In May 2019, FLEXE Co-Founder and CEO, Karl Siebrecht, spoke at the D3 Retail Supply Chain Summit on structural flexibility, collaboration within logistics networks, and how to prepare for future changes.
Here are a few of the topics he explored:
- Structural flexibility & access to scale: How collaboration drives value in logistics networks
- The digital logistics ecosystem: New technologies that are enabling greater levels of collaboration
- The world is changing fast: How your business can thrive through asset-lite agility
Below is the transcript from his session; copy has been revised for brevity and clarity.
What is structural flexibility?
All right, thanks everyone, I'm the last stop before lunch. I'm gonna take just a couple minutes to talk about something that we call “structural flexibility.” We describe “structural flexibility” as a way to compete better in a dynamic or uncertain business environment. So, I'll start with a metaphor, I served a number of years in the Navy.
Think about an aircraft. When aircrafts were introduced to the military, it was, obviously, a big deal. You know, a new way to compete, a new way to fight. What also came along with that was a lot of necessary infrastructure or logistics. You want to compete, but now we've got to figure out how to position aircraft around the world. You must find friendly countries who will allow you to set up an airbase and put people there, then there's a lot of infrastructure and then you've got aircraft deployed.
But then it turns out, skirmishes may pop up in places that aren't close to your airbases. So, somebody somewhere had this crazy idea, "Let's put airstrips on top of ships, and let's load that ship up with a bunch of aircraft and people and let's enable that ship to go like 40 knots. Then we'll pre-deploy those ships around the globe and so now when something pops up, we can get there in a matter of days, if not hours."
That's "structural flexibility."
It's accepting the reality that the future is uncertain. Admitting that a way to compete better is to take that reality into account and figure out how you can adapt and become more agile. And then somehow execute on a plan that delivers on that need to be more agile.
How does “structural flexibility” work in logistics?
A more current story, and one that is obviously more relevant because we're all here to talk about logistics and fulfillment and eCommerce, is the recent news from Amazon [announcing one-day shipping].
Two years ago at this same conference, FLEXE rolled out next-day fulfillment. And it was pretty exciting. But, let’s talk quickly about what we do.
FLEXE has a very, very large network of warehouse facilities all connected through a software platform. One of the things we enable companies to do is to pop up fulfillment nodes anywhere [in North America]. It's an on-demand model, so you don't have to sign up for long-term leases. You can be very agile and expand, to compete and get faster, more affordable delivery.
So, it turns out that the way the math works in the U.S. is, if you want next-day, ground delivery, you need 16 fulfillment nodes spread out around the country. And with those 16 nodes, you can reach 98% of the U.S. population in one day. We rolled that out two years ago. It worked really well—there was a lot of interest, a lot of wins, a lot of clients, and we were expecting that because 12 years earlier, Amazon in 2005, they had launched Prime with this promise of two-day delivery.
We figured, "Hey, it's been 12 years, it's time to arm companies with a new ability to do even better than that, right? I see your two-days and I'm going to up you to one-day…”
One of the things we did not anticipate was the reaction we heard from prospects and customers which was, "Hey, that sounds awesome. Can you help me just get to two-day delivery? Because that's really hard too. We've had lots of initiatives, we've tried different software systems, we've tried different providers, and we feel like we're gaining on it, but, man, like two-day ground is hard to scale, we did not anticipate this."
So, we've helped a lot of companies with that too. But of course, inevitably, two years go by and last week, no one was surprised by Amazon’s announcement, “Hey, Prime is now one-day delivery.” Great. So, the goalposts keep moving. Now, a lot of companies, a lot of great companies, have figured out how to do two-day ground. That is more of a common thing. I still would say it's not easy in a lot of cases, but they've figured it out.
