In todays environment we are part of a vast number of networks whether we like it or not. In our personal lives, it seems impossible to escape the craze of social media. In our business lives, networks are not solely used to keep up with trends and technology anymore, but rather necessary to gain access to the market. Networks depend on their users just as much as the users are becoming increasingly dependent on them – eased connectivity only scales this impact known as the network effect.

What is the network effect in container logistics?

The network effect is a phenomenon whereby a good/service becomes more valuable as more people use it, typically this value increases by the square of the number of users ~n^2. There are a few causes for this to happen: The direct effect defines a rise in value due to increased usage. This is the case, as more partners and transactions should go hand in hand with a higher economic value being created. Indirect effects occur when the usage of an alternative good / service increases the value of the original. This is often the case in the IT industry, where the availability of certain programmes that interface with an underlying software increases the demand and therefore the value of the software itself.

Finally, it must be considered that the value from any network comes from one’s own participation („inherent value“) as well as the benefit which comes from other people being active („network value“). As any network is a back and forth of „transactions“, companies need to determine whether they get out at least as much as they contribute in the long run.

five ways big data is changing shipping

How prominent is this effect in the logistics industry?

Logistics companies aim to build their personal network to stay competitive. The value proposition of a large network is that each new partner contributes a benefit in terms of expertise and/or business opportunity. Whether it is the big carriers joining arms to gain market share or smaller players finding new connections in high demand regions, everyone is trying to get a bigger piece of the pie. It gets dangerous however, when these companies try to scale their network too large and too fast. An example would be joining a network of freight forwarders.

When the network is small and only one or two members are present in each country, it is easy to select, approach and work with a new partner. Once the network has critical mass however, members suffer from increased complexity and it gets difficult to keep up with quotations and communication. For an opposing view let us look at the container industry: Traditionally all parties involved rely on a limited network to conduct their global operations. For a typical company this can be anywhere between 15 and 25 partners. The problem is that these „personal“ networks suffer from similarity bias. Companies often share the same partners and in turn the same problems as they have limited capabilities to grow their network on their own.

The challenge for both individual companies as well as larger partner networks is clear: „sustainable growth of a network“. Here, a strong infrastructure must be in place to ensure growth without sacrificing value. To support this, we expect the advent of a fully interconnected future in logistics:
With the physical internet slowly becoming a reality, shipping and logistics will become a fully connected industry with relatively easy access to all partners. This will further drive a disintegration of the container value chain, which entails even more touch-points amongst all parties involved. Equipment optimization will be cloud based with a direct interface to the networks.

Here are three things that you can do right now to maximize the value from your network:

– Identify value drivers – What drives value in your business and what characteristics do you need in your network partners to maximize this value?

– Grow your network by adding partners with the relevant characteristics aim to avoid similarity bias. Sometimes the best way to do this could be simply via joining an existing network with the desired partners.

– Establish processes and technologies to (a) maximize the network benefits and (b) keep complexity and costs of a growing network to a minimum. This will be the hardest task, but also the one with the highest potential rewards: Ask yourself what pain points are introduced purely by growing your network and then figure out how to remove them.

Stay smart through collaboration in shipping 

After taking a deeper look into the network effect, its value drivers and how this applies to the logistics industry, it becomes evident that companies need to make use of „smart“ networks to achieve competitive advantages. Networks are inevitable in keeping up with the requirements of global trade, the key is in choosing the right partners and processes that bring real value to your business. A smart network not only delivers this value through its size and composition, but also by leveraging tools and technologies to manage complexity and keep the marginal value of each additional network node positive.

Join our network in container logistics 

xChange is a neutral online network for one-way container moves/SOC containers, making it simple and efficient to find/offer, negotiate and use/supply containers on a one-way basis through container-xchange.com. The network now has over 190 member companies and facilitates container one-ways globally across more than 2,500 locations.

xChange provides a sustainable value proposition to its members via a powerful search engine that finds the best partners for each potential transaction, keeping all companies on the same contractual framework, making sure that all transactions are tracked and traced end-to-end as well as supporting the entire billing and invoicing cycle.