The reception box impact on home delivery efficiency in the e-grocery business Vesa KaÈmaÈraÈinen Helsinki University of Technology, Finland

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1 The research register for this journal is available at /research_registers The current issue and full text archive of this journal is available at erald-library.com /ft IJPDLM 414 The reception box impact on home delivery efficiency in the e-grocery business Vesa KaÈmaÈraÈinen Helsinki University of Technology, Finland Keywords Internet, Shopping, Grocery, Transportation method Abstract Home delivery of groceries is not yet a very popular service among consumers. One reason for the slow progress has been the time-consuming and expensive ordering process. In recent years, Internet-based solutions have solved most of the problems related to the order transaction process ± making ordering simpler, cheaper and faster. However, there are still a lot of unsolved problems in the e-grocery business. One of the biggest obstacles is inefficient home delivery. This paper examines how different solutions for goods receipt affect home-delivery efficiency. Different alternatives for receiving the goods are presented and the service levels of these concepts are described from the consumer s point of view. In addition, the costs for the e-grocer are studied. The efficiency of using a reception box is demonstrated by simulating two alternative receiving concepts. International Journal of Physical Distribution & Logistics Management, Vol. 31 No. 6, 2001, pp # MCB University Press, Introduction Home delivery is not a new service in the grocery business. In fact, the Internet has just helped to reintroduce an old service. The Internet has had an enormous effect on the ordering process, making it cheaper and faster. However, the delivery process has not experienced a similar efficiency improvement. In spite of current poor operational performance, it is forecasted that the e- grocery business will grow quickly in the future (Andersen Consulting, 1998; Mullaney and Leonhardt, 1999; Cuglielmo, 2000). However, to grow quickly, the e-grocers have to lower the high consumer prices. At the moment, prices are often higher than in traditional supermarkets. Cutting prices is only possible if the e-grocers manage to cut operational costs. Currently, the worst problems are slow picking and inefficient home delivery. First, it is possible to reach considerably lower operational costs by cutting picking costs. Better picking efficiency can be reached by picking the items from distribution centers instead the existing supermarket. Second, inefficient home delivery increases operational costs in the e-grocery business. Inefficient home delivery limits growth because of the long delivery time per customer. However, we can reduce delivery time by using different solutions for goods receipt at the households. Some e-grocers, such as Streamline[1] in the USA and SOK[2] in Finland, use reception boxes to cut delivery costs. The groceries are delivered to locked refrigerated boxes, which are located in the households. By using reception boxes, customers become independent of the delivery timetable, i.e. they do not need to be at home to receive the goods. The reception boxes also reduce home delivery costs for the e-grocer.

2 In this paper, we examine different solutions for goods receipt. We examine the service levels they offer to consumers. In addition, we compare two different receiving alternatives ± a reception box in the household and attended reception ± by simulating delivery times and home delivery efficiency. As a result, we will observe a significant cost difference between these two receiving alternatives. Operations in e-grocery From the consumer s point of view, most e-grocers seem to operate according to the same business model; ordering is done using the Internet and the items are delivered to customers houses. However, if we examine electronic grocery shopping more closely we can see two totally different business models (Dagher, 1998; HeikkilaÈ et al., 1998; HolmstroÈm et al., 1999; KaÈmaÈraÈinen, 2000). The first alternative is to operate as an intermediary in the supply chain by picking groceries from a supermarket or ``cash and carry and delivering these to the households (Figure 1). This is how, for example, Peapod[3] in the USA and Y-halli[4] in Finland operate. It is the most common e-grocery business model today. This model is based on occasional deliveries. Customers do not usually plan ahead what they want to have delivered, but instead order when they notice the need for groceries. Therefore, they want their groceries immediately and demand quick home delivery. This requires short response times from the e- grocer in the form of short picking times and tight delivery windows that can make the whole supply chain inefficient. Occasional purchases and short response times cause capacity problems, especially in the home delivery function, because it is impossible to forecast The reception box 415 Figure 1. The e-grocer as an intermediary in the supply chain

