Listening to the voice of the consumer

This is an excerpt of the original article. It was written for the September-October 2022 edition of Supply Chain Management Review. The full article is available to current subscribers.

September-October 2022

Once again, it’s time for Gartner’s Top 25 supply chains, the annual list of the 25 supply chains that have made it to the top, plus five Masters that have consistently outperformed year after year. You can read the article, along with some web-only material on scmr.com, to find out what it takes to become a supply chain leader. Last year, I was struck by how the leaders were embracing ESG, or Environmental, Social, & Governance. That has only been reinforced in this year’s report. In fact, ESG has been on the agenda of every event I’ve attended this year, including the keynote address at this year’s ISM conference. Whatever is the…

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Although e-commerce has been growing for years, the pandemic accelerated its adoption to unprecedented levels increasing the challenges of last-mile logistics. According to the U.S. Census Bureau, e-commerce sales increased by 32% from 2019 to 2020, and they’re continuing to rise.

As a result, carriers are experiencing a huge surge in demand for last-mile deliveries—moving goods from transportation hubs to their final destinations (typically consumer homes). In fact:

• the North American last-mile delivery market is expected to grow by almost $60 billion between 2020 and 2025 (technavio, 2022);
• the number of parcels requiring last- mile deliveries is rising by 22% each year, increasing from 150 billion in 2021 to 260 billion by 2026 (Gartner Supply Chain Symposium/XPO, 2021); and
• demand for last-mile deliveries in urban areas is even higher—it’s fore cast to rise by 78% by 2030. Without any intervention, this will lead to 36% more delivery vehicles in the top 100 cities and greater traffic congestion (World Economic Forum 2020).

Last-mile deliveries and costs have been a challenge for years, but this rapid, massive growth has increased pressure on carriers to solve this problem. By some estimates, last-mile deliveries already account for 53% of logistics costs, and they have a major impact on consumer satisfaction. Carriers urgently need to crack the last-mile conundrum because they’re now running out of capacity. And the dramatic rise in domestic fuel cost exacerbates the situation.

One solution: Parcel consolidation

To address this challenge, Tata Consultancy Services (TCS) teamed up with Carnegie Mellon University’s Tepper School of Business to explore whether parcel consolidation, where multiple shipments are combined into a single delivery, can provide an effective solution to the last-mile capacity/cost problem. Under parcel consolidation schemes, carriers store participating consumers’ non-essential parcels for a certain time-definite period, then deliver all the parcels at once. The outcome? Fewer deliveries, lower costs and additional security for consumers from time-definite delivery.

We examined three different parcel consolidation programs.

• Assigned weekday. Participating consumers receive all non-essential parcels once a week. If a parcel arrives after the assigned delivery day, it’s stored until the following week (so that the maximum storage time is seven days).
• Assigned multi-weekdays. Participating consumers receive all non-essential parcels on two assigned days each week. Parcels are held until the next assigned delivery day.
• Dynamic holding. Carriers store non- essential parcels for up to three business days before delivering them to participating consumers.

During our research, we developed a simulation of delivery data that is reflective of real-world environments. In addition, we developed specific algorithms and used sophisticated optimization software to find the best possible trade-off between delivery costs and storage expenses in each of the three programs. The study accounted for real-life constraints, such as limited capacity at transportation hubs; a limited number of delivery vehicles; and the size and weight of
parcels that each vehicle can safely carry.

Game-changing cost savings

The research revealed groundbreaking insights. Each consolidated parcel delivery costs the carrier only 20 cents to 40 cents more than a standard delivery. And parcel storage is inexpensive (costing around $0.04 per pound per 24 hours). So consolidated deliveries (reduced stops) work out far less expensive for carriers, provided that each consumer receives more than one parcel per delivery.

Our research also found that the assigned multi-weekdays model offers the greatest potential: It generates significant cost savings while being able to serve a large population. In practice, carriers may offer different consolidated delivery options to suit different consumers or geographic markets, based on the number of packages delivered each week.

Parcel consolidation can deliver carrier benefits

It frees up last-mile delivery capacity and significantly cuts costs. This can help carriers reverse some of the margin erosion carriers experienced in the last couple of years, as operating expenses increased. Furthermore, parcel consolidation can help carriers cope with peaks in demand, for example, during the holiday season.

