Supply Chain Frontiers issue #50
Remember the early days of cell phones when a new model seemed to appear every week and each one looked dramatically different? This is typical of a new product market. Initially, wildly different variants are released and tested in the market, but eventually they converge on a common core set of features. That is, a dominant design emerges from the pack that becomes the de facto standard.
Is a similar process redefining distribution in the US?
In the early days of the bicycle, for example, there were many different designs from machines with no pedals to the famous Penny Farthing configuration. The basic format that we are familiar with today eventually gained the upper hand. The dominant design is not necessarily the best for all situations, but rather it is the one that satisfies the majority of users.
It seems that the logistics market has followed a similar evolutionary path in terms of distributing manufactured products in the US.
The dominant design of distribution over the last several decades has been ocean-based transport from China to (usually) U.S. West Coast ports and then into a multi-echelon distribution network. This means that most products are funneled into one of just 25 leading gateways and then are moved to deconsolidation points by truck and rail, and delivered by road to the final destination.
Both the public and private sectors are making huge infrastructure improvement bets that this form of distribution will not change anytime soon. Recent rail and intermodal infrastructure initiatives such as BNSF’s TransCon Corridor, CSX’s National Gateway, and Norfolk Southern’s Crescent Corridor are just three (very big) examples of these recent investments.
For products, after a dominant design is reached, the industry shifts focus from creating product feature innovation to improving efficiency. The number of firms in the market tends to decrease as does the level of new innovations or features. At some stage, complacency, or the arrival of another innovation, usurps the dominant design and the cycle is repeated. Think of how traditional photography was disrupted by digital cameras – which are now being disrupted by smart phones!
The big question is whether this current dominant design for distribution will be disrupted. This is the question that the MIT FreightLab is looking at as part of our continuing research on the future shape of supply chains and logistics services.
Our initial work has identified four macro trends that could fundamentally alter product flows, and hence unseat this broadly accepted pattern of distribution.
Densification of Product. This is the process of reducing product size while maintaining or increasing its value. Examples of densification include laundry detergent (shifting from liquid to concentrate), portable computer storage (think magnetic tapes to floppy disks to USBs to microSD cards), pre-recorded music (from vinyl to 8-tracks to cassettes to CDs) and electronic goods (consider all the components within a smart phone to their 1980s equivalents!).
Transporting product in smaller units enables companies to cut the number of containers, trucks, and rail cars used in distribution networks as well as potentially shift to other faster modes such as air.
Diversification of Sales Channels. Online retailers such as Amazon.com have grown rapidly over recent decades. Now, omni-channel retailing is gaining ground, where traditional retailers bundle online, mobile, and traditional channels to compete for sales. The retail store can become a DC and the DC a final delivery point.
This shift requires retailers to rethink the way they distribute product and could dramatically change the dominant multi-tiered echelon system of today.
Decentralization of Production. One of the primary reasons manufacturing is conducted across the globe is to achieve economies of scale; a single massive plant can reduce production costs. But, what if new manufacturing technologies and production processes dramatically diminish these economies of scale? Additive manufacturing and programmable robotics are just two examples. As the economies of scale are reduced, production can be decentralized into smaller, perhaps regionally-based manufacturing clusters that are closer to population centers.
Why ship product half way across the world and funnel them through ports when a more customized product can be built across town?
Digitization of Products. This is the long-predicted shift away from physical to information-based products. While this is old news for knowledge-based products such as books, music, and movies, it is now starting to happen to more traditional products. The intellectual property of the product (the design or recipe) is being bifurcated from the physical product (or the ingredients). This will not only lead to more decentralized production, it could spawn even more dramatic supply chain changes.
As these trends play out, there will likely be a period when many different logistics models emerge. The shape of the dominant model is unknown, but it will look very different from the one we follow today.
Perhaps the real question is not whether this current dominant design will be disrupted, but when.
This article was posted by the author, MIT CTL Executive Director Dr. Chris Caplice, on the Center’s blog Supply Chain @ MIT (www.supplychainmit.com). For more information on the research and MIT FreightLab, contact Dr. Chris Caplice.