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Hybrid Last Mile Delivery Fleets Offer Sweet Spot Between Cost Efficiency and Service Quality

November 24, 2021

Speedy home delivery isn’t just a nice-to-have proposition in today’s competitive marketplace – it’s what most consumers expect. Large retailers such as Amazon, Target and Best Buy now offer same-day delivery for many products, raising new questions about how to balance cost with quality of service in the persistently inefficient last mile of delivery.

Innovative partnerships between retailers and gig-economy platforms – for example, Walgreens and Postmates – offer promising solutions to this challenge. Complementing existing delivery fleets with crowdsourced delivery can help companies enter new geographical markets, scale up quickly or manage demand surges without adding new vehicle fleet ownership costs. But risks are involved, including the uncertainty of whether a driver will accept a delivery request.

“How do you measure that risk and decide which tradeoffs make sense? The answer lies in thinking of hybrid fleets as a holistic system rather than as traditional fleets with a constraint on capacity,” says John Bell, chair of the Department of Supply Chain Management at the University of Tennessee, Knoxville’s Haslam College of Business.

The system may generate a synergy that’s more than the sum of its parts, Bell and his co-authors argue in a new study, depending on factors such as crowdsourced driver autonomy, compensation and demand intensity. The study, by Vince Castillo (Ph.D., ’18), now at The Ohio State University, and his UT doctoral dissertation committee members, Bell and Ted Stank, and Diane Mollenkopf of University of Canterbury in New Zealand, sheds light on how these three factors affect your last-mile results – and how you might find your own “sweet spot” for creating competitive advantage using hybrid fleets for delivery.

Cost vs. Service

The challenge of balancing cost efficiency with service quality is as old as business itself. However, the effects of hybridizing on last-mile delivery cost and service are not fully known, making it tough to find your point of differentiation in the marketplace. For example:

  • Does increasing driver compensation produce faster delivery service?
  • Do the benefits of increasing driver compensation outweigh the added costs?
  • How can you predict a hybrid fleet’s performance during demand surges?

The researchers analyzed the issue using a simulation that combined a macro-level view of processes with the ability to examine how crowdsourced driver behavior would affect the system’s output. Based on real data from a national retail pharmacy over a one-year period, the simulation began each time a customer placed an order – and in the case of the real pharmacy, all orders were delivered the next day by an in-house fleet.

The researchers then added “same-day,” on-demand service to the simulation menu, producing a strain on capacity. To meet this demand, crowdsourced drivers were added to the vehicle fleet to perform one-off deliveries, with the autonomy to accept or reject each delivery order. The authors linked the probability of acceptance to the per-task compensation offered to delivery drivers. Further, each rejected delivery was offered to a new driver until it was accepted or a pharmacy vehicle became available to make the delivery.

The simulation tested four variables:

  • Compensation for crowdsourced drivers
  • Number of privately owned vehicles in the fleet
  • Size of the available crowdsourcing pool
  • Intensity of demand

The researchers were interested in four outcomes:

  • Cost per same-day delivery
  • Same-day delivery fulfillment time
  • Number of same-day deliveries
  • Number of expedited deliveries resulting from missed deliveries

The Big Insights

Previous research has suggested that crowdsourced delivery can lower overall costs, but the research team found this is only true in a compensation sweet spot. A midrange compensation level maximized the chances a driver would accept a job, which – by ensuring constant availability for same-day deliveries and preventing expedited orders – translated into the lowest mean unit delivery cost. Lower fees caused drivers to drop out of the pool; higher fees had a diminishing effect on acceptance while increasing delivery costs.

The team also discovered a similar insight related to fulfillment time: moving from low to medium compensation caused a significant uptick in delivery speed, but moving to high levels of compensation improved speed only minimally compared to a medium-level pay. In both cases, the observed effects were amplified whenever demand became more intense.

The most expensive fleet to own turned out to be the smallest: one privately owned vehicle plus zero crowdsourced drivers generated the highest operating cost, because surges in demand necessitated expediting orders. On the other hand, a hypothetically large fleet size of five owned vehicles and 50 crowdsourced drivers had a perfect track record fulfilling same-day orders – except when drivers were compensated at the lowest rate.

Takeaways for Managers

This research suggests that hybrid fleets can provide excellent service and responsiveness in a cost-effective way, if you find your own sweet spot for driver compensation. A hybridized fleet is a holistic system, and drivers’ price sensitivity affects the performance of the entire system. Paying your crowdsourced drivers at the bottom of the scale isn’t likely to keep costs low or provide the fast service you want, but paying them the highest fee won’t yield benefits that outweigh the added delivery cost

Your sweet spot will vary by market, so you should closely examine driver availability and price sensitivity in your area. Geography and population density are also important factors to consider when building the right hybrid delivery fleet for your market.

Finally, monitoring and anticipating your demand rate is critical in different geographic and last-mile market areas. Hybridizing your fleet allows you to use crowdsourced delivery only during peak demand periods, which may be at certain time of day or days of the week. This means you can right-size your hybrid fleet for maximum efficiency – and enjoy more flexibility and agility in delivering to your key last-mile customers.

This article is based on "Hybrid last mile delivery fleets with crowdsourcing: A systems view of managing the cost-service trade-off," published in Journal of Business Logistics.

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CONTACT:

Scott McNutt, business writer/publicist, rmcnutt4@utk.edu