How is same-day delivery becoming a viable strategy for U.S. retailers?

This is an excerpt of the original article. It was written for the May-June 2022 edition of Supply Chain Management Review. The full article is available to current subscribers.

May-June 2022

I recently returned from three days in Atlanta at the Modex trade show. Although advertised as a supply chain event, it’s really a materials handling automation show with a handful of logistics providers thrown in for good measure. Heading out the door to the airport, I had no idea what to expect. The two-year absence from the trade show and conference scene had me, and many of the individuals I spoke to before the show opened, wondering what’s next—not just for the show but for operations in general. If the turnout and the enthusiasm is any indication, I think supply chain is in pretty good shape these days, despite the disruptions we’ve…

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Until recently, when a consumer was purchasing online from a retailer and evaluating delivery options at checkout, the faster the service the more the customer had to pay. However, this is no longer always the case with some leading retailers who have begun to offer a same-day delivery service that costs less than two-day delivery and is half the price of next-day shipping for U.S. consumers.

What is changing the paradigm when it comes to same-day delivery? While some of what we are seeing today is a result of strategies retailers began investing in pre-pandemic, the majority of the shift is a result of the growth in online shopping during the pandemic. Retailers were forced to rethink many long-standing practices, for example with online order fulfillment from stores, which has had a cascading effect on services such as delivery of goods purchased online.

The shift to decentralized fulfillment

According to a recent Gartner analysis of the fulfillment offerings of 50 fashion, apparel and footwear retailers in the U.S., only 8% of retailers offer a same-day delivery service. This is because most retailers fulfill their online deliveries through a centralized model where orders are shipped from either a single fulfillment center or a select few fulfillment centers.

In the U.S., parcels from retailers often need to travel many hundreds or thousands of miles to reach the end consumer. Further, traditional carrier networks, such as those operated by FedEx and UPS, are designed to service such large geographies, but not to provide same-day delivery. Expedited delivery services across these large distances are more costly than their slower, non-expedited services.

Target, the trailblazing mass merchant, was one of the first retailers to recognize the opportunity that a more decentralized fulfillment-from-store model could provide in terms of last-mile cost efficiency. In 2017, they announced a strategic shift towards fulfillment from store, and within two years had moved from 30% to more than 75% of online orders fulfilled from their store network.

The benefits of the model were highlighted by Target CEO Brian Cornell who discussed in a 2019 earnings call with investors how: “As we [Target] move digital fulfillment from upstream DCs to stores, we see a significant reduction in expense and we talked about a 40% reduction. When we go from an upstream DC to some of our same-day fulfillment offerings, like Order Pickup and Drive Up, we see a 90% reduction in costs.”

The impact of the pandemic

When Cornell made this statement, many retailers were skeptical of the scale of cost reduction achieved by Target through its fulfillment from store model. Specifically, many retailers questioned the cost benefits of picking and packing items in a store environment versus a fulfillment center while not seeing clear benefit in shifting away from their national carrier partners.

However, as with so many other things, the pandemic has changed the conversation.

To ensure inventory did not sit idle during pandemic-related store closures, many retailers invested to develop, accelerate or advance their capability to fulfill online orders from stores. Most used this capability to support buy online pickup in store (BOPIS, also known as click and collect) or curbside pickup with a smaller proportion enabling ship from store capabilities.

Where online delivery orders are local to a fulfilling store location — e.g. within 5, 10 or perhaps 20 miles — same-day parcel delivery may be possible through small, specialized delivery partners specific to a region or larger, crowdsourced delivery providers operating across multiple regions. And these same-day delivery partners typically provide services that are cheaper than the overnight or two-day delivery offerings from the national carriers. This means, at least in terms of transportation, same-day delivery is cheaper than the next- or two-day delivery services enabled through national carriers and shipped out of centralized fulfillment centers.

Evaluating same-day delivery strategies

If you already have a fulfillment from store operation in place and offer BOPIS, perhaps now is the time to consider exploring a same-day delivery offering. While you won’t have your full range of products available for same-day delivery, it may open an avenue to better service your shoppers with the products you do have in market in a more cost-effective way and without diminishing profitability.

One way to begin is by adopting crowdsourced last-mile delivery providers as a new component of your logistics strategy. These providers typically have four common process flows, or execution steps, that make them work — from both a service and cost perspective:

• Orders processed in the platform: Online orders are processed through a virtual crowdsourcing platform and the data is aggregated and deployed at point of shipment — your distribution center, store, 3PL — wherever the pickup origin will take place.
• Asset and route optimization: Orders are consolidated where possible and dynamically assigned an optimized route and the packages are dispatched to the optimized asset (i.e., mode of transport) — a parcel fleet, gig driver, cargo bike, delivery van — whatever combination of route and mode meets the delivery speed requirement at the lowest cost.
• SMS/Email track-and-trace notifications: Orders are scanned when loaded or picked up, initiating real-time, track-and-trace mobile alerts to the shipper, delivery driver and the customer.
• Completed delivery and POD: The package arrives at the final delivery destination and the proof of delivery (POD) is electronically confirmed in real time.

Finally, to assess the success of any new same-day service (or other delivery service for that matter) the business should have clearly defined metrics to evaluate the success of the initiative. Common measures include: utilization rate of the same-day delivery service, on-time performance, net promoter score (NPS) or similar voice of customer (VoC) metric and cost-to-serve by fulfillment type.

Thomas O’Connor is a Senior Director, Analyst for Gartner’s Supply Chain Enablers & Consumer-Retail team. Through in-depth, cross-industry research and insight into trends, Mr. O’Connor provides advice to CSCO’s and supply chain leaders on supply chain transformation, the integration of digital and physical supply chains, demand-driven supply chain maturity, performance management and benchmarking initiative.

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