Article written by Mark Solomon
High costs, low margins keep providers away
Third-party logistics providers (3PLs) have, for the most part, been bystanders as the e-commerce gold rush surges past. The reason for the laggard status is the 3PLs’ inability to master the all-important yet challenging final-mile delivery component.
Third-party providers long ago mastered first- and middle-mile transport functions. They have even gotten ahead of the “pick, pack and ship” operation in warehouses, though it has been an adjustment from working with palletized shipments to handling individual items known as “eaches” that make up much of e-commerce fulfillment. The hang-up comes at the final mile, which even for the most seasoned providers can be costly and complex, especially in the “buy anywhere, get anywhere” world of omnichannel distribution. Unfortunately for 3PLs, struggling with final-mile deliveries is like the golfer with a great drive and fairway game whose putter deserts him or her once the ball is on the green.
Michael Zimmerman, a partner at consultancy A.T. Kearney who has worked closely with 3PLs, said most providers know that they need to penetrate this space, and that their shippers are prodding them to do so. However, 3PLs have been unable to “crack the code” to make the final-mile portion sustainably profitable, Zimmerman said. What’s more, 3PLs have struggled to even identify a scenario where final-mile can consistently work, he said.
Shippers are of limited help, since they know less about how to make final mile work than their partners, Zimmerman said. At the same time, shippers don’t want to be the “guinea pigs” and bear the potential costs of failed final-mile experiments, he said.
One possible solution to mitigate costs, Zimmerman said in a recent interview, might be in developing shared-use facilities in densely populated markets like New York City where goods can be forward-positioned for subsequent delivery. That option remains a work in progress, he said.
Some 3PLs have thrown up their hands in frustration. Marc Althen, president of Penske Logistics, a large 3PL, said at an industry event in June that Penske will not play in final-mile delivery because there is too much risk for insufficient potential margin. Many larger 3PLs will be reluctant to jump in for that reason, Althen said.
The U.S. final-mile delivery market will grow to $39.5 billion this year from $33 billion in 2019, according to projections from Armstrong & Associates Inc., a consultancy that closely tracks the 3PL category. The average last-mile delivery generates about $85 in revenue, the firm reckons. But the top line can vary widely. A delivery that involves bringing a large-format item into a consumer’s room of choice, installing the item if necessary, and taking away the old item can run more than $300, which is typically paid by the end consumer. Deliveries to a doorstep can generate $30 for the provider.
If done right, gross margins for non-asset-based providers could run 30% or more, said Evan Armstrong, the firm’s president. “For 3PLs, the opportunity is large, but it requires a well-thought-out strategy with significant network capabilities supporting a cross-docking model, Armstrong said.
Compared to less-than-truckload (LTL) operations in which freight moves in and out each day with some semblance of order, in the final-mile many items are typically left on the dock to be merged with other goods prior to delivery, Armstrong said. “Final mile is messy compared to traditional LTL,” he said.
There are no shortages of final-mile challenges for 3PLs. The most obvious are the heightened service demands of consumers and the presence of Amazon.com. Inc. (NASDAQ:AMZN) and its massive closed-loop network. The final-mile segment is populated with thousands of small, local delivery contractors, many of whom specialize in a specific area like store replenishment or “white glove” deliveries, essentially the full-service line of final-mile service. With so many players, the many operating systems in use can make IT integrations challenging for shippers and contractors.
Many providers insist their delivery partners integrate with the providers’ platforms, which often results in contractors juggling multiple orders at one time from different shippers. Danny Barfield, executive vice president of Alpharetta, Georgia-based IT firm eTrac, said 3PLs struggle in trying to integrate with each partner’s platforms. eTrac promises a simplified alternative in which a 3PL identifies its partners and integrates one time with the e-Trac platform. The eTrac software then automatically flows an order into the carrier’s native operating system.
Barfield said the model pulls a lot of inefficiencies out of the final-mile system. More important, it fosters real-time order visibility, which has become the name of the game in the final mile, he said.
It would be relatively easy for 3PLs to succeed in final-mile delivery if all they had to do was assess the capabilities of delivery firms to reliably support customer volumes, said Marc Palazzolo, an associate at Kearney. The issue is balancing the costs, delivery quality and operational control needed to make it work each time out, Palazzolo said. “Recognizing this challenge, 3PLs must either put in the necessary effort to develop local partners or develop the capabilities themselves,” he said.
