Money in fashion is made with the back end. Yes, runway looks and fashion shoots get all the attention, but the ability to produce and deliver goods in the most efficient and cost-effective way ultimately separates the winners from the losers. But the supply chain we currently have is severely underfunded and in need of massive retooling. Cue Shekar Natarajan and his radical solution.
Natarajan is the executive vice president and chief supply chain officer of AEO, the parent company of American Eagle Outfitters, and he has a career spanning some of America’s major nameplates (Coca-Cola, Walmart, and Target, for to name a few). He believes the future of retail and delivery depends on creating a platform that all businesses can use to share supply chain assets and resources. After AEO acquired several logistics companies in 2021, Natarajan began to realize his idea of a shared back-end environment by creating a logistics platform that other companies could also access. This pool of shared resources quickly paid off. The network already has 67 merchants, including AEO, in its customer portfolio, as well as 30 logistics partners.
The model is designed to reduce costs over time for all network members and help them operate more sustainably. The idea is that brands and retailers will be better able to compete with the biggest companies in the world, at least when it comes to logistics. And the early days are seeing signs of success. Although in its infancy, the fledgling platform allowed users to deliver e-commerce orders to end consumers a day and a half faster and cut package miles by 10%.
Edward Hertzman: We all know the supply chain is broken. While the pandemic was the straw that broke the camel’s back, the system has been struggling for years. Add to this the rise of mega-players in the retail sector, where economies of scale have made it extremely difficult for small and medium-sized players to compete. Does that seem fair to you?
Shekar Natarajan: Obviously the supply chain capacity is limited. The pandemic has accelerated e-commerce by years and has made freight, warehouse, last mile, labor and other constraints more severe than ever. Growing retailers are now all competing for a greater share of these limited resources, but operating under the mistaken impression that they must own their own supply chain assets.
This doesn’t make sense for small and medium retailers because no matter how much they invest in acquiring more capacity, they will never be able to achieve the same efficiencies that allow them to compete on the supply chain. sourcing with the biggest players – the Walmarts and Targets of the world. These companies have been investing in their supply chains for decades, move tens of billions of products a year, and have the ability to have logistics companies prioritize their own shipments, leaving less capacity available for everyone else.
If you think about it, companies generally don’t own the factories where their goods are made, or the ships and trucks that transport those goods. They may own a distribution center, but they don’t own the workforce to run it. They do not own DHL, FedEx or UPS. So many retailers have tried to build their own vertically integrated supply chains, but building more assets and buying more resources is not the answer to achieving large-scale efficiencies. Sharing is.
This has been key for some of the fastest growing companies we’ve seen over the past decade. They have evolved rapidly, but they lack the assets to provide their services. Airbnb does not own a single hotel room. Uber does not own the cars in which passengers travel. And Seamless doesn’t have any restaurants. An open and shared supply chain network is the only way to level the playing field, so businesses of all sizes can compete with the biggest players.
I have heard you say many times that most supply chains are not efficient. Do you think brands and retailers would agree? Companies see their supply chains as competitive advantages that they like to keep close to their chest. Are they wrong?
The typical supply chain is small scale. Suppose a medium-sized retailer has a distribution center large enough to meet its fulfillment needs during the peak holiday season. That’s only about four weeks out of the year, meaning the center is only operating at about 60% capacity for the other 48 weeks. Additionally, due to land use regulations and the infrastructure needed to support operations, this facility will compete with other companies’ distribution centers in the same area for resources such as electricity. and the workforce.
Even though this hypothetical company is extremely good at controlling this narrow part of its supply chain, it will end up paying proportionately more to operate than larger corporate retailers because they can access efficiencies at massive scale. The mid-level retailer will never be able to even the odds with the bigger names.
Some retailers have ruled for years by having a superior back-end. If they can’t win in sourcing and logistics, where is their competitive advantage?
Listen, the back end is not the place to try to compete with other retailers and brands – the front end is. Retail companies should be free to focus on product competition and customer experience. It’s what they do best and it’s what customers expect of them. Buyers don’t care about back-end operations, the engineering behind a company’s e-commerce site, or trucking capacity constraints. Resource sharing generates efficiencies that allow each brand to compete on its core offerings.
Your company you work for acquired AirTerra and Quiet Logistics last year. Was this the first step in building this type of network? And why did you land on these two firms? What separated them from the many new logistics companies in existence?
I started imagining this new kind of shared supply chain model about four and a half years ago, and AEO’s leadership team has been extremely supportive of bringing the concept to fruition, culminating in these acquisitions of 2021. AirTerra consolidates packages from multiple shippers and delivers them through its transportation network to generate economies of scale. Quiet Logistics operates a network of fulfillment, consolidation and sorting centers that allow brands to position inventory closer to stores and consumers’ homes. Both companies are rooted in a sharing model.
Can you tell me what originally inspired this idea of creating an open supply chain network? Was it to create an advantage at American Eagle or was it triggered long before you joined AE?
I grew up in an area of India where many people did not have access to adequate educational opportunities or even electricity, and I think the developed world could learn some lessons about managing shortage in the developing world. Businesses now have to manage the kind of limited resources that less well-off people around the world have always had to deal with.
In my opinion, most midsize retailers [firms with annual retail between $100 million and $1 billion] have two big problems. First, they mistakenly perceive their brick-and-mortar stores to be the best places to add last-mile fulfillment capacity. Retail stores are usually too small for this. Additionally, store inventory often has to be picked, packed, and shipped to a customer across the country, which is very inefficient. And store associates aren’t logisticians, so they can’t be expected to optimize execution on their own. Solutions like curbside pickup have become very popular during the pandemic, but so have same-day and next-day home delivery, and these present additional challenges because, for most businesses , the last mile is actually about 1,300 miles.
And that doesn’t even address the issue of why we all receive home delivery orders in multiple packages, most of which have a small item packed into a large box full of packing material. What if everything came in one box? We seek to help brands bring their resources to the consumer’s door – the door click, as we call it.
The second problem is that midsize companies will never achieve the same scale that allows larger retailers to become hyper-efficient. Walmart, for example, can move 50 billion products a year. It can move as many units in half a day as AEO does all year. No matter how well a mid-sized retailer’s supply chain is managed or how much they invest, that business will never be able to catch up and compete in the supply chain with the biggest names. .
I started considering this shared platform when I realized that supply chains are not competitive advantages for brands; efficient supply chains are. If every retailer shared supply chain assets, we could reduce transportation miles by 9 trillion per year, have 90,000 fewer trucks on the road, and dramatically reduce the industry’s carbon footprint. Ultimately, supply chain scalability is a matter of sustainability, both environmentally and financially.
Edward Hertzman is the founder and president of Supply Log and the executive vice president of Fairchild Media.