Escaping The Retail Supply Chain Squeeze

The “Uberization” of retail supply chains is underway with new cooperative models and hypernetworked logistics promising an escape for retailers stuck between the costly privilege of supply chain independence and superdependence on the retail behemoths.

“The essence of flexibility is in the mind of the commander; the substance of flexibility is in logistics,” the US Navy’s great planning thinker, Rear Admiral Henry E. Eccles, once said. The past two years have required retailers to exercise every bit of agility and creativity they have been able to muster to navigate the challenges of COVID-19, the inexorable rise of online sales and supply chain volatility, and the pressures continue. E-commerce accounted for 19.6% of global retail sales in 2021, up from 13.8% in 2019, according to Statista, and the firm anticipates growth to reach 24.6% in 2025.

With consumer expectations regarding access to inventory and on-demand delivery having shifted, retailers seem to now face a stark choice between superdependence on the platforms of behemoths like AmazonAMZN
, WalmartWMT
and TargetTGT
or continuing to operate their supply chains independently, but swallowing higher costs, lower resilience and a potentially compromised customer experience. Although many retailers have been dynamic in their thinking, they all know the competitiveness of their logistics is fundamental to both margins and adaptability.

Scale Matters

Walmart’s supply chain handles over 200 times the annual volume of a typical midsized retailer—roughly 50 billion units per year versus 200–300 million units for a company the next level down in size. That makes for a cost differential that some estimate runs 25%–35%, or $0.50–$1.00 per item. Retailers have generally purpose built their supply chains with a network of service providers, warehouses and distribution centers scoped to their regional profile and throughput needs. But as long as those retailers operate within the economies of their own demand and infrastructure, their ability to operate cost-competitive supply chains is constrained and their capacity for investment limited. It’s an uncomfortable negative feedback loop. While outsourcing parts of the supply chain has provided retailers with some flexibility and fixed-cost benefits, marginal costs generally go up. Meanwhile, Walmart’s volumes only continue to grow.

With going it alone increasingly unattractive for retailers, some have decided hypernetworking their infrastructures with others and embracing a cooperative model is the answer to forging an escape path. Just as Airbnb and Uber mobilized utility value locked up in single-use properties and vehicles, respectively, opening retail supply chains for capacity and infrastructure sharing between cooperating retailers presents a potentially attractive model of efficiency without requiring them to surrender to dependency on one of the scale platforms.

AEO Chief Supply Chain Officer Shekar Natarajan has turned the apparel retailer’s supply chain inside out, pioneering a new approach. On the back of the acquisitions of AirTerra and Quiet Logistics in 2021, AEO seemed to do the irrational by bringing onstream capacities and capabilities that significantly exceeded its own item demand. But Natarajan and his team have onboarded over 50 other retailers to the Quiet Platforms network—including Saks Fifth Avenue, Fanatics and Peloton—each adding to the network both their item volume and virtualized access to their infrastructure. It’s a “coopetition” supply chain and it’s succeeding in clawing back the cost disadvantage these retailers faced acting alone, leveling the competitive playing field.

The Quiet Platforms model does not require participants to relinquish ownership of their infrastructures. Just as Airbnb and Uber make a marketplace out of rooms and cars owned by others, participants in the Quiet Platforms network open and interconnect their supply chain infrastructures. A package may transit the warehouses and shipping services of several different participants as it makes its way to a customer.

Hyperconnected Supply Chains

Assigning digital identities to items, packages and pallets enables receiving and dispatching parties to identify them and share data from and about them via cloud-based platforms. Supply chain data sharing technologies and standards have been maturing. In the past, data sharing between parties in a supply chain depended on bespoke point-to-point connections and specially negotiated agreements, but 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 for supply chain data and events to be passed between independent organizations using web protocols. And 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 by algorithm and AI systems that offer fast data flow along with interworking, yet separately owned, infrastructures.

Compared with the digital internet, the flow of items through the physical internet this Uberized supply chain model envisages is relatively slow, creating room to apply a great deal of computational intelligence to maximize the efficiency of the supply system network. When the supply network is completely open at full scale, we may be able to think of it as a logistics operating system that providers and resource users simply plug into, with the network and its operating system building and managing the system from the collective participation.

Better Together

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

The notion of an independent and self-determinant supply chain has arguably been an illusion for retailers all along. Clearly, trust in the network is a crucial factor for organizations participating in this new cooperative model. While everyone may be willing to contribute infrastructure and happy to recover cost when they have capacity, what happens when the pressure is on and their warehouses and distribution centers are challenged to handle high volumes of their own packages, let alone those of others in the network? The model requires state-of-the-art traceability technology and data-sharing protocols as well as a reliance on decision making in algorithms embedded in the network that respond in real time to supply, demand and capacity dynamics of the entire network.

Adversity is always a good motivator for both creative thinking and unexpected collaborations. As more and more retailers face an unhappy choice between costly supply chain independence and uncomfortable superdependence on the scale retail platforms, perhaps a third way is to be found in cooperation with the competition and in hypernetworking supply chains into a new type of scale platform where the power lies in the sum of its parts.