What is the Network Effect?
The “network effect” is the phenomenon of a network’s value to each participant increasing, as the number of participants in the network increases.
Within the network, the greater the number of participants, the greater the network effect, and the greater the associated value of the offering. A social network is a good example of this phenomenon. If it consists of you and ten other random people, it's of very limited value to each person. If it includes almost everyone you know, it's hugely valuable. It’s important to note, that network effects can only be realized if participants are on the same network. Fragmentation only decreases network effects and value.
One Network's Perspective on the Network Effect
While the Network Effect is powerful in and of itself, in networks like Uber, AirBnB, Amazon and Alibaba, in supply chains the effects are magnified and multiplied (see The Network Effect for Supply Chains). This is because you have many more participants, many more touch points, many more points of friction. Networks streamline all of this
The need for networks has arisen due to the evolution of business. In the past, major brands were vertically integrated thus centrally controlling the assets and inventories throughout their supply chains. Today, at least 80% of a company’s assets and materials are owned by trading partners. This horizontal structure along with the outsourcing of supply chain management, leverages trading partners who specialize in particular aspects of distribution, logistics, manufacturing and material procurement, while also providing geographic cost advantages.
While the investment and costs related to the assets, materials, logistics, distribution, manufacturing and labor required to operate the various network tiers has been shifted to trading partners, so has the visibility and control. More importantly, 80% of the data required for decision-making now resides outside the brand owner’s enterprise. Added to that is the fact that each of these trading partner enterprises will be making decisions to optimize their own performance without understanding the impact, positive or negative, they may be having on others in their ecosystem.
The key is to create a win-win scenario for all trading partners, with the ultimate goal to deliver to end-consumers the highest level of service at the least landed cost. The network enables coordination of all assets and inventories as a team on a real-time basis across the supply chain.
Network Effect Resources
Webinar: The Power of the Network Effect in the Supply Chain
Alibaba, Amazon, AirBnB, Uber, and others, have proven the unmatched superiority of the multi-party, real-time network model over traditional hub and spoke type relations. Learn how to leverage the Network Effect in your supply chain to improve service while lowering COGS across all parties.
Supply Chain Networks: Think Upside Down
You need to stand conventional thinking on its head! The place to start is with the targeted business outcomes you want to achieve – namely delivering the “right product, at the right time, at the right quality, at lowest cost,” and then determine the supply network variables and flows required to achieve that optimal business result. Find out how One Network helps you achieve it.
Understanding Supply Chain Networks (ChainLink Research Report)
ChainLink Research’s new report, Supply Chain Networks Revealed, examines the breakthrough business strategy employed by leading companies, and that is winning in today’s fast moving and hyper-competitive global landscape.
