Layering in returns

From the February 2024 print edition

Last-mile delivery is simple to understand.

In the parcel world, it’s the last step of the delivery process when a package is moved from a transportation hub to its final destination – a personal residence. This is the most critical step in the delivery process because it is the point where that online click results in a physical good in a consumer’s hand.

John McClymont is principal at Operations and Logistics Solutions.

It’s also the most expensive part of the delivery process. Last-mile fulfillment can account for 40-to-60 per cent of a product’s overall delivery costs. This is because residential deliveries are often spread across diverse and widespread locations, with less predictability and lower chances of first-time delivery success.

In this article I’m going to share the economics of operating a last-mile service, the productivity levels that make those services possible, and why the current proposals for at-home returns pick-up are doomed to fail.

Direct-to-consumer eCommerce
The eCommerce activity in the US and Canada is booming, and 2023 was a stellar year for revenue and activity. The US market was expected to see sales of $1.14 trillion while in Canada sales finally crossed the $100-billion threshold. This translates to about 50 million packages per day in the US and one million packages per day in Canada delivered to people’s homes.

With an average return rate of 20-to-30 per cent, there’s a growing tsunami of eCommerce product bumping its way back through a system that was never designed to move this much volume in reverse.
It’s easy to understand why people are looking at the revenue potential and launching services to capture more of the returns market.

Density rules
A successful last-mile service is all about one thing, density. The better your density, the more transactions per hour you can achieve and the more revenue you generate.

Another reason that density is so important is because of the behaviours and expectations that have been created around eCommerce delivery – namely, that it should be free. If you are going to offer your customers free delivery, you want that cost to be as low as possible, so as not to erode the profitability of your business.

The higher your density (or a better way to think of it – transactions per hour), the lower your overall cost to serve. That means you can charge retailers less to ship each package.

Last-mile economics
If density is the yin, then time is the yang. There are three major buckets that draw on time when operating a last-mile service: administration, driving, and delivery. Think of the total shift length a driver will work as a pie. You must cut the pie into three pieces, but they don’t have to be equal.

Whatever time you can remove from one of those slices immediately goes back to the others. In case it’s not obvious, the only value-generating piece of the pie is the delivery activity – always work to make that the biggest.

Last-mile delivery routes are a fixed cost system. A 10-hour day on route A, should have similar operating costs as a 10-hour day on route B. Understanding this, there are only two variables left to master: your rate (what you charge per delivery) and the amount of time spent per customer interaction (the delivery). That’s because the more you charge, the fewer deliveries you need to make to generate enough revenue to cover your costs. Consequently, the faster you can make a delivery, the more deliveries you can make and the lower you are able to charge per delivery.

Whether or not you agree with how Amazon, UPS, FedEx, and so on operate, I can assure you that their delivery routes aren’t inefficient. An Amazon route, for example, can be anywhere from 80 locations and 120 packages in a low density area to 286 locations and 400 packages in a high density area.

How do they achieve so much activity over a 10-hour shift? Route optimization for sure, however that can only take you so far.

The current level of parcel delivery efficiency in the US and Canada comes from the ultrafast drop-and-go delivery interaction at the customer’s door. In some of the modelling I have done, I have estimated that this is around 31 seconds for the activity.

While most people think in terms of hours or minutes, it’s seconds that matter for last-mile success.

Keeping with our Amazon example, a delivery time change from 31 to 90 seconds would mean that your typical urban delivery route would make $1,756 less per day as a result of the drop in the amount of deliveries they could accomplish over the same period of time.

The at-home returns pick up dilemma
The reason why I am so firm that at-home returns pick-ups is a doomed endeavour is simple – it’s too slow. What providers are pitching is something like this: The customer will receive a text when the driver triggers some estimated ETA. The package cannot be left outside and must be manually handed to the driver. The driver arrives, exits the vehicle, goes to the customer’s door, rings the bell then waits for the customer to answer. The customer must hand them the package, the driver needs to ensure it is packaged properly and has the label, scans the label, then has to end the interaction with the customer, make it back to the truck, then leave.

There is no way you can add elements of customer interaction in the returns process that aren’t in the delivery process and somehow be the same speed. This means that your interaction time will go up, your transactions per hour will go down – making the returns process more expensive to complete than the initial delivery.

The biggest problem? A more expensive service for an activity that is generating no revenue for the retailer or eCommerce brand.

The bottom line is, your last-mile execution has massive potential to improve your customer experience while creating differentiation from others in the marketplace. It can be used as a loss leader to enhance the offer to a customer; free shipping, free returns and at home pickup are examples that do exactly this.

While I don’t see all of these things being able to continue as they are today, the core offers are good and can be woven into a broader customer and market strategy – the key is to understand and appreciate the nuance in the details.

Do I think that we should give up on the returns market? No. Do I think that there are ways to make services like at-home pickup realistic? Yes.