Last mile delivery

A Breakdown of Transportation Costs in Last Mile Delivery

A Breakdown of Transportation Costs in Last Mile Delivery

In this new guide, we break down the transportation costs in last mile delivery.

You will learn:

  • What are transportation costs
  • How to calculate them
  • The most common delivery costs
  • What affects shipping costs in logistics
  • What can your business do to lower them
  • And a lot more

So if you want to cut the costs of your operations, you’ll enjoy the actionable tips in this guide.

Let’s start.

Transportation Costs

In this chapter we’re going to walk you through the basics of transportation costs.

Including:

What they are.

Why they affect logistics.

And how you can calculate your transportation expenses.

What Are Transportation Costs?

Transportation costs make up all of the expenses associated with the movement of raw materials, finished goods, or retail products to customers, businesses, or third-party sellers. They include direct costs such as fuel and payroll, but also indirect costs like maintaining vehicles, support structures, distribution networks, and other overhead.

Why Are Transportation Costs Significant?

Transportation costs account for the majority of all operating expenses in last-mile delivery.

That means that they can impact other key areas of business. Like the price of products or your competitiveness on the market.

So companies continuously strive to reduce this cost by optimizing the transportation process.

But there isn’t a universal expense. And it doesn’t apply to all industries and businesses in the same way.

Instead, it depends on a number of factors.

These include your industry. But also the size, structure, and complexity of your operations, as well as the location of your business.

And to know how much you spend on transportation, you’ll need to learn how to measure it:

How to Calculate Transportation Expenses?

transportation-cost-calculation

When doing a cost analysis of your transportation expenses, the first thing you need to do is measure how much money you spend on transportation.

To do this, you’ll have to use the transportation cost formula:

transportation-cost-formula

Total transportation spending: your company’s direct and indirect expenses per month or year

Gross income: the revenue you generate from delivery without taxes for the same period

The result is displayed as a percentage. And it tells you how much of your earnings you allocate to transportation during a given period.

But to be clear:

This percentage will be different for every company.

And this type of transportation cost calculation will give you a general idea of overall spending.

To make it as accurate as possible, you’ll have to take a deep dive into operational expenditure.

The more expenses you include, the more precise this percentage will be.

And because transportation touches every part of last-mile delivery, there is a lot to consider:

  • Fuel consumption
  • Employee payroll
  • Vehicle maintenance
  • Equipment and tools
  • Software subscriptions
  • Utilities, rent, and general overhead
  • And more

If you use an external vs. internal delivery fleet, most of these costs make up the service fee you pay to a third-party logistics provider.

But for a more accurate representation, you’ll still have to track additional expenses.

And that means staying on top of transportation costs in logistics.

Transportation Costs in Logistics

Transportation accounts for the majority of logistics costs.

In fact, it made up 50.3% of all logistical spending in 2020.

And in the Annual State of Logistics Report for 2019, US businesses allocated $1.04 trillion (or 10.4% of overall revenue) to transportation.

That’s because logistics touch every part of the delivery process.

This means the money you spend depends on various types of transport cost.

Because nobody wants this number to get out of hand, transportation management has become the backbone of logistics.

So it’s vital that you also measure key metrics in delivery logistics.

This will give you a more accurate picture of where you spend most of your resources.

(But more on that later.)

Right now, let’s take a look at the various areas of logistics where these costs prevail the most:

What Are Examples of Transportation Costs?

transportation-cost-in-logistics

Different transportation expenses shape your final transportation cost calculation.

So in this part of the article, we break down the cost based on the area of delivery logistics.

Here are a few examples of transportation costs and where you can expect to find them:

Supply Chain: Transportation of Goods to Storage

A well-managed supply chain is essential for last mile delivery.

Without supplies, you can’t sell the goods you want to offer.

But that also means sourcing those items and bringing them to your store.

Or, in the case of e-commerce, moving them to your storage facilities.

So a lot of supply chain transportation costs depend on geography.

The biggest thing to consider is the location of your suppliers.

If your supply chain is spread too far, drivers have to cover more distance to pick up goods.

It also means that you’ll have fewer supply runs.

In turn, you’ll have to buy and pick up more goods. Products will spend more time in inventory. And you’ll waste resources keeping them there.

On the other hand, you have to consider the supply chain of the last mile.

If you plan multiple supply depot locations too far from your transportation hub or delivery area, that’s also going to raise the cost of transportation.

The more time you spend moving goods, the more it takes to deliver them to end users.

And the more time you spend on delivery, the more money you’ll spend on transportation.

Last Mile Delivery: Getting Orders to Customers

Last-mile delivery refers to the final phase of the delivery life cycle.

Or, moving goods from stores and distribution centers to consumers.