3 IJPDLM 416 customers demand. However, this concept is easy to implement when sales volumes are low and electronic grocery shopping is only a value-added service for the supermarkets. It is not very cost effective, but it is a fast way to increase sales volumes by moving quickly into new areas (HolmstroÈm et al., 1999). On the other hand, when volumes increase, a more effective way to operate is needed. When sales volumes are sufficiently large, a totally new direct channel between the producers and the consumers can be created. In this business model, the e-grocer purchases items straight from the producers or importers, stocks products in a local distribution center and delivers directly to the consumers (Figure 2). This is how, for example, Streamline[1] and Webvan[5] in the USA and Matomera[6] in Sweden operate. In this model, picking and packing is more efficient than when operating from a conventional store, because picking speed increases when the operations are especially designed to serve home delivery (HolmstroÈm et al., 1999). However, investments are higher in this model. For example, Webvan s highly automated distribution centers cost between $25 million and $35 million apiece (Cuglielmo, 2000). Competitors who use less automation have costs of between $4 million and $6 million per distribution center, while supermarkets can offer home delivery service without large additional investments. Until lately, the e-grocers have operated as intermediaries in the supply chain (HolmstroÈm et al., 1999). This service concept has worked well as a valueadded service for supermarkets. However, the increased amount of e-grocery customers has forced retailers to look for more efficient solutions. When an increasing number of customers require better services and lower prices, picking needs to be done from distribution centers, not from supermarkets. In Figure 2. An e-grocer using a distribution center in the supply chain

4 addition, more flexible ways of receiving the goods at the consumer end are needed for lowering the delivery costs. Different alternatives for receiving Usually, the reception has to be attended when the e-grocer delivers the products. This means that the customer has to be at home to receive the delivery. This restricts the number of potential customers. Therefore, more alternatives for receiving the groceries are needed. We have examined different alternatives and identified four potential receiving concepts for electronic grocery shopping: (1) Pick-up by the customer: customers pick up groceries from the local supermarket or a warehouse. (2) Shared reception boxes: there is a shared pick-up point near the consumer. (3) Own reception box in the household; orders are delivered to the household s reception box. (4) Attended reception: the shopkeeper or a third party delivers groceries to a given place where the customer accepts the delivery. In the first approach, the e-grocer only offers picking services. Shopping is easier with this approach but pick-up from the store does not eliminate the customers troubles completely, because they still have to travel to and from the store. This means that the service level is far below that of the other reception concepts. However, in some cases this service level is good enough. This is the easiest and cheapest way for the e-grocer to start. In the second concept, shared reception boxes are used. The customers are independent of the delivery timetable, i.e. they do not have to be at home to receive the goods. The groceries are delivered to locked reception boxes that are allocated to a specific customer with every delivery, which makes it possible for many customers to use the same reception box. The customer receives the number of the box and the code needed to unlock the box, for example to his mobile phone by text message. The reception box operates in many temperatures and keeps the groceries in good condition for as long as a normal refrigerator would. By using shared reception boxes, it is possible to drop off many orders at one stop and reduce the delivery time per customer. This is the most cost-effective solution for the e- grocer, when delivery is required. However, the service level perceived by the customer only improves significantly if the reception boxes are located near the household. Furthermore, before the delivery savings are achieved, the e-grocer, the customer or a third party has to invest in the reception boxes. Currently, there are no e-grocers who use this concept, but its future potential is huge. In concept three, every household has its own reception box. This is convenient for the customers because they get the groceries straight to the home. The customers are also independent of the delivery timetable. In The reception box 417

5 IJPDLM 418 addition, the reception box has a significant impact on home delivery efficiency (Feare, 1999). The delivery time is not as short as with shared boxes because it is possible to drop only one order per stop. However, the delivery time is considerably shorter than if the reception were attended, as we will show later in this paper. Also in this alternative, someone has to invest in the reception boxes. Currently, there are many different kinds of reception boxes entering the market (Bennett, 2000). The costs vary significantly (estimated up to E2000 per box), depending on the type of the box, i.e. the location, size, different temperature zones, electronics, etc. of the box. The owner of the boxes can be the e-grocer who buys the boxes and rents them to the customers. This is how, for example, Streamline[1] in the USA and SOK[2] in Finland operate. The customer could also buy his/her own box or there could be third party financing the boxes. In the last alternative, no investment in reception technology is required. This is why attended reception is the most common receiving concept today. However, tight delivery windows and personal contact with the customer increase delivery time. The long delivery time also increases the costs to the e- grocer. On the other hand, attended reception offers an opportunity to offer face-to-face service to demanding customers. All four alternatives are potential service models in the e-grocery supply chain. However, only in two of them ± a reception box in the household and attended reception ± are the items delivered to the final consuming point. These two alternatives are the focus of this paper. Next we will examine the service levels of these reception concepts. Delivery time and cost simulations for home delivery with and without reception boxes (concepts three and four) are also presented. Service levels for different receiving alternatives Both attended reception and delivery to the household s own reception box offer a good service level, but in different ways. Personal contact with the delivery personnel is important for some customers, while others appreciate being able to pick up their groceries from their own reception box at a time of their choice. The reception box model also offers new service opportunities (SmaÊros and HolmstroÈm, 2000). For example, Streamline[1] offers its customers a replenishment service where regularly needed products are automatically delivered, e.g. once a week. In addition to groceries, Streamline offers, among other things, dry cleaning, videos and film processing. In Table I we compare service levels of attended reception and the reception box concept. We can see how both concepts provide good service depending on the delivery targets and the customer s personal preferences. From the customer s point of view, the reception box is the easiest way of receiving, since this relieves the customer from having to be at home when the goods arrive. Furthermore, by using a reception box, it is possible to provide a

