Innovation and competition in last mile delivery

Innovation watch

Innovation and competition in last mile delivery

24 Oct 2018 London

Professors Emel Aktas and Richard Wilding from Cranfield School of Management outline how automated vehicles, drones and crowdsourcing can make last mile delivery more cost effective, environmentally friendly and efficient.

The world population is moving from rural areas to urban areas with shifts from agricultural economy to mass industry and services. According to World Bank, currently 55% of the world’s population of 7.53 billion live in cities. The proportion of population living in cities is 84% for Oman, a country of 4.6 million people, comparable to the urbanisation level of 83% for the UK with a population of 66 million. Urbanisation is a prominent phenomenon not only for Europe but also for the Middle East.

Cities generate jobs and income, provide healthcare, education, financial, and other services; enabling social mobilisation and resolution of social and environmental problems that may exist in rural areas. With preferable working and living conditions we expect cities to grow further, necessitating not only investment in housing, infrastructure, and services but also smarter ways of meeting increasingly diverging needs of city-dwellers.

Burgeoning e-commerce and the subsequent last mile problem

The prevalence of the internet in consumers’ lives have exacerbated online shopping behaviour with cascading effects in subsequent fulfilment of their orders. The convenience of ordering products at the comfort of one’s home or office has led to a rapid increase in not only the number of people preferring online over bricks-and-mortar shops but also the amount they spend in online shopping. Common products and services purchased online include books, fashion items, hotel and flight bookings as well as groceries. 

The shopping is fulfilled by what we call the last mile delivery: the final journey of products from a business to a consumer.

For physical items such as books, clothes, or groceries; the shopping is fulfilled by what we call the last mile delivery: the final journey of products from a business to a consumer, destination being either the consumer’s home or a collection point. Retailers have different fulfilment models for the last mile delivery: from stores, dark stores, distribution centres, dedicated online fulfilment centres. Delivery distance to be covered by the retailers is analysed in two parts:

  • Stem distance which is the distance to and from a delivery zone (stem mile) and
  • Drop distance, which is the distance travelled once a drop or delivery zone is reached to reach the destination, be it the consumer’s home or a collection point (the last mile).

The drop distance remains the same irrespective of the distance from the supplying picking location, but the stem distance varies depending on the facility where the items are picked. What is costly in last mile distribution is the sparsity of destinations and the time window constraints that may be imposed on deliveries (e.g. groceries to be delivered on Tuesday between 15:00 and 16:00). Owing to these operating conditions, the last mile delivery van is likely to be underutilised. Indeed, according to the research by Business Insider, the last mile delivery cost has the highest proportion within total transportation costs at 53%.

New business models and technologies

Pressured by the economics of last mile delivery, the industry is looking for alternative solutions. For example, in a recently completed EU Horizon 2020 funded research project, U-TURN, the research team at Cranfield University investigated the idea of establishing micro-hubs with a service radius of 3-km near residential areas. They identified distance reductions if retailers were to share this micro-hub facility and the last mile delivery to be fulfilled from this micro-hub. The distance reductions with shared logistics ranged from 5% to 12% depending on the geography and the drop density. Another new business model is crowdsourcing, where the delivery operation is fulfilled by agents acting as drivers; a concept that has emerged with the on-demand economy; accommodating the peaks in the network with flexible supply of last mile delivery vehicles and drivers.

Another new business model is crowdsourcing, where the delivery operation is fulfilled by agents acting as drivers.

In terms of technologies to improve the last mile logistics, replacing current van fleets with electric vans and complementing the operation with cargo bikes, using drones especially in remote areas, and fulfilling the last mile delivery with autonomous ground vehicles are at the top of the agenda. Electric cargo bikes are already in use in several countries (e.g. UK, Germany, the Netherlands) with advantages such as their ability to bypass traffic congestion and make more stops than a traditional van. Moreover, the total cost of ownership over their lifetime is less than half of the cost of owning a van.

Drones, electric or hybrid-electric vehicles with four or more rotors, can move cargo from one point to another through the air. They can be remotely piloted or fly autonomously. A drone can carry parcels up to 15 kg and are expected to break new ground in deliveries of low weight but high value items such as medicines. They are cost-competitive especially in rural areas, about 10% above the cost of today’s delivery model, with faster and more flexible operation.

A drone can carry parcels up to 15 kg and are expected to break new ground in deliveries of low weight but high value items such as medicines.

A self-driving vehicle made for local goods transportation does not seem too futuristic anymore. For people to stop making car trips to run errands, this new technology of autonomous ground vehicles is expected to deliver goods to consumers sometimes even faster and cheaper than going to the store themselves. Consumers can place same-day delivery orders on the web or in a mobile app and receive their orders at home from the self-driving vehicle, cancelling out at least one car trip to the store, reducing congestion. 

Outlook

The need for new business models to cope with increased traffic and negative environmental and social impact in urban environments could be addressed by zero-emission and connected delivery vehicles such as cargo bikes, drones, and autonomous delivery robots. Several successful applications of these technologies and new business models already exist as discussed above. What will be needed for the future is to identify which of these technologies are best compatible with the needs of specific cities so that economic costs are not prohibitive, environmental implications are preferable, and social acceptance is achievable. 

IRU World Congress

For more on Innovation, join us in Oman 6-8 November.

Dr. Emel Aktas

Dr Emel Aktas is a Professor of Supply Chain Analytics at Cranfield School of Management. She specialises in applied decision analysis for transport, retail, and manufacturing sectors. Her recent research focuses on logistics collaboration for food distribution in cities.

Professor Richard Wilding

Professor Richard Wilding is recognised globally for his thought leadership in logistics and supply chain management. He is Professor of Supply Chain Strategy at Cranfield School of Management and Chairman of the Chartered Institute of Logistics & Transport.  He is passionate about taking and creating academic knowledge that creates action in business.