And while this is an important part of many industries, it’s most significant in e-commerce.

In fact, Statista predicts that the number of online shoppers will rise to 300 million by 2023.

And that means transportation will be a big cost in last-mile delivery.

But what customers value in last-mile delivery isn’t helping you reduce this cost.

That’s because companies like Amazon, Walmart, and Target are moving towards fast and free fulfillment.

So people now expect to receive goods faster and cheaper than before.

And that’s a problem when the average cost per delivery is $10.1.

But unlike retail giants, small businesses don’t have the resources to absorb these costs.

Instead of competing with Amazon delivery directly, businesses have to co-exist with them.

That means reducing the distance from pick-up to drop-off.

It’s one of the reasons many small businesses are using stores as supply depots.

Or, they’re focusing on the local last mile. And reducing the distance between them, their suppliers, and their customers.

On the other hand, some companies are optimizing operations.

They’re relying on route optimization software to reduce the cost of transportation.

(Even when they outsource operations to 3PLs, like UPS, FedEx, or DHL.)

By learning how to improve last-mile delivery, they’re lowering operational expenditure.

That allows them to offer delivery options such as free or same-day delivery despite their costs.

This means they can support a high transportation cost by attracting more consumers. And generating more revenue from sales.

Field Service: Making Service Calls to Customers

If your business relies on field service, then your transport rate will depend on getting your employees to customers.

Other than that, the expenses associated with a field service business are similar to those of last mile delivery.

These costs depend a lot on fuel prices and fuel usage. But also on mileage and local tolls.

That’s why many companies are using field service management software.

This enables you to plan and optimize routes technicians use when making service calls.

Which means you can cut fuel consumption by as much as 50%.

But it also enables you to plan better schedules.

You can optimize how many field outings your employees make.

By cutting down the average time per service call, you reduce the time between outings.

And this allows you to generate more income from your field service operation.

Maintenance of Vehicles in the Delivery Fleet

If you own and operate an in-house fleet, then how you manage it is part of your operating expenditure.

Vehicles depreciate over time. Parts and tires wear down. Oil gets dirty.

All of this affects the performance of your vehicles. But it also represents maintenance costs.

But routine vehicle maintenance is a vital part of fleet management.

Despite the costs, it’s far less expensive to regularly tune vehicles than to repair them.

It also conserves your vehicles. You can raise their lifespan, and they consume less fuel.

They’re also less likely to break down. This makes vans and trucks more dependable on the road.

And when your business relies a lot on transportation, how much you spend on vehicle maintenance will determine the overall cost.

But other things also have an impact on transportation cost in logistics:

What Affects Transportation Costs?

Distance is just one thing that affects the price of transportation.

And in this part, we’re going to show you every aspect of delivery that raises those costs.

(Including real-life examples of how you can dramatically lower your costs.)

Let’s dive in.

Distance

Distance is the main reason behind a high transportation cost. So to lower the price, you have to lower the distance that your vehicles travel.

A simple way to begin measuring distance is to find out your average distance per delivery. To calculate it, you can use this simple formula:

transportation-cost-delivery-cost

Once you know this number, you can use delivery tactics to lower it.

A good way to easily do this is by optimizing your routes. Taking roads with less traffic, better access points and stop orders.

Another is to raise the stop density on each route. This means lowering the distance between various pick-up and drop-off points on the map.

All of which you can easily do with vehicle routing software.

Vehicle Capacity

What’s the load capacity in your vehicles?

How many orders can they carry per route?

This affects the cost of transportation since it determines the number of pick-up stops your drivers will have to make to complete their route.

Small vehicles will generally carry fewer orders than larger vans or trucks.

But they are also less mobile in dense urban areas.

So most companies build an agile delivery that can balance both.

They also closely monitor vehicle capacity per route.

Idle space in vehicles is a waste of money. So if your drivers go around with half-empty cargo loads, it may be time to rightsize the fleet.

And when you optimize your fleet, you can handle large order volumes. (Even when demand exceeds your capacity.)

Urgency

A higher urgency of delivery will usually hike up the cost to send a package.

This doesn’t just mean a higher price the end-user pays.

Fast fulfillment will mean a higher last mile cost for you, as well.

Still, consumers want to get their orders fast. But they also don’t mind paying for them.

In fact, 23% of consumers would pay a premium price for same-day fulfillment according to delivery statistics.

And that means you can cover at least some of the cost of urgency by transferring some of the expenses to your customers.

Delivery Accuracy

Failed or missed deliveries all affect delivery accuracy. And, as a result, the cost of transportation.

That’s because every time a customer doesn’t receive their purchase, you have to return it.

This means you lower accuracy and raise the cost of reverse logistics.

