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Hyper-networked supply chains: how a collaborative way of working can benefit retailers

A new co-operative supply chain model may point the way to a hyper-networked supply chain future, and a third way for retailers stuck between the costly privilege of supply chain independence and heavy dependence on the retail behemoths

By: EBR - Posted: Thursday, June 16, 2022

Retailers can often need to choose between the costly privilege of supply chain independence, or heavy dependence on retail giants.
Retailers can often need to choose between the costly privilege of supply chain independence, or heavy dependence on retail giants.

by Niall Murphy*

A new co-operative supply chain model may point the way to a hyper-networked supply chain future, and a third way for retailers stuck between the costly privilege of supply chain independence and heavy dependence on the retail behemoths.

Amazon, Walmart and Target have demonstrated just how much scale matters in retail, both in choice with consumers and the economies of scale of their logistics.

Smaller retailers now increasingly face a stark choice: throw in their lot with one of the behemoths to benefit from their platform, with all the risks of super dependency that brings, or continue their supply chain independence but swallow higher costs, lower resilience and a potentially lesser customer experience.

"The essence of flexibility is in the mind of the commander; the substance of flexibility is in logistics," said the US Navy’s famous planner Rear Admiral Henry Eccles. The past two years have required every ounce of agility and creativity from retailers navigating the dual challenges of COVID-19 and the inexorable rise of online sales.

According to research firm Statista, 19.6% of worldwide retail sales were online in 2021, up from 13.8% in 2019, with 24.6% of worldwide retail sales anticipated to be online in 2025. And online has shifted consumer expectations in access to inventory and on-demand delivery. Competitiveness in logistics is now fundamental to both the sustainability of retailer margins and their agility.

Tailored supply chain models have limitations

Retailers have generally purpose built their supply chains with a network of service providers, warehouses and distribution centers. But tailored infrastructures bring limitations, and while outsourcing parts may bring flexibility, it also brings higher marginal costs.

Walmart’s supply chain handles an estimated 200 times the volume of the next level down of retailers who move between 200-300 million units per annum through their systems. With that volume differential comes a cost disadvantage estimated to be between $0.50- $1 per unit by some retailers.

Meanwhile Walmart’s volumes continue to grow. Economies for the scale players keep improving, while subscale retailers face decreasing capacity for investment and a widening competitive gap.

Now some retailers have decided there is a third way. Just as Airbnb and Uber mobilized utility value locked-up on single-use properties and vehicles, opening supply chains for co-operative capacity and infrastructure sharing promises a model of efficiency without surrendering to a platform superpower.

Co-operative supply chains for better efficiency

Apparel retailer American Eagle is at the forefront of this new thinking to break the constraints of the traditional models. Chief Supply Chain Officer Shekar Natarajan has turned American Eagle’s supply chain inside out.

The company acquired logistics businesses AirTerra and Quiet Logistics in 2021, boosting capacity well beyond American Eagle’s own item throughput demand. Natarajan and his team have now onboarded more than 50 other retailers to the Quiet platform – including Saks, Fanatics and Peloton – each bringing both their item volume and adding virtualized access to their infrastructure to the Quiet network.

The result is an expanding ‘co-opetition’ supply chain that claws back that $0.50-$1 per item, levelling the competitive playing field.

Collaboration key to Quiet supply chain model

Orchestrated by algorithm, the Quiet model does not require participants to relinquish ownership of their infrastructures, but rather to open them to others and interconnect them.

A package may transit the warehouses and shipping services of several different participants as it makes its way to customers. Quiet can also procure services from the likes of FedEx or UPS with the aggregate purchasing power of its co-operative community.

Clearly the success for new collaborative models like Quiet depends a great deal on trust amongst the co-operating organizations.

Everyone is willing to contribute infrastructure when they have capacity, but will they play ball when the pressure is on and their warehouses and distribution centres may find themselves challenged to handle their own packages as well as those of others in the network? The model also requires state-of-the-art traceability technology and data sharing protocols.

Hyper-connected ’physical internet’ supply chain

Digital identity on items, packages and pallets enables receiving or dispatching parties to identify them and share data from and about them via cloud-based platforms.

While in the past data sharing between parties in a supply chain has depended on bespoke point-to-point connections and specially negotiated agreements, new methodologies are emerging to improve automation.

The EPCIS 2.0 standard, now in the final stages of ratification with the GS1 global standards organization, introduces a publish-and-subscribe methodology that enables supply chain data and events to be passed between independent organizations using web protocols.

In addition, blockchain-based smart contracting technologies make it possible for algorithms to negotiate transactions across distributed networks of participating organizations and service providers on an automated basis.

These protocols point the way to a hyperconnected ‘physical internet’ supply system, routing packages much like the internet routes TCP/IP packets. With multiple parties participating on a distributed basis, facilities, vehicles and modular containers can be orchestrated dynamically with the fast flow of data and interworking algorithms.

Technology enables us to reimagine systems

As American Eagle’s Natarajan points out, “The reality is none of us own our supply chain. We manufacture goods in factories that are shared right across retail. We move them in ships that are shared across businesses.”

Arguably the notion of an independent and self-determinant supply chain has been an illusion for retailers all along. Now with technology creating the art of the possible, it’s perhaps the perceptual barriers of trust that need to be bridged to see the kind of ’Uberized’ supply chain model Quiet heralds really scale.

Adversity is always a good motivator for both creative thinking and collaborations of common interest. Perhaps the time has come in retail supply chains looking for a third way at an unhappy fork in the road.

*Co-founder and CEO, EVRYTHNG
**first published in: www.weforum.org

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