What are last-mile delivery costs? 7 ways to reduce them and boost last-mile delivery profits.
By Komal Puri | October 13, 2022
Savvy customers are expecting same-day delivery of goods as a prerequisite for ordering online. With the demand for a faster and effective delivery service increasing, companies need to find effective ways to optimize last-mile delivery costs.
What are Last-mile costs?
The last-mile costs refers to the investment that goes in the final step of the delivery process from a distribution center or the facility to the end-user. This step is crucial for achieving customer satisfaction. Implementing a cost-effective and efficient system helps in building brand loyalty. However, if last-mile delivery is not executed efficiently, it can result in massive losses in the guise of financial dents, poor brand reputation and bad customer experience.
Over the last few years did your last-mile delivery costs shoot up?
A shift in current consumer behavior has made companies around the world try out various means to ensure customer satisfaction, as a result last-mile delivery's popularity. The recent growth of e-commerce has driven a surge in last-mile delivery demand. The growing volume of last-mile deliveries has made it difficult to keep up with the delivery efficiency.
The biggest last-mile challenge is to manage costs yet maintain efficiencies. And that’s possible by following some basic methods and adapt to shifting consumer demands. Increased shipping costs generally eats up the profit, leaving businesses worried. In order to minimize last-mile delivery costs, it is pertinent to understand the parameters that are driving this spike in the cost.
How much does last-mile delivery cost?
If not managed efficiently, the cost incurred on executing last mile can put a significant dent on your bottomline. Last-mile delivery costs can contribute up to 41% of the total supply chain costs and accounts for almost half i.e. 53% of the total cost of shipping. A modern last-mile solution can go a long way to help enterprises manage this increasing costs and achieve healthy profit margins.
The average cost per last mile delivery incurred to organizations in 2018 was $10, in an estimated last-mile delivery market size of $30.2 billion in 2018. Unless last-mile operations are managed properly and last-mile delivery is optimized, the factors driving the cost can hardly be controlled. Streamlining last-mile operations and managing warehousing can reduce costs with resource optimization and technology innovations.
Parameters that Drive Last-mile Delivery Costs
1. Same-day delivery
With steep competition in today’s e-commerce segment, it is tough to keep up with consumers’ expectations. Today’s consumers expect fast (and free) shipping and same-day delivery. This puts businesses under tremendous pressure to optimize delivery routes and streamline various functions, which can incur additional costs. Surging shipping costs and shrinking profit margins have placed the companies in a tight spot.
2. Free shipping
Studies suggest that most customers demand free shipping and is even likely to cancel the order if the purchase isn’t accompanied by free shipping. Therefore, many companies have to balance free shipping and cost optimization, which is a challenge.
3. Failed or late deliveries
Disgruntled customers do not hesitate to dump companies if their expectations aren’t met. And by chance if the same-day shipping doesn’t happen, they are left frustrated with no option but to shift business elsewhere. With plenty of options available, customers find another retailer instead and the other retailer loses the business.
Even if deliveries arrive on the day as promised, consumers keep guessing as to what time the delivery driver will be knocking at the door – this itself jeopardizes a customer’s day planning. If they aren't home when the package arrives, it leads to failed deliveries. A lot of time is wasted when drivers have to return to different points on their route, which results in enhanced delivery costs.
Last-mile Delivery is Known for its Inefficiency
Globally companies are known to be struggling with last-mile delivery which is hardly ever completed in one mile, and is largely affected by its drop size and delivery points throughout a distance. The dynamics of delivery points in urban versus rural areas are completely different and should be dealt accordingly. In a rural context, the delivery points might be several miles apart, but in cities, they are nearer but being challenged by constant traffic delays and congestion. Further with growing e-commerce business globally, the number of deliveries have increased exponentially, which has added to the complexities and contributed to inefficient last-mile delivery.
Last Mile Delivery Cost Breakdown
Last mile delivery stage is crucial for customer satisfaction but also poses significant logistical and financial challenges. Below is a detailed breakdown of the costs associated with last mile delivery:
1. Labor Costs
Labor is one of the most substantial components of last mile delivery expenses. This includes:
- Driver Wages: Compensation for drivers, which can vary based on location, experience, and employment type (full-time, part-time, or gig workers).
- Administrative Staff: Costs related to employees who manage logistics, customer service, and coordination.
2. Fuel and Vehicle Expenses
Transporting goods requires vehicles, which incur several costs:
- Fuel: A significant and variable cost influenced by market prices and vehicle fuel efficiency.
- Maintenance and Depreciation: Regular maintenance and repair costs to keep vehicles operational, as well as the depreciation of vehicle value over time.
- Vehicle Leasing or Purchase: Costs associated with acquiring and financing delivery vehicles.
3. Technology and Infrastructure
Efficient last mile delivery relies heavily on technology:
- Routing Software: Advanced algorithms to optimize delivery routes, reducing fuel consumption and time.
- Tracking Systems: Real-time tracking for both internal logistics management and customer transparency.
- Customer Management Systems: Tools to handle customer orders, preferences, and communications.
- Warehouse and Distribution Centers: Costs for operating facilities that store and dispatch products.
4. Packaging and Handling
Proper packaging is essential for product protection and customer satisfaction:
- Materials: Boxes, bubble wrap, tape, and other packaging supplies.
- Handling: Labor costs associated with packing and preparing orders for delivery.
5. Insurance and Liability
Insurance is crucial to cover potential risks:
- Vehicle Insurance: Coverage for delivery vehicles.
- Cargo Insurance: Protects the value of the goods being transported.
- Liability Insurance: Coverage for damages or injuries that might occur during delivery.
