Perspectives from ISB

It is interesting that US retailers have once again started looking into same day delivery service

It seems not so long ago many internet based firms had tried and abandoned this approach to serving their customers. The last mile cost is responsible for making this service unprofitable. The service is apparently an effort to skim top end revenue from customers. But, the basic fact remains (and is unsaid) that the store delivering to the customer is more efficient than each customer driving an empty car to the store and spending hours shopping. So, here is the puzzle, some thing which is both efficient and responsive is difficult to achieve.

In recent work, Gerard Cachon of Wharton examines whether levying a carbon tax will change the structure of supply chains. He concludes that levying the tax will not greatly affect the cost. In related work, my student Seung Jae Park along with Cachon and Lai, look at the effect of carbon tax on social welfare, profitability of retailers and utility of consumers. We find that in a competitive setting supply chain design will be greatly affected by carbon tax if the industry is competitive. We also show that third party logistics (and by extension delivery service such as the UPS) will reverse the effect of taxes. This reveals the underlying tension in this problem, if taxes are levied it will tend to make customers and firms less profligate in the use of fuel. But that will reduce the competitiveness of the industry due to higher variable costs. To offset this a common transportation mode will reduce the impact of taxes by allowing retailers to have more stores and not worry about transportation costs.