6 Attended reception Personal service Yes No Final delivery point Customer Box Reception box Customer s dependence Has to be home Does not need to be home E-grocer s value offering Order fulfillment (quick delivery) Available delivery hours Fixed timetable At any time Delivery frequency Variable, depending on customer needs ``Inventory management (enough products) Usually fixed Delivery window Fixed delivery hours Operating hours Delivery time per household Long Short The reception box 419 Table I. Most significant differences between the attended reception and reception box concepts fixed delivery frequency for the customers and even apply vendor-managed inventory (VMI) principles to the households (Feare, 1999; SmaÊros and HolmstroÈm, 2000). This creates better opportunities to arrange picking and transportation operations more efficiently (Waller et al., 1999). Fixed delivery frequencies also level demand. However, from the customer s point of view a fixed delivery frequency is not enough if additional groceries are needed quickly. Furthermore, some customers require personal service. Attended reception is a puzzle for the e-grocer, because it requires offering a short delivery window and response time. This leads to a situation where both delivery and picking timetables become more inflexible. However, if personal service is not required, a reception box in the household offers the possibility of creating a more flexible delivery timetable. For example, Streamline drops about ten orders per hour compared to about three for a typical e-grocer using attended receiving (Lardner, 1998). Table II presents the service concept of some existing home delivery suppliers. Home delivery framework and computer model We built a computer model to study the home delivery cost of different service concepts. Figure 3 presents the framework of this model. In addition to the cost estimate, each scenario results in an associated service estimate. Due to the nature of the business, we have chosen to compute the cost with a fleet required to meet 100 percent on-time delivery performance within the model. The delivery cost is computed directly from vehicle usage hours. The customer base is limited to the geographic area where the service is offered. Furthermore, it is reduced by the customer penetration of the e-grocer in the area. The typical customer spends a certain amount of money on the product categories offered by the e-grocer. After that the shopping frequency defines the number and size of the daily orders.

7 IJPDLM Streamline a (USA) Matomera b (Sweden) S-market Mikkeli c (Finland) 420 Table II. Classification of some existing e-grocers (Streamline, 1999; Matomera, 1999; S-market, 1999) Product range offered Groceries, video rentals, laundry, postal services, etc. Groceries Groceries Reception type Box Attended reception Attended reception Available delivery hours A fixed weekday, before 6.00 p.m p.m a.m p.m p.m. Delivery window Operating hours 2 hours 2-3 hours Minimum delivery lead time Delivery charge or minimum order Next day 5 hours 2 hours E30 a month includes one delivery/week E6/delivery (orders of over E60 free of charge) Sources: a b c E6/delivery The service concept is defined by the characteristics already presented in Table II:. the product range offered;. the reception type (i.e. own reception box or attended reception);. the operating hours;. the length of the delivery window;. the delivery lead time, i.e. the minimum time difference between order and delivery; and. minimum order or delivery surcharge. In the computer model, each scenario is constructed in two steps. First orders are generated and then they are routed. The first step results in an order file. In the second step, the orders are routed using RoutePro, a routing software from CAPS Logistics. The routes are constructed using the tree algorithm included in the software. The algorithm builds routes one at a time and tries to build a full truckload with one vehicle before using another vehicle. The order with the most distant destination is chosen first. The algorithm grows the route by adding the unrouted candidate order whose summed distance to the seed location and the depot is the smallest. The order file format presented in Table III is determined by the requirements of RoutePro. In addition to the volume of the order, the routing is limited by the two time windows included in the order file. The delivery, specified by drop-off start and drop-off end, depends on the drop-off type. If there is a reception box in the household, the delivery window equals the

