Planning and executing the end-to-end movement of temperature-controlled goods to customers' receiving docks and doorsteps is one of the most challenging feats for cold chain practitioners. While across most of the developed world, the inter- and intra-continental upstream cold chain is well populated with established service providers, life is not so simple downstream in the cold chain. That region represents the culmination of all the carefully planned and accurately executed processes, technologies and resources that preceded it. It's the final mile of temperature-controlled delivery, and it has the attention of everyone, including the C-suite. Chief marketing officers want to dangle "free" or heavily subsidized freight to their channels and customers to increase market share and sales, COOs want to explore every known (and some unknown) operational alternatives to meet customer demands, and CFOs want to continue scrutinizing the strategies and costs of new channels and of buying market share.
The solutions that the grocery industry explores and refines for temperature-controlled delivery may, because of its cost and complexity, be the template that other cold chain industries use to shape and implement their own last-mile delivery solutions.
Learn from Leaders and Innovators
In a 2000 distribution industry presentation, Fred Smith, CEO of Federal Express, marveled at the $1B+ market capitalization value of Webvan, which at the time was a young dotcom start-up that was just beginning to burn through nearly a half billion dollars of investment capital as it neared a complete implosion. The center piece of Smith's Webvan comments was that Federal Express had invested years of experience, technology and process innovation to wring out the last cent of costs in their last-mile delivery fleets in order to protect thin operating margins.
So, how did Webvan, a richly funded and asset-heavy start-up, intend to execute on its offer of "free" same-day delivery of temperature-controlled groceries, in an industry that then and now has a margin of just over 1% net? Thirteen years later, there are at least three different answers to that cold chain delivery question.
High-Asset Model
In the case of AmazonFresh, which according to Reuters is staffed by ex-Webvanners Doug Herrington, Peter Ham, Mick Mountz and Mark Mastandrea, the temperature-controlled delivery strategy is closed-loop and asset-heavy. This strategy hinges on maintaining full control over orders from intake to delivery by using company and contract assets to serve high density consumer markets that can be supplied same day out of nearby high-efficiency distribution centers to obtain last-mile- delivery operating economies of scale.
While similar to the failed Webvan model, AmazonFresh plans to leverage its same-day, grocery-centric, temperature-controlled delivery capability that is anchored by a $14B, 94-DC distribution network to deliver higher margin consumer goods, thereby further improving the financial performance of expensive last-mile delivery assets. As AmazonFresh and other retailers build out their U.S. DC networks in proximity to population demographics, the idea of delivering all things on the same day they are ordered becomes more of a reality for much of the U.S. population.
Proof of the efficacy of the asset-heavy, closed-loop approach to last-mile temperature-controlled delivery lies with FreshDirect, an online grocery company founded in 2002 that had profitable 2012 revenues of over $400M in serving New York City and more recently, Philadelphia. Other successes employing the asset heavy model are Peapod ($650M in online sales) and Safeway, the $44B national grocery chain.
Low-Asset Model
The opposite version of the delivery strategy being used and refined by AmazonFresh, FreshDirect and others is the crowdsourcing strategy being employed by Instacart, a one-year-old home grocery delivery company founded by Apoorva Mehta, a former supply chain engineer at Amazon who knows the challenges inherent in the mechanics of procuring, storing and delivering perishables.
In contrast to an asset-heavy temperature-controlled delivery model, Instacart applies technology (store and inventory location and personal shopper workflow management software in the cloud) to the crowdsourcing business model to enable personal shoppers to fill Instacart customers' orders from traditional brick and mortar retailers' inventory and then execute the delivery of those orders with minimal asset investments.
While exposed to the flaws of crowdsourcing businesses (e.g., quality customer experience, reliability of personal shoppers, freshness and temperature of food, accuracy of information and data exchange) and the reduced control inherent in open-loop delivery services that rely on employees and resources outside the direct management of the company, Instacart may still be the prototype for companies looking for asset-light strategies that meet customer's demands for last-mile temperature controlled delivery to their doorsteps.
Store Fulfillment Model
The third model for last-mile temperature-controlled delivery is store fulfillment. Although a misnomer of sorts, store fulfillment has proven to be a popular alternative to doorstep delivery of temperature-controlled and ambient products. Consumers are not tied to a home delivery window that requires someone be available to receive and properly store temperature-controlled orders.
As with asset-heavy, closed-loop temperature-controlled delivery models, the success of store fulfillment is predicated on companies focusing on the 100 most densely populated U.S. markets to provide their customers with timely access to their temperature-controlled orders. Walmart, Safeway, CVS and other national and regional retailers who have saturated their markets with traditional brick and mortar stores are rapidly responding to customer demands for click-and-collect order fulfillment of temperature-controlled and ambient orders. In the case of Walmart, its store network (which in fact is a distributed online inventory network) is so pervasive that 67% of all Americans live within five miles of a Walmart location. Regardless of the store fulfillment option that a consumer may select with their favored bricks and mortar retailer (store pickup, locker pickup, door delivery), leveraging their store network asset is a strategic differentiator for retailers in the race for the efficient and convenient matching up of buyers and their orders.
Three Steps Forward
As in all businesses, there is no such thing as free freight in temperature-controlled supply chains. The market share acquisition strategies that are today built on free or heavily subsidized last-mile delivery will naturally mature over time and be forced to address the significant costs of last-mile delivery, especially in the case of temperature-controlled products. With this law of economics in mind and by continuously observing the three types of delivery solutions now unfolding, companies who are looking to meet current and future customer demands for temperature-controlled delivery of products should consider the following three steps.
1. Start with Strategy. Make sure that your company's overarching business strategy drives your cold chain delivery strategy and not the other way around. Strategic considerations include profit margin goals and the implications of subsidizing expensive last-mile temperature-controlled delivery to gain market share or brand recognition; supply chain integrity that may point to closed-loop or open-loop solutions; and customer service objectives that will dictate which (or all) of the three temperature-controlled delivery options will achieve the best balance between customer satisfaction and operating cost.
2. Leverage Knowledge. Few companies have the financial heft or risk tolerance to experiment with new and emerging temperature-controlled last-mile delivery strategies. Instead, leverage the rapidly growing knowledge base of potential solutions leaders and innovators. Web research, talent acquisition from leaders/innovators, trade groups and academia are sources of actionable knowledge when developing temperature-controlled last-mile strategies and designing tactical solutions.
Also be aware of your company's existing internal or partner best practices that may be applicable to new strategies and tactics for temperature-controlled last-mile. How are customer requirements and preferences defined, what internal or external partner operational expertise exists for same-day order processing and delivery, are there incremental changes such as adding temperature-controlled lockers to existing stores that can be used to test and prove last mile solutions?
The excitement of riding the new wave of same-day, customer door delivery of temperature-controlled orders is quickly tempered by distributors' and retailers' angst over figuring out how to accomplish this feat without losing market share or risking financial instability. Employing a logical decision-support process to define strategy and tactics is the best way to get onto this new wave.
Don Anderson is vice president of transportation services for Tompkins International (www.tompkinsinc.com).
