Jan 26, 2021
From the blog of Supply Chain Brain:
Following are PeakSpan Capital LLC’s research and observations on the supply-chain and procurement software space, with 10 predictions for 2021.
1. Knowing, managing and communicating with suppliers has never been more important. The COVID-19 global pandemic was a wakeup call for many supply chains from a variety of perspectives. By way of illustration, when the world stopped and manufacturers needed to ask their suppliers at scale “R U OK?” — they struggled. Large enterprises might have been able to get away with Excel, e-mail and phone calls in the past, but 2020 became the effective “light bulb moment” regarding supplier information management and digital communication. Supply chain executives will pursue numerous beefy initiatives in 2020 spanning risk management, supplier diversity, and sustainability. However, none will be possible without intelligent, ongoing supplier information management.
Drivers of adoption for supplier-centric software solutions include sustainability efforts, corporate social responsibility, diversity efforts, and supply-chain resiliency. Security and compliance have also never been more important, in an age where a single labor law violation can lead to global headlines and millions of dollars in brand impairment. Organizations that do not get a handle on their supplier information in 2021 will be left in the dust and exposed.
Suppliers are both the cornerstone and Achilles’ heel of the supply chain. Overall end-to-end supplier management, accountability, data sharing and trusting ecosystem strategic partnerships are going to be a lot more important in 2021 than ever before.
2. Artificial intelligence and machine learning: “You’re still early.” We aren’t quite ready for artificial intelligence in supply chain. To be sure, we see a handful of companies doing interesting things with A.I. around spend analytics and strategic sourcing, but from a mass-market, holistic perspective. it feels as though we’re stuck in inning one. We see a wide array of supply-chain data gaps, dirty data and human intervention still at play. This space is also still feeling the effects of on-premise systems, bespoke in-house technology, and siloed datasets scattered throughout the supply chain. Enterprises need to nail the basics and foundational aspects of supply chain (including spend management, supplier information management, the four walls of logistics, and transportation) before taking a swing at A.I. Once that gets done, we think A.I. and machine learning will have a profound impact on supply chain and procurement, given the complexity and volume of data at play. Twenty twenty-one will be a year of immense growth for A.I. and machine learning, setting the stage for wider adoption later on.
3. Sustainability, sustainability, sustainability. While we’d like to say that 2021 is “the year” for sustainability, that prediction is doomed to fall short. We can say, however, that the macro tailwinds around sustainability are stronger than ever, and underwent a stark acceleration in 2020. Whether enterprises are being altruistic or self-serving, it’s now undeniably important for large global entities to take on sustainability initiatives with fervor. The pressure to do so is coming from every direction, including consumers, employees and investors. The largest, most prominent brands in the world are focused on the sustainability of their suppliers, end-to-end supply-chain visibility, and transparency. For example, PepsiCo just announced a goal for net-zero emissions by 2040. In verticals such as food and grocery, we see the emphasis compounding even further, leading to the adoption of smart inventory management, order management and waste reduction. We think the role of chief sustainability officer will be much more prevalent by the end of this year. To that end, we’re seeing more chatter, infrastructure, groups and events being built around this role, which is a great sign, and exactly what we saw in the early 2010s around the title of chief procurement officer. Successful companies ensure that efforts in sustainability have tremendous business value by focusing on the right priorities.
4. Debunking the digital transformation myth. This trend really comes down to supply-chain visibility. In evaluating the technology stacks at many of the largest manufacturers globally, it’s clear that the number of organizations that have successfully “digitally transformed” their organizations are few and far between. We see several roadblocks, including the tenure of digital transformation projects outliving that of project leaders, turnover in key leadership roles such chief procurement officer, too much software, and continued reliance on legacy or on-premise enterprise resource planning (ERP) applications. New technologies such as robotic process automation (RPA), integration platforms and low-code platforms offer interesting alternatives, but the one overarching conclusion is the lack of a “one-size-fits-all” approach. Cloud-based ERP and master data management (MDM) platforms offer hope, but are still in the early innings of displacing on-premise deployments, which take years to implement, and typically don’t come up for tender for five or even 10 years. We believe supply-chain technology, especially that pointed at digital transformation with agile methodology, will continue to be “the Wild West.” While tools sch as RPA offer a means to solve bespoke business problems, these are blank-canvas solutions which require multiple “painters” to make something beautiful. Our view is that we will see vertically oriented, supply-chain-focused software providers start to take on digital transformation initiatives over the coming years, with the thesis that a one-size-fits-all approach may exist for a subset of supply chains, such as those of large retailers.
5. Rise of the CSCO and CDO. We see multiple new seats at the table, in no small part due to some of the trends highlighted above. The chief supply chain officer (CSCO) will have increasing influence in the boardroom, given inherent links to important initiatives such as digital transformation, sustainability, diversity and brand value, especially in the new omnichannel world. The chief data officer (CDO) is an even more nascent role, but is fast emerging as a staple for forward-leaning, large enterprise C-suites. We’re also starting to see enterprises hire several CDOs, each of whom owns a bucket of data (such as for customers and suppliers). Given that every company is a software company now, we expect organizations to double down on data. The next generation of software leaders will win with “software plus data,” not just applications.
