Why is last-mile delivery so expensive?

As e-commerce continues to grow, last-mile delivery has emerged as a critical component to optimize costs and guarantee customer satisfaction. However, this final stage of fulfillment comes with its fair share of challenges and limitations, which can push up the overall cost of shipping and delivery to unsustainable levels.

As customers demand faster delivery times, e-commerce brands are grappling with the rising costs associated with the last mile. So, why is last-mile delivery so expensive, and what can brands to do take control of this final stage of delivery?

In this blog, we will explore why last-mile delivery costs are booming, what is contributing to these costs, and how e-commerce brands can reduce last-mile cost for a more efficient operation.

How expensive is last-mile delivery?

Last-mile delivery costs will vary between businesses and their chosen shipping methods, but one thing is for certain; the last-mile delivery process is taking up an increasingly large share of total shipping costs.

According to the delivery management platform FarEye, last-mile delivery now accounts for 53% of overall shipping and delivery costs on average. This is a significant increase from 2018 when the last mile accounted for just 41% of total supply chain costs.

The reason for this sharp increase can be attributed to the growing popularity of online shopping, as well as rising customer expectations for rapid delivery timeframes. To improve customer satisfaction, brands are under pressure to offer faster and cheaper shipping options, putting their last-mile logistics under considerable stress.

Moreover, businesses' efforts to reduce costs during the last mile are often thwarted by the high rate of failed deliveries for e-commerce orders. Failed deliveries happen for a range of reasons, including incorrect delivery information, poor route optimization, or lost packages. A survey by Statista in 2020 found that every failed delivery cost U.S. businesses $17.20 on average, which adds significantly to overall last-mile delivery costs.

What exactly is the 'last-mile delivery problem'?

The 'last-mile problem' is a catch-all term in logistics for the challenges that businesses and 3PLs commonly face during the final mile delivery phase. Because last-mile delivery services entail transporting completed orders from a warehouse or fulfillment center to the final delivery destination, this poses some unique difficulties that aren't seen elsewhere in the order fulfillment process.

A range of factors, such as traffic congestion, unique delivery locations, and route planning, make it almost impossible to achieve the same level of efficiency that exists in stages such as order processing and picking. Not only does this mean sacrificing economy of scale; it also pushes up the cost of last-mile delivery significantly.

And as online order volumes rise, delivery drivers are forced to navigate more complex routes that contain multiple deliveries, lengthening the time it takes to complete delivery routes. This in turn affects delivery capacity and forces businesses to expand their delivery fleet to deliver more orders - which brings in higher maintenance costs.

In sum, last-mile logistics can easily turn into a runaway train of escalating costs as e-commerce brands try to keep pace with consumer expectations. To control last-mile delivery costs, it's necessary to have an understanding of the visible - and invisible - expenses that contribute to getting orders to the customer's doorstep.

Understanding last-mile delivery costs

Breaking down last-mile delivery expenses helps merchants to understand where final-mile delivery is costing them the most and identify where they can make improvements.

Fuel costs. Long, indirect routes to deliver packages cause fuel expenses to add up quickly, especially when out-of-route miles are difficult to avoid on many last-mile deliveries. Moreover, traffic congestion and long idling times can impact overall fuel efficiency, especially within busy metro areas.

Labor costs. Delivery personnel play a pivotal role in last-mile delivery operations. To ensure timely deliveries, delivery drivers and couriers require training on how to deliver packages correctly and avoid failed deliveries, in addition to wages, benefits, and insurance. Labor costs are also liable to fluctuate throughout the year in line with peak season and the availability of delivery staff.

Vehicle costs. Maintainance of your delivery vehicle fleet is essential to keep delivery operations running smoothly. A delivery truck breaking down mid-journey can result in lengthy delays in delivery and must be avoided at all costs. Because businesses require a large number of delivery trucks - even for a relatively small volume of packages - these costs can escalate quickly.

