It’s More Than Transport
Doing any final-mile work today?
The “final mile” as the last link in the retail portion of supply chains has always been a critical link in supply chains, the point at which the economies of scale of manufacturing must be reconciled with the needs of individual customers. One sees this clearly when recognizing the power of retail brands and the profitability of machinery and auto dealers. Historically this function has largely been performed by a partnership between the retailers/distributors and consumers. The retailers brought the goods close to the consumers and displayed them to ease the choice process, while the consumers performed the delivery service. In an hour, my wife and I are headed to the town nearby to do a collection of shopping chores. In that activity, we will be completing the final-miles portion of several supply chains: milk, paint, garden watering equipment. Even today, with the explosion of internet-based supply chains, more than 85% of goods reach consumers this way. Anybody deliver your gasoline recently? Of course not; you go to the pump yourself. The gasoline supplier fills the convenience store tanks from a 53’ tanker; then you move your fifteen gallons across the “final miles” to your garage.
It’s more than transport.
You can see this pattern in the accompanying diagram of a traditional supply chain.
Importantly, there are three critical retail supply chain functions. The first is disaggregating the large line-haul loads of product into the small volumes that consumers buy. Second is the presentation of the product in the convenient, attractive forms that encourage the consumer to buy. Although some of that work does take place in an upstream warehouse, or in downstream consumer advertising, most occurs at the store. The third critical function is the retail delivery, the “final miles”, again performed by you and me. So there is a disaggregating, a marketing, and a transportation function in the retail portions of a supply chain.
The retail world is changing.
I emphasize this broad definition because it is an essential context in which to understand the current revolution in final-miles logistics. The revolution started when Jeff Bezos figured out he could do Barnes and Nobel one better at the big box game. If Barnes and Nobel could make a customer out of a bookworm like me by offering more than one hundred World War II titles in a single store, how happy am I when Amazon.com can offer thousands. Amazon.com is a humungous catalog that has everything. Moreover, it has it now! I just bought a new Ryobi drill with an odd battery size. The drill came with a charger and battery, but I wanted a spare battery. Home Depot didn’t have one in the store. Amazon had a dozen choices. I ordered what I wanted, with a minimum of fuss and time invested. Keep in mind that no battery has moved yet. I accomplished the ordering process entirely through information.
To date, Amazon.com is the champion big-data application.
I am describing a big-data function that saves me finding time, while making many, many more choices available. In a very important sense, Mr. Bezos’s innovation is about information. Amazon collects the information then makes it available across the final miles to your home computer or smart phone. Think about it. Amazon has five million vendors, sixty-five million U.S. customers, and six hundred six million SKUs. That produces something larger than 40 trillion permutations to manage, my battery being merely one. The miracle is that Amazon manages all that data with very easy-to-use software. It took me much less time to buy the battery on Amazon.com than it did to buy the drill in Home Depot; not to mention the time it took me to drive over to the store. Here’s the point for those of us the transportation part of this revolution. The whole thing starts with information, a bewildering volume of information. As we get involved, our ability to synch with all those bits shooting across the cloud may determine our success as much as our ability to move that battery of mine from a fulfillment center to my house.
It’s about time – saving time.
Bezos’s meteoric expansion is propelled by a second major insight that dovetails with his original bright idea about big data. Economists, me included, have long been impressed by the high cost of home delivery, the “final miles”, when compared with the extraordinary efficiency of line-haul transport, the “far miles”. A 53’ dry van full of the batteries I ordered might hold 100,000 of the things, moving each one for $.00002 per mile. The FedEx step van that will deliver the battery to my doorstep tomorrow or Monday will do so at about $.04 per battery mile. That would appear to be a prohibitive cost penalty for the additional service that home delivery provides, since I usually perform my final miles deliveries myself, as I did with the drill.
Bezos’s insight is that I – and you – do understand the cost of our self-delivery, especially the time aspect. At a minimum I would have spent a few more minutes in the tool section every time I shopped at Home Depot looking for that battery, assuming I had some other reason to stop at the store. Mr. Bezos highlights the convenience of home delivery by his promise of unusually rapid delivery. The core of the convenience is not having to drive around town, especially when I am not sure which store has what I want, if any. Of course, there are some things that I need now! Maybe it is fresh food, or that part I forgot to get when starting on a fix-it-myself project. But most things we buy, like this battery, can wait a few days. So it’s usually about saving me time and aggravation. I will pay something for that. So, apparently, will the retailers who save money for not having to shelve that battery in the store.
The store comes to me now.
