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Last mile cost reduction using digital twins

Published April 2023

Table of Contents

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What is a digital twin?

The recent rise in parcel logistics costs has been a topic of concern for most retailers. In addition, rising labour costs are forcing retailers to get efficient with e-commerce fulfilment.

For an e-commerce business that has a national distribution network of three DCs and uses a parcel provider to reach their consumers, last mile costs can be as high as 70–80% of the total logistics costs (middle mile and warehousing costs are 10–30%). The flow diagram below illustrates this concept:



These estimates are based on our experience designing networks for major retailers in the US.

Optimization of last-mile costs for the e-commerce network depends largely on two things:

1. How efficiently can you place inventory in the network so that supply is balanced with demand and products travel through the fewest number of zones?

2. How efficiently can you leverage zone skipping to drive consolidation efficiencies in parcel shipping?

Inventory placement

Let’s talk about the first strategy, i.e., inventory placement. Planning inventory is part of the supply-chain planning exercise that starts once the demand forecasts are finalized. However, in a multi-DC network, this demand needs to be broken down by DC regions. It is recommended to use network design software to create these regions, which can optimise the total landed cost of the product (i.e., line haul + warehousing + last mile logistics cost) for the network.For a company with 3 distribution centre locations, this assignment could look like the one below:


Note that these assignments depend a lot on what kind of service commitments are given to the e-commerce consumer and your service provider. The network above has a 2-day footprint using the FedEx network.

A digital twin with parcel optimization capability can help you assess these assignments easily.

Once assignments are decided, the next step is to create an unconstrained supply plan based on demand allocation based on optimal assignments.

In an ideal world, an unconstrained supply plan would work, but not in a capacity-constrained scenario. Assume that one of your DCs can only handle a few SKUs due to capacity constraints, or that you want to fulfil an entire product family from a single DC for operational reasons.To ensure these kinds of constraints are factored in while planning supply, a digital twin needs to be created that takes into account unconstrained supply and various other supply constraints.

Optimal inventory placement can reduce last mile logistics cost by 10-15%.


Zone skipping

Moving on to the second strategy, zone skipping. Zone skipping is a strategy that brands can utilise to build parcel loads and inject customer orders deeper into their parcel provider network. As seen below, customer orders flow through a parcel hub network before reaching their final destination. Usually, a parcel provider company consolidates orders across its customers (brands) and then sends them to the most optimal last-mile distribution hub.

But if a company has enough order density for a region, then it can consolidate orders itself, “skip” parcel zones, and inject the orders into the optimal regional hub.

A digital twin can help in assessing how much money can be saved by implementing a zone skipping strategy in the distribution network.

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