Skyrocketing Delivery Costs Force Retailers to Accelerate Change Through AI

As retailers gather this month for the National Retail Federation’s annual confab, no one’s expecting a year of smooth sailing as the COVID-19 pandemic continues to disrupt both their sales and global supply chain.

Now they’re turning to data and AI as a lifeboat in turbulent seas. Walmart, Tesco, Target and many others see AI-based innovation as the best way to reimagine the supply chain for the $23.4 trillion global industry. Researcher IDC calls 2021 a period of “accelerated disruption” – when digital transformation plans that once took two years are more often taking place in two months.

Holiday shopping numbers hint at why many are increasingly focused on AI as a solution. US online shopping grew 47.2 percent year over year between Nov. 1 and Dec. 1, according to Mastercard SpendingPulse data, yet overall retail sales grew a measly 2.4 percent.

Hot commodities like apparel, electronics, appliances and furniture arrived in large part via online shipping – and there’s the rub. COVID-19 shutdowns dramatically reduced foot traffic inside stores, exacerbating the problem of skyrocketing delivery costs brought on by increased consumer expectations for fast, mostly-free shipping.

The Last Mile

Delivery in the final phase of the supply and distribution chain, where the purchase reaches the end customer, is called last-mile delivery. That delivery segment cost retailers $30.2 billion globally in 2018, according to TheMarketReports and is expected to skyrocket to $55.2 billion by 2025. Considered the most inefficient part of the supply chain, the average last-mile costs incurred per order to organizations globally is about $10.10 (US), according to Statista.

“The dilemma facing retailers is to provide last-mile delivery services that customers value, without damaging their own profitability,” says Tim Bridges, global sector leader of Consumer Products, Retail and Distribution at Capgemini, which finds that because consumers remain price-sensitive to delivery charges, retailers only charge between 50 percent and 80 percent of their cost.

The need to pick up or deliver packages for the least amount of cost, while never exceeding a particular vehicle’s capacity is a fundamental problem of delivery routing. NVIDIA is working with retailers and restaurant chains to use software, sensor technology, computer vision and machine learning to optimize routing and delivery.

Rearchitecting the Supply Chain

The spectre of last-mile delivery is one of the biggest reasons retailers are accelerating their efforts to refine their supply chains. NVIDIA’s application frameworks, including Metropolis for video analytics, RAPIDS for data science, Jarvis for conversational AI and Merlin for ecommerce recommendation systems, are used by over 150 of the most innovative AI startups. Customers are also building their own AI solutions to improve the accuracy of their algorithms by accelerating training and optimizing compute performance.

Now, retailers large and small are seeking scale by partnering with delivery startups such as Jinn, Postmates and Instacart. Venture capitalists have recently invested around $28 billion globally in logistics startups, nearly all of it since 2015, according to McKinsey and Company. About half that money went to startups focused on helping solve the last-mile problem.

These venture-backed companies employ gig workers to collect or fulfill orders placed online and deliver them to shoppers in as little as an hour. Customers typically get to track the progress of their order online and are able to choose specific delivery windows.

Walmart in late November announced plans to acquire the platform, intellectual property and staff of last-mile delivery startup JoyRun, whose mobile app allows users to share that they are making a trip to a retail store or restaurant and gives neighbors the option to purchase items from the same store through the app for the original poster to deliver. Similarly, Target purchased Deliv, another delivery startup.

AI Helps Reinvent Retail

Many retailers will take a hybrid approach, buying a solution from a software solution provider to quickly roll out new operations, or working with a systems integrator to assist where internal expertise or resources may be lacking. Others are creating custom AI solutions internally. Competitive companies rely on focus and understanding their core competencies, solving tasks such as shrinkage and stock-out, and then taking those savings to tackle larger AI projects.

A good path forward for retailers is to first evaluate the overall AI solutions that would help them become more agile and efficient in meeting ever changing customer behavior, and then select one or two use cases that would deliver the greatest business value in the short term. We see most retailers starting with asset protection and AI-based forecasting.

McKinsey projects that businesses will gain between $1.3 trillion and $2 trillion each year in economic value by using AI in their supply chains.

That’s a good enough reason everyone in the supply chain is aiming to improve their operations for smooth sailing amid what’s expected to be ongoing stormy seas.