My point here is the rapid expansion in for-hire final-miles services is not about some technical revolution in delivery technology (not yet anyway). It is about a reframing of our final-miles delivery options. Home delivery is no longer a luxury reserved for legal documents or a special present at Christmas. It is now a regular part of the retailer’s job. It is explicitly a substitution of information and transport for the functions of the traditional store. It follows that a major aspect of this revolution is the movement of retail functions upstream into the warehouse portions of the supply chain.
I have shown this in the second graphic, my representation of the emerging supply chain. You can see that the retail section of the supply chain now stretches upstream to encompass what used to be called the warehouse stage. I have renamed it “fulfillment center” in recognition of its explicit part in the meeting of individual customer needs in the retail chain. Note also in this schematic that the local store stage in the chain has been replaced by a breakbulk stage, where large collections of individual customer orders are broken into step van loads for home delivery. Those facilities still exist because it is efficient to combine several step van loads into one larger truck for the “near miles” that link the fulfillment center to your neighborhood.
It is useful to use these two schematics to consider the full set of differences and their implications for supply chain participants. First, there is but one major difference in the interface between the factory and fulfillment center/warehouse, the “far miles”. Now there are two kinds of warehouses as destinations for the over-the-road trucks. The medium volume fulfillments centers handle the majority (for now) of the goods and provide traditional parcel-based delivery, albeit with greatly accelerated internal handling standards to get the goods moving faster than before. All of us get emails telling us our goods have been shipped within hours of our making an order. The low-volume fulfillment centers are located close to major population centers in order to provide the same-day or next-day service that Amazon Prime is so proud of. I call them “low volume” centers because their smaller geographic coverage makes them smaller than the larger and less numerous centers that cover a much bigger geography. Note very importantly that line-haul operations that link the first two stages are unchanged. It is still large trucks traveling long distances.
Length of haul is not shrinking!
Read this carefully. The addition of the low-volume fulfillment centers DOES NOT shorten length of haul between the first two stages. That would occur only if the new centers were moved closer to the factories. To the contrary: they are moving closer to the customers. If anything, that would lengthen the haul. Remember that traditional warehouses were sited to minimize length of haul given the locations of sources and customers. Changing warehouse location based on some other criteria (short haul to customer) would disrupt the original minimization of miles. The big takeaway is that the retail revolution, at least so far, means little to the movement of goods out of factories towards inventory-holding locations. That is a complicated way to say that the over-the-road, inbound far-miles operations look much the same as they used to.
But something has changed!
I’ll start with a real biggie. When the production, presentation, and choosing activity moves to the eithersphere, its physical manifestation moves back from the third stage (retail/breakbulk) to the second stage (fulfillment center/warehouse). In the old system, the consumer “picked” the items from store shelves. Now a robot picks the items from warehouse shelves. Used to be that picking in a warehouse was limited to the selection of piles of goods going to a single store, boxes, or pallets. Now, the picking applies to individual products: one drill battery for me, rather than a box of many batteries for subsequent stocking at Home Depot. Moreover, the ordering system deals with a population of fulfillment centers. For high-volume items, I will be served by a local small-volume warehouse in my region. For anything else, the information system searches for the closest location of the good, perhaps nearby, perhaps in China. It is easy to see, then, that this first big change speaks as much to big data information management as it does to physical supply chain procedure.
Don’t worry; I’ll deliver it for you.
That promise means that the physical retail chain starts at the fulfillment center/warehouse rather than the store. This change causes changes in the interface, the “near miles” between the second and third stages of the chain. Historically it was dominated by private or contract-carriage store-delivery operations, usually 53 footers, but also in large straight jobs. All the trucks carried volume lots headed for store inventory. In addition, each retail chain controlled its own operations. Now the goods jump right into the parcel delivery system, heading for breakbulk centers where the near miles load is broken up for final miles residential delivery. Moreover, these moves must now occur to precise timing. The clock starts on my order of a battery when the order hits the fulfillment center.
Your local store is now a cross-dock.
That building with trucks around it in your neighborhood is now a cross-dock rather than store. Really, the traditional store was a breakbulk too, except its layout was governed by the shopper’s behaviors rather than the efficient transfer of goods from a big truck to a small truck. Because a breakbulk can handle a much larger throughput than a store, this change reduces the number of stage-three handling points, concentrating the near-miles volumes from fulfillment center to breakbulk. The traffic historically moving in this manner has always been more concentrated, hence the very large players in the parcel sector. Also, have you noticed how many retailers are closing stores? Don’t need them anymore!
You will need new friends.
A third change follows from that concentration: carriers serving this set of flows will be dealing with the parcel consolidators rather than the retailers. (Amazon is becoming a very large parcel consolidator.) That change is just part of an overall revolution in the identity of retail players. Carriers serving these flows, and those serving receiver-controlled line-haul moves, will have to develop relationships with a whole new set of customers. Unless you think that Sears will be the last victim of this revolution.
