A Theoretical and Evidence Based Assessment of the Economics of Last Mile Delivery Consolidation

Cowie, Jonathan; Fisken, Keith

Abstract

Much research literature suggests that one mechanism through which the sustainability of road freight could be enhanced within the urban context, is through consolidation of consignments over ‘the last mile’. An often cited added benefit is that this would represent a significant improvement in efficiency over what is “the highest cost” element of the whole supply chain (Ref). Through such initiatives, the main externalities arising from last mile deliveries, primarily emissions and the invasion of public space, can be minimised. Despite much academic literature proclaiming the significant advantages of such initiatives, few in practice have proved to be either commercially viable or economically sustainable, and a major review of the literature has failed to highlight clear reasons as to why this may be the case. One element completely overlooked by the body of research to date has been the barriers that underlying economic principles might present to last mile consolidation. This paper therefore examines this issue and supplements this with both secondary evidence (research literature) and primary research (case study).

The main challenges found are firstly that the existing literature has tended to overly focus on the last mile. As a result, it has been assumed that failure to consolidate over this part of the supply chain represents failure to consolidate. The highly competitive nature of the road haulage industry however requires consolidation of consignments at some point in the supply chain, whether that be at the point of origin or at the point of destination. Closely related is the narrow definition given to ‘the last mile’, which has almost inevitably been taken to relate to city centre deliveries to retail outlets, however the reality is that ‘the last mile’ can be a mix of consignments for retailers and final consumers. In other words, the economics of road haulage require that ‘the last mile’ is not geographically defined but rather is far more fluid in its application. This also brings in the idea of the paradox of last mile consolidation, which suggests that in order to be commercially or economically sustainable, any such service requires a critical mass in terms of a consumer base. Allen et al (2000) usefully divides the structure of the urban supply chain system into three segments, specifically centralised, decentralised and hybrid goods. As a consequence, what this results in is a situation where the elements of the retail sector that could perceivably benefit from the use of last mile consolidation services, i.e. those serviced by decentralised goods supply systems, by its very nature tends to be a small proportion of the whole market and in the majority of cases insufficient to constitute a critical mass.

Further challenges exist in the form of the underlying cost structures of both road haulage and urban consolidation centres, hence whilst there is a body of evidence that suggests UCCs have the potential to produce considerable costs savings, once the reality of economic costs are taken into consideration, then the extent to which such savings can actually be realised is highly questionable. This in particular relates to the issues of fixed v variable costs, transaction costs both in the form of admin/handling and profit requirements and finally opportunity costs, particularly in relation to UCCs and the ‘advantage’ of the provision of ancillary services. Other issues concern freight as the ultimate ‘private’ economic good, and finally Pareto optimality in terms of an economically efficient, i.e. perfectly competitive, urban freight market.

This paper brings these issues into clear focus, as to date they have been largely overlooked in the academic literature, and when combined lead to the conclusion that any attempt to impose any form of measure that acts against the underlying economics of urban freight, will inevitably (and history shows, has) result in commercial failure.

Citation

Cowie, J., & Fisken, K. (2019, December). A Theoretical and Evidence Based Assessment of the Economics of Last Mile Delivery Consolidation. Paper presented at 6th International Workshop on Sustainable Road Freight, University of Cambridge

• Presentation Conference Type: Conference Paper (unpublished)
• Conference Name: 6th International Workshop on Sustainable Road Freight
• Conference Location: University of Cambridge
• Start Date: Dec 5, 2019
• End Date: Dec 6, 2019
• Deposit Date: Feb 24, 2020
• Publicly Available Date: Feb 24, 2020
• Keywords: last mile delivery; cycle logistics; economic viability
• Public URL: http://researchrepository.napier.ac.uk/Output/2537865