Driver Networks and The Future of Last-Mile Delivery Operations

My smartphone now allows me to order and receive almost anything within an hour or two — from a bottle of wine a dinner guest mentioned during appetizers to more coat hangers for the shorts I received as a gift a few hours ago. And I hardly pay for the convenience! It’s like the good ‘ol Dot-com Bubble days all over again thanks to companies like Saucey, WunWun, Google Shopping Express, and Door Dash. I’m still a bit surprised when the driver knocks at my door and it turns out he is only doing deliveries for the app / technology company, and hands me his phone to use a special driver-only version of the app to tip, sign, or rate my experience. Having both dedicated drivers and proprietary transportation and logistics technology are luxuries that only the biggest volume service providers can afford — think UPS, FedEx and Amazon. Why are these tech companies (really their venture investors) spending so much money on what is non-unique infrastructure? It’s particularly puzzling when you consider that these companies provide similar service levels for similar products, which require nearly identical technology to manage.

Ensuring Availability

The primary concern driving these companies’ use of dedicated drivers is availability. When a customer places an order, and the countdown to delivery begins — whether it’s an hour later, by the end of the day, or during a scheduled window — a driver needs to be available. After talking to many of these companies, they all struggle to right-size their driver workforce, and end up typing up a lot of recurring expense in drivers. Unlike a company whose specialty is logistics, they aren’t able to sell their spare capacity. I understand, however, why they think they need to have dedicated drivers. As they try to build a recognizable brand in the social media age, a single disappointed customer has an overweight impact on customer experience.

These tech companies would be wise to examine the wholesale industrial supply and pharmaceutical industries. These industries offer essentially the same delivery service levels (i.e., “ASAP,” 90 minute, scheduled) in highly-competitive markets with relatively low barriers to entry. While some companies in these industries used in-house dedicated drivers early on, they quickly outsourced to local delivery and courier companies that today often commingle deliveries from both industries and sometimes even competitors. A shared capacity model offers huge savings in recurring cost, ease of adjusting to volume changes, and a way to rapidly and cheaply expand into new markets. Not coincidentally, the app economy is starting to present a great alternative to dedicated drivers with networks of app-enabled, vetted independent contract drivers. Deliv has been at it for a few years, offering its service in a few markets; Grand Junction has a network of over 10,000 drivers across major markets in the US; and Postmates, which recently closed another funding round, announced that it is releasing capabilities that allow it to be a shared delivery service for others to use rather than a destination site where consumers order a product or food and get delivery. No dominant driver network has emerged for the tech companies to plug into, although a lot of money has been poured into these networks by investors over the past year, and I suspect there will be several winners. These winners will each focus on a different service level and segment along with the relevant information for the tech companies to use (e.g., 30 minute deliveries for food and beverage with an API to provide back driver GPS info, stats on time at restaurant picking up, etc.).

Misunderstanding of Cost

A senior executive at a tech company, whose offering includes large-item scheduled delivery done by in-house drivers, recently told me it cost them about $20 per delivery. Williams Sonoma, Restoration Hardware, Sears, and Best Buy aren’t close to this number even with their high volumes and densities (i.e., many adjacent pickup and/or delivery locations). When I drilled into how the person arrived at that number, he simply divided the number of deliveries into the total wages they were paying, which is far too narrow a way to look at cost; I’m betting it’s more like $55 per delivery at their volume and density! It’s not that surprising, though, since the vast majority of distributors and retailers aren’t thinking broad enough when it comes to cost either, and they typically cite the average rate they pay across their couriers.

