The Impact Of COVID-19 On Supply Chains

 

by Mark Tuinstra

Social & Economic Hardships

As the coronavirus has spread around the world over the past four months, the pandemic has brought unimaginable devastation with the loss of over one hundred thousand lives and millions of confirmed cases of the disease. Globally we are self-isolating and staying away from meeting places and events to avoid contracting or spreading the disease. In addition, widespread policies mandating social distancing are in effect, and most US states have shut down non-essential businesses like sit-down restaurants, gyms, and boutiques as well as schools, parks, and other public places.

The COVID-19 outbreak has upended our day-to-day life and significantly impacted the global economy. In the US, an analysis by Moody’s estimates the daily US economic output has fallen 29% compared with the first week of March1 prior to extensive closures. Industries like travel and hospitality face a devastating impact from the virus.

With large portions of the workforce laid off or working fewer hours, over 20 million Americans filed unemployment claims during the weeks between March 21 and April 11, according to the Labor Department. At the other end of the spectrum, some industries are scrambling to find workers to meet increased demand. Unfortunately, there are indications that illnesses and fears associated with the virus are leading to workforce shortages and strains on supply chains. The roles most impacted at this point in the crisis are truck drivers, grocery store staff, and workers in meat processing plants, and shortages of these workers may lead to delays or shortfalls in certain products in the coming weeks.

Adapting To Huge Changes In the Channel Mix

A striking aspect of the COVID-19 crisis is the degree to which some industries have been entirely shut down while others are surging. Indeed, even similar products within related sectors of the economy have been impacted in very different ways. The clearest example of this may be in food manufacturing and processing.

Data from the USDA shows just over half (54%) of the $1.7 trillion in US food sales in 2018 involved away from home meals. However, due to the coronavirus, most of the nation’s one million restaurants have closed entirely or moved to exclusively takeout/delivery, and 95% of Americans are under some form of stay-at-home order. Significantly more at-home meal preparation, along with consumers stockpiling as they prepare for spending more time at home, have meant a major spike in demand in retail channels, particularly grocery and ecommerce. Food service sales have subsequently plummeted, with the shift representing a massive challenge for the food supply chain.

Nowhere is the difficulty of adapting to a new channel mix more obvious than with dairy and other farm fresh products. At the same time as panic-buying has resulted in limits on items like milk, butter, and eggs at stores, farmers are dumping their excess supplies of milk and eggs. Differences in product and packaging requirements for food service compared to retail channels mean producers cannot easily pivot to serve consumers.

For example, grocery stores generally stock wedges from cheese blocks, not the sliced barrel cheeses used by fast food restaurants. In addition, products headed to food service are mostly sold in bulk and not distributed in consumer-facing packaging. Think of a 10lb bag of shredded cheese versus the 8-ounce package shoppers buy for home.

In cases where processors might be able to modify production and acquire the packaging to sell in the grocery channel, they often lack relationships with stores to negotiate for shelf space.

For some consumer packaged goods companies, the surge in demand has meant sharpening their focus to produce key SKUs at the needed volume. One example is Coca-Cola which is seeing a spike in demand in grocery and ecommerce as consumers stock up, and the brand is aiming to deliver its best-selling beverages while smaller SKUs may go unstocked for now2.

The Impact Of COVID-19 On Transporting Goods

Even when manufacturers are able to get the needed product in the right packaging and secure space on the shelf, transporting goods represents another major challenge.

Carriers in general do not have extra capacity to meet the spike in demand brought about by the crisis, and the delivery of goods has slowed in many cases due to several factors. First, a chronic shortage of freight truck drivers has existed for several years as the aging workforce of drivers retire without sufficient numbers of new workers joining the industry to replace them. As the coronavirus spreads, there are even fewer as some drivers are not working due to illness. Meanwhile, others fear contracting a virus that is particularly dangerous to those over 60 and have opted to not take the risk of working in a job where they interact with many others along their routes.

In addition to the shortage of drivers, logistical limitations are preventing the efficient distribution of products to meet surging demand. Delays and backlogs at plants may result from overloaded delivery docks and storage areas that lack the space to handle the increased output. A shortage of refrigerated trucks has slowed shipment of products like meats and grains as well.

