Labels: [Sourced] checked against a source listed at the end. [General] standard industry knowledge. [Our view] opinion, labelled as such. [Illustrative] made-up numbers to teach an idea.
1. The story: UPS and the "traveling salesman" of 55,000 drivers
UPS began a journey in 2003 to modernize its pickup and delivery operations, which led to a suite of systems including a route optimizer called ORION. [Sourced: Interfaces abstract, 2017] INFORMS describes the challenge as a giant traveling-salesman problem: 55,000 US drivers, each making on average more than a hundred deliveries a day. [Sourced: INFORMS] A textbook excerpt says ORION cost $250 million to build and deploy and was expected to save $300 to $400 million annually. [Sourced: InformIT excerpt; expected savings, not audited results] The lesson: delivery is a math problem, and small improvements across a vast network add up. [Our view]
2. The one idea
Outbound moves goods from your warehouse to the customer. The last mile, the final leg to the door, is where the cost per package is highest, because each delivery is small and individual. [General] Walton College researchers note home deliveries are the costliest channel in retailing since each order requires individual picking, packing, shipping and hand delivery. [Sourced: Walton College working paper]
3. The kitchen-table version
A bus versus a taxi. The bus carries many to a station cheaply; the taxi takes one person to their door at a high price per person.
4. The pieces [General]
- Line haul (DC to local hub): big, cheap per parcel.
- Sortation at hubs.
- Last mile: van, bike, locker, store pickup, or the customer comes to the store (the cheapest last mile).
- Delivery promise: same day, next day, scheduled window (Module 8).
5. Why density rules
Worked example [Illustrative, computed by script]. A route costs $250 a day (driver, van, fuel). With 100 stops: $2.50 per stop. With 60 stops (sparser area): $4.17 per stop, 67% higher. Same driver, same van. That is why delivery companies push consolidated windows and why "free same-day delivery everywhere" is hard to sustain. [Our view]
How much of shipping cost is last mile? Commonly quoted figures run up to about 53% (an Invesp study via a vendor blog; Statista charts compare 2018 and 2023). Treat the share as "large and varying", not exact. [Sourced: ShipScience citing Invesp; Statista; both secondary]
6. Options retailers use [General]
Ship from store, pickup in store (Module 19), lockers, crowd or gig drivers, regional carriers, own fleet. Each trades cost, control and customer experience.
7. Where AI fits
- Route and stop-order optimization (ORION is an early example). [Sourced above]
- Delivery windows predicted by learned stop times. [General]
- Forward thread: autonomous vehicles and drones for specific geographies. [Our view] We make no claim about timing.
8. Exercise
Your street gets 3 deliveries a day from different companies. What would a shared delivery cost you if the three combined?
9. Quiz
- Why is the last mile expensive? Small, individual, low density.
- What does route density do to cost per stop? Higher density, lower cost.
- What is ORION? UPS's route optimization system.
- Cheapest last mile? The customer picking up.
Sources
- Interfaces: https://ideas.repec.org/a/inm/orinte/v47y2017i1p8-23.html ; INFORMS: https://pubsonline.informs.org/do/10.1287/orms.2016.03.10/full/ ; InformIT: https://www.informit.com/articles/article.aspx?p=2992600&seqNum=6
- Walton College: https://walton.uark.edu/initiatives/supply-chain-research/working_paper-reducing_the_cost_of_last_mile_delivery.php
- Share of cost: https://www.shipscience.com/understanding-the-cost-breakdown-of-last-mile-delivery/ ; https://www.statista.com/statistics/1434298/last-mile-share-of-total-shipping-costs/