Network Effect for Supply Chains Part 1 - Optimizing value across supply networks

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In recent years, companies have outgrown the traditional capabilities provided by hub and spoke, ERP solutions. Based on an increasingly omni-channel world, these systems are challenged to handle the combination of downstream demand variability, upstream supplier variability, and the risk that comes with leveraging global sourcing and supply chain strategies. Many brands today are operating primarily as demand-based hubs with production and logistics outsourced on a global basis. And, from an ESG perspective, only having visibility and control one tier upstream in the supplier network is no longer sufficient from a corporate responsibility and reporting perspective.

Supply chain networks have emerged to bring enterprises and ecosystems together. Now supply chains can benefit from network effects. The enterprise can work closely and in real time with all parties in its ecosystem. The ecosystem includes multiple tiers of suppliers, contract manufacturers, maintenance providers, logistics services providers (carriers and shippers), distributors, customers, competitors, government agencies, and logistics — all of which tie the value chain together. This enables businesses to deliver products at the highest service levels with the least landed cost. And each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship that facilitates resiliency, flexibility and adaptability in planning and execution.

Network Effect and Corporate Strategy

The Network Effect can increase the value of a product or service based on the relative number of buyers, sellers, and users. The greater the number, the greater the network effect and the value created by the offering. The willingness of companies to onboard onto a supply chain network increases as their own opportunity to generate value grows and is amplified by the overall growth in the number of buyers or sellers.

The Network Effect goes much further than what is obvious in Facebook, Uber, Twitter, StubHub, eBay, Amazon, and Alibaba. Looking deeper, in a supply chain there are many more parties involved in a transaction than just the buyers and sellers. We also have all the parties involved in the transportation and logistics along with distribution, warehousing, manufacturing, supply, and aftermarket services when applying network effect to e-commerce and the production of goods and related services.

Given the number of trading partners and the sheer number transactions across today’s supply chain, the potential value that can be unlocked is enormous.

"Supply chain network effect holds tremendous value potential due to the number of moving parts and interactions that come across a trading partner ecosystem." -Joe Bellini Click To Tweet

For major demand or brand hubs in the network, the more suppliers and carriers that are onboarded onto the network, the more potential value there is from the ability to source across a wider set of options. As the network grows, suppliers and carriers can benefit from an expanded set of new sales opportunities brought in from new brand hubs, suppliers and customers coming into the network. And, beyond the largest and most dominant companies in the world, shippers of all sizes can enjoy the benefits of network effect as well.

Whether it is through the buyer and seller or shipper and carrier, industry networks quickly expand. When a buyer uses a carrier, that carrier becomes known to the seller, this then delivers new sources of business for all parties. As these two businesses transact more with others, the carrier may work for even more of their connections. The network effect is an excellent means for organizations to broaden both their client base and their partnerships.

In my next post, The Network Effect 2: Key Concepts & Value I discuss some of the important concepts that drive value in networks. If you’re interested in this topic, sign up for my webinar here: Why the Network Effect is Essential to Supply Chain Survival

The Network Effect for Supply Chains - why the network effect is essential to supply chain survival

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Joe Bellini

Chief Executive Officer at Eyelit

Joe Bellini is CEO at Eyelit, a leader in Manufacturing Operations Management (MOM), Manufacturing Execution (MES), Quality Management (QMS), and Factory Automation solutions. Joe has been a leader at some of today’s top technology companies, including One Network Enterprises, General Electric, HP/EDS, Brooks Automation, IRI, R1/Accretive Health and Oracle. Joe holds a patent in Supply Chain Planning and is the co-author of the business strategy book, “The Real-Time Enterprise.” Joe holds degrees in Mechanical Engineering, Applied Mathematics and Statistics, is an alumnus of Harvard Business School, and is certified in Artificial Intelligence and Machine Learning from MIT Sloan.