Managing The Supply Chain To Meet Health & Safety Needs

Arguably the most critical supply chain during the crisis serves the healthcare industry, ensuring sufficient supplies of medical devices like ventilators, sanitizers/cleaners, and personal protection equipment (PPE), including masks, gloves, and gowns.

Export controls have been imposed in many markets, and in the case of medical equipment and PPE, governments are re-routing deliveries. Officials have seized products at the border to keep them in the country and in some cases sent PPE to hospitals instead of the original buyer.

Ansell, a leading manufacturer of PPE, says demand for their products has doubled and their supplies are sold out3. It is unclear how much they can boost supply due to raw material shortages and supply chain disruptions.

Pharmaceutical manufacturing is another vital area where supply chains are strained. Critical medications are in increasingly short supply as drug manufacturers in China and India, which the US relies heavily on for its drug supply, have largely shut down plants and blocked exporting active pharmaceutical ingredients used in drug manufacturing.

As the coronavirus first spread, the initial challenges were related to reduced supplies from China. Now supply chains are challenged everywhere, and with unemployment rising and consumer spending reduced, demand is plummeting. Outside of companies making essential medical/PPE goods or products for the defense industry, few large manufacturers can keep operating at full capacity. Automakers and their suppliers have in most cases closed manufacturing facilities. However, some companies are adapting and have shifted to produce different goods in order to meet the surge in demand for medical-related products. In one case, a producer of oil/gas equipment has moved to making medical visors.

For manufacturers finding their raw materials in short supply, local suppliers and 3-D printing are being used more. Local sourcing allows producers to avoid rising import costs, export restrictions, and delays in shipping times due to fewer flights, overextended trucking companies, closed ports, among other barriers.

Over the past few years, 3D printing solutions have offered advantages to companies looking for greater agility in manufacturing, such as in the production of spare parts allowing companies to maintain smaller inventories. During the pandemic, 3D printing is a valuable tool to support supply chains and address product shortages. NASCAR, which typically uses 3D printing to build composite parts for stock cars, is producing PPE to donate to hospitals4

Preparing For Future Supply Chain Challenges

Following the current crisis, organizations will have an opportunity to learn from the challenges they experienced and take steps that will strengthen their supply chain. For many, the crisis will serve as a “wake-up call” that better preparation is needed, and supply chain management experts say mapping out supply networks is key5. The process should include not just a company’s immediate suppliers but their suppliers’ suppliers and their global footprint.

Many companies still rely on personal relationships and anecdotes when sourcing and tracking their suppliers. The lack of systematic collection of this information means that when procurement personnel leave, change roles, or retire, their knowledge leaves with them.

While supply network mapping can be resource intensive and difficult, companies may discover the value of the map is greater than the cost and time to develop it. Knowing which suppliers, sites, parts, and products are at risk during a crisis allows organizations to put themselves first in line to secure constrained inventory and capacity at alternate sites.

Companies should also explore new ways to make their sourcing more agile, and some of these may run counter to conventional wisdom. For instance, over recent decades global companies have concentrated production geographically to save money6. Organizations should re-examine the marginal benefits of this kind of concentration since the additional cost of a large company operating plants in different locations is often not more than the cost of having one huge plant. At a certain point, companies may reach the maximum (or near maximum) incremental improvements in efficiency. That is, they may not lose much in terms of gained economies of scale at half the size. By running two plants, businesses lose little in efficiency, but make tremendous gains in flexibility with a supply chain that could better handle future pandemics and other natural disasters.

Other emerging technologies such as Blockchain and driverless vehicles can offer solutions to help governments and businesses respond to COVID-19. Blockchains are already supporting in various ways by certifying the origin of PPE and other sanitary products to ensure authenticity and limiting the privacy impact of tracing and immunity tracking apps. In Italy, blockchain technology has enabled donations to the Red Cross to go through and has been used to certify a news on a publishing platform to combat fake news.7

Meanwhile, autonomous vehicles can help address a shortage of drivers and solve delivery issues including new requirements for touchless deliveries. There are signs deployment of the technology is accelerating due to the pandemic. In fact, automated vehicles distributed groceries and medical supplies in China during the coronavirus lockdown. JD.com delivered goods in early February with workers loading autonomous logistic vehicles which could each deliver dozens of packages to destinations including hospitals.8

Shortages of essential medicines and equipment during the crisis have exposed the dependency of the US on China and other nations. This has led to calls for the US to move away from reliance on importing these types of essential goods and strengthen domestic capabilities to manufacture drugs and medical supplies.

