Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

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  • Anonymous said More
    Well written. Well constructed. Tuesday, 13 August 2019
  • Ron Giuntini said More
    As always a good read.
    I have always... Thursday, 25 January 2018

A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

 

In Playing the Same-Day Delivery Game Part 1, I discussed the differences between shopping experiences that take place in-stores vs. online, and I noted that same-day delivery services aim to provide shoppers with much of the convenience of online shopping, without the associated delays. I then discussed the Last Mile problem, which has historically been an impediment to the cost-effective provision of same-day delivery services.

In this part of my analysis, Part 2, I discuss various configurations of delivery networks.

 

Essential Components

The essential components required to operate any type of delivery network include (i) hubs, (ii) vehicles, and (iii) drivers. The minimization of costs associated with operating a delivery network entails several, simultaneous optimization problems involving these essential components.

Hubs

Hubs are warehouses and/or office buildings that serve as the base of delivery operations. Goods from individual suppliers are transported to the hub, where they are stored. When customers order goods, they are removed from storage, combined, and loaded into trucks for delivery to customers.

The optimization problem involving hubs entails choosing the number and size of hubs to operate, together with their locations. The tradeoffs at issue when considering number/size and location of hubs are:

•  The rents in more centrally located areas are higher than rents in outlying areas. This mean that the fixed costs associated with operating hubs are higher when hubs are located closer to customers. So to minimize fixed costs of operations, one would want to have less centrally located hubs, which would be more distant from customers.

•  There are economies of scale in operations. This means that the fixed costs per delivery from hub to customer are higher at smaller hubs than at larger hubs. So to minimize fixed costs of operations, one would want to have fewer larger hubs, rather than many smaller ones.

•  Delivery costs are larger when time and/or distance between hubs and customers are greater. So to minimize delivery costs, one would want a larger number of smaller hubs closer to customers.

Clearly, there are conflicting tradeoffs in the optimization of number/size and location of hubs.

 

Delivery Vehicles

Delivery vehicles are costly to purchase (purchase costs), maintain (repair and storage costs), and operate (fuel costs).

The optimization problem involving delivery vehicles entails choosing the number of vehicles to purchase. The tradeoffs at issue when considering number of delivery vehicles to purchase are:

•  Purchasing a larger number of delivery vehicles is more expensive, but it enables a greater amount of simultaneous delivery. Simultaneous delivery requires a larger number of drivers, but less delivery time per driver, and less delivery time per package.

•  Purchasing fewer delivery vehicles is less expensive*, but it requires sequential, rather than parallel delivery. Sequential delivery requires fewer drivers, but greater delivery time per driver, and greater delivery time per package.

* One could argue that purchasing fewer vehicles is less expensive in the short run, in that it entails a smaller capital payout during the current period. However, if the fewer vehicles are used more intensively, then they will have to be replaced sooner. In this case, purchasing fewer vehicles would not necessarily be less expensive in the long run.

The tradeoff associated with the choice of number of delivery vehicles thus comes down to a tradeoff between capital (vehicle) costs and time (driver and package) costs.

 

Drivers

Delivery drivers are costly to hire (administrative and training costs) and use (time costs).

The optimization problem involving delivery drivers entails choosing the number of drivers to hire. The tradeoffs at issue when considering number of delivery vehicles to purchase are:

•  Hiring a smaller number of drivers entails

°  lower administrative and training costs,

°  potentially greater driver utilization but greater potential to have to incur overtime costs,

°  but less potential for driver slack time, and

°  potentially longer delivery times (if drivers must work sequentially).

•  Hiring a larger number of drivers entails

°  greater administrative and training costs,

°  but lower driver utilization and less potential to have to incur overtime costs,

°  but greater potential for driver slack time, and

°  potentially shorter delivery times (if drivers can work simultaneously).

 

Network Configurations

The optimal choice of hub number/size and location, number of delivery vehicles to purchase, and number of delivery drivers to hire will be dependent upon the configuration of the delivery network. Delivery networks may be configured as (i) hub-and-spoke systems, (ii) “aggregator systems,” (iii) “point-to-point aggregator systems,” (iv) point-to-point systems, or (v) other various systems. Figure 2 illustrates the respective layouts for these systems, and Figure 3 provides comparisons of the systems’ respective characteristics.

