Photo: RetailWire
Are third parties the biggest reason delivery costs keep going up?
A survey of 237 retail supply chain executives finds delivery speed isn’t the end game anymore as cost concerns rise. One of the major hurdles to controlling costs, however, was found to be the need to partner with third-party providers such as carriers.
Sucharita Kodali, VP and principal analyst at Forrester Research, who was interviewed as part of the study, said retailers need to rely on third parties for the information necessary to control costs as well as to improve the customer experience (CX), but the related sources of data and their handoffs so far are found to be effectively black holes.
“To get the costs down and get your items to customers, you usually put together a patched together solution of lots of different carriers,” said Ms. Kodali. “The reality today is that most retailers don’t own their own delivery network and they’re still dependent on other companies and carriers to execute the last mile, and maybe there’s a sense that it’s difficult to reduce costs, and there’s a sense of not knowing what you can cut in an experience that you don’t control anyway.”
The survey from eft Supply Chain and Logistics Business Intelligence on behalf of Convey, a logistics software provider, found supply chain leaders greatly concerned about delivery costs. Eighty-one percent indicated they don’t feel confident that they can balance CX initiatives and expectations in the face of rising transportation costs.
Indeed, retailers were found to be increasingly prioritizing speed over costs for delivery, except for critical times such as holiday. Some retailers are letting customers choose which day they receive their packages, a strategy the study noted Amazon is also pursuing.
Although efficiencies could help, 61 percent of supply chain executives indicated their existing systems do nothing to improve CX — only a five percent improvement since a similar study in 2017. The two top customer service concerns were the inability to connect disparate data, cited by 65.5 percent, and the inability to take action on distressed shipments, 54 percent.
Discussion Questions
DISCUSSION QUESTIONS: To what degree is working with third parties a hurdle to driving profitability in online delivery? What advice would you have for working with third parties in resolving both delivery and customer service issues?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Jeff Sward
Founding Partner, Merchandising Metrics
For many retailers, there is no alternative but to use third-party logistics firms. It would be impossible for almost all retailers to create an in-house, last-mile national distribution network that was anywhere near break-even. The volumes would be far too low to allow for this. That’s why it’s most cost-effective to used shared third-party services.
The real reason costs are rising is because retailers are offering better, more intricate delivery services at a time when labor and logistics costs are on the rise. This is an issue because most retailers don’t charge consumers anywhere near the true cost of the service.
Neil is right. Data shows the last-mile is what’s killing retailer profitability with online ordering and deliveries. The most cost-effective, and really the only sound option at this point, is shared third-party resources. This means delivery mechanisms of all kinds. Most Americans think of this as packages delivered to their house. I think this will dramatically shift over the next two years – packages will start to be delivered to hubs (click and collect, delivery kiosks…).
Definitely, using third parties (like last-mile delivery) is a cost and it impacts profitability. One of the best things retailers can do about this is market, advertise, and encourage shoppers to try out in-store pickup. Yes, omnichannel retail. It reduces the reliance on and cost of third-party delivery. It also grows store foot traffic — which helps drive more sales. Push BOPIS (click and collect)!
I think retailers selling online are still shocked by the fact that direct-to-consumer (DTC) is less profitable than brick-and-mortar.
It’s very counter-intuitive, and in the early days it didn’t seem to make sense (and maybe sometimes today with all the “retail apocalypse blah-blah-blah”) but, in fact, stores are more than boat anchors holding retailers back.
Costs are part of the DTC business and depending on the breadth of your assortment, you’ll ship more or less air along with the product you’re selling. And your returns will be higher.
So my best advice is to negotiate the best prices you can, ship in full loads, and have the right size boxes for your assortments.
I saw a study by Alix partners on margin in apparel. DTC costs a brick and mortar retailer 8% – 10% more than selling the same item in a store.
The delivery expectation has already escaped from Pandora’s box. Young digitally-empowered shoppers, in particular, have come to expect free delivery as a foundational expectation when they begin their online shopping search and discovery. The challenge — now that the expectation exists — is how to either rationalize or reduce (eliminate?) the expense. Amazon is certainly using incentives to motivate people to not select or expect two-day deliveries. The cost of these services is in direct conflict with the expectations that were set by Amazon and retailers. Now that the expectation has been set, retailers are realizing that they are losing money on this service. How do they get themselves out of the trap that they themselves set?
