A growing number of sectors is facing a last mile challenge. While, mostly logistics companies have struggled with the challenge of reaching consumers’ front doors, consumers are expecting more and more services to be delivered to them, anytime and anywhere. To satisfy this demand, in a cost-efficient and sustainable manner, much is expected of technological innovation, e.g. in the form of autonomous robots, but this can only be part of the solution. Instead, there may be much to gain from cooperation between different last mile services, including traditional infrastructural utilities that struggle with challenges of their own.
Observations
- E-commerce is still in its early days as “only” about 12% of retail sales takes place online. China is leading in this respect, with e-commerce amounting to 23%, while countries such as the U.S. (9%) and Germany (8%) are lagging Global growth of e-commerce is expected to hover around 20% per year and this implies that many more parcels will have to be delivered to consumers’ and other front doors. Moreover, there’s a general trend towards faster deliveries (including same-day deliveries), which is further spurred by the rise of grocery deliveries that necessitate rapid handling.
- In e-commerce, the challenge is not only to get parcels to customers. About 20-30% of ordered goods are sent back to webstores (with some luxury categories amounting to 50% returns) and being able to return goods easily (and free of charge) is a major argument for shoppers when selecting a webstore. Consequently, this specific feature of online sales presents a particular “first-mile” problem.
- Logistical last-mile challenges are not limited to B2C services; a large portion of urban last mile logistics (still) relates to B2B deliveries (e.g. to brick-and-mortar shops) and also includes a significant portion of construction material.
- Last mile logistics seem a logical starting point for autonomous vehicles as they can dramatically reduce labor costs. McKinsey estimates that the last mile costs about 50 to 4.00 euro per delivery, a large portion, up to 85%, of which entails labor costs. A large number of startups is working on self-driving vans, smaller robots and drones for deliveries.
- The rollout of 5G mobile internet infrastructure also resembles a last mile challenge, especially because the bandwidth used for 5G calls for antennas to be significantly closer to end users than was the case with 4G and older mobile technology.
- Ageing populations and the rise of chronic diseases are likely to lead to an increase in home health care in general. Moreover, in some cases, home health care may be an equally effective, but lower-cost, alternative to hospital care.
- In developed economies the electric grid has solved its last mile problem for quite some time and energy companies are now struggling with a commodity trap, leading them to look for additional revenue streams, hence other means of adding value for customers. At the same time, the electric grid is now confronted with an influx of decentralized power generation assets that have to be integrated in the grid. The latter resembles a similar kind of “first mile” problem to the e-commerce parcel returns; an infrastructure designed as a one-way system has to reinvent itself to become a two-way system.
Analysis
The term last mile is generally used to denote the last leg of a logistical chain in which a product is delivered to its final destination. The last mile is the most expensive part of the chain as individual products have to be delivered to different, sometimes far apart, locations. To illustrate, parcels from an e-commerce fulfillment center can be moved in a single large truck (with a single driver) for the first part of their journey, but at some point (typically when they reach the outskirts of a city), they have to switch to multiple smaller vans (hence multiple drivers) and ultimately, each parcel has to be carried individually to a home, an office or a construction site. It is, however, not just logistics that faces a last mile challenge. The term actually originates from traditional infrastructures (e.g. water and electricity) that dealt with a similar challenge in the past. In addition, the last mile also applies to a wide variety of old and new services such as (public) transport, home health care and other personalized services.
the last mile has become a cross-sectoral challenge
Over time, even more services will be delivered to (or beyond) our front doors (e.g. health and personal care or education). Digital technology is an important driver in this respect as it has gradually given rise to an economy in which consumers expect to be able to order ever more services from the confines of their home and have them delivered anytime, anywhere. This started with digital services (e.g. free music and movies) and has come to include books and other durable goods and, slowly but surely, groceries as well. IT is pivotal in this development, as it improves the consumer interface with these services and, on the back-end, reduces costs and enables service providers to deliver more services on location (e.g. tools for remote healthcare).
Because of these developments, the last mile has become a cross-sectoral challenge and, to understand this challenge better, we can distinguish between two ends of the last-mile spectrum. On the one end, we find goods and services that are (currently) delivered or provided by people (e.g. the aforementioned e-commerce parcels, food deliveries, homecare and ride hailing). On the other end of this spectrum there are services that are delivered by “machines” (and often to machines). These include the traditional infrastructures and newer ones such as broadband internet and (new) generations of mobile data communication (e.g. 5G and possibly even 3D printing).
Both ends of this spectrum face their own challenges, but they may be reconciled in the future. People-based last-mile services suffer mostly from high labor costs and labor market regulations (e.g. concerning flexibilization). But they also contribute significantly to urban pollution and congestion (e.g. delivery vans blocking streets). Much is expected from automation as a reduction of the human component; fewer people will be needed to deliver goods and services (e.g. because of delivery bots) and they will increasingly be able to deliver to non-humans as well (e.g. parcel lockers, micro-warehouses, automated front doors).
On the other end of the spectrum, machine-based services (i.e. the traditional infrastructures) are suffering from a commodity trap and resulting low margins. At the same time, they are also expected to decentralize and become smarter (e.g. in terms of local power generation and storage, heat networks or water recycling ). Furthermore, new technology will necessitate new investments (e.g. 5G antennas, EV charging stations). To escape the commodity trap, current machine-only infrastructures may seek to introduce a human component in order to add value with additional services, such as advice and installation services) and increasing consumer engagement (e.g. by becoming some sort of personal assistant to customers). As a result, it is not unlikely that both ends of the last mile spectrum will join forces to lower costs on the one end and add value on the other.
Implications
- Not all humans in logistical chains can or will be substituted by automated systems. In fact, several businesses have insourced (part of their) deliveries (e.g. Amazon, Coolblue) in order to provide higher quality of services (e.g. installing equipment) than those of regular transporters and they often do so with actual employees instead of subcontractors.
- The automation of last mile (logistics) is not only about technological innovation; it will require institutional innovation as well, in terms of regulations (e.g. allowing autonomous bots on public roads) and a shift in societal norms (e.g. developing trust in robots and accepting them as co-workers instead of vandalizing them).
- The rise of last mile challenges may, over time, lead to a re-establishment of all-round utility companies that combine traditional infrastructures with new (digital) services.