And although these things can happen, it’s vital to minimize returns.

So making sure your drivers reach their destinations should be a top priority.

You can do this by giving your drivers more accurate directions.

And, typically, many companies tend to use delivery driver apps to do it.

Handling

Damaging goods in transport also raises unnecessary costs.

If this happens, you’re responsible for delivering a replacement item.

It also means that if you handle more fragile products or perishable goods, you have to put more time, money, and effort into how you package and deliver them to customers.

So, the more sensitive your products are, the bigger the shipping cost.

But if you invest in quality packaging, vehicles, and equipment, you get better returns over time.

Simply because you reduce how often this happens.

Delivery Area

The delivery area your business covers determines the cost of transportation.

Local delivery service covers short distances and can handle large order volumes.

A nationwide delivery has to cover vast distances. It also has to have a large fleet to fulfill the same order volumes.

The best solution is to focus on the local last-mile delivery.

If you offer delivery in multiple locations, make sure to treat each one as a separate last mile.

(With its own supply depots, fleet, and routes.)

That way, you can use tactics to grow your delivery operations.

Without sacrificing the cost of transportation.

Hidden Transportation Costs: Planning, Dispatching, and Routing

The hidden costs of transportation can appear anywhere.

Some of them are direct expenses.

Many of them have to do with indirect costs.

All of them have to do with planning, dispatching, and routing.

Here, we take a look at all of them:

Employee Payroll

When calculating the delivery charge per km, many fail to include the cost of employee payroll.

Many more include only the driver payroll. But what about the other teams involved in last-mile delivery?

What about your dispatchers? Route planners? Logistics and inventory managers?

In one way or another, you pay all of their salaries. If you’re not careful, these costs can get out of hand.

It’s just as critical to keep track of the salary load of your delivery teams (worker benefits and payroll taxes).

Inefficient Schedules

Inefficient schedules mean more time on the road. That means extra fuel and toll costs.

They can also mean more bottlenecks during pick-ups. And that can seriously disrupt both your supply chain and the last mile of delivery.

At the other end of the spectrum, it can mean more idle time. You may hire more drivers than you need who’ll spend more time waiting on orders than actually fulfilling them.

The same is true for the vehicles in your car park. And the products that you keep in storage.

Inefficient Routes

Not planning routes is a serious mistake many companies make. And inefficient routes impact the cost of transportation A LOT.

On the one hand, it’s the foundation of a successful transportation strategy.

If you don’t plan routes, you rely on fixed routes that limit growth opportunities.

Or you have self-determined drivers who don’t always know what’s the best route they should take. And you lack control over the last mile.

But there’s a difference between route planning and route optimization. And planning routes isn’t enough.

That’s why you can’t manually plan routes. And you’ll have to use digital tools like vehicle route optimization software.

This helps you to automate the process and plan truly cost-efficient routes.

(But more on that later.)

Order Accuracy

Order accuracy is a delivery KPI. Technically, it tells you the success rate of your delivery.

So every time you miss a delivery, you lower the order accuracy of your business.

And not monitoring it can leave a mark on your reputation and authority.

This can lead to additional delivery costs.

How?

If a mistake occurs, you’ll want to correct it. Otherwise, you risk damaging the customer’s experience and you may lose their business.

And if your order accuracy starts dropping, you won’t lose just a few customers. In fact, you risk losing customer loyalty altogether.

Cost per Delivery

Cost per delivery is another useful KPI you should track.

Why?

Because it helps you track the delivery cost.

If this KPI is lower, it means the transportation cost is lower. And that affects both you and your customer.

As the delivery charge per mile drops, you can offer better standard shipping rates. So as the cost per delivery goes down, profits go up.

Time per Delivery

Time is money. So the longer it takes to deliver goods to your customers, the more money you lose.

If you have a high time per delivery, you also can’t handle as many orders. And again, you’re losing money.

When customers have to wait longer for their packages to arrive, you’re losing customers. (And their money.)

All of this affects both costs as well as revenue. That’s why tracking time per delivery is important.

So how do you lower it and the other costs of transportation?

Let’s find out:

How Can You Lower Transportation Costs?

how-to-reduce-transportation-costs-in-business

How do you lower transportation costs?

Besides what we’ve already mentioned, you can use software.

Various tools like delivery management software cut expenses.

These systems are end-to-end solutions. So they raise the efficiency of the whole last-mile delivery process by process.

And when efficiency goes up, costs go down A LOT.

How much?

Let’s take a look.

Automate operations to reduce payroll costs

Are you manually planning deliveries? It’s time to STOP.

Why?

To start, automating delivery operations reduces payroll costs.

Software enables one person to do the job of several people.