What Comes Next

As the number of infections and coronavirus-related deaths appear to have reached an apex or at least a plateau in some areas, officials have begun to assess lifting restrictions and re-opening businesses. Leaders in the US are looking to countries like China and Italy where the outbreak hit earlier to understand how to avoid potential dangers of lifting shutdown orders prematurely.

As guidelines are prepared in the coming weeks, it is clear that many aspects of daily life in the areas hardest hit by the virus will be significantly altered at least in the near-term until widespread testing is undertaken, and perhaps even longer still until a vaccine is brought to market. In the meantime, supply chains, particularly those with the healthcare and food sectors, will undoubtedly be strained and companies forced to adapt to a new reality.

1https://www.wsj.com/articles/state-coronavirus-shutdowns-have-taken-29-of-u-s-economy-offline-11586079001
2https://www.cnbc.com/2020/03/24/coronavirus-coca-cola-ceo-says-supply-chain-is-creaking.html
3https://www.ft.com/content/140c9875-2c57-4e54-a4c4-e8518645887c
4https://www.forbes.com/sites/stevebanker/2020/04/13/covid-19-and-3d-printing/#7fb6317a3f7a
5https://hbr.org/2020/03/coronavirus-is-a-wake-up-call-for-supply-chain-management
6https://insight.kellogg.northwestern.edu/article/coronavirus-upended-supply-chains-how-companies-can-prepare-disruption
7https://cointelegraph.com/news/eu-founded-task-force-to-study-how-blockchain-may-help-covid-19-response
8https://www.weforum.org/agenda/2020/03/china-covid-19-coronavirus-mobility-solutions/

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Supply chain risk: take back control

 

How to make risk management a strategic asset and a source of competitive advantage

Over the past two years, global supply chains have been in a state of turmoil. For businesses across the economy, supply shocks and shortages have become a fact of life, and a financial headache: the cost of shipping containers on many major global trade routes has more than doubled.

With substantial supply chain risks set to remain for the foreseeable future, risk management needs to become a strategic function. Get it right and your business will gain a substantial competitive advantage.

Customers are demanding better and more transparent risk management. Their purchasing strategies are increasingly oriented toward suppliers’ ability to deliver (as well as cost).

As existing supply chains become less reliable, alternate sources are in big demand. But they are also few and far between. Key raw materials, such as lithium and magnesium, are hard to procure, while the supply base of several key sectors, such as semiconductors, is now highly concentrated.

Other risks include non-compliance with increasingly onerous trade restrictions, a lack of transparency, and a tricky transition from low-cost and just-in-time-based value chains to ones that revolve around environmental, social, and governance (ESG) factors. Each of these dynamics may contribute to shortages and high prices that ripple through supply chains. In some cases, businesses try to innovate their way out of trouble, but that can jeopardize their financial viability.

Risk management needs to be rethought

The market has responded to the reemergence of supply chain risk by offering a range of mapping and scoring technology/services, but many organizations fail to create sustainable competitive advantages and business cases around supply chain risk management by focusing too much on platform-driven approaches.

That is a mistake: companies that are adept at risk management will gain a competitive advantage. Trusted by customers, they are more likely to win new business. In fact, successful and transparent risk management increases the marketable quantity of end products by ensuring the ability to deliver. An important competitive differentiator in today’s world, robust risk management can justify higher prices.

It is important to recognize that a structured and systematic approach to identifying risks is now a must. Supply dynamics are too complex to be addressed ad hoc. Businesses need to take a comprehensive and fully transparent approach to risk management throughout the value chain. The organizational culture must reward the identification of risks and encourage open exchanges on this topic, while risk management should be embedded into the existing roles within the organization.

How do we approach risk management?

Drawing on our deep expertise in procurement and supply chain management, Kearney works with clients to develop a governance model to monitor the impact of risk across the organization. We aim to build a central, stringent, and cross-functional process for the systematic management of risks. Ideally, this process will be fully automated to address risks across all areas and for all customers in the best possible way.

A cognitive risk engine can be used to provide full risk transparency. If you can create a digital twin of your value chain, you can address risks throughout the entire value chain and logistics, right down to which customers are affected. Global, detailed, and real-time risk modeling, using a scalable cloud-based solution, is the best possible way to gauge risk and optimize the mitigation strategy.