6. The customer experience’s continued impact on the supply chain: the Amazon-like approach. We love Amazon. It his spurred a flurry of innovation across the e-commerce and supply-chain ecosystem from a variety of perspectives. There are obviously categories of software that exist to help brands sell on Amazon, but what excites us more are categories that help brands to compete with, or at least stand a fighting chance against, the e-tailing giant, such as feed management, co-warehousing, fulfillment, last-mile delivery, e-commerce shipping, and supply chain as a service (SaaS). Essentially, any software category that helps a brand receive orders and deliver in two days with an “Amazon-like” approach and customer experience is a winning proposition in our book. Selling on Amazon is a must, but it can’t be the only approach, as we’re already seeing margin pressures trickle down throughout the ecosystem. Especially for larger brands, selling direct through one’s own supply chain is mission critical, and the only way to compete with Amazon (unless you possess the clout of a Walmart) is to deploy software and shared resource models.
7. E-commerce continues to change the game. Anyone who has been entrenched in e-commerce over the past several years knows that the e-commerce gold rush of 2020 wasn’t a flash in the pan. It’s true that 10 years’ worth of acceleration occurred in eight weeks, but this adoption was bound to happen eventually. The pandemic simply got us there quicker. Generations that were forced to buy items online in 2020 aren’t going to forget the convenience of having groceries delivered to the doorstop, or the joy of receiving the perfect Christmas gift in the comfort of their homes. We saw this strongly form in the small-business arena, a customer segment that has been adopting e-commerce steadily over the past decade for certain verticals, but was forced online in Q2 2020. We’ve continued to observe emphasis and adoption in this segment, but see a long-term horizon for innovation. The continued flurry of activity is supporting multiple equally large opportunities, such as e-commerce shipping, payments and other banking products, while propping up newer opportunities around direct to consumer and drop-shipping.
We especially like the food and beverage supply chain, in particular the grocery and restaurant verticals. The online grocery space got put to the test during a short period of time in 2020, and has a long way to go. The complexity of the food supply chain, mixed with high consumer expectations set by Amazon Fresh and Instacart, is yet another recipe for innovation and further momentum in the space. We expect to see several scale-ups take on the grocery supply-chain and e-commerce challenge this year, and recognize multiple approaches in this space, including supply-chain visibility, cold chain, inventory management, safety and temperature monitoring, e-commerce enablement, fulfillment, marketplace models, last mile-delivery, and drawing on existing and new assets for the omnichannel.
8. Supplier diversity. The concept of suppler diversity has been around for a while, but we’re starting to see a turning point, in no small part due to the spotlight placed on this issue in 2020 in the U.S. Similar to our analysis on sustainability, supplier diversity is clearly becoming a board-level initiative with strong stakeholder support. We’re seeing employees care more about their organizations’ efforts around supplier diversity and also see more government regulation acting as a tailwind for supplier diversity. Moreover, in supply chain — we see organizations taking a more proactive approach towards supply chain visibility, transparency and management. This starts with understanding who your suppliers are and how they fit into corporate strategy. We expect 2021 to be a continuation of 2020 with respect to an enterprise focus on diversity.
9. Best-in-breed point solutions > all-in-one platform. Zooming out from supply chain and procurement, we see several themes evolving across business software in general. Typically, we notice cycles during which multiple best-in-breed point solutions rise in popularity in a given industry. These eras are then typically followed by periods of mass consolidation. The cybersecurity and sales technology spaces have been through a few waves over the years. For example, the average sales team is now using 43 sales or customer relationship management (CRM) tools, while the average security team is using 75! The supply-chain and procurement software spaces aren’t near these levels, but are starting to head in that direction. Discussions with CPOs and CSCOs reveal a shift toward best-in-breed. Incumbents in this space have grown fat and happy, and aren’t competing effectively in key areas such as supplier management, analytics and strategic sourcing. We expect to see multiple categories of point solutions progress over the next few years, supported by enterprise adoption. The reality of the procurement software space in particular is that the incumbents continue to be extremely acquisitive — which is both a blessing and a curse, depending on your vantage point.
10. Supply-chain and procurement specialization. As these spaces continue to mature, it becomes clear that a one-size-fits-all approach isn’t optimal. We believe that vertically oriented SaaS will become even more critical in supply chain and procurement, where complexity and nuance are high. Food and beverage, grocery and restaurant, pharmaceuticals, cold-chain, e-commerce and cannabis are all verticals that we view as exciting over the near term. Putting aside end-market vertical specialization, we similarly see a spend-category focus in multiple areas of opportunity, including travel, contingent workforce, software, aviation, and various flavors of direct procurement, which up to now has experienced very little innovation.
Lastly, from a logistics perspective, we’re seeing providers rise to dominance, focusing on certain segments of the logistics chain such as less-than-truckload, drayage and international, and certain types of cargo, such as bulky items. The logistics software space is seeing hefty capitalization, and for good reason. With electronic logging device (ELD) mandates in our rearview, and electric vehicles in the foreground, there’s a lot to like in these segments going forward. Our near-term focus, however, is on data-centric software platforms that can drive efficiency for all constituents in the logistics ecosystem. From a marketplace perspective, we like specialized marketplaces that match supply and demand for very specific lanes, regions, transportation methods or cargo types.
Bonus round: a 2022 prediction. In 2022, we hope to see payments take the supply-chain and procurement spaces by storm. Over time, we hope to see the office of the CFO, CPO and CSCO work more in unison around the physical and financial supply chains. Supply chains will first need to get a handle on their suppliers, spend and data, but with those basic pillars as a launching point, the opportunity for driving future savings through payment processing, cash-flow management, consolidated invoicing and financing products, to name a few, is robust.
Jack Freeman is a principal with PeakSpan Capital LLC.