Facing low demand and new rules, truckers pile into last-mile logistics

Facing low demand and new rules, truckers pile into last-mile logistics

Many trucking companies see no choice but to branch into last-mile delivery.

Frustrated by a slow-growth economy and low demand for traditional freight service, trucking providers are looking for new opportunities. In the age of Amazon.com and home delivery of everything from books to bedsets, last-mile logistics is often the first place they look.

“Last-mile delivery is becoming the new logistics battleground, particularly in the consumer world,” consultant Adrian Gonzalez said at the SMC3 Connections 2016 conference in Chicago June 27. As consumers buy more heavy goods online, shippers are diverting more motor carriers from the warehouse to the townhouse, transport executives at the conference said.

“We’re surprised by the growth of our residential business,” said Geoffrey Muessig, chief marketing officer and executive vice president at regional trucking company Pitt Ohio. “We focus on industrial dock to dock business, not even doing much in the retail space,” Muessig said. “But in the past year our residential deliveries have increased 20 percent.”

Home-delivery demand is growing at Estes Express, the largest privately owned U.S. less-than-truckload carrier. The trucking company will launch a final-mile division this year. Trucking and logistics operator Schneider in June acquired Watkins & Shepard, a trucking company specializing in difficult deliveries, and Lodeso, a last-mile logistics company.

“Online shopping is no longer constrained by the size of the product,” Mark Rourke, executive vice president and chief operating officer at $3.9 billion Schneider, said. “Furniture and appliances are among the fastest-growing segments of e-commerce, and those overdimensional products don’t go through the parcel networks,” Rourke said.

“Our customers are increasingly leveraging their web-based sales capabilities,” Muessig said, and goods Pitt Ohio once delivered to distribution centers are now going straight to homes.

Shippers such as Walmart and Home Depot also are directly involved in the last- or final-mile market, sometimes by offering buy-online, deliver-from-store strategies through contractors. “It’s the Amazon effect, but Walmart isn’t standing still,” said Gonzalez, president of Adalante SCM. “They’re experimenting, piloting local delivery with the likes of Uber, Lyft and Deliv.”

Home Depot now offers “deliver-from-store” last-mile service at more than 400 of its 2,200 U.S. stores and expects to roll out the service throughout the U.S. by the end of this year. “This is one more bow in our quiver to support our customers,” Stephanie Smith, vice president of direct fulfillment and delivery for the $88.5 billion retailer, told JOC.com in an interview.

More and more large goods sold at J.C. Penney Co. department stores will be delivered by the retailer’s vendors direct to consumers’ homes as J.C. Penney looks to reduce inventory. “Product will be directly shipped to our customers and J.C. Penney will own the floor samples, but will carry no additional inventory,” J.C. Penney CEO Marvin R. Ellison said in May.

That retail strategy, which J.C. Penney will pursue through a partnership with Ashley Furniture and other vendors, eventually will create more demand for last-mile home delivery services.

Even UPS, the largest U.S. transportation company and the granddaddy of home delivery companies, has invested in Deliv, a same-day delivery company founded in 2012. Deliv uses crowdsourcing technology that does for retail delivery what Uber has done for riders, getting consumers to deliver packages and goods purchased locally to other consumers.

“We want to learn from what they’re doing on the cutting edge of this market,” Tom Jensen, a vice president in the Washington, D.C. office of UPS, said at the SMC3 conference.

Amazon may be the “instigator,” but it’s not necessarily the “propagator” for the expansion of last-mile logistics. To find that propagator, look in a mirror, said Ross Elliott, executive vice president and chief strategy officer of supply chain software company HighJump.

“We as a people have fundamentally changed the way we think about buying,” Elliott said. “Our expectation is now that we can get anything within two days at the outside.”

For shippers, last-mile logistics isn’t just about the delivery, it’s about inventory, Elliott said.

“We see it not as a delivery issue but as a supply chain issue. I’ve got to know where to have inventory to efficiently make deliveries. It’s about the delivery, but it’s also about optimizing inventory locations so you’ve got the right goods in the right place to make that delivery.”

A new market means new challenges

Last-mile delivery isn’t the easiest market to roll into, however, especially for companies used to handling business-to-business freight. Not all last-mile deliveries are equal, said Elliott.

“To compete against startups like Deliv, the traditional carriers and couriers are going to have to start thinking along the lines of an on-demand delivery service, rather than aggregating shipments into an LTL load,” Elliott said. “Over time, the bigger trucking companies are going to wind up working with companies like Deliv. They’ll do the linehaul and hand the shipment off to local services. This Uber-like service is going to disrupt traditional service.”

Differences arise, however, when the goods ordered online are too big to fit in your SUV or hatchback, or require skilled assembly when they reach a customer’s home.

“This is a very complex space,” said Will O’Shea, chief marketing and sales officer for XPO Logistics’ Last Mile division, the largest final-mile deliverer of heavy goods in the U.S. “We do over 12 million deliveries a year, and a lot of them require special services,” O’Shea said. “We’re delivering everything from an envelope in New York City to a stove in Dallas.”

The day when shippers or consumers just received notice that a shipment “is out for delivery” and would be delivered by the end of a certain day are fast fading, O’Shea said. “As more large items moving from the traditional retail channel to a consumer direct model, consumers want speed and visibility throughout the life cycle of the process.”

“We’re seeing more manufacturers and retailers saying we want time specific delivery windows,” said O’Shea, who joined Muessig on a panel about last-mile delivery at the SMC3 conference.

“Customers want their online purchases assembled and installed,” O’Shea said. Increasingly, “they want compressed delivery windows and expanded days of service,” including Sundays.

