Last Mile Delivery Cost Breakdown: What to Do About High Costs

Last year, more than 80% of retail executives said that reducing total cost per order was their top last mile priority. 3Pls and carriers showed similar priorities, and for the same (obvious) reason: last mile costs are notoriously high, and notoriously hard to control. 
High last mile costs are an industry wide issue that has a major impact on consumers (who ultimately pay for shipping), on manufacturers who make the goods, on transport companies including 3PLs, on the environment that absorbs the carbon generated by shipping, and of course on retailers — who are the last stop before the last mile. 

But when your number one goal is to reduce cost per delivery, where do you get started? Which cost factors have the biggest impact on total delivery costs, and what are the best practices for addressing them?

The key to overcoming these challenges is to first understand the scope of the problem by analyzing the component costs of your particular last mile and then finding the right processes and technology to address them. 

Analyzing Costs in the Last Mile

Not all of the cost drivers are obvious, but here are the most important ones for most businesses:

• Labor 
• Fuel and fleet maintenance
• Warehousing
• Reverse logistics
• Technology
• Customer communications

Each of these cost factors represent essential ingredients that go into successful deliveries that work for your customers. Maintaining the quality of the delivery experience helps build your brand, but it also costs money. All of this adds up to one important fact: logistics optimization to manage costs is non-negotiable. 

The Top 6 Sources Last Mile Delivery Costs (and How to Reduce Them)

1. Labor costs

According to the U.S. Bureau of Labor Statistics, hourly pay for drivers is highly dependent on location. In 2023 the mean pay (half of drivers earn less and half earn more) in rural Alaska was $28.12 hourly, $25.72 in San Francisco but only $17.55 in coastal North Carolina. Nationally, UPS averages $23.35 per hour. Statistics from the National Transportation Institute show that per-mile driver pay grew 6% in 2023 alone.

These increases are likely to continue in the near to mid-term future, so minimizing the labor required to make a delivery is critical to managing labor costs.

While the market price of labor is out of your control, how you use that labor is very much controllable. The number to focus on is the labor cost per delivery, and increasing the number of deliveries your drivers make in each shift through optimization can lower your overall labor costs despite increases in hourly pay. 

2. Fuel use in the last mile 

Fuel costs are both significant and unpredictable: In the U.S., the national average price of a gallon of diesel is about $3.57 per gallon as we write this, but it was recently as high as $4.63. Booming oil production inside the U.S. coupled with increased production in Canada, Guyana, Brazil and Norway helped drive down prices that spiked amid the pandemic era production crash and Russia's invasion of Ukraine. However, continued global instability and weather events that affect supply and distribution can push prices up significantly with little or no warning. 

There's also the matter of sustainability: Some consumers will show preference for brands working to minimize their environmental impact. While packaging does contribute to the environmental costs of logistics — and there's been an upsurge in alternative packaging to address those — fuel is still the largest contributor of carbon in the last mile.

For managers, both of these underscore the importance of minimizing fuel use. The way to do that is by reducing miles driven per delivery. Optimization plays its role here in two ways: Making the most of fleet capacity so that trucks don't depart the dock half–full and cutting unnecessary miles. 

If you're using the pen-and-paper method of routing or a simplistic shortest point-to-point solution, you won't get there. Because there are so many variables that affect delivery routes, compared to older solutions, AI-enabled routing coupled with machine learning (ML) is essential. Routing software with AI and ML actually gets more accurate and efficient as it gathers data from completed routes. 

This intelligent optimization has proven to reduce miles driven by 10%. That's 10% less fuel consumed. The impact of that goes far beyond the pump, too. That's making the same number of deliveries with fewer service units, lower maintenance costs and fewer driver hours too. Your delivery cost per mile will stay the same, but the number of miles driven per delivery will shrink significantly.  

