Strategic last-mile delivery

Going the distance

It’s no secret that with each passing year consumers continue to move more to the internet to buy their goods and less to traditional bricks-and-mortar stores. Consumers have come to expect fast, reliable and affordable delivery services as more retailers have made it their mission to make this their norm. These new buying behaviors have of course introduced many challenges for delivering goods to customers' doors based on expected service levels. Last-mile delivery has become particularly costly and complex with the increasing service levels demanded by customers. 

One forward-thinking option organizations are studying and even piloting to address these challenges and growing costs is the use of drones for last-mile delivery.

Drone 101

A drone is a versatile, remote-controlled or autonomous vehicle designed for water, land or air use. For large-scale drone delivery executions think air: Such drones are designed to fly and maneuver very easily and quickly, typically resembling helicopter flight more than traditional airplane flight. Various drone startups have adopted distinct approaches, employing different types of delivery aircraft. The examples below highlight the various vehicles in use:

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Why drones for last-mile delivery?

Drones have introduced many potential strategic benefits that ought to be closely analyzed for last-mile delivery operations. Beyond just retail and consumer products, various industries—such as hospitality, energy, industrials, food delivery, and even life sciences and health care services—all have valid use cases for drones in their supply chains. Some of these benefits include but are not limited to:

• Drones offer organizations the capability to significantly enhance delivery speeds and reliability, achieve higher service levels and extend their reach. This can help ensure efficient and timely distribution of goods across diverse locations.
• Drones can deliver goods directly to someone's doorstep, typically regardless of location. This can allow some retailers to reach many otherwise inaccessible customers or to deliver goods to someone's doorstep with less difficulty.
• Drones, through autonomous flight,¹ when approved, can reduce the need for human intervention—which could dramatically drive a lower cost per parcel, potentially 70% less than that of traditional delivery methods.²
• Drones in operation consume significantly less energy than standard delivery vehicles, with estimates projected at 94% less energy per parcel—making them more sustainable and lowering a company's overall carbon footprint.³

Two of the benefits that should intrigue most organizations are the ability to dramatically reduce delivery cost and to increase delivery speed. Based on a delivery fee and delivery speed comparison, estimates currently show the cost for parcel shipping via drone to drop from $60 per parcel package in 2020 to $4 in 2030 for roughly the same or faster delivery speed.⁴ As it has been demonstrated, drones already have an extremely quick delivery speed in the markets the technology operates in, but as of today the cost remains high. However, as the technology improves, it is expected that operational cost—and thus cost per parcel—will dramatically improve compared to other delivery methods.

Challenges and market horizon

Before drones can become a widescale last-mile delivery option, there are several challenges that need to be overcome to truly realize value and the cost savings previously outlined to drive growth in the industry. Some challenges facing the technology are:

• Regulatory compliance and progress: Full approval for drones in the United States to be piloted without a visual line of sight is still pending. Currently this is a significant hurdle to realizing substantial cost savings. However, advancements in regulatory frameworks are creating a more optimistic outlook for the future of autonomous drone flight.⁵
• Weather dependency: Bad weather remains a challenge, as it can impact flight schedules and delivery times.
• Limited range: Drones currently have limited delivery ranges, which can restrict their effectiveness.
• Privacy concerns: The use of cameras necessary for drone operation raises privacy issues, as these cameras record surroundings during flight.
• High initial investment: Establishing a drone delivery framework requires substantial investment. Costs—which include purchasing drones, setting up the operating system and training pilots—add up.

All these challenges have prevented the idea of widescale last-mile drone delivery from taking off. However, despite these challenges, the market for drone adoption looks promising, and growth in the sector is forecasted to increase substantially with drone market share expected to double in the defense, logistics and consumer markets by 2030.⁶

Considerations for a last-mile drone delivery strategy

In 2024, drone test and pilot operations continue, and regulatory requirements are still unsettled (but recent developments have sparked a positive outlook); widespread adoption remains limited. However, as with any emerging technology, it’s crucial to contemplate the future implications and potential value that a last-mile drone delivery framework could bring to fulfillment operations. 

In the near term, what can organizations curious about how last-mile drone delivery could improve their fulfillment operations do? They should look to analyze its potential capabilities, identify the technology's benefits, assess the total cost of ownership, construct a business case and build a strategy for adoption for when regulations allow for the more liberal use of the technology.

When defining this strategy, firms should:

1. Decide if last-mile drone delivery adoption will primarily be focused on cost reduction or to increase service levels by providing a faster, more meticulous delivery method.
2. Review your overall product base, demand trends and shipping lanes to understand which items would be best fit for drone flight and which markets would be best to operate in.
3. Define clear and realistic drone delivery processes that can be operationalized considering business rules, service levels and logistical requirements.
4. Identify the best fulfillment points in your organization's network where drones could be launched.
5. Analyze how this delivery method integrates, replaces or coexists with other last-mile delivery methods being utilized in your network.
6. Decide if this is a solution the company would want to build in-house or instead partner with an outside provider.

The future of last-mile delivery

In conclusion, drones could one day bring a lot of promise to last-mile delivery and fulfillment operations from the perspectives of both cost-reduction and a strategic ability to increase service levels. While there are regulatory considerations to navigate, recent advancements suggest that these are not insurmountable barriers but evolving aspects of a developing industry. Organizations should keep alert for when these get resolved, as the widescale introduction of drones could completely change the last-mile delivery space. In the interim, organizations should consider if and how drones fit into their overall strategy and define the benefits they could provide with the goal to understand if this is a technology to consider for future implementation.

Authors:

Christian Riemann Managing Director Deloitte Consulting LLP criemann@deloitte.com	Wanda Johnson Technology Fellow, SCNO US Deloitte Consulting LLP wjohnson@deloitte.com
Ryan Butler Manager Deloitte Consulting LLP rybutler@deloitte.com	Nihar Garg Consultant Deloitte Consulting LLP nihargarg@deloitte.com

Endnotes:

¹ It should be noted that the FAA has not fully approved drones for autonomous flight or flight outside of the view of a spotter; approvals have only been granted under specific circumstances deemed "safe."
² Laurence Goasduff, “Why flying drones could disrupt mobility and transportation beyond COVID-19,” Gartner, May 19, 2020.
³ Unmanned Life, “Environmentally friendly drone technology,”  January 26, 2023.
⁴ Levitate Capital, The future of the drone economy, December 2020.
⁵ Farri T. Gaba and Matthias Winkenbach, Regulatory implications for unmanned aerial vehicles in last-mile delivery, MIT Center for Transportation & Logistics, October 3, 2022.
⁶ Levitate Capital, The future of the drone economy.