8 The reception box 421 Figure 3. Home delivery framework operating hours. Otherwise the operating hours are divided into delivery windows as defined by the service concept. The delivery window of each order is defined independently using a distribution. The shape of this delivery distribution describes when the customers want their deliveries to arrive. The pick-up window, which models when the order is available for pick-up from order assembly, is determined in the order file by using pick-up start and pickup end. The delivery concepts presented later deal with next-day deliveries and the order is assumed to be ready for pick-up when the operations begin in the morning. If the service concept allows same-day deliveries, the delivery will be available for pick-up at the last possible ordering time for each delivery window. Figure 4 presents an example of the relationship between the time windows in the order file. As noted above, the delivery window specification is based on Order_ID From_ID Depot Depot Depot To_ID Cust3345 Cust1185 Cust7789 Quantity PickAvlDT a 10/6/ AM 10/6/ AM 10/6/ AM PickByDT b 10/6/ PM 10/6/ PM 10/6/ PM DropAvlDT c 10/6/ PM 10/6/ AM 10/6/ PM DropByDT d 10/6/ PM 10/6/ PM 10/6/ PM Notes: a pick-up start; b pick-up end; c drop-off start; d drop-off end Table III. Example order file (transpose)

9 IJPDLM 422 Figure 4. Order file windows the delivery time distribution. The service concept specifies a last possible order arrival time for each delivery. This is used as the starting point of the pick-up window. The pick-up window ends as the delivery window ends. Case study In the case study, which is based on an ongoing pilot in the suburban area of Helsinki, we studied the attended reception and reception box concepts by using the home delivery framework presented above. The service area in the model is a circle with a 5km radius. The size of the customer base in the case is 300 households. This number equals 2 percent of the families living in onefamily houses or semi-detached houses in the selected area, and can be regarded as a potential penetration for the service. The concepts studied are based on next-day delivery. As can be seen in Table II, companies using attended reception typically offer a shorter order lead-time. The modification, however, is made to make the service level of the concepts more comparable. Two deliveries a week per customer are assumed, which results in 120 daily orders, with no daily demand variation and no deliveries on weekends. The fleet consists of one vehicle, which can operate 12 hours a day. Several scenarios were constructed to explore the effect of different characteristics of the system on the efficiency of the delivery. One factor examined was the capacity of the vehicle: the vehicle can carry 40 or 60 orders at a time. The other factor studied was the drop-off time, i.e. the duration of the stop at the customers. Despite the fact that delivery to a reception box can be considered quicker, the factor was given the values of one and two minutes in both concepts. Furthermore, the concepts were compared using the same

10 vehicle capacity and drop-off time respectively. Each scenario was replicated five times by sampling from the 300 customers. Results The main result of the study is presented in Table IV. On the average, with the reception box concept an over 40 percent cost reduction can be achieved compared to the attended reception concept. The results presented in Table IV are for vehicles with a capacity of 40 orders and a two-minute drop-off time. The characteristics of the system using the box are explored in Tables V and VI. Increasing the capacity from 40 to 60 orders per route does not affect the results significantly. In fact, the results in Table V indicate that the larger vehicle performs even worse in some cases. This is due to the fact that the routing algorithm uses the full capacity of the vehicle when constructing each route. The monthly cost of a suitable delivery vehicle with a driver has been estimated to be around E3,000. As there are 21.5 working days a month, the daily cost will be E140. The pure delivery cost per order is therefore approximately E1.20 in the reception box concept. In the attended reception concept, one vehicle becomes overbooked even with a one-minute drop-off time, regardless of vehicle capacity. It can deliver 96 of the 120 orders. Delivering these orders it travels 173km, which equals 1.8km per order. In the busiest delivery window the vehicle travels 1.5km per stop. During this period it can deliver up to 26 orders in 108 minutes, which equals roughly 14 orders an hour. The average figures per order above cannot be used directly to present the delivery efficiency of the attended reception concept. This is because the orders actually delivered are not selected randomly but using the routing algorithm. To get a comparable mileage, an additional vehicle is needed. The results with two vehicles with the capacity of 40 orders can be found in Table VII. The additional vehicle is employed for five hours. On top of the delivery cost of the Attended reception (E) Own reception box (E) Cost reduction (%) The reception box 423 Table IV. Delivery cost per order Capacity One-minute drop-off Two-minute drop-off 40 8 hours 6 minutes 10 hours 17 minutes 60 7 hours 48 minutes 10 hours 24 minutes Table V. Busy hours of the vehicle delivering to reception boxes Capacity Total distance (km) Distance per order (km) Table VI. Distance travelled by the vehicle delivering to reception boxes

