Essec Business School

The explosion of information technology services is deeply shaping the economy and the business world by generating new industries and fields of production and service that were not even conceivable thirty years ago. In particular, e-commerce has revolutionized customer behavior and needs and, consequently, the way companies do business.

Figure 1. The explosion of e-commerce.

Focusing on the logistics implications of e-commerce, the rapid increase of the speed of delivery has generated enormous challenges in the organization of the distribution of on-line orders. In particular, last-mile delivery is the most challenging part of the distribution process, counting as the highest cost component (https://www.mckinsey.com/, Travel, Transport and Logistics, September 2016 [3]). Last-mile delivery corresponds to the last leg in the distribution process, whereby the consignment is delivered from the last distribution point, either a warehouse or a distribution center, to the recipient, either at the recipient's home or at a collection point. The main activities performed in last-mile deliveries are related to warehouse management and the transportation of goods to the recipient. In detail, warehouse management includes picking operations as well as inventory management, performed in a setting previously defined by strategic and tactical decisions (e.g., warehouse design, product allocation). Organizing the transportation, instead, implies defining the daily operations related to the distribution. A great example of the challenges related to managing distribution activities for on-line shoppers is provided by Amazon fulfillment centers. 

1. Emerging challenges in last-mile delivery 

The high speed of delivery of on-line orders generates new issues that were not faced by the setting of the distribution systems in the past thirty years. Some of the components and features of last-mile delivery services in the e-commerce business that are creating the most prominent challenges are:

1. On-line orders

2. Short delivery times

3. Overlap of customers' time windows

4. Crowdshipping

5. New delivery technologies

1.1 Online orders

In the e-commerce era, the information related to orders arrives on-line, mainly from private customers, generating a dynamic and uncertain setting. The location of the customers is not known in advance. Home delivery is often required. The number of orders is much larger than in the classical distribution services related to routing problems, but most orders have an extremely reduced weight and volume. Moreover, a large assortment of products are required and often niche products are demanded. According to a recent report by Lipsman [1], the retail e-commerce sales worldwide will hit 6.5 trillion dollars in 2023. The market share with respect to the total retail market is forecasted to grow from 10.4% in 2017 (with an amount of sales of almost 2.4 trillion dollars) to 22% in 2023. This has an enormous impact on the management of the retail business, and, with a focus on the logistics side, on the way deliveries to customers are performed. As online shoppers often require fast delivery times, online orders should be processed immediately, as soon as they are placed. All operations needed to get orders delivered to the customers are compressed in a short time span (order processing and picking, long-haul transportation and last-mile delivery). Thus, what typically happens is that orders enter into the distribution system when other (preceding) orders have already started the distribution process, and thus they have to be integrated into the delivery plan. This uncertain and dynamic setting gives rise to most of the challenges of last-mile delivery.

1.2 Short delivery times

Online orders are more and more associated with the explicit request, or at least the expectation, of extremely short delivery times, like next-day or even same-day deliveries (as evidenced by the explosion of same-day delivery services). Therefore, new transportation resources, able to efficiently manage orders with extremely reduced weight and volume and having low-cost delivery, and new delivery strategies are needed to handle this strong time pressure, guaranteeing the expected service level in terms of short delivery times.

Figure 2: Same-day delivery

1.3 Overlap of customers’ time windows 

Online orders are often associated with attended home deliveries, where the customer has to be at home within a selected time frame to accept the delivery. In fact, goods ordered online have to be transported to the customer's destination, which often corresponds to a customer's home. Some exceptions are related to click-and-collect systems, where the seller sends a notification to the customer when the order is ready for collection, and to smart lockers, where the product is delivered to a box that can be unlocked by the customer, typically through a key-code. One of the main issues related to attended home delivery is that the time windows at customers are typically highly overlapping, in the sense that customers' preferences are concentrated on specific times of the day (mainly in the evening, after working hours).

Another important topic is related to manipulating customer requirements through proper pricing policies with the aim of smoothing the downside effect of customer preference concentration over the same time slots.