But a risk management solution also needs to be flexible. To evaluate suppliers based in countries where information is difficult to obtain, a business may need to employ alternative forms of finance and risk modeling. It is important to receive this information in real time before another competitor terminates this supplier so that, in this case, a safety stock can be built up unnoticed.

How clients typically apply risk management in their supply chain

We see three supplier risk archetypes:

1. Risk seeker

Focused on regulatory compliance and mitigation of short-term risks. Risk management strategy characterized by specific risks and problematic suppliers. Uses streamlined technology diagnostic tools for identification and assessment of risk. This archetype may be first to move, but can miss quite a bit of the picture if they move forward without a robust process and governance to manage the process and act on identified risks.

2. Disruption avoider

Focused on future and buried risk, but potential disrupters take precedence. Risk management strategy characterized by broad supply chain bottlenecks including suppliers’ risk and performance, and crucial risk categories such as raw material or cyber. Uses identification of critical suppliers’ potential issues for identification and assessment of risk.

3. Strategic differentiator

Focused on risk management as a competitive advantage. Risk management strategy characterized by building strategic capability, and views risk as an input into business operation optimization. Uses strategy, process, governance, and technology for identification and assessment of risk including full digital twin of supply chain to reconfigure for resilience, and risk map as trigger for continuous management.

Additionally, the companies differentiating risk strategically as a competitive advantage encourage its strategic partners to follow Supply Chain Risk Management Standard (SCRM) culture and processes. Intellectual property and business sensitivity can prevent the level of openness desired to directly monitor supply chain risk, but if your partners can adopt the right mindset and process, you can be more comfortable with the level of risk and potential exposure.

Key questions to ask before setting out to improve the management of risk

Strategic

• What do you want to achieve—mitigate short-term risk and secure business continuity in the coming 24 months or drive strategic decision-making?
• Are you ready to adopt a predictive mindset to identify vulnerabilities and enable avoidance strategies?

Process

• Are you willing to create full transparency and connect key downstream processes to risk management?
• What performance improvements process are you willing to embed to ensure processes are self-healing and relevant?
• Are you willing to dedicate resources to contact second- and third-tier suppliers directly and obtain more information?

Governance

• Are you ready to make risk management a part of your main steering mechanism?
• Will you make sure that accountabilities are embedded in roles?
• Which key performance indicators (KPIs) will be used to incentivize risk mindset, and are they appropriate?

Technology/enablement

• What is your ambition for transparency and automation?
• Are your aspirations limited by existing technology and datasets?

Capabilities and culture

• Will you come up with a clearly articulated and socialized case for change?
• Do you have the ability to connect strategy and culture through metrics and performance management?

How to make the management of risk a source of competitive advantage

To provide guidance to our clients, Kearney has developed the risk management reference model (see figure 1).

Mindset

Understanding risk management. Make risk management a strategic function under the responsibility of the CPO with regular reporting and steering committees. It should be fully integrated along the entire value chain (R&D, purchasing/supply chain, sales).

Tone from the top. Risk management should be sponsored by the CEO, with the CPO taking technical responsibility, supported by a risk management committee consisting of relevant managers and employees from purchasing, supply chain, and R&D.

Transparency and honesty. Develop a risk management manual setting out risk management’s eight core dimensions (see below), which is accessible to the entire organization and the subject of recurring training courses and onboarding. Create an incentive model that rewards people for identifying and addressing risks, together with an organizational model that defines roles and responsibilities.

1. Values and culture
2. Communication and training
3. Technical infrastructure and IT
4. Risk management
5. Goal setting
6. Programs and processes
7. Organization and control
8. Monitoring and improvements

First line of defense

Risk identification and opportunities. Perceive risks as opportunities to gain a competitive advantage and introduce processes to identify risks. These should include:

• Scoping: Selection of industries, categories, value creation steps for risk sensing
• Sensing: Linking of internal (BOM—bill of materials), supplier (risks), and market (logistics) data
• Interpreting: Transfer of the harmonized data into the respective risk dimensions
  • Dimension #1 (risk category): information security, regulations
  • Dimension #2 (components): semiconductors, batteries
  • Dimension #3 (supplier): …
• Evaluating: Prioritization of risks using a multidimensional scoring approach
• Planning: Development of actions to mitigate risks via cross-functional teams

Execution, steering, and monitoring. Introduce regular reporting mechanisms, such as business area-specific reviews of risks and cross-divisional review of risks, and ad hoc reporting mechanisms, such as external risk panels or a whistleblower system that can escalate and mitigate risks as appropriate. Control mechanisms could include an OBK-driven (objectives and key results) model based on a cross-functional organizational and process landscape and an internal system for monitoring the risk management process and its efficiency.

