The seven deadly sins of last-mile remuneration

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Last-mile drivers are an increasingly limited resource following the explosion of e-commerce parcels – and Covid-19 has only aggravated the situation. Posts and carriers are struggling to find new ways to manage the situation while minimizing the financial cost.

Arguably, the most important element of any last-mile labor solution is the remuneration model. Courier remuneration is a key to success or failure in the new last mile. 

In this article, we will share what we have called the ‘seven deadly sins’ and how to avoid or, at least, control them when approaching any PUD (pick-up and delivery) payment model re-design. 

Any remuneration system which is not set in an optimal manner will, sooner or later, lead to either significant overpayment to subcontractors or underpayment, which triggers staff rotation and, in consequence, low performance. Let’s look at each of the sins in turn…

1. Paying a fixed fee

There are three common scenarios when a daily fixed fee is applied:

A. A new tour (or new depot) is introduced and it changes dynamically in terms of pick-up and delivery structure. Normally it should be temporary and shifted to a flexible model. In specific cases, it is kept for a long time because it is easy to reconcile. Only a temporary solution is acceptable if we are to avoid the first deadly sin.
B. Remuneration logic is not mature enough due to insufficient expertise of staff responsible for PUD costs.
C. Software remuneration tool is not compliant with the real effort made by the courier. 

In the worst case, all three situations occur at the same time which makes things ultra-complex.

2. Treating each tour in the same way
Two couriers delivering in the same area have the same delivery structure. No, they almost always won’t. We tend to assume and simplify, but it is an easy way to misjudge. Let’s imagine that two couriers have around 100 parcels to deliver in a medium-size town. It is really tempting to put them to one ‘bucket’ but … before you do that, put some extra effort and check:

A. Do they both deliver a similar amount of B2C (to private)?
Residential delivery is usually more time-consuming (even where proof of delivery is not mandatory) than delivery to business points. Moreover, if remuneration is based on per delivery address + per parcel, it is good to include the fact that in the vast majority of 2C deliveries, a parcel per shipment (PPS) factor is close to one, so it may be a good reason to distinguish 2C and 2B deliveries. Other factors that affect B2C deliveries are issues relating to apartment buildings such as addressing, parking, entry codes and even broken or no lifts.

B. Do they both deliver to shopping malls?
On one hand, it is usually more parcels with a much higher PPS factor, but also more time spent. An additional point to remember is that the procedures at shopping malls (or large markets) are different therefore it is not so simple to apply simple rules in the remuneration model. 

Do you need to have a fast, initial comparison of the two couriers? Just check the net delivery time and don’t be surprised if there is a difference of one hour or even more.

3. Cherry picking
Even if PUD tours are defined (e.g. by postal code [zip code]ranges or addresses), there are always some individuals who seek to take a shipment from someone else’s tour (“it’s on my way” is a term commonly used). It does not have to be bad, if we treat such a case as the potential to optimize the tour division in the short term. Leaving parcels behind is much worse – it happens when a courier “forgets” to load and deliver a shipment to a place that they want to avoid (for example due to long distance, not on the way, complex delivery, etc.). ‘Orphan’ shipments are usually detected when couriers are gone or when an unhappy consignee complains.

4. Full trust in weight

It sounds fair to add a ‘weight’ factor to the remuneration system, right? When it is done, just make sure you act in line with the saying ‘trust but control’.

Having a limited confidence in measurement done upon an individual (courier’s responsibility) or high-volume (weight from sender’s IT system) pick-up, will secure a fair remuneration. Of course, to “control”, takes additional operation – weight verification at depot – but it is worth doing. Evidence suggests that with a good post-collection weighing system, several percent can be added to your EBIT as well as to your courier remuneration, provided you have the right customer price list (this will be a topic for a further article).

5. Belief that tours are easy to categorize
We have seen many cases when tours were divided into standard buckets of ‘urban’ and ‘rural’. The bad news is that there is usually a substantial group of ‘mixed’ tours where PUD addresses (stops) are dispersed in both towns and rural areas. Moreover, in some tours, there may be fixed and short time-slots (i.e. one hour) to deliver or pick up shipments, which determines how tours have to be planned. Correct categorization of tours is one of the key elements to design a successfully working remuneration model. The key principles are:

Collect the data about the tours (preferably from MDUs);
Calibrate the data (examination of PUD deviations e.g. very long stops);
Application of KPIs which will allow us to objectively compare the tours.

6. Assumption that size does not matter

Vehicle capacity expressed simply by the number of parcels that can be loaded is often misleading. A ‘half-a-kilo’ parcel is not always just a thicker envelope. Lighter but larger volume shipments may result in sending one more vehicle to deliver a parcel too long to load on the first one, which usually is less cost-effective and a bit challenging to organize as ad-hoc.

As with the weight related ‘sin’, not only is money there to pay more to drivers but also to cover your additional delivery costs for BHU parcels (big, heavy, ugly). Of course, in some cases large or fragile parcels ought just to be left to specialist carriers and not to a standard postal or CEP operator.

7. Remuneration can be detached from performance
It is not enough just to put the obvious elements into the remuneration model as it is pretty easy to forget the ones that affect the performance. To cut a long story short: all the products and IDM-related (interactive delivery management) attributes should be examined and selectively considered to apply in the remuneration model.

Would you like, for instance, to secure the performance of early delivery? Then think if a small surcharge should be applied. Positive motivation usually works better than penalizing for not meeting daily objectives. Should a locker delivery of 50 parcels to a stop with good parking and 24/7 operational hours be charged at the same rate as a to-door B2C delivery of one parcel to the fifth floor or an apartment building…without a lift?

These are just some of the key issues faced by operations managers in the last mile. Not all can be resolved overnight but the Last Mile Experts team’s experience shows that investing time and effort here can lead to better, more loyal couriers and happier customers, which in turn leads to more EBIT!

Meet the authors:

Damian Jarosz has over 20 years in the CEP sector, including senior roles in operations, processes and change management.


Marek Różycki is managing partner at Last Mile Experts, specializing in CEP and e-commerce last-mile advisory.

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