In order to decide if maintaining a dedicated driver force makes sense, a company needs to take the time to gather the all-in cost. I’m talking about absolutely everything that is needed to make a delivery: having a driver available, including all the time they sit idle; developing, maintaining, and enhancing the driver version of the app; allocating costs driven by incident rate (e.g., damages); managers to oversee the drivers, hire new ones, and keep documentation up to date (e.g., driver’s licenses); cost of carrying liability insurance…you get the point. There is absolutely no way that it makes financial sense at these tech companies’ volumes and densities to have a dedicated driver force, and when they go to a new market, it’s unlikely they can leverage anything other than the technology, insurance, and payment process. While they can certainly reduce their cost 20 percent by using local delivery companies, the driver networks are where the real savings is — I’ve seen upwards of 40 percent by going straight to drivers. While it may be hard for companies bent on disruption to do, they should look at 100+ year-old Macy’s, which announced last year that it was going to pilot same-day delivery in a few markets using Deliv’s driver network instead of having its own dedicated drivers.

Control Over the Customer Experience

When a company’s delivery volume and density aren’t high enough to make the economics of having dedicated drivers work, this approach does make sense when the customer experience is very unique or the product /service requires specialize product knowledge from the driver, which typically means the customer is of high-value. Think medical device distributors like Apria Healthcare, whose drivers need to do tasks such as setting up and breaking down home infusion devices or replenishing oxygen tanks, or business automation manufacturers like Fuji-Xerox, who need to setup copy machines or scanners. Although most tech companies have special requirements for how the customer should be greeted, where to pick up food at restaurants, or how to put a product that was picked up from a 3rd party retailer in special packaging, these parts of the customer experience are not complicated enough to warrant the high cost of having dedicated drivers.

The home products industry is a good example of how a customer experience can be tightly controlled without having to use dedicated drivers. The manufacturers of cabinets carried by Lowe’s and Home Depot are actually responsible for delivery, and they use courier companies to make deliveries despite it being a very complicated process — e.g., the courier needs to talk to the customer to schedule an appointment window, the window is tight and performance is very important since it reflects on the manufacturer and the retailer, and the average kitchen involves upwards of 10 easily damaged boxes. Several of these companies train their couriers’ drivers to offer the experience they want using on-line learning management / training systems, and then monitor and manage it closely through a combination of real-time integrations to dispatch software used by the couriers and their drivers’ phones, follow-up phone and email surveys to measure courier and driver performance, and automated alerts and dashboards to highlight quality and performance issues. Specialized local delivery software providers have started to combine these customer experience monitoring and management capabilities into a single platform that any shipper can use.

With the combination of an app-enabled, vetted independent contract driver network and specialized local delivery software platform, I see a time in the not so distant future where tech companies could have a virtual private network of drivers. A tech company would market to the drivers, encouraging them to take online training specific to their customer experience, and assuming a driver has achieved a certain score, he would be eligible to “see” their deliveries on his app. The company could then monitor and manage their drivers’ performance and quality through surveys and metrics, which are passed back from the driver network to their local delivery software platform, with the platform automatically making drivers ineligible if they, for example, miss a pickup. This future is also better for independent contract drivers, who can make more money by commingling deliveries from multiple tech companies until one of those companies is large enough to keep them busy all day.

Unfortunately, I don’t see these tech companies abandoning the dedicated driver and proprietary transportation and logistics technology approach until they move from proving there is a market for their business and what works and doesn’t, and create the business plan to expand to 5, 15, 25 markets (most are only in 1-3 markets today). Another possibility is what drove more and more tech companies over the past ten years to use shared IT infrastructure / Cloud providers such as Digital Realty and Rackspace instead of running their own data centers: their investors started to coach them into focusing on what was the core of their business, not the “backend,” and minimizing fixed costs.

RobHoward_GrandJunctionRob Howard is the founder and CEO of Grand Junction, a software-as-a-service (SaaS) and mobile platform for managing the unique requirements of local delivery that has a built-in network of >400 integrated courier companies and 10,000 drivers. Prior to Grand Junction, he cofounded Ensenda, a non-asset based third-party logistics provider focused on the last mile, and led its sale to Transforce. Rob has a fifteen-year track record of driving innovation and leading both start-ups and nonprofits to success.