3. Warehouse management

What is the cost of leasing and operating storage and shipping prep areas? Are those areas optimized for your current operation? Advanced AI-enabled delivery management software can help reduce costs in several ways. As the system gathers information about your deliveries over time, it may find that your current distribution location isn't ideal, and can help pinpoint the optimum site for your warehouse, or the optimum placement for an expansion or secondary hub, further reducing miles driven and speeding deliveries. 

The right software will also fully integrate with your POS/ERP system, with bi-directional APIs capable of smoothly moving every delivery from order-in to the customer's door and back to the ERP with confirmation. This eliminates mistakes introduced by manual entry or translating orders between incompatible systems. Your pick and pack operation will be more efficient, saving you even more labor cost. 

4. Reverse logistics and failed deliveries

Product returns are costly. In the U.S. the National Retail Federation says that $247 billion worth of merchandise that was ordered online in 2023 was returned — 17.6% of the total.That compares to just 10% for brick-and-mortar purchases. If your delivery management software can eliminate packing and shipping misfires, it can make an appreciable difference. There's also the cost of getting the return back to your warehouse, restocking and storing it. An AI-enabled delivery management solution can integrate outbound and inbound trips, reducing miles driven.

Failed deliveries affect both customer satisfaction and the bottom line. Improving your productive delivery rate or first attempt delivery rate (FADR) means cutting the cost of the affected deliveries in half. 

One proven way is to choose delivery management software that allows customers to self-schedule deliveries at the point of sale or online. When customers choose their delivery window, they are more likely to be at home, so your FADR goes up. Make sure that the software only offers time windows that are AI-optimized for your fleet, routes, and current delivery orders. That way, your routes remain optimized so you keep the benefit of shorter routes and full trucks. 

Over time, AI optimization can improve ETAs to 98% accuracy. Combined with live-tracking of deliveries, you will boost both FADR and customer satisfaction. 

5. Transportation/delivery management software cost

There's no doubt that manual routing requires the least capital investment, but it is also true that it's the most expensive in the long run due to its lack of efficiency. The real cost of logistics fleet management software is actually the cost of the software minus savings in fuel and labor (both in the warehouse and on the road). 

 For example, last-mile delivery software that uses AI can assign jobs to delivery drivers based on each crew's efficiency in different types of deliveries or installations and the capability of individual service units . 

Advanced last mile delivery route optimization like this enables companies to reduce many different last mile delivery costs.

To realize the full benefits of delivery management software, make sure it addresses the last mile delivery costs you discovered in your analysis. Is it shortening routes to save fuel and labor? Is it making warehouse and packing operations smoother and more accurate?

If you're already paying for delivery management technology and it's not helping you scale your operations, measure your performance, and improve your agility, it’s time to look for a replacement. Your last mile delivery software should be saving you so much time and effort on delivery management that your overall delivery cost per mile drops significantly. 

6. Customer communication costs

Customer expectations have evolved significantly in just the last few years. Consumers expect your delivery ETAs to be accurate. They expect to be able to track your service unit on the day of delivery. Many now expect free delivery on certain items.

These rising expectations have the potential to exacerbate the costs discussed above. Keeping customers in the loop means sending them a bevy of emails and messages (as well as responding to their messages throughout the process), which can eat up a huge amount of time and labor if it's not efficiently automated. 

If your business doesn’t have the tools to meet those expectations, you could be caught in the squeeze between expectations and costs. 

Why Investing in Last Mile Delivery Software Is Crucial to Reducing Delivery Cost Per Mile

Lack of investment in dispatch automation software can make the final mile more costly. Missed, late, incorrect, and failed deliveries—all of which are more likely with inefficient routing, tracking, and customer communication —incur additional costs for product returns, re-delivery attempts, replacements, and concession offers to pacify irate customers.

The last mile is expensive. There is no doubt. Your delivery rate per mile can sometimes feel like it's spiraling out of control. 

But understanding last mile delivery costs and analyzing your own delivery data is the essential first step in optimizing fleet operations. That will help you make the right investments in technology to improve workflows and cut expenses in your last mile delivery operation.