Third-party providers long ago mastered first- and middle-mile transport functions. They have even gotten ahead of the “pick, pack and ship” operation in warehouses, though it has been an adjustment from working with palletized shipments to handling individual items known as “eaches” that make up much of e-commerce fulfillment. The hang-up comes at the final mile, which even for the most seasoned providers can be costly and complex, especially in the “buy anywhere, get anywhere” world of omnichannel distribution. Unfortunately for 3PLs, struggling with final-mile deliveries is like the golfer with a great drive and fairway game whose putter deserts him or her once the ball is on the green.
Michael Zimmerman, a partner at consultancy A.T. Kearney who has worked closely with 3PLs, said most providers know that they need to penetrate this space, and that their shippers are prodding them to do so. However, 3PLs have been unable to “crack the code” to make the final-mile portion sustainably profitable, Zimmerman said. What’s more, 3PLs have struggled to even identify a scenario where final-mile can consistently work, he said.
Shippers are of limited help, since they know less about how to make final mile work than their partners, Zimmerman said. At the same time, shippers don’t want to be the “guinea pigs” and bear the potential costs of failed final-mile experiments, he said.
One possible solution to mitigate costs, Zimmerman said in a recent interview, might be in developing shared-use facilities in densely populated markets like New York City where goods can be forward-positioned for subsequent delivery. That option remains a work in progress, he said.
Some 3PLs have thrown up their hands in frustration. Marc Althen, president of Penske Logistics, a large 3PL, said at an industry event in June that Penske will not play in final-mile delivery because there is too much risk for insufficient potential margin. Many larger 3PLs will be reluctant to jump in for that reason, Althen said.
The U.S. final-mile delivery market will grow to $39.5 billion this year from $33 billion in 2019, according to projections from Armstrong & Associates Inc., a consultancy that closely tracks the 3PL category. The average last-mile delivery generates about $85 in revenue, the firm reckons. But the top line can vary widely. A delivery that involves bringing a large-format item into a consumer’s room of choice, installing the item if necessary, and taking away the old item can run more than $300, which is typically paid by the end consumer. Deliveries to a doorstep can generate $30 for the provider.
If done right, gross margins for non-asset-based providers could run 30% or more, said Evan Armstrong, the firm’s president. “For 3PLs, the opportunity is large, but it requires a well-thought-out strategy with significant network capabilities supporting a cross-docking model, Armstrong said.
Compared to less-than-truckload (LTL) operations in which freight moves in and out each day with some semblance of order, in the final-mile many items are typically left on the dock to be merged with other goods prior to delivery, Armstrong said. “Final mile is messy compared to traditional LTL,” he said.
There are no shortages of final-mile challenges for 3PLs. The most obvious are the heightened service demands of consumers and the presence of Amazon.com. Inc. (NASDAQ:AMZN) and its massive closed-loop network. The final-mile segment is populated with thousands of small, local delivery contractors, many of whom specialize in a specific area like store replenishment or “white glove” deliveries, essentially the full-service line of final-mile service. With so many players, the many operating systems in use can make IT integrations challenging for shippers and contractors.
Many providers insist their delivery partners integrate with the providers’ platforms, which often results in contractors juggling multiple orders at one time from different shippers. Danny Barfield, executive vice president of Alpharetta, Georgia-based IT firm eTrac, said 3PLs struggle in trying to integrate with each partner’s platforms. eTrac promises a simplified alternative in which a 3PL identifies its partners and integrates one time with the e-Trac platform. The eTrac software then automatically flows an order into the carrier’s native operating system.
Barfield said the model pulls a lot of inefficiencies out of the final-mile system. More important, it fosters real-time order visibility, which has become the name of the game in the final mile, he said.
It would be relatively easy for 3PLs to succeed in final-mile delivery if all they had to do was assess the capabilities of delivery firms to reliably support customer volumes, said Marc Palazzolo, an associate at Kearney. The issue is balancing the costs, delivery quality and operational control needed to make it work each time out, Palazzolo said. “Recognizing this challenge, 3PLs must either put in the necessary effort to develop local partners or develop the capabilities themselves,” he said.
Original Source: https://www.freightwaves.com/news/final-mile-issues-hamstring-3pls-e-commerce-fulfillment-plans