As retailers expand home-delivery options for goods ordered online, last-mile capacity has come under pressure. Retailers have had to scramble to build networks of delivery contractors.

Like the truckload market, the last-mile market is highly fragmented, with as many as 7,000 carriers, Kirk Godby, a partner with FM2 Logistics Solutions and former president of the Customized Logistics and Delivery Association, said at the SMC3 conference.

Rising demand can put pressure on capacity in certain markets, Godby said, especially during and around holidays. “Finding people that fit your business can be really challenging.”

“There are still a lot of mom-and-pop providers, the market is undercapitalized, and a lot of providers haven’t made the investments in technology they need to expand,” O’Shea said.

Retailers are struggling to offer customers a “unified similar experience” in last-mile delivery across the U.S., Schneider’s Rourke said. “There’s a lot of final mile capacity, some of it being very small companies with perhaps one or two trucks. They want to go to fewer places to get broader coverage and have less connections to make to do that. They can’t find enough players of scale, whether it’s in Poughkeepsie, New York or San Antonio, Texas,” he said.

That’s one reason larger LTL and truckload companies are looking to enter the last-mile business. But there are last-mile obstacles and hazards those truckers need to consider. “Over the years, most LTL carriers looked at residential deliveries as a necessary evil,” Muessig said. Residential delivery came with “opportunity costs” LTL carriers would rather avoid.

“You might have been able to get two or three extra stops off a truck delivering in a commercial area rather than a residential area,” Muessig said. Now, Pitt Ohio believes, “residential deliveries can add density to our runs, and add to the profitability of those runs,” he said.

Many LTL fleets will have to add equipment to make residential deliveries, or partner with contractors. “They’ve got pups (28-foot trailers), and there’s difficulty attaching lift gates to pups.” Pitt Ohio uses straight trucks with lift gates for home deliveries, he said.

“There’s also an added liability concern,” Muessig said. When moving heavier items, “there’s more opportunity for driver injury. As more and more LTL carriers look at getting into last-mile, we need to rethink our whole position” when it comes to liability insurance and benefits, he said.

If it’s hard to hire and keep truck drivers, it’s no easier to find qualified last-mile delivery drivers. “You can’t just take a regular delivery driver and put them in someone’s home,” O’Shea said. “This takes a different skill set.” That set includes “soft” customer relations skills. “It’s very different working with a consumer, going into their home, than bumping a dock,” O’Shea said. “These people need to be the ambassadors for our customers’ brands, as well as drivers.”

Pitt Ohio is more focused on curbside, or “threshold,” deliveries rather than in-home installations of electronics or appliances, Muessig said. That makes it easier to use its LTL drivers for home deliveries. “We explain to our drivers when they start with us that they’ll begin in a straight truck doing a lot of lift-gate deliveries and then move up to a tractor-trailer,” he said.

“Not all last-mile deliveries are the same,” Muessig said. “Probably most LTL carriers will be best able to handle threshold deliveries that one man can handle. My sense is the preponderance of last-mile deliveries are threshold deliveries, and that’s where LTL carriers have opportunity.”

Even with simpler deliveries, trucking companies need to ensure they have the right systems in place to support demanding last-mile customers. “LTL carriers need to pick up their game in regards to the communication of shipment status information,” Muessig said. “If you look at what’s available in the small parcel space, LTL carriers need to be able to mirror that, offering same-day notification. It’s not enough to say it will be delivered by the end of the day. Consignees want to manage their schedules and know what delivery windows are available.”

The location of deliveries can have a significant impact on carrier costs, Muessig noted. “If you’re in a dense urban market you’ll have a different cost associated with the delivery than in an exurban market. We found a lot of deliveries were more than 50 miles from our terminals.”

Returns can also pose a challenge. “The goal is to get the product there in great condition so it doesn’t come back through the reverse logistics channel,” Rourke said. “That’s a big value proposition. Sending a sweater back is one thing, sending a dining room suite back is another.”

XPO Logistics has separate reverse logistics channels for LTL and last-mile returns. “In Last Mile, we operate from both customer facilities and our own sites,” O’Shea said. “We recycle packaging as part of the service. We consolidate shipments and send them back weekly.”

Perhaps the biggest issue for carriers entering the last-mile market is providing the kind of visibility for consumers that Amazon does through its fulfillment services. Supply chain visibility in the freight world is too often opaque, rather than transparent, as shipments move through several links in the supply chain and between various modes before reaching consignees.

“If I’m a shipper in San Francisco, and I’m using a broker to send goods by LTL carrier to pool distribution points in Salt Lake City and Denver before handing them off to a local last-mile service, I may be using three to five companies with disparate systems that have to work together to give me visibility,” Elliott said. More often than not, “that’s not going to happen.”

The answer, he suggests, may be to put the tracking capability into shippers’ hands using mobile apps downloaded by drivers as the freight is transferred from one carrier to another. Drivers can use the apps to alert shippers when loads are delivered, and at various check points along the way, and shippers can provide information directly to their customers.

Technology companies such as MacroPoint and Overhaul already follow this strategy. “This way, it’s technology the shipper owns rather than the carrier,” Elliott said. “When we were bound to use things that required dedicated hardware in the cab of a truck or on the back of a bike, it was more difficult, because everyone had to use the same technology.” The concept that shippers and truck drivers can share information directly may be more disruptive than Uber or Deliv.

Last-mile deliveries may spell opportunity for trucking operators, but they also may be an opportunity they can’t refuse. “We could resist the market,” and stick with industrial, palletized freight, “but I think we would do so at our own peril,” Muessig said. “Amazon and Uber are really just changing consumer expectations. That endline customer is looking for different things today and different things in the future, and if LTL carriers don’t adjust, we may become obsolete.”

Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy_joc.