Wednesday, August 10, 2005

The Long Tail - Can we find a place for it in the logsitics world?

The Long Tail in probability theory
The long tail is the colloquial name given to a long-known feature of statistical distributions (Zipf, Power-laws, Pareto distributions and/or Levy distributions ). They are also known as "heavy tails", "power-law tails" or "Pareto tails". Such distributions can be visualized by the image of the graph on this page. In these distributions a vast population of events occur very rarely in the yellow (or more generally have low amplitude on some scale, e.g., popularity or sales) while a small population of events occur very often in the red (or have high amplitude). The huge population of rare (or low amplitude) events is referred to as the long tail. In many cases the rare events—the ones on the long tail—are so much greater in number than the common events that in aggregate they comprise the majority. My question is this, can we find (or take advantage) of this concept within the transport and logistics world?

The Long Tail by Chris Anderson
The phrase "The Long Tail," as a proper noun, was first coined by Chris Anderson. Beginning in a series of speeches in early 2004 and culminating with the publication of a Wired Magazine article in October 2004, Anderson described the effects of the long tail on current and future business models. Anderson observed that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough. Examples of such mega-stores include, Netflix and even Rhapsody. The Long Tail is a potential market and, as the examples illustrate, successfully tapping in to that long tail market is often enabled by the distribution and sales channel opportunities the Internet creates. Do these opportunities exist for other retailers, of the bricks & mortar type, and can 3PL organizations provide services to support this pursuit of the Long Tail?

A former Amazon employee described the Long Tail as follows: "We sold more books today, that didn't sell at all yesterday, than we sold today of all the books that did sell yesterday." Yeah I know, it sounds crazy...but read the sentence again...and its not a Yogi Bera quote...

"We sold more books today, that didn't sell at all yesterday, than we sold today of all the books that did sell yesterday."

Can we aggregate market opportunities via reverse logistics service offerings, that span multiple markets and multiple customers?

Relationship between the Long Tail and storage and distribution costs
The key factor that determines whether a sales distribution has a Long Tail is the cost of inventory storage and distribution. Where inventory storage and distribution costs are insignificant, it becomes economically viable to sell relatively unpopular products; however when storage and distribution costs are high only the most popular products can be sold. Take movie rentals as an example: A traditional movie rental store has limited shelf space, which it pays for in the form of monthly rent; to maximize its profits it must stock only the most popular movies to ensure that no shelf space is wasted. Because Netflix stocks movies in centralized warehouses, its storage costs are far lower and its distribution costs are the same for a popular or unpopular movie. Netflix is therefore able to build a viable business stocking a far wider range of movies than a traditional movie rental store. Those economics of storage and distribution then enable the Long Tail to kick in: Netflix finds that in aggregate "unpopular" movies are rented more than popular movies.

More Questions:
Again, what are the most unpopular aspects of the supply chain? Returns? Slow moving items? Seasonal items? My thoughts are spinning, but a real answer (opportunity) has not become crystal clear!

Competition and the Long Tail
The Long Tail is not just a positive economic effect; it can also threaten established businesses. Before a Long Tail kicks in the only products on offer are the most popular, but when the costs of inventory storage and distribution fall then a wide range of products suddenly becomes available; that can in turn have the effect of reducing demand for the most popular products.

We need to assess the ideas that this blog creates...and formalize a game plan. Does your orgnaization have a "Long Tail Game Plan?" Should it? What do you think? Sooner or later, one of the many logistics organizations is going to grab onto the long tail...maybe a carrier related company (MLOG, asset based), a 3PL (Exel, non-asset based), or even a 4PL (Accenture, solutions and integrater). The ultimate question is when will the industry catch up with the wired crowd by chasing that Long Tail?


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