How route optimization can increase your margins

As much of the world shelters in place and consumers embrace the convenience of at-home deliveries, delivery services are in high demand. But does this uptick in final-mile deliveries mean higher profits for businesses who meet this demand? Not necessarily. Meeting consumers’ expectations for fast and free delivery is putting the squeeze on carrier and retailer profits.
How can today’s carriers protect their margins without losing market share? Route optimization apps offer a fast path to cost savings and increased revenue.
Emin Younan

Emin Younan

August 25, 2020

Complex, labor-intensive, and resistant to economies of scale, last-mile delivery costs represent an outsized proportion of total supply chain costs. In an age where consumers are increasingly shopping online and expecting local businesses to deliver packages to their doorstep, your last-mile delivery costs can have a significant impact on your bottom line.

Do you know what percentage of your revenue is being consumed by last-mile delivery costs? If you aren’t proactively managing your logistics expenses, it could be more than you think.

Analysts estimate that last-mile delivery’s share of total supply chain and logistics costs range from 28% to more than 50%.1, 2 Not all of these costs are passed along to your customers. Today’s consumers expect businesses to offer fast and free (or low-cost) to-their-door delivery.

According to a survey by Capgemini, the results are that businesses are spending an average of $10.10 per customer order on last-mile delivery, of which only $8.08 is recovered from the consumer. Capgemini estimates that by 2021 the absorption of to-their-door and click-and-collect delivery costs by businesses will reduce their net profits by 26%.3

Even large organizations are feeling the effects of this shift in consumer shopping habits.

  • In Q1 of 2020, Target reported a 141% increase in digital sales revenue. At the same time, its operating income margin rate dropped from 6.4% to 2.4%. The retailer blamed the four-point drop on a shift in consumer spending in favor of lower-margin goods combined with higher supply chain costs associated with the increased volume in online sales. 4

  • UPS spent Q2 of 2020 recovering from the abrupt decline in operating margins that occurred in Q1 after the demand for smaller, more frequent residential deliveries outstripped deliveries to businesses and disrupted its cash flow. It was only able to recover by quickly changing its delivery strategies and pricing.5

As a result of the COVID-19 pandemic, more consumers than ever are shopping online and using home delivery services. A July 2020 survey by McKinsey & Company found that these new shopping habits are likely to endure after the current health crisis ends.6

What’s the bottom line for businesses? Protecting their profit margins means finding ways to meet rising consumer demands for convenience while keeping delivery costs in check.

One way to do that is by leveraging the power of route optimization technology.

Route optimization software takes over the time-consuming work of manually preparing delivery routes while improving the output of your route planning efforts. By letting algorithms identify the best combination of segments and stops for each driver, businesses can save time and money. For years, large carriers have used similar applications to help them make better routing decisions. Now, even small delivery services have access to easy to use, cost-saving optimization powered by cloud computing and mobile communication.

Here’s how it works.

Route optimization shortens drive distances and reduces drive times

Every mile your trucks travel and every minute your drivers spend making deliveries increases your costs. Route planning algorithms can process multiple variables such as delivery windows and stem distance to identify efficiencies that you might miss when preparing routes manually. Automated route planning also shortens the distances your trucks cover by avoiding backtracking and misrouting.

Your route optimization app saves time and fuel by enabling your dispatchers to respond to changing conditions in real-time, add pick-ups and drop-offs, or transfer loads between drivers. With the help of route optimization technology, you can reduce the distances your trucks travel and the time it takes your drivers to complete their routes by as much as 50%.

How much money can shortening your delivery routes with route optimization save?

You can begin to calculate your potential savings by looking at your cost per delivery and cost per mile metrics.

Need a ballpark figure? On average, fuel and wages combined represent 43% of total delivery costs for motor carriers, according to a report prepared by the American Transportation Research Institute (ATRI). The ATRI survey found that for less-than-load carriers, total delivery costs averaged $1.90 per mile in 2018 which would make the fuel and wages portion $0.82 per mile.7 In July of 2020, Overdrive reported that dry van spot rates were $2.23 per mile.8

Route optimization increases productivity

Reducing the number of miles your delivery drivers travel is a pretty straightforward way to save money, but it’s not the only savings route optimization delivers. Route optimization also enables your drivers to make more deliveries per shift. Because your drivers travel fewer miles to make the same number of deliveries, their productivity increases. You can then use this extra capacity to serve more customers each day or reduce your dependence on overtime to meet delivery deadlines.

How much would a 10% to 30% increase in capacity benefit you? Take a look at your average number of deliveries per driver per route to find out.

Route optimization improves on-time delivery performance

Route optimization is also critical for maintaining and improving drivers’ on-time delivery rates. You can’t anticipate every delivery problem in advance. Nonetheless, a single delay along a drivers’ route can have a ripple effect, causing your driver to miss subsequent delivery windows. Arriving ahead of schedule can be a problem, too. In a survey conducted by Mapillary, 96% of delivery drivers said they lost time each day while waiting to hit a delivery window.9

How much of your couriers’ time is spent in detention each day? A cloud-based route optimization tool like Routetitan’s empowers your dispatchers to respond to potential timing problems before they cost you money.

What’s at stake for your business and on-time deliveries?

Your business’s on-time delivery performance is more than just a metric. The costs of not delivering when expected can add up quickly. If your drivers’ first attempt at delivery fails, you’ll have to do a send-again--doubling the fuel and labor costs of that delivery. Late or missed deliveries by carriers providing delivery services for third-parties may trigger fines.

Failing to deliver on time can also cost you future revenue.

If a business is late with a delivery, 45% of consumers say they probably won’t order from it again.10 In contrast, customers who are happy with their delivery experience tend to shop more often and spend more. Businesses that consistently deliver on time are gaining their new customers from those who don’t.

Big picture bonus: Route optimization reduces your business’s carbon footprint

Optimized routing improves your vehicle’s fuel efficiency and lowers your impact on the environment. Automated planning, paired with real-time response capabilities, enables you to reduce the number of miles your trucks travel, avoid traffic jams, and limit engine idling. Route optimization plays a key role in international carrier DHL’s ongoing sustainability initiative, helping them reduce CO2 emissions and save 20% on costs.11

Reducing your carbon footprint is good for the environment and your business. The National Retail Federation reports that consumers in 2020 are increasingly focused on sustainability. In response to its 2020 global survey, 57% of consumers said they would switch their purchase habits to help reduce negative impacts on the environment and 72% indicated they would pay more for environmentally friendly products.12

Increase your margins and exceed customer expectations with automated route planning and optimization

To maintain your business’s profitability while adjusting to shifts in consumer expectations for want it now, get it now delivery of everything from fresh groceries to home furnishings, you need to use every tool at your disposal to keep last-mile delivery costs low. Routetitan is the right tool for today’s carriers.

Try Routetitan’s route optimization app free and discover how brands like DHL save time and money on every delivery.

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