But we can all have a philosophical debate about whether consumers really need stuff next day. I think at some level that's moot because Amazon is so large, so many of us are Prime members, that they're just resetting expectations. I wouldn't have said 10 years ago that I needed to get things delivered in a day, but because that's now possible, that becomes my expectation. So, now they're moving towards one day. There was an analyst at Morgan Stanley who did a bunch of math and estimated that Amazon will spend about $5 billion above their existing fulfillment expenses in 2020 to go from two-days to one-day. Five billion on top of close to the $30 billion that is their annual spend. Just an extra 5 billion, and then we'll take it to one day. There’s a lot of change happening in logistics.
How did we get here? The old model of logistics
Why is this so hard? You've heard a lot of folks, including the ones on this panel, are living it today. It's very difficult. I think one thing that's important to remember is, if you wind the clock way back and think about retail, this is what's actually happened.
For forever, the model for retail was, you bring goods to a place, the people go to that same place and they transact. That's been the retail model, right? For millennia, literally. The format has changed to shopping malls and strip malls and big-box stores. The format changed but the fundamental model for a long time was the same. Bring the goods to a place, the people go to the place they transact. And $1.5 trillion is spent to move those goods into those places. To put products on store shelves so that this model for commerce works.
The internet changed everything
For decades, this has been optimized and companies have gotten really, really good at it. Then, about 20 years ago, the internet came along and changed everything. No longer does a person have to go to the place to buy stuff. I know I'm saying stuff that everybody knows. But it’s important to put it in context.
Think about it. For millennia, it worked this way. A logistics industry was built to support one way of doing things, and then that way of doing things changes. I can order stuff online, I don't have to go to a store, I can shop on my computer, my mobile phone and I can get it delivered. And that $1.5 trillion infrastructure was built for something different.
Most of those assets and technologies don't work in eCommerce. And this is what has disrupted this massive industry. As well as the fact that eCommerce is growing at 5X the rate of overall retail and there’s this incredible company, Amazon that is changing all the consumers' expectations. I believe Amazon is the best company that's ever been built on the planet, the most innovative company and they continue to innovate at a massive scale. Which is near impossible to do.
How to survive in the new world
So, the world has changed, but more importantly, it keeps changing. This is really painful to the retail market. Something like over 15,000 retail stores have closed since 2010. Obviously, a bunch of businesses have gone away. So dire, dire, dire, right? But there are a lot of companies that have figured out new ways to compete. Many are thriving. The reason? I’ll sort of generically boil this down to what my marketing 101 professor would say, "Differentiation."
In a world where you can't replicate what somebody else is doing and do it better, you've got to find a way to be different, right? How many companies can replicate what Amazon's doing and do it better? I'd say exactly zero. And I would further submit that no one's ever going to catch up with them. They have spent tens upon tens of billions of dollars in logistics infrastructure that no other company will ever be able to replicate. So, the question is, what do you do? How can you adapt? Can you find a way to adapt to this continuous change?
One of the keys is differentiation on the front end of a business—the consumer-facing shopping experience. There has been fantastic innovation and differentiation there. Examples like Glossier with pop-ups, Nike and Adidas with shoe drops. Digital Native brands like Casper and Away Luggage have built brands online and then extended those online brands to brick-and-mortar retail. This is often done with small square footage, small footprint retail stores. More of a boutique shopping experience. Again, that's great innovation on the front end of the business.
On the back end of the business—i.e. that $1.5 trillion logistics portion—a bunch of companies have been able to create differentiation there as well. This is one of the areas where I'm very proud to say we've been able to help.
A new solution
A lot of digitally native brands don't have much existing infrastructure. But with them, there's often a trade-off in a capital-constrained environment. It's sort of, "Hey, do you want it to get there fast or do you want it to be relatively inexpensive?" It's amazing if you don't have to make that trade-off. Lull, a mattress company, is an example is a company that popped up a multi-node network through FLEXE. No leases, no fixed costs, et cetera. They were able to cut their delivery times in half and save about 30%.
