equation,” he says.
Kellaway says one way his team has found to keep costs down is handling multiple clients in the same facility.
“It’s a strategy of marrying up companies in fulfillment centers that are complimentary in some way — for instance, pairing a home and garden company that does a lot of business in the spring with a more holiday-related company,” he says. “That way, you can time-share your assets, if you will, whether the asset you’re talking about is the building infrastructure or conveyors or forklift trucks or staff and technology.
“Blend those situations correctly and get a good synergy going, and you achieve significant savings from a fixed cost perspective,” he says.
On the transportation side, Kellaway believes the success or failure of a local delivery effort comes down to a single factor: outbound density.
“So, say you want to do ‘milk runs’ from a specific DC or even a retail store,” he explains. “To make that work, you have to create enough density to make it cost effective. You need fluid deliveries and route optimization to make sure you are maximizing the utilization of that truck.
“But that’s very hard to do. There’s no question about it. And it’s critical because any time you have diffuse deliveries without a lot of density, it drives up costs significantly,” he says. “So what we have right now is an environment in which people are working very hard to figure out how to optimize their systems in a morphing world, and it’s morphing and changing so much today that the challenge is never entirely behind them.”
A Changing Landscape
Given the ease of e-commerce and the increased comfort people feel about buying online even in the face of threats like identity theft and hacking, it’s a certainty that an ever-growing number of purchases will find their way into the home delivery supply chain.
Howard and others predict that as the online tide continues to rise, more and more companies will shift toward using local delivery instead of using their own fleets or using full truck loads.
“That shift is possible because they now have a viable alternative to the way things used to be,” he says.
But there’s something else pushing traditional retailers into the local delivery space — Amazon’s same-day delivery.
As a result, experts agree, a growing number of traditional retailers feel Amazon has thrown down the gauntlet on their home turf, challenging them to take it on by offering customers same day or even one hour delivery.
“The thing every retailer is thinking is, ‘How do I differentiate myself from Amazon?’ Well, Amazon can’t do one-hour delivery. I can. How do I do that? Well, you have to use local delivery to do that,” Howard says. “In our view, the rise in service levels growing out of this competition bodes well for a general increase in local delivery — and we think we’re pretty well positioned to take advantage of that.”
For his part, Kellaway posits that big-box retailers will continue to try to figure out what to do with their assets, and as fewer people come to the retail store, he says, “I suspect you are going to see more of the locker concept come to the retail store.
“We have retail outlets up here in New England, like Stop and Shop, who have adopted a model in which they will do the shopping for the consumer and then place the item in a locker outside the store where the customer can pick up their order and go.
“The virtue of this is that it eliminates the cost of final mile delivery, which can be expensive, while still providing a service and encouraging the consumer to shop with you,” Kellaway says. “I think that’s what will further develop in the marketplace as people try to figure out what do you do with these big retail stores.
“In the long run it may be that the big retailers turn their stores into consumer pickup-and-delivery places, locations where the customer can come and pick up shipments not only from this specific retailer, but from multiple businesses. I really wouldn’t be surprised to see something like that occur, especially as retailers continue to grapple with how to take the cost out of final mile delivery,” he says.
While talk of drones delivering individual parcels captured the imagination of many and headlines around the world, DHL was relatively quiet about its own plans for upping the ante in time-sensitive delivery.
One of the challenges facing any delivery company trying to maintain service levels in a highly populated urban area is traffic congestion. DHL has decided to rise above all of that — literally.
To meet urgent delivery commitments in the midst of traffic gridlock, DHL introduced a new helicopter service for several major banking customers in the downtown Los Angeles area.
DHL Express introduced the helicopter service into its Los Angeles operation as a way to guarantee early morning 9:00 a.m. delivery service regardless of traffic bottlenecks. Used by specific financial services customers, this service will expand to include additional customers in the Los Angeles area.
“DHL is always looking for innovative ways to move our customers’ shipments with the greatest speed and reliability,” said Mike Parra, CEO of DHL Express U.S.
International shipments arrive at the DHL LAX Gateway, with specific packages transported by helicopter to a dedicated heliport in downtown Los Angeles. A DHL courier meets the helicopter and provides the final mile deliveries.
The DHL helicopter, a “Twinstar” Eurocopter AS355, is operated for DHL by Helinet of Van Nuys, Calif., and can transport up to 800 lbs. of letters and packages.
A DHL helicopter service is also used in New York, providing lifts from the DHL JFK gateway to prime U.S. bank headquarters and Federal bank locations, making stops in downtown Manhattan and at New Jersey’s Teterboro Airport to speed deliveries of important financial and legal documents.
Don’t expect helicopter deliveries to reach residential neighborhoods any time soon, but it does make those drone experiments sound a little more realistic