1.4 Crowdshipping

The “sharing economy” is a term that identifies emerging activities, services and initiatives, whereby people and organizations share their available resources with potential users in order to obtain a mutual benefit. This happens also in the transportation field where ordinary people, i.e., not professional drivers, offer their time and resources to provide transportation services. This phenomenon is called “crowdshipping”. One prominent example is Amazon Flex (https://flex.amazon.com/), which was introduced in 2013 and, nowadays, is widely used in the US and starting to be used in Europe. Crowdshipping is also associated with the term uberization which means that ordinary people make available their time and resources (car, fuel,...) to other transportation services (either for transporting people or freight). Indeed, Uber has launched two projects associated with freight transportation: Uber Freight (https://www.uberfreight.com/) and Uber Eats (https://www.ubereats.com/).

Figure 3. Crowdshipping

1.5 New delivery technologies

Given that most online orders have an extremely reduced weight and volume, light and agile means of transportation, like bikes and drones, can be used in delivery management. These means of transportation constitute the proper resources to guarantee the extremely high service level required and to be competitive. According to the 2018 McKinsey's report on Travel, Transport, and Logistics and Advanced Industries (https://www.mckinsey.com) [2], the future of online retail deliveries will rely on new technologies for the transportation of light goods. The most prominent solutions investigated in the report are autonomous ground vehicles, bicycles, and drones.

Figure 4. Drone delivery

Drones are supposed to be one of the prominent technologies to emerge in the next few years. Companies have launched different projects involving them (like, e.g., Amazon,https://www.amazon.com/Amazon-Prime-Air/b?ie=UTF8&node=8037720011, UPS,https://www.ups.com/us/en/services/shipping-services/flight-forward-drones.page, FedEx,https://newsroom.fedex.com/newsroom/wing-drone-deliveries-take-flight-in-first-of-its-kind-trial-with-fedex/) and the research is already quite rich. However, presently they are not used in practice due to safety and security issues. It is difficult to predict how these issues will be overcome and at what point this will happen.

2. What is still missing?

All the challenges mentioned above need the proper decision support tool to be managed. Decision and Business Analytics methodologies provide the right pool of instruments to deal with data analysis and decision making. Technologies have started to be developed, embedding prediction and optimization techniques taking into account the dynamism of the new systems. Such instruments are essential to achieve the success in beating the last-mile challenges.

3. What challenges can optimization help with? 

New solutions need to be proposed merging technologies and strategies mentioned above in order to determine sustainable solutions capable of facing the logistics challenges and, at the same time, satisfying increasingly demanding customers. Sustainability has to deal not only with economic objectives, but also (with increasing importance) with environmental and societal issues. Indeed, the increasing number of vans that go on the road every day to perform last-mile deliveries creates a lot of negative externalities that have a high impact on human life, especially when considering urban environments: congestion, pollution, increased risk of injuries…. Optimization tools are the backbone to develop integrated strategies that take into account multiple objectives coming from different stakeholders. With the help of mathematical modelling, computer science and artificial intelligence, optimization can provide the right strategies for building solutions which combine the new technologies with the aim of maximizing the benefits of companies and society. Researchers are nowadays developing models for drone deliveries, crowdshipping, and reducing carbon emissions, among others.

The challenges are there. It’s time to face them!

References

1. A. Lipsman, June 27, 2019. Global ecommerce 2019, https://www.emarketer.com/content/global-ecommerce-2019

2. McKinsey, July, 2018. Fast forwarding last-mile delivery - implications for the ecosystem. https://www.mckinsey.com/~/media/mckinsey/industries/travel%20transport%20and%20logistics/our%20insights/technology%20delivered%20implications%20for%20cost%20customers%20and%20competition%20in%20the%20last%20mile%20ecosystem/fast-forwarding-last-mile-delivery-implications-for-the-ecosystem.ashx

3. McKinsey, September, 2016. Parcel delivery: The future of last mile, https://www.mckinsey.com/~/media/mckinsey/industries/travel%20transport%20and%20logistics/our%20insights/how%20customer%20demands%20are%20reshaping%20last%20mile%20delivery/parcel_delivery_the_future_of_last_mile.ashx