Fast Company: American Eagle Exec: The Supply Chain Is Broken. Here’s How To Fix It

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By Edward Hertzman | Link to article

Money in fashion is made with the back end. Yes, runway looks and fashion shoots garner 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 a massive retooling. Cue Shekar Natarajan and his radical solution.

Natarajan is the executive vice president and chief supply chain officer for AEO, the parent company of American Eagle Outfitters, and he has a career spanning some of the top U.S. nameplates (Coca-Cola, Walmart, and Target, to name a few). He believes that the future of retail and delivery hinges on creating a platform that all companies can use to share supply-chain assets and resources. After AEO acquired several logistics companies in 2021, Natarajan began to execute his idea of a shared back-end environment by building a logistics platform that other companies could access as well. This shared resource pool paid quick dividends. The network already counts 67 retailers, including AEO, on its client roster, along with 30 logistics partners.

The model is designed to lower costs over time for everyone in the network and help them operate more sustainably. The idea is that brands and retailers will be better able to compete with the largest companies in the world—at least when it comes to logistics. And early days are seeing signs of success. Though in its infancy, the nascent platform has allowed users to deliver e-commerce orders to end consumers one and a half days faster, and reduced parcel miles traveled 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. Couple that with the rise of mega players in the retail space, where the economies of scale have made it extremely difficult for small and midsize players to compete. Does that sound about right to you?

Shekar Natarajan: It’s obvious that supply-chain capacity is constrained. The pandemic accelerated e-commerce by several years and made freight, warehouse, last-mile, labor, and other capacity constraints worse than ever. Growing retailers are now all competing for a bigger share of these limited resources, but they’ve been operating under a misperception that they need to own their own supply-chain assets.

That doesn’t make sense for smaller and midsize retailers because, no matter how much they invest in acquiring more capacity, they’ll never be able to achieve the same efficiencies that let them compete on supply chain with the biggest players—the Walmarts and Targets of the world. Those enterprises have been investing in their supply chains for decades, move tens of billions of products a year, and have the might to get their own shipments prioritized by logistics companies, leaving less capacity available to everyone else.

If you think about it, companies don’t typically own the factories where their goods are manufactured, or the ships and trucks that move those goods. They may own a distribution center, but they don’t own the labor that runs it. They don’t 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 hyper-scale efficiencies. Sharing is.

That’s been the key for some of the fastest-growing companies we’ve watched over the last decade. They’ve scaled quickly, but they don’t own the assets needed to deliver their services. Airbnb doesn’t own a single hotel room. Uber doesn’t own the cars passengers ride in. And Seamless doesn’t own restaurants. An open, shared supply-chain network is the only way to level the playing field, so companies of all sizes can compete with the biggest players.

I heard you say repeatedly that most supply chains aren’t efficient. Do you believe brands and retailers would agree? Companies view their supply chains as competitive advantages that they like to keep close to their chest. Are they wrong?

The typical supply chain is sub-scale. Say a midsize retailer owns a distribution center that’s big enough to accommodate its fulfillment needs over the peak holiday season. That’s only about four weeks of the year, which means the center runs at only about 60% of capacity for the other 48 weeks. Also, because of land-use regulations and the infrastructure needed to support operations, this facility will be competing with other companies’ distribution centers in the same area for resources like electricity and labor.

Even if this hypothetical company is extremely good at controlling this narrow part of its supply chain, it will end up paying proportionally more to operate than the biggest enterprise retailers because they can access hyper-scale efficiencies. The mid-tier retailer will never be able to level the playing field with the biggest 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 competing on product and customer experience. That’s what they do best and that’s what customers look to them to do. Shoppers don’t care about back-end operations, the engineering behind a company’s e-commerce site, or trucking capacity constraints. Sharing resources drives efficiencies that allow every brand compete on its core offerings.

Your company you work for acquired AirTerra and Quiet Logistics last year. Was this the first step in putting this kind of network together? And why did you land on these two firms? What separated them from the many new logistics companies out there?

I started envisioning this new kind of shared supply-chain model about four and half years ago, and the AEO leadership team has been extremely supportive of making the concept a reality, culminating with these 2021 acquisitions. AirTerra aggregates packages from multiple shippers and delivers them through its transportation network to drive scale efficiencies. Quiet Logistics operates a network of fulfillment, consolidation, and sortation centers that let brands position inventory closer to stores and consumers’ homes. Both companies are anchored 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 sparked long before you joined AE?

I grew up in an area of India where many people didn’t have access to adequate educational opportunities or even electricity, and I think the developed world could learn a few lessons about dealing with scarcity from the developing world. Companies are now having to deal with the kind of constrained resources that less-well-off people across the globe have always had to deal with.

In my view, most midsize retailers [firms with annual retail between $100 million and $1 billion] have two big problems. First, they misperceive that their brick-and-mortar stores are the best places to add last-mile fulfillment capacity. Retail stores are typically too small for this. Also, inventory in the store often has to be picked, packed, and shipped to a customer way across the country, which is highly inefficient. And store associates aren’t logisticians, so they can’t be expected to optimize fulfillment on their own. Solutions like curbside pickup have become really popular during the pandemic, but so have same-day and next-day home delivery, and those present additional problems because, for most companies, the last mile actually equates to about 1,300 miles.

And that’s not even getting into the problem of why we all get orders delivered at home in multiple packages, most of which have one tiny item packed in a big box filled with packing material. What if all the stuff came in one box? We’re looking to help brands share resources all the way to the consumer’s doorstep—click to door, we call it.

The second problem is that mid-tier companies will never achieve the same scale that lets the biggest retailers become hyper-efficient. Walmart, for example, may move 50 billion products a year. It may move as many units in just half a day as AEO does all year. No matter how well-run a midsize retailer’s supply chain is, or how much it invests, that company will never, ever be able to catch up and compete on supply chain with the biggest names.

I started envisioning 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 a year, have 90,000 fewer trucks on the road, and massively reduce the industry’s carbon footprint. In the end, scalability in the supply chain is about sustainability—both environmentally and financially.

Edward Hertzman is the founder & president of Sourcing Journal and the executive vice president of Fairchild Media.