With a delivery management platform, a professional can plan, dispatch and manage the entire lifecycle of delivery.

But it also doesn’t mean you’ll have to rely on just one dedicated person.

Because the software resembles any other app, the learning curve is low.

This means you can assign anyone to plan routes or schedule deliveries.

The subscription fee for the software is also lower than the cost of payroll.

So how much does delivery management software cost?

It depends. But on average, the price is $182.35 per month.

And that’s a lot more affordable than the average salary.

Plan efficient routes to lower fuel consumption

When you use SaaS delivery management software, you don’t need any other tool.

That’s because it’s a modulated software suite.

It has multiple modules that enable you to manage multiple aspects of delivery.

This includes planning and optimizing delivery routes.

The software can’t reduce how much fuel vehicles consume. But it can help you plan efficient routes around many factors that affect fuel consumption.

This includes distance and time spent on the road. But also traffic, access to drop-offs, types of roads, stop lights, and more.

Technically, the more constraints you add the less fuel your drivers will use to fulfill orders.

And you can optimize routes around order priority or stop density. Which makes your last mile more profitable.

Maximize fleet capacity and vehicle utilization

You need to use each component of your supply and delivery chain to turn a profit.

So make no mistake, you aren’t in a status quo when your vehicles are sitting idle and empty. You’re losing money.

In fact, raising fleet capacity has been especially helpful following the impact of COVID-19 on last-mile delivery.

That’s why software solutions like these support fleet management in great detail.

Technically, you build a virtual fleet. You customize each vehicle according to its type, model, load capacity, speed limit, and mileage.

Once that’s done you can structure the fleet. Group vehicles into smaller units that cover specific areas of the last mile.

And it doesn’t matter whether you use an internal or external fleet. Or a hybrid model that utilizes both options.

So these software solutions are aimed at the complete capacity of your vehicles and fleet. And this can help you:

  • Plan shipping so there is no unused space in vehicles
  • Utilize your drivers for maximum time in the field and output
  • Reduce the time per delivery and raise the stop density

So the more work you put into maximizing fleet capacity, the more order requests you’ll be able to process.

Track orders in real-time to reduce failed deliveries

SaaS software adopts a cloud-first approach to delivery logistics.

This means that all of the information is stored in the cloud.

It also enables you to tap into the power of cloud computing.

Together with geocoding, this is what gives you complete visibility and control over the last mile.

That’s why many modern delivery systems allow you to track vehicles in real-time.

To achieve this, the software has two components: a dashboard and a driver app.

The dashboard is what gives dispatchers the ability to see drivers move across the digital map.

The app, on the other hand, is how the software tracks drivers as they move on the map.

And that means you can also track orders in real-time.

This is useful for three reasons:

First, it lets you share the order location with customers. You can use tracking links to raise the customer experience.

Then, it lets react to various conditions from the field. If there’s a failed delivery, you can immediately contact the driver or plan a return.

And it helps you to plan deliveries on the go. In case there’s room in the schedule, you can add orders as soon as they arrive and readjust the route to match it.

And since all the data is available to the driver via the app, he can see the changes straight away.

This prevents your order accuracy from slipping. And reduces the number of failed deliveries.

Reduce human errors when managing the last mile

Human errors are unavoidable.

Even with last-mile delivery software, they’re bound to happen.

But using software helps you to mitigate them as much as possible.

The delivery planning app lets you:

  • Receive and complete all delivery tasks automatically
  • Keep up to date with delivery details and requirements
  • Navigate, create, and adjust tasks more easily
  • Integrate with other software solutions that you use
  • Connect with familiar apps like Google Maps or Waze
  • Collect digital proof of delivery and use it for reporting
  • Build and store a delivery database for drivers and dispatchers
  • Set customer notifications and alerts for a better service
  • Streamline communication via calls, texts, and in-app chats

And there’s more.

But right now it’s over to you:

Start Reducing the Cost of Last Mile Transportation

So that’s how you can cut the cost of last mile transportation.

Now it’s your turn to implement these strategies.

And start reducing transportation costs.

How?

We can help you with that.

Here are the nine free guides that will show you exactly what we do to optimize the last mile and dominate delivery logistics.

1. Delivery Management Software for Small Businesses

2. How delivery management software cuts costs and saves you a LOT of money

3. Must-Read Books About Last-Mile Delivery and Why You Need to Read Them

4. How to boost experience by building trust with your customers through delivery

5. Biggest mistakes in delivery management and planning (and how to solve them)

6. The challenges of last-mile delivery and how to solve them.

7. A Definitive Guide to Last-Mile Delivery

8. Driver Route Planning Software: Everything you need to know

9. How to achieve last-mile e-commerce delivery success

Try it out for FREE

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