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Innovation and tight cost management key to last mile

30 May 2014

LCP Consulting says those that innovate for consumer convenience in the last mile with a close eye on channel profitability will be the ultimate winners.

Two stories relating to last mile deliveries made the national news recently – a rare occurrence outside of Christmas. First, Royal Mail announced it is to trial a Sunday delivery service for parcels within the M25 motorway – and will open 100 offices on a Sunday afternoon to pick up parcels. On the same day, UK Mail announced that its parcel business lifted its operating profit by over a third to £22.4m – and said that it will launch new services later this year, including a ‘text when your next service’ so consumers know when they’re about to receive a delivery.


New services to provide convenience to the consumer need to be applauded, but with total online order volumes expected to rocket, there are three major hurdles for retailers as they develop their understanding of their channel profitability.

 

First, pure play pricing benchmarks are eroding margins as retailers seek to offer value. To add to this, there is a higher cost of fulfilment – and as sales volumes migrate from store to online, retailer operating costs will increase and profit margins reduce. We are also seeing more demanding customers – who want higher service standards and more convenient solutions, but are also liable to return more online purchases leading to even more margin erosion.


These issues will have major implications on UK Retail – and the sector will need to quickly adapt to a net reduction in sales through conventional stores, an increasing demand for click & collect rather than speed of fulfilment, and the challenge of growing returns. With the level of returns from e-commerce reaching 40 per cent or more, it is often cited as a retailer’s biggest (internal) supplier and should be managed as such. 


This has prompted The Omni-channel revolution and, whilst the term ‘Omni-channel’ is leading to some polarisation in the supply chain debate, the need for a more integrated, seamless approach to retailing is clear and is dramatically altering the retail industry – something clearly illustrated over the 2013 Christmas period, with a strong correlation between the use of this integrated model and the top performing retailers.


"Pure play pricing benchmarks are eroding margins as retailers seek to offer value. To add to this, there is a higher cost of fulfilment – and as sales volumes migrate from store to online, retailer operating costs will increase and profit margins reduce."


The UK’s use of national carriers means retailers have greater control over the process and also that retailers can expect, and to some degree influence, nationwide consistency of delivery standards.


But, as carriers currently offer a standardised national ‘last mile’ service which fails to differentiate at an individual customer level, this will increasingly lead retailers to consider alternative solutions. For some, the failure to differentiate service offerings represents a threat to their brand. For others, the lack of differentiation limits innovation in the last mile. In either case this will prompt more retailers to invest in their own last mile solutions; something that is already being trialled by Amazon and John Lewis amongst others.


At LCP, our view is that last mile solutions in the future will centre on personalisation and convenience for the consumer and increasing alignment between fulfilment and returns services.


Consumers will increasingly seek flexible delivery channels dependent upon personal circumstances at any point in time. Click and Collect provides arguably the most convenient solution but the in-store experience will change to focus on speed of collection and more retailers are likely to adopt House of Fraser’s concept for a pop-up collection point complete with changing rooms to allow for immediate return of incorrect goods.


"At LCP, our view is that last mile solutions in the future will centre on personalisation and convenience for the consumer and increasing alignment between fulfilment and returns services."

UK carriers will need to innovate more, and the Post Office and UK Mail’s announcements illustrates how they are trying to adapt and develop services around the consumer. But across industry, customers will need to be offered more options for delivery to them when they want; whether that be to their home, car, the workplace or to their mobile phone. They will also need more convenient alternatives to ‘carded’ deliveries, for example dropping the parcel at a local collection point where the consumer can pick it up at their leisure.


In the ‘Omni’ world, consumers are also looking for flexible return channels dependent on personal circumstances. In short, they are seeking an efficient service, with acknowledgement of return and prompt reimbursement. We will see retailers placing increasing emphasis on efficient and seamless returns processes, providing a selection of returns opportunities and easing the customer journey by shipping in returns ready packaging, supported by the inclusion of ready printed returns labels, without the requirement for pre-authorisation and with consumers getting credited on ‘first scan’ into the carrier network, not on final processing of the goods.


Our research is very clear. Those retailers who have embraced an Omni-channel approach to trading are already seeing differentiated performance. They not only view the revolution as essential for success in a digitally-enabled world, but also appearing to see a bigger, more holistic picture when compared to their multi-channel competitors. This involves controlling all elements of the supply chain, while understanding the entire customer journey - a balance between ‘front of house’ and ‘back of house’ while servicing the customer whatever, wherever and whenever the touch-point.


Those that innovate for consumer convenience in the last mile with a close eye on channel profitability will be the ultimate winners.


Authors:
Stuart Higgins & Phil Streatfield, both Retail Partners at LCP Consulting

 
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