The Opportunities We See in Supply Chain Tech—a Challenge We Think Could Define Post-Pandemic Innovation

This is the first installment of our Supply Chain Newsletter—stay up to date with new issues by subscribing here.

The team here at Primary strongly believes that the global supply chain challenges we’ve endured over the last three years present an incredible opportunity that will support multiple category defining businesses—each one of the opportunity sets above represents tens of billions of dollars of market potential.

Here, we’ve outlined the key areas we’re thinking about, and that we’ll explore in more depth for subscribers of this newsletter. Expect further thinking and perspectives including case studies, market maps, interviews with thought leaders, and more. Let us know if you have ideas, suggestions, or questions!

We have seen no shortage of founders pursuing ambitious solutions to these problems and we are eager to meet more. Please send any founders our way, and remember, there is no such thing as too early for us!

Why supply chain tech is primed to define meaningful innovation in the coming years

If the Global Financial Crisis helped to kick off a decade-long boom in fintech, we think of the pandemic and its immediate aftermath as the Global Supply Chain Crisis. As we all saw, the shock that Covid-19 brought to global supply chains was truly unprecedented, shutting down factories and constraining supply, sending the costs of global shipping skyrocketing, and in many markets driving unprecedented new levels of demand. Maersk, the world's largest shipping company, tripled gross margins and 5x’d EBITDA in a single year. On the other hand, large companies went under, employees got laid off, and supply chain leaders had no answers. And then Russia invaded Ukraine in February of 2022, sending shock waves through global supply chains once again.

These multiple body blows showed how brittle our supply chains had become. Just-in-time was a brilliant idea until it wasn’t, right? The reality is that with global supply chains stretched and tweaked as tightly as they’ve been, driven by a relentless drive for efficiency, dangerous shocks appear likely to be as much a part of modern global commerce as hurricanes are to Florida and wildfires to the American West. Companies of all sizes need to optimize their risk exposure and responses to these inevitable shocks.

To build more durable supply chains, companies first need to diversify their supplier and transportation provider networks

This may seem simple and obvious, but doing so at scale comes with transaction costs that have historically made supply chain diversification infeasible. There’s good reason these supply chains were overly optimized previously, after all.

Imagine you are the Chief Supply Chain Officer of Walmart, with an already enormous network of suppliers and logistics companies to make and move your products. Materially increasing the diversification of your network would likely mean working with a larger number of lower quality partners and SMBs, who are less sophisticated and don’t meet all of your procurement requirements. Working with companies like these will result in manual work, lower quality service, and an overall increase in cost.

Squaring this circle – finding paths to making supply chains more diversified and durable while not adding mountains of operational complexity and additional risk, presents a massive new challenge. We believe it's a challenge that only technology can answer. This push for diversification and durability is the central opportunity for supply chain tech right now, and we are very excited about it, because we believe it’s the only path forward.

Challenges

After seeing what we saw in the pandemic, we’re betting on a world where supply chain diversification is a top priority for any organization that moves goods at scale. There are lots of reasons why it’s difficult to increase the breadth of a supply chain network, but we bucket them into four problem statements:

1. Operational complexity - As the number of vendors in a company’s supply chain increases, and likely the average size and sophistication of those vendors goes down, the number of manual tasks and opportunities for errors will increase, too.
2. Interoperability - As companies adopt more software and start working with more vendors in their supply chain, they will need to build more integrations within their stack and with their vendors.
3. Vendor discovery - The push for vendor diversity and redundancy creates a discovery challenge / opportunity. Actually finding and understanding the quality of net new supply chain partners to work with is extremely opaque today, relying heavily on word of mouth referrals.
4. Financial infrastructure - Transactions between supply chain partners is still largely manual and prone to errors, fraud (truckers handling piles of cash—what could go wrong?), and other risks. As supply chains become larger and more complex, that will only exacerbate these risks. Enough is enough.
   

Solution Sets

The above are intentionally very broad ways of categorizing today’s supply chain challenges.  We are using them to refine the lens we look through to find the next generation of category defining businesses in this space. We believe that each challenge area calls for solution sets that include multiple potential venture scale outcomes.

