Same-day shipping will be one of the biggest changes in overall delivery experience. The promise of ordering something and receiving the delivery on the same day will change the rules of the business for distance sellers. When the first big e-commerce shops introduce same day delivery for very low costs, the customers will get accustomed to these fast deliveries and they will want this service level from all their trusted suppliers.
The path to same-day-delivery
The expectation is that some of the big e-commerce companies will start to offer the same day service and will use incentives (spend more than 50 Euro and receive same day delivery for free) to push the service as a strategic differentiator. Same-day-delivery can be expected in the near future. Take Amazon in Germany: While originally operating from a central hub in the middle of Germany, Amazon developed two small regional warehouses in Leipzig and Werne while implementing a second warehouse in the central location. Over the last two years, Amazon has created four big distribution centers of nearly the same size in several locations all over Germany with a focus on southern Germany. The locations have been selected because they can serve most of central Europe and for coverage over all of Germany, Amazon is only missing a warehouse in the Hamburg region.
While same-day shipping is close to being realized, there are still several major changes that need to occur. The first major shift will be the shift from a hub and spoke system to a multiple hub and mini-spoke system. This requires a complete redesign of the delivery networks in all countries. In Germany, this translates into a need for the creation of distributions centers in all major regions in order to cover the big population centers. Instead of one hub in the center of Germany, several strategically placed distribution hubs will be needed to cover 90% of the German population within a radius of 100 to 200 km. The distribution centers will have to carry most of the products and specialty products with regional demand. The 30 delivery centers of the German Post Office can be the starting point for locating distribution centers in order to cover all of Germany completely in the event that same-day delivery to all German addresses is required.
The redesign of the logistics network may be unthinkable for some of the established parcel delivery services. The same-day delivery may require a new delivery service system, which, in turn, may cause big e-commerce companies to create their own parcel service, such as Hermes, the delivery service of the distance seller Otto. The new parcel service will change their business model.
With the new logistics network, the costs for same day delivery will not be significantly higher than normal delivery services. This may require new route optimization services based on time slots, which customers may enter in the ordering process or in a mobile/web application.
So, what? – Implications for distance sellers
For distance sellers, the main question will be how to react to this service requirement. Since cost will not be that much different, the main task of a seller is to increase the average delivery value to compensate for the higher delivery cost. Possible solutions for increasing order size may include increasing the minimum order size for free shipment, or using a bonus scheme (“faster to rewards with same day delivery”). Also, portfolio enhancement or collaboration with other senders can increase the average delivery size. Strategic acquisition of complementary distance seller companies may be one option for some companies who wish to push the same day delivery.
On the other hand, using a limited same-day-portfolio of products may ease the implementation of the service, since the required portfolio would be simpler to keep in multiple locations. Understanding customer preferences and requirements will be important to keep the right size inventory and optimize inventory allocation for same day delivery. Replenishment concepts will need a complete review – especially in the changing logistics networks and the additional requirements for exchanging products between neighboring locations with a shuttle concept. Planning new warehouses will require a strategic approach to determining whether additional locations may be useful to serve other regions instead of creating new warehouses in an existing location.
How to prepare for same-day-delivery
Data warehouse analytic solutions will play a key role in the development of same day delivery concepts. Using existing information may not be sufficient, but it will be required to clean the data from skewing facts, such as end of the year budget spending sprees (“December fever” for government agencies) or the effects of sales incentives (free delivery starting from €50 or 10 order lines) or marketing promotions. The key will be to understand the customer’s buying patterns and how to influence customer behavior through the use of promotions, as higher average cost per delivery will be instrumental for making same day delivery happen. If a delivery network is set up for same day delivery, the price differential may be less than 15% as compared to a hub and spoke system. In order to maintain the margins, average delivery size will need to increase by 15% to cover the extra cost.