11 IJPDLM 424 Table VII. Results in the attended reception concept first concept comes the additional cost of five vehicle hours. According to Road Freight Finland, the hourly rate for a vehicle with partial utilization is E22.5. The additional cost per order is therefore E0.94, giving a total delivery cost of E2.10 per order. Conclusions The results show a delivery cost difference of over 40 percent when using different receiving concepts. The difference in costs is due to the wider delivery window enabled by the reception box. This wider delivery window can be used to minimize the visiting of different geographical areas but also to level out the delivery workload during the day. Because of these effects alone, the orders can be delivered with a more than 50 percent shorter distance driven compared to attended reception. As always, the model used includes simplifications that may affect the results. These simplifications, however, favor the more inefficient alternative and thus do not reduce the observed comparative advantage in practice. The model studies only a very narrow part of the e-grocery supply chain. Accordingly, no direct conclusions about the overall efficiency of the concepts can be made. Because of the strong link between delivery and order picking, however, it is fairly safe to say that the balancing of the workload in delivery affects order picking similarly. The model does not take into account that the reception box concept with fixed delivery dates would allow even more compact routes when the service is offered to different areas on different weekdays. Fixed delivery dates also enable the leveling out of within-week fluctuations experienced in traditional grocery shopping. Furthermore, the concepts differ in aspects that go somewhat beyond routing. An order generated by a customer acquiring a reception box is probably bigger on average, since such households are probably larger and customer loyalty is stronger. The major conclusion of this paper is that the way e-grocery consumers receive the goods has a major impact on the grocery supply chain. In addition to inefficient home delivery, picking causes problems in the e-grocery supply chain. Actually, inefficient home delivery links very closely to the picking problem, because an efficient supply chain cannot be created if these two operations do not level demand together. The results give support to the claim that an e-grocery business operated from a local distribution center and using reception boxes could have a cost advantage even over traditional grocery stores (Macht, 1999). When using reception boxes, there are also better opportunities to create lasting, regular customer relationships by providing good prices and customized services. This Capacity Busy hours Total distance (km) Distance per order (km) 2* hours 42 minutes

12 means that a better service can be offered while lowering the delivery cost at the same time. The distribution center, combined with the reception boxes, opens up opportunities to level out demand and create a more efficient supply chain. By using reception boxes and variable pricing depending on time and day, the e-grocer can level out demand peaks which are currently concentrated on late afternoons and weekends. This means level demand in home delivery and picking. In addition, this can level out demand in production as well. Further research will focus on two topics. First, how does the system behave, when there are both attended reception and reception boxes? Initial analyses show that neither one of the readily available routing algorithms included in the RoutePro v. 6.0 fully utilizes reception box deliveries to level out the workload. As the value of the average order is relatively low, it is crucial that the manual work associated with routing be minimized. Second, future models will explore larger scale operations. This larger scale will have effects deeper in the supply chain. This opens new, exciting research questions. With next-day deliveries, the exact demand of the local distribution center is known one day in advance. There is no need for storing products with a one-day or less order lead-time. Furthermore, this information could be used in scheduling production of such products. The development of e-grocery operations is very fast at the moment. Players work hard by developing different kinds of solutions for reaching better home delivery and picking efficiency. In the future, there will probably be many different kinds of alternatives for receiving the goods depending on customer preferences and willingness to pay for the service. However, looking at the operational costs of e-grocers, we believe that the reception boxes combined with efficient distribution centers will have a clear benefit compared to other home delivery solutions. The reception box 425 Web addresses 1. Streamline, 2. SOK, 3. Peapod, 4. Y-halli, 5. Webvan, 6. Matomera, References Andersen Consulting (1998), ``On-line grocery shopping on track for rapid growth, January, Bennett, N. (2000), ``Homeport addresses the delivery dilemma, The Daily Telegraph, 10 September. Cuglielmo, C. (2000), ``Can Webvan deliver the goods?, Inter@ctive Week, February 7, Dagher, N. (1998), ``Online grocery shopping, 1998 INSEAD, Fontaineblau.

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