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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

January 20, 2015



Sears Case Study: Same Day Delivery

A Guest Post from Diego Klabjan, Professor at Northwestern and Partner at Opex Analytics


Dr. Watson Says:

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...those who can best utilize their resources and overcome risks will stay in power in the same day delivery business ...
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In this column, we've talked about same-day delivery and its impact on the design of your supply chain.  This guest column, written by Diego Klabjan (professor at Northwestern and my colleague at Opex Analytics), will discuss the latest developments as well as a project he and a PhD student worked on.




By Diego Klabjan
Professor at Nortwestern and Partner at Opex Analytics


Same day delivery is familiar to those who experienced the failure of Webvan and Kozmo a decade ago. Nowadays, a new breed of delivery startups such as Deliv, Zipments and Instacart has debuted at the burgeoning e-commerce market. Meanwhile, large omni-channel retailers such as Amazon and high tech companies represented by Google are launching their own same day delivery service in metropolitan areas.

For same day delivery, economy of scale is essential. For example, at the end of 2000, Webvan averaged 2,160 orders a day in the San Francisco Bay area while the break-even point was close to 2,900 orders per day[1]. However, uncertainties inside this business hinder the scale down of unit cost as orders’ locations also determine the cost. Therefore, a more flexible network and labor yield opportunities to overcome uncertainties and fulfill the fluctuating demand. As a case in point, Google is launching their service by leveraging existing grocery chains, and Instacart and Deliv are constructing their crowd-sourced networks. Traditional big-box retailers are also interested in same day delivery to insure they are not staying behind.

 

Previous Columns by Dr. Watson

Supply Chain by Design: Reinforcement Learning Explained Using the Beer Game

Supply Chain by Design: Simple Game for Teaching the Value of Optimization

Four Supply Chain Lessons from the Amazon book The Everything Store

Supply Chain by Design: What Toyota, Schneider National, PayPal, and Palantir Got Right

Supply Chain by Design: Service Level Measures in the Supply Chain, Part 2

More

Sears, one such big-box retailer, is contemplating leveraging their current network as well as partner grocery chains and local merchants. To assess economic viability, the chain partnered with Northwestern University, in particular with me and Ph.D. candidate Jie Yang, to conduct a feasibility study and weigh the underlying costs under many scenarios. In terms of transportation modes, different possible fleets are taken into account including bikes and walking, to further allow flexibility of the resources. Meanwhile, a consolidation center is placed in the business model to reduce risks and potentially increase the possibility of economies of scale.

In terms of the shipping rate, Amazon and Google charge per shipment and per item based on a customer’s loyalty status. The obtained per shipment and item costs for Sears are competitive in comparison with Amazon or Google’s estimated costs, although slightly on the higher end depending on the total volume. It hints that these companies might be running their same day delivery operations for a loss, especially since their networks are less flexible than the Sears network. When depots can be used to consolidate shipments before they go out for delivery, approximately 5% of the items ordered can be consolidated which reduces the overall cost.

Car is the most efficient mode while in presence of high but very dispersed demand, but van is also a viable option. If the fleet of available cars is limited so that it cannot serve all customers, van and bikes become economical substitutes. No matter how high is the demand for same-day delivery and how geographically dense it is, delivering goods by foot is never economical due to the limited capacity and very low speed.

Labor is usually very expensive, but in same-day delivery out-of-store shopping at other stores does not represent a significant amount of time and thus investments such as mobile devices with store layouts have a long payback period. A significant decrease in this time leads only to a small marginal cost decrease. A similar conclusion holds for time spent at depots for consolidation and other general warehouse operations.   

The same-day delivery cost is much more sensitive to delivery time obligations. Typically an order placed in the morning is expected to be delivered in the evening on the same day. Shrinking the afternoon delivery window by half increases the cost by 10%. Lower sensitivity is observed if the noon delivery window for orders placed the prior afternoon is reduced by 25%, which leads to a cost decrease of 5%.

Competition for last mile delivery is rising, which necessitates additional software tools to optimize the delivery cost, including more ‘exotic’ options such as smart boxes for pickup, or drones. They allow flexibilities for utilizing resources and those who can best utilize their resources and overcome risks will stay in power in the same day delivery business.

 

Reference

[1] Nitin, C., Martich, M., Ruwadi, B., Ulker, N. (2012) The future of retail supply chains. McKinsey & Company.



Diego Klabjan
Professor at Nortwestern and Partner at Opex Analytics


Diego is a Professor at Northwestern University in the department of Industrial Engineering and Management Sciences.  He is the director of the Master of Science in Analytics program.  He is also a partner at Opex Analytics.


His research interests are analytics; business intelligence; smart grid; transportation; supply chain management; and optimization.

 

 

Recent Feedback

I really understand and agree with the case, but in India, as well as, globally every ecommerce company is talking about same day delivery. In some cases they are even talking about 3-4 hour delivery. I really do not agree with this happening. What is your opinion on this?




 


Arvind Sharma
VP Supply Chain
Barista coffee company limited
Jan, 23 2015
 
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