Tools and methods. Aggregate internal BOM, supplier risks, and market logistics data, while developing a fully automated and fully integrated IT solution for identifying and assessing risks, as well as tracking responsibilities and mitigation strategies.

Capabilities. Develop risk identification, mitigation, and prevention capabilities related to the technical, financial, and administrative capacity of an organization.

Continuous process improvement. Take a structured approach to identifying potential for improvement and corresponding measures, supported by a mindset of continuous improvement.

Second line of defense

Corporate risk management encompassing values and culture, goal setting, communication and training, programs and processes, technical infrastructure and IT, organization and control, risk management, and monitoring and improvement.

Legal: safeguarding buyers. Provide buyers with a defined framework for the selection of suppliers/components/raw materials, and a real-time overview of the risks via the integrated IT solution for risk management. Request that suppliers regularly fill out a questionnaire on the current risk situation and risk mitigation.

Third line of defense

Process and documentation audit, random sampling, and traceability. Develop a risk management handbook and a database that tracks risks and associated responsibilities.

What does “good risk management” look like?

In our experience, very few organizations can count themselves as leaders in risk management, nor use it to establish a competitive/business advantage. In many cases, they have assembled some pieces of the puzzle, but not all (see figure 2).

Here is a summary of what leaders will have implemented in each area of the risk management reference model:

Risk identification and opportunities. The supply chain has been modeled completely and transparently (in other words, which risks exist and which customers are exposed to these risks).

Execution, steering, monitoring. Cross-functional processes have been implemented to address risks. These will include a weekly reporting routine, structured approach, and checklist to assess risks and set up a task force. The organization will have a catalog of measures for known risks.

Tools and methods. An integrated and near real-time (less than five hours) cloud solution will collect all relevant data centrally and model risks. A risk management tool will present risks transparently along the value chain, with an interface to suppliers.

Capability setup. The organization will have the data science skills to model relationships and to create and manage IT solutions, together with cross-functional knowledge regarding industry-specific relationships, since parts are reused everywhere via platform models. The organization will have the skills to ensure process security and the mentality to identify the best possible solutions.

Continuous process improvement. After each incident, the organization will hold workshops with the process participants, possibly involving the respective suppliers and customers, and extract the potential for improvement.

Second line of defense. The buyer, supply chain manager, and risk manager will be involved in the development process with the value proposition of “Go” and “No go” component lists. If a supplier does not meet the relevant risk criteria, the buyer, supply chain manager, and risk manager will be able to exercise a veto.

Third line of defense. The organization will conduct internal and external audits on a regular basis to obtain expert opinions.

Ready to make risk management a strategic asset and a source of competitive advantage?

We understand the complexities of establishing a strategic risk management function and its implementation toward a competitive advantage. Our transformation approach ensures a comprehensive perspective with a clear business case. To talk more about your ambitions and how we can help, please contact the authors below.

The authors would like to thank Andreas Foitzik for his contributions to this article.

Authors

Michael Roemer

Partner

Ryan Elliott

Partner

Daniel Santiago

Partner

Emal Ehsan

Director

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The Rise of the Last-Mile Exchange

Keeping up with the growing volume of e-commerce will require delivery companies to disrupt their long-standing business model.

by Tim Laseter, Andrew Tipping, and Fred Duiven

Park yourself at a typical residential intersection in the U.S., and you’ll watch a parade of delivery vehicles pass by over the course of the day. Trucks from FedEx, UPS, and the U.S. Postal Service (USPS) crisscross neighborhoods, retrieving and delivering packages, sometimes more than once. Increasingly, they are joined by trucks from regional shippers such as OnTrac or LaserShip, as well as by unmarked vehicles with non-uniformed drivers, who drop off packages for companies including Walmart and online startups such as Roadie, Doorman, and Sidecar. Soon, fleets of vans bearing Amazon’s logo, operated by independent companies, will be joining the mix.