Consolidation significantly reduces carriers’ carbon footprints

There are environmental benefits that can help carriers meet their Environmental, Social, & Governance (ESG) commitments. Fewer deliveries translate into decreased fuel consumption, lower mileage, reduced emissions and less traffic congestion.

Consolidation also addresses driver shortages

Many distribution centers don’t have enough drivers. Parcel consolidation helps solve this problem by reducing the number of deliveries and enabling better capacity utilization. Furthermore, parcel consolidation helps create a better driver experience as each shift contains fewer stops. This makes delivery jobs more attractive, potentially improving driver recruitment and retention.

What about the consumer?

If carriers are up for parcel consolidation schemes, how can they get consumers on board? Unlike traditional supply chain research, working with market research, we developed, executed and analysed several iterative surveys asking consumer panels about their feelings toward parcel consolidation.

The surveys reveal great news: Consumers don’t need convincing to sign up for parcel consolidation schemes. A whopping 68% of consumers are
willing to receive all their non-essential parcels on two set days each week, even if carriers provide
no incentive.

For many people, consolidated deliveries may not only actually be more convenient, but it may also offer competitive advantage. Right now, households receive parcels on multiple days per week. People may have to stay home to receive deliveries, and they might miss some deliveries because they’re not sure when items will arrive. Unfortunately, unattended parcels are sometimes stolen.

Consolidated deliveries give consumers greater certainty over when items will arrive and help them plan accordingly. This will likely become more important as people embrace hybrid working, whereby they go into the office on certain weekdays, meaning they can choose the days when they’re at home to accept deliveries. Parcel consolidation reduces the risk of missed deliveries, which in turn lowers the risk of parcel theft. Furthermore, consumers receive fewer deliveries that interrupt their daily routines.

On top of that, parcel consolidation could reduce failed deliveries, or those where a driver has to return to a house if the parcel requires a signature, but no one is home. Considering that failed deliveries account for 12% of all deliveries, there could be significant savings here as well. Not to mention a boost in driver morale.

Carriers can boost consumer uptake still further by offering incentives for people to participate in parcel consolidation programs. According to our research, 81% of consumers are willing to receive all their non-essential parcels on two set days each week in exchange for a gift card. Additionally, 75% would sign up in exchange for loyalty card points.

Global potential

While our research focused on implementing parcel consolidation in the United States, we believe that there’s strong potential in other markets as well. Parcel consolidation schemes offer compelling operational and environmental benefits in places with mature economies, strong e-commerce markets and high population densities such as the UK, continental Europe, Japan, China, Brazil, India, Argentina and Colombia.

Urban areas are especially well-suited, as densely populated areas are particularly expensive to serve under the current approach to last-mile deliveries. Case in point: The toll costs for last-mile deliveries in New York’s five boroughs could add up to six figures a year if carriers don’t select the right routes.

Unlocking the power of the ecosystem parcel consolidation encourages carriers to shift their thinking from e-commerce toward ecosystem commerce. In other words, evolving from linear logistics chains toward broader connected logistics networks. Let’s take that network idea to the next level.

Our study focused on the benefits each carrier could obtain by optimizing its own operations. But if carriers and shippers all worked together and consolidated all of their deliveries, the rewards could be even greater.

• Carriers would drive even greater cost savings.
• Consumers would benefit from increased convenience, because they’d receive all their non-essential parcels in one delivery.
• There’d be an even greater reduction in the industry’s carbon emissions.

To achieve these impressive results, carriers and their shippers must learn to collaborate instead of compete when it’s appropriate. For example, they would collaborate on the interstate and in the warehouse, but compete at the point of demand/sale.

Jump-starting parcel consolidation

It’s clear that parcel consolidation schemes offer huge potential cost savings for carriers, and that consumers are willing to sign up. To seize this opportunity, we recommend that carriers start by implementing pilot programs at their key last-mile hubs, without offering incentives for participation.

Our research can help carriers achieve value quickly because we’ve already developed sophisticated, repeatable algorithms that consider the relevant variables and constraints of parcel consolidation programs. These algorithms can be rapidly adjusted to suit each carrier, including their fleet and the area served. In fact, TCS and CMU recently opened a co-innovation lab on campus called PacePort Pittsburgh to invite carriers to collaborate on such challenges.

This project included input from a student Capstone Program Research team comprised of Kristina Schiffhauer, Sivanagahari Devarapalli, Stefanie Montgomery and Timothy Marshall.

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