6. Delivery Attempts and Returns
Not all deliveries are successful on the first try, and returns can be costly:
- Failed Delivery Attempts: Additional labor and fuel costs when a delivery cannot be completed.
- Returns Processing: Handling and restocking costs for returned items.
7. Third-Party Services
Many companies use third-party logistics providers, which come with their own costs:
- Third-Party Delivery Services: Fees paid to external delivery firms or courier services.
- Contractual Agreements: Long-term contracts may have fixed costs or minimum usage requirements.
8. Environmental and Regulatory Compliance
Adhering to environmental standards and regulations can add to costs:
- Emission Controls: Investments in low-emission vehicles and other eco-friendly practices.
- Regulatory Compliance: Meeting local, regional, or national regulations, which might include permits, taxes, and other legal requirements.
7 Ways How Technology can Reduce Last-mile Delivery Costs
Logistics processes of the last mile when implemented properly can save a lot of time, money and also optimize carrier operations. Some of the key controllable last mile costs are as follows:
1. Ensuring fleet visibility
Companies need to ensure transparency and visibility on the movements of fleets available for the delivery of goods. By implementing automated systems and smart technology, a company can track and maintain a communication channel between the ground staff and the delivery fleet to avoid last minute delays. The visibility of fleets enables companies to keep customers informed about the status, location and timing of their deliveries. Happy customers mean better business.
2. Implementing real-time tracking
Real-time tracking provides complete visibility to customers and solves any internal delivery issues faced by the company. The ability to communicate critical information to guide the delivery fleet efficiently would help in avoiding delays due to traffic or weather conditions. With real-time tracking in last-mile, companies can provide the estimated time of delivery (ETA) to customers via web or mobile application automatically. It also helps in managing last-mile delivery costs and ensuring transparency of delivery at all times. Companies can even monitor the efficiency and performance of drivers. Real-time tracking saves last-mile costs by optimizing miles travelled and enhancing driver productivity.
3. Utilize route optimization
Route optimization is the process of determining the most cost-efficient route while enabling the maximum number of delivery points. Companies need to consider factors like fuel costs, driver productivity, risks, one-way windows, delivery urgency and more, to figure out a viable and efficient route. With highly efficient delivery routes in place, companies can dispatch delivery tasks within seconds.
Additional factors like monitoring the routes that fleet drivers take, identifying traffic patterns, idling time and driving time, enables a company to find efficient routes, thereby cutting down the fuel costs and the delivery time. Real-time route alerts like unexpected traffic situations can be used to re-route the delivery fleet to avoid delays. With such information, dynamic route optimization can be implemented. It can help companies integrate new orders into the delivery schedule. Route planning software will help shift deliveries to other drivers automatically, in case of a vehicle breakdown. Companies will be able to map the shortest path, taking all parameters into consideration. This way, they can save time, cut expenses and increase overall efficiency.
4. Enhancing customer engagement
Customers are increasingly demanding transparency on the status of the goods and control over both the delivery location and timing. When customers have the option to select the desired time window, companies can plan their delivery process better, thereby reducing the risk of first-failed delivery. Customers should be provided with real-time updates of their shipments. These updates can be sent via e-mail, SMS, in-app notifications or a phone call.
5. Maintaining proof of delivery
Companies need to maintain proper proof of dispatch and delivery, condition of the goods delivered, customer’s non-availability status and payment details. These proofs can be electronically captured through notes, pictures or videos, and uploaded immediately into the system. Having the ability to maintain data in the real-time will help in resolving customer queries. Electronic proofs eliminate unnecessary paperwork and reduce physical storage space in an office.
Controlling the last-mile delivery costs by optimizing routes, reducing fuel usage and tracking fleet, companies will be able to deliver goods on-time and keep customers satisfied. This will build brand loyalty and drive profitability.
FarEye has been empowering retailers across the globe to achieve high levels of delivery efficiency by optimizing their last-mile operations.
6. Utilize real-time data to identify inefficiencies
Analyzing data can lead to identify major inconsistencies in your last-mile deliveries and is critical in improving specific functions in the supply chains. Tracking information such as number of tasks completed, average time taken per task, distance covered, idle time, miles per task, and successful vs. failed tasks can help in monitoring drivers in the field.
Data can be accessed at team or individual driver level. The required data can also be sliced and diced as per various segments, by day, week or month, or even hourly. This helps to identify bottlenecks and inefficiencies in the delivery processes. It also answers pertinent questions such as:
- Why are some drivers outperforming others?
- Are there certain days of the week when deliveries are made faster?
- Is there a certain hour of the day that’s making deliveries difficult?
- Is there a way to adjust the drivers’ routes so as to avoid times with heavy traffic, or compensate for seasonal changes?
Customized reports can be created and further studied for improvements. By analyzing these important data, one can make informed decisions that will help improve efficiency and lower costs.
7. Control and minimize the costs of last-mile delivery
The impact of last-mile delivery costs can be reduced by adopting certain practical steps. One such way is to invest in the latest last mile delivery software that benefits you by optimizing routes, communicate with customers, track driver activities and use real-time data to make informed decisions.
Consumers won’t hesitate to switch to a competing brand if a faster delivery service is offered to them. Retailers need to invest more in delivery logistics so as to ensure brand loyalty and repeat purchases.
Get a full-service fleet management platform to improve on-time deliveries and scale last mile operations without compromising customer experience.
Komal Puri is a seasoned professional in the logistics and supply chain industry. As the AVP of Marketing and a subject matter expert at FarEye, she has been instrumental in shaping the industry narrative for the past decade. Her expertise and insights have earned her numerous awards and recognition. Komal’s writings reflect her deep understanding of the industry, offering valuable insights and thought leadership.