 

Hub-and-Spoke Systems

Hub-and-spoke systems are centered around the delivery service’s hub. All goods from suppliers are shipped to the hub, where they are stored until ordered by customers. When a customer orders a product, it is retrieved from storage, loaded on a truck with other packages destined for batch delivery to nearby customers, and then transported to customers in a sequential manner by delivery drivers.

By taking delivery of suppliers’ goods before they are ordered by customers, hub-and-spoke systems entail higher costs (storage) and risks (stored items may not be ordered in a timely fashion by customers) than other systems. However, since the items are already in the possession of the delivery service when they are ordered by customers, shipment times to customers are reduced. Also, taking possession of goods from suppliers enables delivery services to have more control over the quality of goods they deliver to customers.

Taking delivery of suppliers’ goods before they are ordered by customers also enables hub-and-spoke systems to offer a greater variety of products than other systems, since they can draw on offerings by more distant suppliers.

On the other hand, the greater hub maintenance costs and the greater complexity of logistics make new market entry much more difficult to accomplish with hub-and-spoke systems, as compared with new market entry using alternative delivery systems.

 

Aggregator Systems

In “aggregator systems” products from suppliers are not transported to the delivery service’s hub until they are ordered by customers. When customers order products, delivery drivers are dispatched to collect the products from suppliers and transport them to the hub. At the hub, products are assembled and loaded into trucks for batch delivery to customers located next to each other, and then transported to customers in a sequential manner by delivery drivers.

The fact that delivery services do not take possession of goods until they are ordered by customers make aggregator systems cheaper, less risky, less complex logistically, and easier to scale than hub-and-spoke systems.

However, delivery times are lengthened by the time it takes delivery services to retrieve ordered items from suppliers, transport them to the hub, and assemble them for delivery to customers.

Finally, aggregator systems provide the benefits of only using local suppliers, but the costs that entails of lacking any variety that tapping into more distant suppliers would enable.

 

Point-to-Point Aggregator Systems

In “point-to-point aggregator systems” products from suppliers are not picked up by delivery drivers until they are ordered by customers. When customers order products, delivery drivers are dispatched to collect the products from suppliers and deliver them directly to customers.

The fact that delivery services do not take possession of goods until they are ordered by customers make point-to-point aggregator systems cheaper, less risky, less complex logistically, and easier to scale than hub-and-spoke systems.

However, delivery times are lengthened by the time it takes delivery drivers to travel to each store to retrieve ordered items from suppliers before delivering them to customers.

Finally, aggregator systems provide the benefits of only using local suppliers, but the costs that entails of lacking any variety that tapping into more distant suppliers would enable.

 

Point-to-Point Systems

Point-to-point systems do not involve a delivery service hub. Rather, when customers order products, delivery drivers are dispatched to collect the products from suppliers and transport them directly to customers.

Dispatching drivers to pick up goods and deliver them directly to customers avoids the costs, complexities, and time delays associated with systems that involve hubs.

As with aggregator systems, point-to-point systems provide the benefits of only using local suppliers, but the costs those entail of lacking any variety that tapping into more distant suppliers would enable.

Presumably, hub-and-spoke and aggregator systems both involve paying delivery drivers by the hour. Given the nature of driver requirements for point-to-point systems, however, the only viable means of paying drivers would be on the basis of number of deliveries performed.

 

Other Systems

•  Curbside Delivery

Curbide is a start-up offering pickup services to customers. Under this service,  customers place their orders with suppliers. Suppliers assemble the orders and deliver them to customers in their cars when they drive up to the suppliers’ location. 

•  Delivery Lockers

Delivery services have been increasingly making use of delivery lockers. Under this system, delivery drivers transport customers’ orders in batches to temporary storage locations for subsequent retrieval by customers. The lockers are located more centrally than are customers’ residences, which eliminates much of the last mile problem. Storage locker delivery is generally provided as a modified version of hub-and-spoke or aggregator system delivery services.

 

Figure 2

Figure 3

 

 

Go to Part 3: Delivery Network Operations

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