Get it delivered in 3 days, by tomorrow!, today!!
We have often given into this instant gratification, though for a premium, but what is the real cost of expedited deliveries?
This blog is in continuation to an earlier blog – Online Shopping: Environment Friendly? If you haven’t already checked that out, I would recommend you pause here, read the earlier blog and come back to enjoy this one.
In the early days of online shopping, I remember getting packages delivered to my home in about a week or two from the day of purchase. In logistics jargon, this is called lead-time. During those days, my online purchases would pertain to things I knew I couldn’t get anywhere near me, such as PlayStation game disc maybe. But sometime during the last 7 years, my online cart has gradually transformed from having things I knew I cannot get anywhere near me, to things I know are easily available around, but I would rather save the time and effort of the travel. This bolsters the idea that travel is a derived demand, i.e. we travel not for the sake of it but for some other purpose, and hence if we can get that bag of groceries delivered to our door step, then we might as well. Coming back to lead-time, this change in shopping cart, from maybe not so essential to more essential and daily-use items has induced a need to get things as early as possible, thus reducing the lead-time available. This surely has affected the way supply-chains organize and consolidate themselves, but what are the impacts on the end-user (and the community in general) beyond the premium you paid for the expedited delivery?
Before we look into the numbers, lets first understand what happens when temporal constraints become stricter. Generally speaking, the more time available at the e-retailer’s disposal, the better can the delivery tours be planned, i.e. the e-retailer can consolidate as much demand as possible and thus better utilize the capacity of the delivery vehicle. And hence it is argued that since e-retailers consolidate the demand, and optimize the routes, e-commerce can reduce shopping travel related negative externalities. However, any such benefits were wiped out by rush deliveries as it compels the e-retailers to ship packages at lower consolidation levels (Jaller and Pahwa, 2020). Tozzi et al. (2013) argued that temporal constraints compel the e-retailers to plan higher amounts of shorter tours which essentially increases the distances driven, thereby increasing costs and emissions. Wygonik and Goodchild (2016), in fact, corroborated this strong correlation between time-window length and emissions. Pahwa and Jaller (in review) quantified these impacts from expedited deliveries. Some generic results from the analysis carried out in the aforementioned paper are presented below.
The results below corroborate the hypothesis stated above. For simplicity, y-axes have respective variable that has been graphed, while the x-axis goes from same-day delivery to delivery within 1-hr time-windows. The figures below not only demonstrate the reduction in consolidation level with stricter temporal constraints but also highlight deteriorating benefits from e-commerce. In particular, the number of deliveries made in a tour goes down from 310 to 13 – a reduction of 96%; the Vehicle Miles Traveled (VMT) per package, often used to understand impacts on congestion, goes up from 0.14 mi to 1.35 mi, almost 10 times. Similar impacts can be traced for other externalities and emissions. In monetary terms, the cost of distribution for the e-retailer goes up from $1.74 to $7.26, which could either be transferred onto the customer as a premium for faster delivery, or can be subsidized to gain larger market shares. However, beyond the premium, the increased emissions and congestion results in an externality cost to the society, which goes up from $0.09 per package to $0.73 per package, a hike of about 8 times.
Nerd Note: The results presented here assume that as delivery time-windows get smaller, the supply chain can be optimally re-organized. Hence, one must think of these results as long-term changes, in the short-term the impacts under stricter temporal constraints are even stronger.
To conclude, it can be argued that last-mile deliveries are logistically efficient and can produce savings in cost and externalities in comparison to shopping in-store. However, the recent trends in last-mile delivery, such as expedited and time-window based deliveries, especially observed in the e-grocery and food delivery segment of e-commerce, seem to be environmentally unsustainable. Yet, more and more firms today offer such lucrative offers in order to capture larger market shares, and generate larger revenue and profit. Although not discussed here, free returns is yet another way in which e-retailers pursue larger market share. The tendency to return a product is not founded in the functional error of the product but can be ascribed to lack of information about the fit and suitability of a product. The apparel segment especially observes high rate of return, which can go as high as 45% (Cullinane et al., 2017), i.e. almost every other product is returned. And although reverse logistics incur additional operational cost (also emissions) to the e-retailer, not providing free return puts the retailer at the risk of losing the customer. This compels the e-retailer to provide free return, face the additional operational cost, produce more emissions just to keep the consumer happy. Hence, in general, one can conclude that the environmental efficiency of deliveries reduces significantly as companies make such lucrative offers to its consumers. The above results and discussion therefore highlights the importance of stakeholders, in particular, for consumers in consolidating their demand, for e-retailers in consolidating the deliveries, and for planners and regulators in managing the urban freight system to foster sustainability.
Notes for nerds:
On expedited deliveries – Jaller and Pahwa (2020), Tozzi et al. (2013), Wygonik and Goodchild (2016)
On free returns – Cullinane et al. (2017)