Quite simply, there’s got to be a mutually-beneficial partnership. Develop your business case for your partner(s) and create a compelling solution.
Retailers cannot build out their own distribution network to deliver packages to consumers. So they have no choice but to work with 3PLs. Supply chain costs are not going to go down anytime soon. Fuel costs, labor costs, maintenance costs are all continuing to rise. Retailers need to look at the entire system to get costs out of the system. From the size of the box, the speed of delivery, the packaging materials, all need to be evaluated continually. Once a retailer achieves scale in e-commerce, they need to work with the carriers to find ways to make the process more efficient. For example, we have one client who worked with USPS to have their own branded “If it fits it ships” box with one rate across the country for two-day delivery. It helps them control their costs, provide a better customer experience and minimize packing issues in the warehouse.
I launched a grocery delivery program for a supermarket retailer back in the mid-’90s and the same problem of high delivery costs plagued us then as it appears to be doing now. Whether you use a third party or source internally, the key to bringing incremental costs down is volume. Everything becomes more efficient when you are doing it repeatedly and in large quantities. Vans carrying multiple orders will always be more efficient than the back seat of a car with a single order. While there are logistical elements with delivery that can be tweaked, critical to getting (at least) to a break-even point with delivery is doing more of it.
This is the reason that Boxed is successful. They understand how to use the carriers’ built-in allowance for weight/size of the box equation to make themselves money. The way they pack the box with extra items without increasing the cost to ship is their secret sauce. I just heard the founder speak at an industry conference and his method seems to be very smart.
Costs…??? How about using the word “FREE” less frequently? Table stakes. Level playing field. That’s the market dynamic, but clearly free isn’t actually the operative word.
The last mile of delivery is a big challenge for retailers and, as others have noted, retailers have notoriously under-charged for home delivery because consumers’ expectations have become unrealistic. Free delivery isn’t a viable model, as nothing is free!
Free in-store or locker pick-up is a better long-term pricing model. Eventually, retailers may have more of a tiered delivery/pick-up pricing model that is more representative of the true costs. While pick-up lockers are still relatively new, they may be the answer – just like in the olden days when people would go the the post office to pick up their mail. It will be interesting to see how fulfillment/delivery/pickup will change in the next few years. BTW, I don’t think the answer will be drones or driverless cars or robots – at least not in the next five years.
Working with third-party carriers is not a “hurdle,” it’s a cost of doing business unless you have the scale (volume and geographic coverage) and can support your own fleet of vehicles. Seems the real issue is data visibility and a siloed responsibility approach.
There are further implications beyond Supply Chain to consider here, especially on the CX side, beyond “delivery costs.” Having recently consulted with one well known retail brand, they shared the Customer Service implications of having multiple third-party providers, and poor data visibility as:
Perhaps instead of focusing solely on “lowest cost provider” (meaning a patchwork of providers), consider one 3PL that can provide real-time data, easy to use UIs, dashboards for all teams (SC, CS, Store Ops, etc.) for tracking, etc. And maybe you just go “all in” with one provider that has stellar data visibility for awhile.
Sure, maybe you pay a bit more in some regions or classes of service with just one 3PL to rely on, but the bigger picture of data availability, currency, access and risk is the central issue to be considered. If this is made to be a “supply chain” issue, you’ve already lost.
This is a strategic element of the business, and as such should be viewed as an ENTERPRISE issue to solve, and a shared burden (across all major lines of business) — this is NOT just a supply chain problem; it impacts the entire business.
The last mile has always been the most difficult step in the DTC process. Retailers will need to apply creativity to collaborate with partners and set expectations with customers.
It doesn’t take a genius to figure out that the word FREE is a total myth. The e-commerce folks are not in a position to dictate shipping costs, and the exceptions are the same players in Brick & mortar, i.e. Walmart, Target, Amazon, and Costco. Who do you think is going to win this war? Not the single store grocer, or the shoe store. They will not be able to compete against the big boys on free shipping, which eventually will cause their demise as well.
The exception to this will be the high-end consumer who wants specialty items for which free delivery is built into the cost without the consumer even knowing, as it is hard to compare a $200 pair of jeans to a box of Cheerios.
I charge for catering delivery and my clients know this, so unless you are prepared to continue to lose money on goods shipped from your business, start being more open about your policies with your customers on shipping, and surprisingly you will find that your loyal clients will still buy from you, if your provide a great product and in-store experience.