1. Operational complexity: An opportunity for more SaaS and AI. A large number of tasks related to procurement, sales, operations, accounting, and data science are still largely manual in global supply chain organizations. This problem grows as the companies expand their supply chain networks. At the same time, ERP and Transportation Management System (TMS) utilization has been widespread for decades, but only recently has it started shifting to the cloud. We think that these systems have been great for keeping a digital record of supply chain data, but have only skimmed the service of what can be done to automate workflows related to supply chain management. We have seen a number of companies enter the market that sit on top of or plug into the TMS/ERP to help companies automate tasks associated with supply chain optimization. Within our own portfolio, there’s an exciting new company we’re yet to announce that gives enterprise data science teams a decision intelligence platform, allowing organizations to improve the quality and speed of everyday supply chain decisions with AI. Parade is another product we admire that helps logistics organizations automate workflows related to the management of transportation vendors in their network.
2. Interoperability: The need for better data infrastructure. Network expansion, cloud product adoption and IoT proliferation are all driving the need for a data infrastructure overhaul in the supply chain tech ecosystem. As enterprises expand their supplier and transportation vendor networks, they will need to build more and more integrations to operate efficiently with their new partners. Today this task is handled by service providers who build costly peer-to-peer EDI integrations. We see companies like Orderful and Chain.io improving the speed and cost of building these connections, ultimately making it easier for companies to expand their supply chain networks. As the section above highlighted, there will also be a wave of new, cloud-native products that come to market that will need to leverage data from legacy ERPs. Today, these new products struggle to build these integrations, which creates a massive obstacle in their go-to-market timelines. Universal APIs for the WMS, TMS and more will provide the interoperability they need to bring value to their customers faster.
3. Vendor discovery: Building the databases to stand up B2B marketplaces. Grounded in our belief that large enterprises will continue to expand their supply chain networks, we also believe they will have to find new ways to discover and assess new vendors. Marketplaces have gained very little ground in this space, and there are only a few reliable databases of suppliers that buyers can trust. We’ve seen products offering quality control/assurance software to help enterprises manage their supply chain vendors. Some of these products also plan to leverage their quality control data and customer traction to build out the supplier/vendor databases needed to stand up a marketplace (we don’t believe you can launch a marketplace from scratch). One great example of this is FactoredQuality, which connects brands to thousands of quality control inspectors and helps them run, monitor and analyze all of their supplier testing and compliance checks. In doing so, FactoredQuality also has a vast amount of data about the quality and performance of their customers’ suppliers and can leverage that to stand up a supplier marketplace for brands looking to outsource manufacturing. Whether or not this is the winning chess move, we don’t know, but we have strong conviction that someone will crack this code and one or more robust vendor marketplaces will emerge.
4. Financial infrastructure: Payments, lending, and insurance. Historically, the way money moves through supply chains – from shippers to forwarders to carriers and back again, with stop-offs at ports, chassis pools and rail yards – is as antiquated and ripe for fraud and errors as it gets. There is an already rolling wave of technology making freight payments easier and safer for customers and vendors alike. They also frequently offer solutions that make supply chain operations more efficient. Freight invoice auditing – the act of reviewing all invoices, bills of lading, and receipts associated with a shipment – has historically been an incredibly error-prone manual task undertaken by large accounts payable teams or outsourced firms. Today, companies like Loop are automating the freight invoice audit process and connecting it to a payments platform to streamline the entire AP process. There are also companies that have succeeded by building payments products that actually accelerate the movement of physical assets through the supply chain by eliminating costly and wildly inefficient waiting for payments to clear at various stops in the chain. Relay Payments, for example, automates lumper payments – fees for the labor required to load and unload cargo – in the warehouse, allowing trucks to save time coming in and out of delivery sites while simultaneously eliminating an important source of fraud. Lastly, we’ve become increasingly interested in supply chain insurance. Commercial auto insurance has become a loss leader for most insurance carriers, yet all trucking companies are required to have it. We’ve seen multiple compelling approaches to leveraging IoT and telematics data to improve insurance underwriting processes. LogRock is building a tech-enabled insurance company that offers carriers free compliance software in exchange for their telematics data. Meanwhile, Terminal is building a universal telematics API – something of a Plaid for telematics – and selling telematics data to commercial auto insurers, with the promise of improving underwriting and bending the curve on loss rates.