On the total other end of the spectrum, a more mature company like Ace Hardware is also able to differentiate on the back end of their business. How? They did this great program, they called it Hurricane Heroes. And what they were able to do is, on top of their existing fixed infrastructure of warehouses, they popped up another 10 nodes. To those 10 nodes, they sent high-moving SKUs that changed from season to season and region to region. So, they put generators and flashlights and sandbags and the like down in the northeast. Buffer capacity in a market where it's needed. This enabled them to have a fantastic and differentiated service delivery at a time of need. Snow shovels and salt in the northeast, emergency gardening equipment in the southeast.
The broad broader point is, companies can differentiate through logistics because they can offer a differentiated consumer experience—speed and/or cost. This is what we call "structural flexibility." And that's the favorite little image our marketing team has ever found. "Structural flexibility," again, it's an approach to competing better in a dynamic or uncertain environment.
Structural flexibility starts in the warehouse
We believe that in logistics, "structural flexibility" actually starts in the warehouse—arguably, the most boring of all the components of the logistics, you know, the cost structure of warehousing. But here's the thing about warehousing. We think it's the fundamental constraint on a logistics flow or logistics network. Because given that warehouses are bought and sold or transacted via long term leases, companies commit capital and then they'll know their warehouse is where it is for multiple years.
How are you going to react when you just signed a five-year lease based on the forecast, but you get a year into it and your forecast wasn't right? How many high growth businesses can have a super accurate forecast looking five years out? It's a very, very difficult thing. So, if your warehouses are where they are, they are the constraint. You can optimize and you can try this carrier versus that carrier, you can try drones, you can try a lot of things, but if the hubs or the nodes in your logistics network are fixed, or semi-fixed, you're constrained by that.
If you can relax that constraint, you can fundamentally rethink the flow of your goods. If you're more like a startup business, you don't have a lot of legacy infrastructure and you can add nodes from 1 to 10 as your business grows, and take your delivery promise from 4 or 5 days down to 1. Or if you're a massive fortune 50 company, you can augment your fixed infrastructure with a flexible additional network to perform better during seasonal peaks and new product launches and such.
If you can relax that constraint and think of warehousing fulfillment not as a fixed capital expense, but as a variable expense through an on-demand model. If you can have scale and technology that makes all of this actually feasible and possible, that can be a pretty good thing and that's why we created FLEXE.
Very simply, FLEXE is a marketplace model. We connect our customers, the high growth digital natives and big enterprises, through a common software platform to a large network of some of the world's best 3PL operators out there. Global 3PLs down to regional operators. And through that, our customers have a unified single experience, control over their inventory, and control over their orders. Even though the operations can be performed by different operators out there, it all happens in a unified experience. And there’s one common set of metrics and dashboards to measure the things you care about, like cost-per-unit, speed, and quality, all measured through one interface without those fixed costs. So, that's FLEXE.
End-to-end supply chain solutions
The world has changed. The good news is, it's not just FLEXE. There are a bunch of companies out there that are innovating in logistics. A bunch of them are here today. There are market leaders, more mature companies, that are also starting to innovate in new, more vigorous ways to respond to this competition.
Goldman Sachs did their quarterly venture capital summary of last quarter, and the number one most invested category in Q1 of 2019 was logistics tech. Think about that. The number one category of venture investment in Q1 was logistics tech. I can tell you that five years ago, when I was at my first supply chain conference just after we started FLEXE, I got the stink eye from a lot of people. “Innovating and warehousing, I don't get it.” But because the world has changed, because Amazon is the force that they are, and because they have retrained us all to have higher expectations, companies need to adapt. And now there's a whole crop of companies that are building new innovative solutions to help make that happen.
So, I'll leave you with wise words of one of my favorite philosophers ever, Mike Tyson. “Everybody has a plan until they get punched in the mouth.” The question is, are you anticipating getting punched in the mouth? Have you accepted the reality that it's likely going to happen? And what are you doing about it? What are you doing about it in a scalable, structural way? And that's what "structural flexibility" is all about.