The rising pace of activity along what’s called the last mile of the retail sales chain reflects the boom in e-commerce. According to the U.S. Census Bureau, e-commerce accounts for about 9 percent of total retail sales, and is growing at a double-digit clip. The number of packages delivered annually in the U.S. is expected to rise from 11 billion in 2018 to 16 billion by 2020, according to estimates from Strategy&, PwC’s strategy consulting business. B2C deliveries, generated mainly by e-commerce, account for more than half of today’s volume, and will make up two-thirds of volume by 2020. In many ways, this seems like a sunny story all around. Consumers have more shopping choices than they have ever had, and their online purchases are delivered faster than seemed possible just a few years ago. Retailers can reach many new customers, and are better able to serve existing customers with faster and more flexible distribution chains. Transportation companies are riding a powerful wave of new demand for their services.

But all this growth brings some peril. Retailers and transportation companies alike are facing challenges in this fast-changing marketplace. Both sectors are at risk from Amazon. The company is the behemoth of the e-commerce boom, with 100 million Amazon Prime members, and accounts for 25 percent of all U.S. packages today, on track to reach 50 percent by 2020. With a vertically integrated network that provides inherent advantages, Amazon is positioning itself to dominate both the retail and the transportation sides of the business.

A second threat to retailers and transportation providers is more systemic. The traditional ways of managing the delivery of packages — with hub-and-spoke ground networks, massive regional distribution facilities, and fleets of vehicles — were designed to optimize long-distance, intercity shipping. As a result, they are not well suited to the emerging realities of expanded e-commerce, in which the trend is increasingly local (trips of less than 50 miles are growing at a 25 percent annual rate). Furthermore, transportation companies struggle to accommodate fluctuations in last-mile demand. Peak shipping volume in December, for example, is more than 25 percent higher than in September, which causes shippers to scramble to hire tens of thousands of temporary employees and add capacity every year. Daily swings can be far higher; volume on some days in holiday seasons is an order of magnitude higher than the daily average.

Meanwhile, new delivery approaches — such as stores hiring their own delivery personnel and startups crowdsourcing delivery vehicles and drivers — can operate effectively only on a very local basis, and they gain few advantages by building scale geographically.

For all these reasons, devising a better solution to last-mile delivery will be the next major battle in e-commerce supremacy. To compete effectively against Amazon’s advantage, retailers and transportation providers will need to develop a way to better coordinate and more accurately match demand for the delivery services they can profitably supply on a given day.

The solution is to build a “last-mile exchange” platform that drives delivery decisions, and, crucially, allows retailers and transportation providers to collectively shape delivery demand and adjust continually to the inherent variability of the last mile. Such an exchange could deliver a win for consumers, retailers, and transportation providers. FedEx and UPS are the companies best positioned to disrupt their own business and create this new paradigm. Each could bring a significant share of the overall transactions to the platform. And each has a great deal to gain by evolving from a commodity provider with large fixed costs into a nimbler player that can compete against Amazon, aggressive regional players, or upstarts working out of the proverbial garage.

The Last-Mile Dilemma

The difficulty of delivering merchandise in a cost-effective way on the last mile of the retail sales chain has bedeviled e-commerce from its beginnings. Hazards in the last mile killed off many of the Internet startups in the late 1990s and early 2000s, such as Webvan (see “The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes,” s+b, July 1, 2000). But despite the growth and evolution of e-commerce since then — along with the advent of smartphones, apps, and improved connectivity — the fundamental economics of the last mile haven’t changed. Profitability remains highly dependent on two key factors: (1) the transportation provider’s route density — how many packages can be delivered on a given delivery run, and (2) the drop size — how many packages or items are delivered at each stop.

Consider your own experience as an e-commerce consumer today. If you receive one package with a new thumb drive from the USPS on Tuesday morning, a package of beauty supplies from FedEx a few hours later, a book delivered by UPS on Wednesday, and a box of groceries from Walmart on Friday, it’s easy to appreciate the inherent inefficiencies in these four delivery trips. Imagine, instead, that a transportation provider could deliver all four of those packages from one truck, in one trip, at one time. Efficiency would soar, and per-package shipping costs would be roughly 50 percent lower, which could result in lower costs for consumers and higher margins for retailers, transportation providers, or both.

