Every successful business relies on being part of an efficient supply chain to compete with its competition and ultimately offer customers a fair price. Industries are constantly evolving and changing, now more-so than ever, and those that fail to innovate will eventually fail as others seize opportunities that arise and profit from them.
Channel efficiency is generally thought of as cutting out middle men, to reduce the number of players that each receive a profit for their contribution and therefore allow for the lowest end price.
Take the rise of the supermarket and corresponding decline of independent family stores, as the supermarket put itself in a position to manage the whole supply chain between producer and customer, therefore removing the need for a wholesaler. This enables the supermarket both a larger cut of the total profit within the supply chain and more competitive prices than the traditional retailers to blow them out of the water. This is what’s known as ‘disintermediation’:
This example is nothing new, but it’s still happening today in all sorts of industries – increasingly fuelled by technology. Quite literally in the case of Uber, which has grown rapidly from launch to now covering 1 million taxi rides per day, all in just seven years. From a supply chain point-of-view, a simple mobile app has managed to wipe out the need for a taxi company and it’s associated high fixed costs of cars, an office and staff to man the phones, by simply connecting a driver in their own car with the customer looking for a ride. Consequently, Uber needs only a fraction of markup to cover its costs and make profit, therefore changing the makeup of an efficient supply chain within its industry.
However, I also wanted to take a look at the other side and how ‘reintermediation’ is making supply chains more efficient in the digital age – that being the addition of another player into the channel.
A great example of this is Deliveroo, a company that makes even Uber look old at only half its age – founded in 2013. Deliveroo is an online food delivery company that partners with restaurants across cities to manage the whole takeaway process from restaurant pickup to customer delivery, again through a mobile app.
This has affected the industry in two ways. Firstly, it’s allowed for more restaurants to offer a delivery service where the traditional internal cost of doing so proved too large a barrier, and secondly, it has created a more efficient supply chain of delivery for those previously doing so through their own service. For the purposes of re-intermediation we should focus on this second point, but it’s crucial to recognise that the Deliveroo service has created a market for eateries that couldn’t previously deliver but now can at low cost.
Without Deliveroo, a delivery would require the investment costs of a vehicle(s), employment of driver(s) and logistics planning. Consequently, often there’s a need for large minimum orders and it may only be profitable during peak periods. Similarly to Uber, Deliveroo takes away these fixed costs and planning, so from the restaurant’s point-of-view, a delivery becomes the same as just another customer pick-up. And Deliveroo also benefits from relatively low fixed costs because its drivers maintain their own delivery vehicle and phone to access the app, so they themselves solely focus on the in-app algorithm to match drivers, restaurants and hungry customers in order to meet their own 30-minute delivery target.
Therefore, whilst re-intermediation adds another player to the supply chain, in this case the efficiency is still increased given the smaller markup required to cover costs and still allows for profit at each stage:
Whilst it’s usually the case that supply chains are made more efficient by disintermediation rather than reintermediation (i.e. the Uber example here as opposed to the Deliveroo one – although I should acknowledge that Uber are also competing directly with Deliveroo in this restaurant delivery space through their Uber Eats service, and therefore exercise reintermediation themselves in that case), if by absorbing a new player into the chain that player can split the cost of operating a key channel activity more efficiently as a standalone service that’s sold across multiple competitors in the industry, even with its own profit margin added into the chain the overall production cost may well reduce.
It’s not revolutionary to suggest the growth of technology will continue to disrupt industries high and wide – those that haven’t as yet been touched and even re-design supply chains of those already influenced by technology.
If you think about the fastest growing companies over the last 10 years or so, you’d be right in thinking there’s more than a fair share of technology companies. A recent study by KPMG found that today’s market leaders tend to define industry specific disruptors as opportunities, while trailers listed the same factors as challenges – and also listed exploitation of technology as part of a three-fold strategy to gain a decisive competitive advantage, alongside retaining and retraining of employees and a solidifying company culture.