Challenges of Last Mille Logistics for E-Commerce

As you might have already known, supply chains are incredibly complex, with a variety of pickup points (store, home, distribution center), a multitude of delivery modes (owned fleet, outsourced fleet, autonomous, drone), and myriad destinations (home, business, pickup point, parcel locker). If one piece of the supply chain fails, its impact is felt by logistics leaders, shippers, and consumers everywhere. Over the past three years, there have been worldwide supply chain disruptions due to a variety of factors, including the pandemic, global unrest, and labor shortages. During this time, e-commerce growth has exploded. E-commerce sales are projected to reach $5 trillion in 2022 and hit $6 trillion by 2024. Supply chains and eCommerce are inextricably linked as eCommerce depends on efficient supply chains for consistency and timely deliveries.

Customers are shopping online more and for more categories than ever before, putting pressure on 3PLs to meet customer demand across product categories and requiring greater flexibility in warehouse inventory management, picking, and packing. At the same time, customers expect ever-faster delivery times, and delivery speed is a crucial differentiator. The increasing scarcity of warehouse space is also contributing to costs. According to McKinsey’s forecasts, there will be a shortage of around 190 million square feet of warehouse space within the next five years, which could increase rental prices and put further pressure on 3PLs, left with the question “How can 3PLs remain competitive in this increasingly challenging environment?”

          Fulfillment operations range from a dedicated single-client model, where operations are customized to client requirements, to the fully integrated multiclient model favored by large e-tailers. A partially integrated multi-client fulfillment model may allow 3PLs to remain competitive in e-commerce. Lessons can be drawn from how major e-retailers organize their multi-client warehouses, which may apply to the partially integrated multi-client model. In particular, technology and automation are deployed wherever possible, and activities and resources are shared across clients, leading to significant cost savings. Although smaller companies may lack the scale to adopt this approach, a partially integrated multi-client model could still result in significant cost reductions.

Multi-client fulfillment operations can create value for e-tailers in several ways and provide a significant growth opportunity for the 3PLs that service them. These operations generally have a broader footprint, allowing e-tailers to be closer to the customer-reducing lead times and competing with market leaders’ two-day and same-day delivery. They can lower e-tialers’ costs as overheads such as labor, automation, and real estate can be shared with other e-tailers. And they can provide greater flexibility than dedicated single-client operations, as they avoid long-term commitments to 3PLs, Saving is achieved through economies of scale, essentially allowing e-trailers to reach more customers faster without increasing their square footage.

The multi-model can lead to cost savings for 3PLs from 7% to 9%, compared to dedicated fulfillment. Such cost savings could be achieved through several drivers, including demand smoothing, site scaling, automation, and final-mile savings. According to McKinsey’s studies, approximately 90% of logistics experts believe that e-fulfillment currently leads to roughly 5% to 10% of profits. The cost-saving achieved through multi-client fulfillment could ultimately increase e-commerce profitability by two to three times.

          Switching from a single-client to a multi-client model may bring commercial challenges. For instance, the fulfillment center may not reach capacity immediately as clients are onboarded over time. Operations will only reach an optimal cost structure after economies of scale. Start-up and fixed costs will likely only be recovered once operations have scaled, which could impact pricking. 3PLs would need to adjust warehousing and operations to efficiently use available resources such as space and labor. They may need dedicated inventory-management teams and new tools to handle the added complexity of co-mingled goods.

Concluding, multi-client fulfillment presents opportunities for 3PLs to continue to take advantage of the current boom in online shopping while meeting the challenges of increasing costs, complex customer demand, and rising competition. The model provides ways to serve more clients faster and in ways that make the most efficient use of resources, thereby lowering costs and boosting productivity. However, 3PLs looking to adopt a multi-client model should be aware that successfully implementing one requires a shift in mindset and concrete changes to their business model. For instance, the commercial structure would need to accommodate upfront costs, including real estate and automation, typically paid by dedicated clients. The leap from one to multiple clients may require new offerings, pricing strategies, and revamped operations and processes.

Article by: Asst. Prof. Suwan Juntiwasarakij, Ph.D., Senior Editor