Last Mile Delivery: 3rd Party or Insource?

In today’s instant consumption world most goods need to be made available at short notice. Consumer businesses offering products, goods and services on-demand have found favour and shown break-neck growth. This holds true for most consumer goods, not just food/grocery/electronics. E-commerce giants like Amazon have developed and mastered technology and processes for running reliable delivery operations. But when it comes to same day to same hour deliveries, even the big companies have struggled. This struggle is all the more acute for smaller companies that lack the technology and best practices required to run an efficient delivery operation. Companies planning to run delivery operations (on-demand or scheduled) often need to make fundamental decisions. Should one build last mile delivery capability in-house or partner with 3PL (3rd party logistics) parties that specifically offer last mile fulfilment services? This is not very much unlike the classic build vs. buy or insource vs. outsource decision.

last mile delivery

For the purpose of this article, we will limit our discussion to businesses that only either have the absolute need to deliver their products/ services to their customers or have taken a strategic business decision to provide delivery as part of their product/ service offering. This strategic decision is ideally taken after careful consideration of the market trends, customer expectations, impact on incremental revenue/sales and cost implications. A detailed discussion can be found in our earlier article

For making a decision about insourcing or outsourcing delivery operations, there are certain factors that have to be considered.

  1. How critical is the delivery for the business – does it act as an additional service (e.g. for a local grocery store it would be just an added customer experience enhancer) or is it a key value-proposition for your product (e.g.: Food delivery in 45 minutes, same/next-day delivery for online shops).
  2. How critical is maintaining the quality of the deliveries to the company’s overall value proposition and branding? For several businesses, the customer connect and impact that the physical delivery touch-point provides (e.g. 30 minute Pizza) is invaluable
  3. What is the type of product offered – is it high value, fragile, time sensitive and/or confidential? Is it acceptable to risk a 3rd party with the product?
  4. Would exposing your customer details (like name and location) infringe on the security and privacy of the customers?

If delivery needs to be under strict control and supervision in order to fulfil the business’s key value proposition, then it would be essential to have an in-house delivery system. Also if the items being delivered are high value or fragile then special security measures need to be taken to avoid any mishaps.

Once these factors are considered a quantitative and qualitative analysis would provide with a rational business decision.

Quantitative Analysis

Quantitative Analysis involves comparing the cost of insourcing deliveries vis-à-vis outsourcing it. Costs involved in setting up an in-house delivery operation can be broadly captured under following heads

  1. Direct Labour costs
  2. Fixed capital expenditure (in case of buying delivery vehicles)
  3. Variable operating costs (e.g.: rentals – in case of renting delivery vehicles, fuel, maintenance)
  4. Incremental managerial costs (for managing dispatches, field-force, customer communication, etc.)
  5. Administration costs (for employing and maintaining part-time/ full-time workforce)

Costs involved in outsourcing the delivery operation would depend on the service provider. Most 3rd Party Service providers charge based on variants of following pricing model

  1. Fixed delivery fee per delivery (with free distance and weight/ volume restrictions)
  2. Variable fee based on additional distance (over free distance) for each delivery
  3. Contractual requirements may necessitate assured minimum delivery volumes failing which penalties may be applicable

Besides above direct costs, there are also hidden indirect costs in using 3rd Party service providers that need to be factored in –

  1. Incremental managerial costs (for managing dispatches, booking, supervising, customer communications, etc.)
  2. Service monitoring and administration (for finalizing contracts and ensuring contractual obligations are met)

Quantitative analysis involves drawing up a business case of insourcing vs. outsourcing based on the above cost components for the forecasted demand. The break-even analysis will give a deeper insight as to the investment and costs involved in both cases. If the current volume of deliveries reduces cost of delivery per order when employing an in-house delivery system, then it would be favourable to go ahead with that option. Whereas, if the current volume of business does not meet the volume as seen in the break-even analysis then it would be ideal to outsource deliveries.

Last Mile Delivery - Insource vs outsource costsInsource vs outsource costs

Open subjective questions are what is the optimum workforce needed and estimated 3rd party delivery charges incurred. Advanced tools and technologies such as those provided by LOOP Solution help obtain a better view of these costs to drive decision making.

Qualitative Analysis

Costs aside, qualitative analysis studies the subjective issues – key among them is the service experience for the customer. For many businesses, the delivery is the only physical touch point for the customer; it would suffice to say that the quality of service would directly affect the customer satisfaction and therefore brand affinity and repeat buys. This means that a better control would be needed within and outsourcing deliveries could be risky. Unreliable service quality will affect long-term customer relationship besides impacting revenues, brand image and value

The Decision

A considered quantitative and qualitative assessment should provide deeper insights to inform the insource vs. outsource decision. In addition, when deliveries are time sensitive, it is imperative to understand demand and estimate with acceptable accuracy what is the right number of field-force strength required to deliver on promised service quality. Under-estimating field-force requirements would result in poor customer experience and over-estimating would result in lower productivity and higher costs. Planning, managing and orchestrating the entire operations from receiving orders/jobs, to consolidating processing, allocating, dispatching and customer communication also requires careful execution. . On the other hand, the service quality provided by delivery service providers come with certain guarantees on time and security of items, which can be a relief for businesses like on-demand food /restaurants that need to focus more on the quality of their product.

An alternate option is co-sourcing, which means that the deliveries are done partly by the firm itself and partly (e.g. when there is a demand surge during peak hours) through a 3rd party logistics partner. This has the dual benefit of keeping costs in control during off-season/ non-peak periods and also accommodating additional customers during peak periods who would have otherwise faced delayed on no service at all.

Many of these operational and execution challenges can be easily handled with high-tech web solutions like LOOP that can provide a high level of automation including optimized planning, execution and orchestration.

In conclusion, the decision to outsource or insource or even co-source deliveries should be taken after carefully considering both the quantitative and the qualitative factors In addition, taking into considerations factors like key competencies of the business, brand image and customer experience, besides leveraging leading automation and orchestration technologies would help make the right decision for one’s business.