Supply Chain Management: The Uber Concept - Supply Chain Management in the 21st Century

Sunday, November 30, 2014

The Uber Concept - Supply Chain Management in the 21st Century

Last weekend, I went to San Francisco for a small conference organized by my German scholarship organization. As many of us (including myself) had traveled across the whole continent for this purpose, we were given some time to explore the city and its surrounding areas. My group had decided to hike on Land's End trail, but in order to do so, we first had to get to "Lands End Lookout", the starting point of our tour.

The only possible way of transportation was by car - neither subway nor bus would have brought us there. As taking a cab was considered too expensive, some local students suggested to use Uber instead. This was the first time I did not only read about this new business model, but actually saw it operate in real life.

For those of you who are not familiar with Uber, I will briefly describe the idea behind this company.

Source

Key concept: connect P2P (people to people) for a ride via a smartphone app, i.e. a driver and a passenger
Unique features:

First P2P search engine in the world
Drivers use their own cars
Automatic payment via app (and no tip necessary)

Procedure:

A person wants to get from A to B and opens the Uber smartphone app
Optional: rough calculation (range) of trip costs with "Fare Quote" (integrated in the app)
She chooses the appropriate car service (a capital "U" indicates a relatively more expensive service)

uberX = low cost Uber (e.g. Toyota Camry)
UberBLACK = original (expensive) Uber (e.g. limo)
uberXL = low cost Uber for groups (e.g. Toyota Highlander)
UberSUV = premium Uber for groups (e.g. Cadillac Escalade)
uberT = normal taxi (mainly in NYC) - grab a cab via the Uber app, but pay the taxi driver without the Uber app

Then, she sets her pickup location (thanks to GPS and GoogleMaps, this is very easy).
According to the type of service she has chosen, the closest (unoccupied) car will be matched and confirmed; the respective number plate and the driver's name pop up on her smartphone screen along with the estimated time of arrival and the most efficient (and therefore most likely) route.
The car arrives. She gets in and tells the driver where to go.
As soon as the car reaches the desired destination, the passenger's credit card will be automatically charged and the receipt sent to her via e-mail.

As the topic of this week's class is supply chain management in the 21st century, my intention was to write about something new and innovative, something that probably most of us do not even think of in this context. When I reflected on my Uber experience, I realized out of a sudden that the Uber concept actually could be interpreted as a new kind of supply chain. Let us go back to the definition of supply chain management we were provided with in class:

Supply chain management is the profitable

organization of the flow and storage of

materials, in-process inventory, finished goods,

financial resources, and related information

from point of origin to point of consumption and

disposal to satisfy customer requirements.

Obviously, we do not have a tangible product but a service, which is the car ride (and maybe a nice chat with the driver, a cool bottle of water and some sweet snacks). Inventory management is not even necessary anymore - as the service is available at any time and in any place (of course only in the cities where Uber operates) thanks to the real-time matching performed by the smartphone app. The same is true for forecasting (the emphasis here is on the "real-time" aspect).

Information about the estimated price of the product can be accessed by the potential passenger using "Fare Quote", and the information on the actual price of the ride is delivered via e-mail after its completion. And, what is more, the implied financial transaction (payment) is fully automated.

Here, we have a great example for a supply chain network - extremely complex in its entirety, but astonishingly simple due to its direct connections between two points - the driver and the passenger.

This leads to another interesting feature - the company itself. So far, I have been talking about the drivers and passengers only. The question is - how does Uber come into play, apart from the fact that it provides the technology required for the operation of these numerous individual services? Well, there is a commission drivers have to pay to the company. Usually, it is 20% (for San Francisco it was just raised to 25%). This means that you might not even make money as a driver. The reason why still so many people drive for Uber is the following: When they offer their services during peak times, the price for a ride is a little higher and therefore, at least a small incentive exists.

It is now time to summarize what we have discovered so far: the P2P business concept (and presumably not only in the realm of services) offers a new understanding and way of supply chains and SCM. By integrating individuals into the business strategy (if the company is big enough), a market is being created that basically regulates itself (and generates money).

The concept reminds me of Adam Smith's theory of the invisible hand - only that in this case the hand is not invisible but visibly collects the profits (parts of the aforementioned generated money).

As always, there are several questions that still need to be answered.

A company's most important goal is usually to grow. Uber, however, does not seem to follow this simple rule. While its competitor "Lyft" (only operating in the U.S.) incentivizes its drivers to work rather more than less by reducing commission the longer they offer their services, Uber sends the opposite signal to its drivers: as the commission is 20% no matter how long they work, it is inefficient for them to drive outside of peak times. Why does Uber NOT change the incentive system as the whole strategy relies on a sufficient amount of people who are willing to sign up as drivers? As soon as the Uber hype comes to an end, the company will face serious "inventory" and "delivery" problems.
Apart from the commission the drivers have to pay to Uber - how does the interaction work? My research tells me that the company uses mainly automatically generated to answer questions or to deal with concerns/problems of its "direct customers" (the drivers). Apparently, this is not a good idea, as many issues cannot be solved in an automated way. Here, the mainly technological approach results in the dissatisfaction of Uber drivers. In SCM terms the question would be: why does information not flow smoothly in this context between the "producer" and the customer? Are there limits to the use of technology in SCM? Does customer service - or should it - always imply human interaction?
And finally - who actually is, in such a complex supply chain network, the customer? At first, I thought the passengers are. But after having written this blog entry, I am convinced that I better revise this initial evaluation of the system. The drivers are customers as well - customers of the company with the (in)visible hand... The less an institution or company is visible, the less accessible and approachable it is. This feels a bit like the set up for a psychological experiment where people you never see let you figure out how to deal with a new system in your habitat without intervention. Only that they claim money from you if you decide to become part of it...

To end on a more positive note, let me show you a picture I took during our Land's End tour. I am so glad we made it there - thank you, Uber! :-)