How Network Effects Impact Supply Chains
- A network effect increases a system’s value when additional elements are added to it
- Enterprises can benefit from network effects by leveraging data and analytics to unify operations across the supply chain
- AI- and ML-enabled tools allow companies to use their data to make and execute better decisions
Network effects can have a large impact on business strategy — from supplier costs to end-user relations. Not being familiar with the concept of the network effect may make it more difficult to achieve high efficiency and profitability in business verticals, especially in supply chain.
What is a network effect?
A network is a system of interconnected goods, and a network effect is the increase in the system’s overall worth when additional items are included in the network. Any situation in which the value of a product or service varies in relationship to the number of buyers, sellers or customers that utilize it experiences a network effect. The greater the number of buyers, sellers or consumers, the greater the effect of the network, and the greater the value of the product offered.
Consider a mobile phone. If the network only has one mobile phone, that network is not useful. With a greater number of mobile phones e.g., 25 or 30, the value of the network increases by being able to offer better customer service at lower costs to mobile operators.
Similarly, a smart network effect approach also includes the use of artificial intelligence or machine learning along with autonomous agents and network optimization to generate value by engaging with the massive amounts of data that are now easily available.
As with the example of mobile phones above, the greater the amount of data that can be captured and analyzed, through AI or ML-based tools, the greater the network effect and the greater the value that can be gained from it.
How do businesses benefit from network effects?
In the COVID era, businesses are implementing robust supply chain networks to reduce the havoc caused by unpredictable demand and supply, as well as lengthy lead times for information and physical goods. Customers prioritize efficient, flexible and quick operations more than brand loyalty or even high quality – this underscores the importance of resilient supply chains that can reliably deliver goods where they need to be.
For instance, in the retail market, the in-stock challenges and customer experience in-store can be solved by implementing network effects using software, analytics and data platforms specifically designed to enable unified and seamless network operations across the supply chain — for both planning and execution. The decline of vertical integration and the development of specialization are producing tremendous competitive advantages for organizations that can most effectively leverage their partners. All these factors make an efficient network necessary.
How are data and technology helping businesses realize network effects?
With the increase in adoption of (IoT) Internet of Things and the growing Industry 4.0 era, the ability to utilize precise levels of data, such as telematics, becomes critical to problem-solving. Visibility-based platforms without this level of analytics are not enough to drive high value or build a sustainable network effect.
The remarkable increase in the availability of data to make and execute decisions is driving a large portion of the network effect. Trading partners can generate immense value by interacting with the massive amount of data that is now available. All this makes AI- and ML-enabled autonomous agents for network optimization a crucial need moving forward.
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