It’s clear that traditional legacy couriers such as FedEx, UPS, and the USPS (which is both a public-sector competitor and a partner, because FedEx and UPS, along with Amazon, offload a significant percentage of their last-mile deliveries to the postal service) are being pressured to keep up with demand. Historically, as in manufacturing, building scale was the primary lever for lowering last-mile costs. But today, the rising tide of e-commerce threatens to swamp the biggest commercial ships. The more that big retailers such as Amazon, Walmart, and Target ship, the deeper the per-parcel shipping discount they expect. Legacy couriers have also been slow to utilize peak pricing; their revenue is typically tied to annual contracts with fixed prices. And declining margins make it hard to justify the last-mile investments needed to keep pace with growth.

Most responses to date have been reactive. OnTrac and LaserShip have grown rapidly by targeting smaller retailers (historically the more profitable customers) with offerings in high-volume service areas that are mispriced in a national network. Other players in the e-commerce marketplace are attempting to make the delivery–supply component of the cost equation more flexible. Crowdsourcing personal vehicles and delivery personnel is one way to offset the “fixed” nature of traditional transportation providers by matching delivery demand with more variable supply. Walmart has tested a variety of solutions, including curbside pickup (“click and collect”) as well as an “associate delivery” service, in which employees can opt in to deliver consumers’ purchases, using their personal vehicles, on their way home from work.

Target was so concerned about the last mile that in late 2017, it paid US$550 million for Shipt, a crowdsourced provider that was less than five years old. Amazon is leveraging its acquisition of Whole Foods to combine grocery with other e-commerce package offerings in order to increase route density. Not to be outdone, Walmart is adding “pickup towers” to 500 of its U.S. stores in 2018 to concentrate demand into a single delivery point. These automated delivery hubs hark back to a concept we profiled more than 15 years ago (see “Oasis in the Dot-Com Delivery Desert,” s+b, July 1, 2001), in which players developed solutions to aggregate online purchases in secure neighborhood drop boxes instead of individual homes. Most of the startup ideas failed in the United States. But DHL has 3,000 “Packstations” throughout Germany, and about 90 percent of the German population can get to one within 10 minutes. Similar third-party delivery point concepts can be found in countries including Costa Rica and Latvia.

The difficulties of managing demand on a given day — which is especially evident at peak times such as Black Friday and holiday seasons — are built into the current e-commerce ecosystem. Transportation providers typically don’t know about a purchase until well after the online shopping cart transaction is complete. (How often have you tried to track a package on the FedEx or UPS website only to be informed that the shipper is awaiting information about the purchase?) Information is often siloed in the retail companies themselves, within order management, inventory management, and shipper transaction management systems — forcing delivery information later in the process.

When retailers have sales campaigns that create shipping surges, they don’t necessarily communicate the surging demand to their transportation providers. And even though shipping peaks can be massive for both retailers and transportation providers, the two players are independently guessing what the volume will be. As a result, retailers often place tremendous pressure on fulfillment and shipping resources.

Building a Last-Mile Exchange

The solution to this problem is a last-mile delivery exchange that connects consumers, retailers, and transportation companies via a digital platform. It could solve many of the difficulties challenging the e-commerce ecosystem today and produce benefits for consumers, retailers, and the package delivery providers, yielding improved convenience, transparency, efficiency, and cost savings. Such an exchange would create a path forward through the disruption caused by increasing consumer expectations, advances in technology, the emergence of new entrants, and the rise of the sharing economy [see the 2016 PwC report “Shifting Patterns: The Future of the Logistics Industry” (pdf)].

The exchange would effectively flip the script. Rather than react to demand and respond to others’ decisions, transportation companies and retailers could engineer demand earlier in the sales process and dynamically balance supply and demand, much as Uber uses surge pricing to encourage more drivers to work during times of peak needs in peak locations. Such a platform designed for e-commerce package delivery would need to be multisided, involving both retailers and last-mile transportation providers. Instead of passing on information from point to point in a linear fashion, it would need to dynamically share data among all the players. The exchange participants would need to have sophisticated algorithms that help them decide how much to bid to deliver a given package to a particular location on a particular day at a particular time. For example, assume a carrier already has a planned delivery of a dress from Nordstrom to a home in Dunwoody, outside Atlanta. That carrier could offer a great price to deliver an additional package to the house next door (from Nordstrom or another retailer) and an even better price for another delivery to the same customer. Accordingly, Best Buy might be willing to offer a discount on a television with excess inventory in Atlanta.