Oh! There IS a shortening of length of haul.
The shortening of delivery times for high-volume items is producing a shortening of length of haul for near-miles operations. Amazon’s proliferation of fulfillment centers is explicitly designed to get the inventory holding points closer to the customers. It applies only, however, to the upstream few-miles portion of the retail chain because the residential portion of the flow, the final miles, is sized by the driver’s ability to deliver small packages. That will be unchanged until the invention of new technology. Those same economics meant that the breakbulks were always close to the customers.
This litany of changes ends with a big, big, very simple, very under-considered problem. It’s the opposite of the Uber phenomenon. In the taxi world, Uber succeeded largely because it created access to a very large reservoir of semi-professional capacity. In the U.S. there are about 280 million cars, all but a few sitting idle all day. Uber uses a portion of that capacity. The Amazon revolution has the opposite effect. Those 280 million cars, and drivers, are no longer employed for final-miles work when a consumer orders online and specifies home delivery, as they do most of the time for Internet orders. At current penetration rates, the new supply chain must replace the capacity of around two million delivery vehicles. Wonder why Amazon is willing to bankroll small startup delivery operations? Sure, they want to lessen their dependence on UPS and FedEx. Still, the driving need is simply capacity.
What about drones?
This analysis is about what my college math teachers called “continuous” change. I am describing here the implications of a radical change upon the known, historical structures of U.S. supply chains. I can talk with relative certainty because I am limiting myself to familiar dynamics that will continue to allow us to used traditional physical and informational solutions. I am still talking about step-vans, and breakbulks, and warehouses. The buildings are rapidly being automated, but the robots are doing familiar work. This analysis does not speculate about the “discontinuous” changes that are already an obvious part of the retail environment but, for trucking, are still ten to twenty years out, like drones. I will deal with some of those possibilities in another commentary. However, such discontinuous forces mean that we have very little historical precedent to use in making forecasts. The George Jetson  world did have flying cars, but was in most respects a tame, disappointing view of the future. What else could it have been, being the creation of 1962 cartoonists? So let’s not mess with the world of the 2030s yet. Let’s just worry about the next five years that are already hurtling down on us.
 The Jetsons was a 1960s TV cartoon show about a family living in the distant future – a sci-fi sit com.
Okay, what does the final mile revolution mean for trucking?
- Information: Like it or not, trucking is entering the world of big data. Supply chains want to know what’s in the truck, where the truck is, and when it will arrive. Either you find a way to get your ELD connected, or you die.
- Precision: Remember that Jeff Bezos is wealthy because he SAVES people time. The performance of trucks and their effect on facility operations in the retail supply chains is now a critical retail customer service function. If you are hauling my battery, you are not serving Amazon (or Home Depot); you are serving ME.
- Near miles verses far miles: These first two effects are the primary changes to far-miles (over-the-road) operations. At least until we get 24-hour line-haul truck operation, most of retail supply chain truck miles will look very much as they always have, big trucks moving along the interstates. The radical changes are so far reserved for the warehouses and near-miles trucking.
- New Customers: History tells us that radical changes like those I am addressing in the retail sphere lead to massive turnover in competitors. The buggy makers were replaced by Ford and Chevrolet; Samsung has replaced Philco and RCA. That means your customer base is undergoing massive change. Your courage in forming new relationships will be a defining element in your survival over the next ten years. The digital revolution in trucking is a ways out. The digital revolution in retailing is now! Most of your current retail customers will be gone soon.
- Concentration: The dramatic shrinkage of near-miles destinations (a few breakbulks replacing many stores) means a significant concentration in traffic flows. If you serve that segment, you will probably have to align yourself with a big player. Keep in mind that Amazon has almost a 50% market share in this space and intends to become a major trucking player. Do you want to get in bed with that giant?
- Capacity: The substitution of for-hire final-miles transport for consumer self-provided transport is creating a massive demand for final-miles capacity. As yet this is very labor-intensive work with few economies of scale once the step van leaves the breakbulk. There is ample room for new entrants, including intermediaries. Imagine an Uber-like provision of final-mile capacity. Admittedly such operations are very different from traditional large truck brokerage. However, this capacity opportunity is easily the largest since deregulation in 1980.
In summary, we have a major change in the context of traditional far-miles trucking and a collection of major physical changes in near-miles and final-miles trucking. For those who chose to stick with the traditional, the changes will primarily be in customer alliances, in data provision, and the precision of pickup and delivery times. Much more is coming but awaits the perfection of the technology we are reading about. Think after 2025. For those who chose to surf the current wave, it means diving into the hyper-competitive near-miles world or figuring out how to provide additional final-miles capacity. We know from watching UPS all these years that final-miles work is very different from the far-miles work that occupies most truckers today.