Article - 008 The Network Effect , Re-thinking the network.

Back Story : Some History.

Increasing volatility in customer demands and dynamic market conditions are forcing many business to re think their existing supply chains with special focus being given to the information technology that powers it.

As of the current state of affairs , these supply chains are now more often than not powered by smaller , more agile but disparate and siloed systems that tackle different parts of the supply chain in a very specific and narrow way (ex: TMS to handle Transport , WMS to handle Warehousing…etc) , but they don’t cost an arm & a leg to acquire and they are very very efficient .

This is state of affairs came about in the late nineties when businesses realized that a single monolith , behemoth solution like an ERP was not enough for them stay competitive . In the early stages of their business , the ERP gave them a massive competitive edge , but over the years as their customers started to change and the power dynamics between manufacturers and customers also changed . Now , customer is truly king and they indeed are truly very fickle kings .

In order to service these new set of customers , businesses had to change their business models and adapt to their customers who now want more choices , more value added stuff and they what they want YESTERDAY .

When the business models changed , the I.T systems that powered the supply chain of manufacturers and distributors had to also change . The businesses with deep pockets and cash reserves were able to start retrofitting their existing monolith behemoth systems to adapt to these changes but the smaller , less cash rich businesses could not spend the time and resources needed to go down the same path as the bigger businesses . So in order to stay competitive , they shopped around for smaller more ‘best of breed solutions’ that could improve areas of their supply chain in more targeted fashion… for example , a ‘best of breed WMS’ (warehouse management solution) for warehousing their warehousing needs or a FMS (Freight Management system) for freight needs.

Several years after this exercise (early 2000s), it was noticed that the smaller businesses started eroding the market share of their bigger counterparts . One of the main reason for this was that the smaller businesses with their cost effective approach were able to go to market faster compared to their bigger counterparts . This was because the smaller systems cost much and much less and was able to be deployed much and much faster .

Not wanting to lose out, the bigger businesses started to scrap large scale modifications to their monolith systems and started augmenting it with smaller ‘best of breed’ solutions which then now gave them the advantage cause they their back end monolith systems still did what they did best while certain capabilities were pushed out to the smaller more flexible peripheral systems that are connected 'networked' to the back end .

Fast forward several years later (2013 onwards) , with the steady increase in world population and thus their customer base , businesses began realize that they needed to be even more faster and even more agile or they risk leaving a lot more money on the table as a result of opportunity loss .

In comes ‘The Network Effect’ .

“The network effect exists when the addition of another element [to the network] makes all the existing elements in the [network] better off,” explains Sheffi, citing cell phone networks and Facebook as examples. “It’s a positive feedback loop. As the network grows, the more value it provides. The more value [the network] provides, it grows even bigger. It’s the economics of having an extra point on the network, and the fact that you can build a lot more services on the existing network, that’s the power of the network.”

MIT Professor Yossi Sheffi (Extract from Talkinglogistics.com)

Since circa 2013 , seeing the successes enjoyed by Facebook ,Uber , AirBnB and other disruptors leveraging on the power of ‘networks’ , big businesses didn’t need much convincing that networks were the way to go . But unfortunately many of these businesses then started building elaborate networks by connecting supply chain partners and their systems but with the same old business processes that wasn’t suited for their new networked ‘supply chain’ paradigm.

Connecting partners in this traditional sense did result in modest incremental performance gains but because their ‘supply chain’ paradigm was antiquated they couldn’t squeeze the maximum gains out of their now networked supply chain.

Opportunities :

Supply chains must abandon linear logic thinking :

Bussiness that are now able to shift their supply chain from a linear logic to a more networked and systemic logic , where physical and digital flows start to converge with real world objects like sensors . With a monolith system , these flows are actually decoupled but products now and their constituent components increasingly need to be tracked in real time . This creates a need for aggregation and analysis of real-time data can potentially inform and restructure the logic that determines stock movement. This will allow supply chains to be able to better assess the inventory performance by digitising all its stock and restructure processes to better liquidate slow-moving inventory.

Moving away from a ‘Dasiy Chain’ network to a more ‘living, fluid ecosystem’

Daisy chain networks that are linear need to be re-architected as ecosystems coordinated by a central supply chain platform that connect ‘best of breed’ specialized peripheral solutions that is connected but decentralised . This give the platforms the ability to constantly ingest data from the interactions of people, processes and objects across the ecosystem allowing it to inform and restructure the logic of ecosystem flows. Now firm centralizing of information become less important and coordination across the value chain becomes much more fluid.

When supply chains move to platform-enabled ecosystems, we will potentially see benefits in the following area :

1) Operation Cost reduction

2) Revenue and profitability boost

3) Better supplier performance

4) Better supply chain collaboration

5) Improved Quality of goods and services

6) Better supply chain planning

Summary :

To maximize gains from a networked supply chain will require organizations to rethink the way their currently are networked and also look to abandoning antiquated supply chain paradigms . They need to start thinking about how they can better merge the physical world with the digital world via newer technological innovations like sensors . Tightly linked, contractually organised entities need to shift to a more fluid decentralised ecosystem that connects all their supply chain partners without having it centrally orchestrated . Steps taken in these 2 major directions will eventually reveal new revenue generation models and lead to a more optimized supply chain partner ecosystems that will benefit all parties .

* Image from Supply Chain Beyond.com