The last-mile platform would need to connect the retailers’ order management and inventory data with package and delivery resource data in real time. Because sending data from mainframe to mainframe will no longer be feasible, a cloud-based ecosystem would be optimal, pooling package data, resource availability data, and analytics with insights, and featuring dynamic optimization of pickup and delivery routes. Drawing another parallel, such a platform would need analytic sophistication comparable to that of the ecosystem that supports Google’s AdWords, which auctions key search terms billions of times each month to ensure the maximum value for both advertisers and consumers on Google’s search platform. Data security — including consumer privacy, protection of proprietary company data, and transaction security — would be critical. This strategy would pay multiple dividends.

Consumers would benefit from seeing direct shopping incentives and options at the initial point of sale. And they would receive indirect shopping incentives because retailers would pass through shipper offers of lower-cost shipping on days when delivery demand is low. Consumers would generally also have more visibility into, and more interaction with, the entire delivery process.

Retailers would benefit from the power of aggregation, keeping their own online storefronts and identities but offering more and better shipping options through the last-mile exchange that would rival the experience that Amazon provides. Their shipping costs would fall.

Legacy couriers would build more flexible and efficient networks. Supply chains at FedEx and UPS are already highly optimized to deal with the fixed constraints designed into their existing networks. But the last-mile exchange would empower them to meet the challenge of managing supply chain costs despite the inherent variability in e-commerce volume growth. They would be able to see demand fluctuations earlier in the e-commerce sales process and shape demand with incentives, dynamic pricing, and real-time matching of resources. They could, in effect, reframe the problem to better design and utilize their fixed delivery fleets — minimizing the need for multiple trucks delivering packages on the same streets in a given time frame. (They might even create a secondary market swapping packages between networks to eliminate such redundant coverage.)

Disrupt Yourself

Although the proposed exchange may seem theoretical and futuristic, there is every reason for companies to act now to make it a reality.  E-commerce volume will continue to boom, and the challenges facing transportation companies will become more serious. Consumer expectations have been reset since 2005, when Amazon introduced free two-day delivery for Amazon Prime customers. And expectations continue to escalate. Consumers now see two-day delivery as the default, and increasingly expect their purchases to arrive the day after they place their orders, or even on the same day. Just a few years ago, transportation companies were delivering packages only five days per week. UPS moved to six-day delivery in 2017. Amazon began arranging Sunday deliveries through a deal with the USPS in 2014 — and it’s inevitable that the entire package delivery business will move to a routine seven-day delivery cycle before long. The last mile of the retail sales chain will likely become even more crowded with more competitors.

The current e-commerce trajectory is pointing toward a future in which FedEx, UPS, and other transportation companies become commoditized players in a game whose odds favor other players. But acting now would enable companies to alter this trajectory. Creating a last-mile exchange would fundamentally disrupt the last-mile delivery business by addressing demand in a more sophisticated way. FedEx and UPS, as noted earlier, are best positioned to be the disruptors. Their significant shares of overall transactions, as well as their huge resource bases and highly evolved delivery capabilities, give them the stakes they would need to place such a large bet. It’s also possible that a consortium of retailers and transportation providers could band together to create an exchange. The specific details are also likely to evolve as blockchain technology becomes accepted more widely.

Finally, although consumers and retailers will see significant benefits if e-commerce delivery becomes more efficient, solving the last-mile dilemma may well be an existential challenge for transportation companies. Creating a new last-mile exchange would enable them to shape a future that would be more favorable to them.

Author Profiles:

• Tim Laseter is a managing director at PwC US, and an advisor to executives for Strategy&, PwC’s strategy consulting business. Based in Arlington, Va., he is also a contributing editor of s+b, and a professor of practice at the University of Virginia’s Darden School. He is the author or coauthor of four books, includingInternet Retail Operations.
• Andrew Tipping leads the U.S. transportation team for Strategy&. Based in Chicago, he is a principal with PwC US.
• Frederick Duiven specializes in advising transportation clients on growth strategies for Strategy&. Based in Arlington, Va., he is a director with PwC US.