Network Effect in Supply Chains

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Great brands and products are no longer a winning formula, what’s needed now

This is part two of a two part series on the Network Effect in Supply Chains. You can read part one here.

In today’s world, companies will not generate market share without a well thought out and activated Network Effect Strategy. Businesses are embracing resilient supply chain networks to mitigate the chaos they experienced during the pandemic and the 2021 holiday season. This chaos was a direct result of demand and supply variability coupled with lengthy information and physical lead times.

In digital economies, sustainable success comes not just from improving products, services, and user experiences, but from improving customers, clients, channels and suppliers, as well.
Michael Schrage, Research Fellow at MIT’s Initiative on the Digital Economy

Beyond great brands and great products, companies need incredibly efficient, agile, and fast operations. Given the shift from retail to consumer direct, these capabilities now define the primary customer service that shoppers receive in that channel. If they’re not buying in stores, efficient/agile/fast is really the primary “customer service” shoppers will receive.

For retail, experienced in-store, in-stock challenges can be resolved by leveraging network effects across the trading partner ecosystem. This is accomplished with a software, analytics, and data platform specifically designed to enable seamless and unified network operations across the entire supply chain and for both planning and execution.

Core Concepts of the Network Effect

Network economics comes into play in a big way here. If a company’s business strategy does not include a move into an industry-based network, their market share will erode over time, along with their ability to leverage lower costs and logistics on a global basis. The ultimate business goal is to provide the highest customer service levels across all channels, at the lowest landed cost while maintaining the highest quality levels and mitigating environmental impacts. A network accomplishes this.

A key thing to consider with network economics is that companies will exploit network effects to increase their growth rates. And with significant increases in market share, once they are ahead, they will tend to stay ahead. Their demand will keep growing as their network presence continues to expand and they will enjoy the economic benefits associated with that expansion.

"The Network Effect gives early network adopters a head start that is difficult to counter for slower competitors." -Joe Bellini #Digital #SupplyChain Share on X

Network density is also a key network effect strategic concept. Brands and shippers operating in an industry network will experience increasing benefits as the network gains density. New brands and shippers entering the network will enjoy the fact that most of their trading partners are already part of the trading partner ecosystem. With the One Network platform, companies simply need to provide permissions to these partners to plan and execute trade across the network.

We have seen this play out, up close. Increasing benefits from network density has played out across all the major networks deployed by One Network: grocery, food service, retail, consumer goods, logistics, automotive, industrial, healthcare, pharmaceuticals, high tech, telecom, and aerospace and defense.

Network Effects Require an Actual Network

These, and other network effects, can only be fully realized in a true Digital Supply Chain Network. Most “networks” are not networks at all. The key is to create an end-to-end network which runs seamlessly from planning through execution on a real time basis. “Network effect” is merely rhetoric without the ability for the system to represent all end-to-end data across the network at the item and asset level. This level of digitized supply chain network is required to resolve problems given the inter-relationships between demand variability, supply variability, and network lead times.

"Talking about Network Effect when you don't have a unified planning and execution platform that spans all trading partners, is empty rhetoric." -Joe Bellini | Key Concepts and Value of Network Effect #supplychainmanagement #logistics Share on X

With the Internet of Things (IoT) and industry 4.0 playing out, the ability to consume precise levels of data, like telematics or POS, becomes critical to problem solving. Visibility-based platforms without this level of analytics are insufficient to drive high value or a sustainable network effect.

Part of the network effect is driven by the incredible increase in data available to make and execute decisions. It would be overwhelming to expect trading partners to drive value by interacting with the amount of data which is now available. Using AI/ML with autonomous agents and network optimization is a must moving forward.

In addition, planning takes on a whole new meaning when you are rolling up execution data to predict problems and issues affecting future performance. Rather than taking an aggregate data snapshot of stale data for in-memory planning purposes, having precise data at the item and asset level creates an AI/ML prescriptive analytics capability never seen in the market before. This approach is the only way to truly realize network effects, and to mitigate the chaos we are experiencing in today’s supply chains.

Network of Networks: Leveraging Other Networks and ERPs

There are networks available in the market that have begun to create density across certain asset groups like carriers or downstream e-commerce channels like Amazon. There is also a significant install base of enterprise-based ERP hub-and-spoke systems that enable direct transactions around the enterprise itself. But, operating in silos, these systems lack the ability to create a desired Network Effect.

The best approach to creating network effect is a dual platform strategy which leverages both existing networks and enterprise systems into an end-to-end real time network across the global trading partner ecosystem. A network of networks approach is a good way to leverage existing asset groups that are already networked.

In the One Network Platform, canonicals exist which enable inter-operation across networks. And for the enterprise systems, a tunable system of control capability allows for the various enterprise-based systems to interoperate with the network. They can transition over time from isolated enterprise applications into the network where they belong. To properly optimize across the global trading partner ecosystem, AI/ML must be applied at the network level and not limited to individual stove pipe operations.

The Value of Network Effect in Supply Chains

At One Network we have seen the value of Network Effects play out across various industries, from Automotive, Aerospace & Defense, Consumer Goods, Restaurant, and others. The data proves the significant impact that the Network Effect generates in terms of improved business outcomes.

Network Effect at a Global Food Manufacturer

A large food manufacturer was able to leverage the Network Effect across their distribution, manufacturing, and supplier base to move in-store in-stock for promoted items from 80% to 99% while also maintaining 99% levels on base volumes. This improvement was achieved while also lowering network inventories from 65 days to 25 days and reducing the number of planners by 50%.

This seems counter intuitive from traditional enterprise-centric hub-and-spoke thinking, where the typical solution is to increase inventory and the associated planners/schedulers/expeditors to increase shelf availability across all volume and mix demand variability. But the network effect strategy enabled them to increase market share across all major retailers and take shelf space from their competitors. The resulting quarterly impacts to earnings per share had a significant impact on the stock price of the company and the overall corporate valuation.

Network Effect Value at Global Food Service Company

A great example of the shared value of the Network Effect was proven by One Network at a major food service corporation. The customer implemented advanced AI/ML in the form of autonomous forecasting agents designed to predict future demand across multiple restaurant chains on a daily/weekly/monthly basis. This demand was translated upstream in the network in real time across all trading partners virtually eliminating the variability the trading partners had grown to live with, given it had been incredibly hard to predict meal, side dish and ingredient consumption.

While the value generated was tremendous at the restaurants themselves, their upstream suppliers were able to significantly reduce costs due to the reduction in variability and information lead times related to orders and forecasts. As a result, the suppliers were able to reduce their costs, provide better pricing to the restaurants, and also push some of those cost savings to their own bottom line. That’s a true win-win. Plus, anytime waste related to food can be reduced. This is a big win for corporate responsibility initiatives.

This is a big subject, and I hope you’ve enjoyed the Network Effects I’ve covered here. I went into a lot more detail in my recent presentation on Network Effects in the Supply Chain. If you want to get the big picture and all the facts, I highly recommend watching it.

The Network Effect 2: Key Concepts and Value of Network Effect