Shipping costs. The last mile contributes significantly to an order's total shipping costs, due to the many unique delivery addresses that delivery vehicles need to reach within one journey. Shipping cost is also heavily influenced by factors like shipping distance, DIM weight, and delivery speed. Same-day delivery, for example, is significantly more expensive than economy ground shipping methods. To achieve lower delivery costs, brands should see whether they can access wholesale shipping rates with regional and nationwide carriers.

Packaging costs. All orders need to be packaged correctly to stay in optimum condition during transit. Warehouse staff need to pay close attention to product characteristics to ensure they are selecting the appropriate packaging, such as using extra filler or bubble wrap for fragile items. Some packages may require additional handling and labeling, such as orders bound for hazmat shipping.

Return costs. When a customer decides to return or exchange a product, this can add significantly to your last-mile delivery costs. Return shipping, repackaging, and reconditioning returned merchandise can complicate last-mile logistics, especially if customers have the option to choose pickup and delivery schedules.

What else is contributing to last-mile delivery costs?

Increased demand and customer expectations

Consumers aren't just shopping online more frequently; they're also expecting ever-faster delivery times from e-commerce brands. In fact, 41% of shoppers say they hope to receive their order within 24 hours or less. This means there's little room for error within the last-mile delivery process, putting more strain on operational resources through the use of expensive expedited shipping or delivery scheduling systems. But if brands don't offer competitive delivery timeframes, they stand to lose a lot of sales.

Peak season pressures

Peak season activity, such as the holiday season or one-off sales events, adds significant pressure to last-mile delivery logistics. When order volumes increase suddenly, this can slow down order fulfillment and shipping dispatched, resulting in extended delivery timeframes and higher transportation costs, especially if additional delivery trucks and drivers are needed to meet delivery targets.

Ineffective route planning

When delivery journeys are not planned out to reduce out-of-route miles, a delivery driver ends up traveling much longer distances and using greater amounts of fuel, meaning slower, more expensive delivery than necessary. This can cause customer satisfaction to take a hit, and the need to invest in more resources to offset inefficient operations.

A lack of proactive communication with customers

Brands need to communicate with their customers post-purchase to confirm their order and tell them when it was been dispatched for shipping. A lack of information about delivery can make customers feel anxious and frustrated, which may dissuade them from shopping with you in the future. Moreover, if customers aren't sure when their order is supposed to arrive, this may result in a failed delivery, resulting in additional trips and expenses.

Managing diverse delivery scenarios

One of the biggest challenges of the last mile is the number of delivery scenarios that couriers will encounter in a single delivery journey. Package drop-offs may include a mixture of apartments, townhouses, P.O. boxes, long driveways, and more. Finding the right address and figuring out the correct place to leave each parcel can add costly minutes and idling time to each drop-off, which reduces overall efficiency.

How can e-commerce brands overcome the challenges of last-mile delivery?

Set the right customer expectations

Your communication with customers throughout the shopping journey sets the tone for what customers expect during the post-purchase experience - including how quickly they will receive their order. Proactive updates and order tracking during the post-purchase experience help to build trust in your brand and build confidence that you can deliver (pun intended).

Decide on delivery speed based on customer location

Depending on your warehousing strategy, it may not be possible to offer the same delivery speeds to all of your customers. While a robust fulfillment network can make it possible to offer two-day shipping to a high percentage of customers, same-day delivery may have to be reserved only to customers within a defined radius of your warehouse or storefront to avoid late or failed deliveries that affect your reputation.

Partner with a 3PL

Handling last-mile delivery independently can result in escalating costs and inefficiencies for a lot of e-commerce brands, especially if they don't have the technology systems in place to give themselves real-time visibility into the shipping and delivery process. A nationwide 3PL with a large number of supply chain partners can equip your brand with the resources and last-mile delivery software needed to effectively manage your orders in transit.

Ryder Last Mile acts as an extension of our customer’s brand experience. With a nationwide network and extensive expertise in delivery fleet management and multi-node transportation strategies, we give our customers a competitive advantage by reaching 95% of the US in two days, while maintaining consistent customer satisfaction. Contact us today to find out how we can remove friction and reduce last-mile delivery costs for your brand.