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Why the platform economy spells good news for supply chain

Why the platform economy spells good news for supply chain

Debraj Bhattacharya
Consumer Services

Bertrand Russell famously said: “The only thing that will redeem mankind is cooperation.” The virtues of cooperation have long been espoused among all cultures. In his treatise on statecraft Arthashastra, Kautilya speaks of “shada gunya siddhanta,” or the six-fold policy on foreign affairs that ensures success in international relations. One of the six principles of surviving war (competition, in today’s business landscape) is samashraya, or joining hands with those with similar aims.

While the virtues of sharing and cooperation cannot be emphasized enough, neither Bertrand Russell nor Kautilya could have imagined that they would find application in an area of business that has historically thrived by operating on the principle of exclusion, in silos. Yes, we are talking of supply chains.

Supply chain shake-up

Supply chains the world over have primarily focused on vertical integration. Whether expanding the warehousing and distribution network by adding distribution centers and Fulfillment Centers or adding logistics capabilities by expanding the carrier fleet, the moat of differentiation for supply chain leaders has traditionally been the quality and range of their asset base. Not anymore. Welcome to the era of shared economy in supply chains.

Let us imagine, for a moment, a platform where multiple retailers can be onboarded, each of whom agrees to partake in the benefits of this shared ecosystem. Each agrees to share its logistics and fulfillment assets with others. An anchor retailer could likely build this platform and maintain it. The member firms pay an upfront fee for registration and can use this shared platform depending on individual license agreements. But why would these members join the platform? One powerful driver is access to shared assets.

Sharing assets

Retailers like American Eagle Outfitters have already embarked on this journey. The Pennsylvania-headquartered lifestyle and apparel retailer acquired Quiet Logistics in December last year for approximately $360 million. It also acquired AirTerra to improve the fulfillment model and carve out a new business around a logistics platform. The Quiet Platform that ensued has been onboarding retailers at a remarkable pace. It already boasts some 60 partner brands, including Steve Madden, Kohl’s, and Peloton. The idea behind this plug-and-play service is to pool the logistics and fulfillment assets of the partner brands, all of which the partners can use. As it turns out, the whole is greater than the sum of its parts.

While more established players in this area like Fulfilment by Amazon and Walmart GoLocal have much larger distribution networks, retailers like American Eagle are taking the lead to counter that. Let us say an order comes through the American Eagle website. This order could be fulfilled by a warehouse that also services Steve Madden and gets delivered by vans that move products for Kohl’s. By pooling distribution and logistics assets, partner retailers on a shared platform can improve delivery lead times and last-mile fulfillment. They can also enhance the efficiency of load consolidation, routing optimization, and load balancing of carriers by offering a wider choice of SKU- to-trailer mapping and a more robust delivery promise.

Turning cost centers into revenue centers

For American Eagle, the platform also does the added function of turning a traditional cost-center function like supply chain into a revenue center. And for partner retailers, it reduces unit cost—clearly, a win-win situation for both parties. More importantly, the entity benefiting most from this arrangement is the end customer, by getting goods delivered at a lesser lead time and with more options.

Emergence of the platform economy

The platform economy is already a mainstay in today’s changing business landscape. After all, who can imagine life without the Ubers and Zomatos of the world? A significant benefit of the platform economy is that the marginal cost of customer acquisition approaches zero after a critical mass of customers has been onboarded. For the supply chain equivalent of such platforms, the marginal cost of customer fulfillment nears zero, and with more pooled distribution assets, it drops further.

Sharing will trump exclusion

To counter the juggernaut of Amazon and Walmart, retailers must think innovatively. And a shared economy in supply chain provides a brilliant solution. Unit economics will determine the success or failure of omnichannel retailers in days to come.

Suffice to say that future champions in supply chain will thrive not on exclusivity, but by sharing.

Tags:
Digital Commerce
Consumer Services

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