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Supply Chains Undergoing Digital Transformation ‘Golden Age’

Bloomberg
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January 4, 2023

By Brendan Murray (Bloomberg) —

When the pandemic arrived in the leafy lakeside town of Holland, Michigan, office-furniture company Haworth Inc. needed more than hustle to avoid a supply-chain meltdown.

Global Logistics Director Crystal Feasby and her team hurried to set up an e-commerce platform to meet surging demand for the $2 billion company’s gear. With trucking in disarray, the firm’s dealers needed real-time information about their deliveries. So Haworth started using software from FourKites Inc. to pinpoint truck movements to help customers plan around the disruptions.

“Just like you want to know where your product is coming from when you order from Amazon, our dealers want to know when it shipped, they want to know where it is in transit, they want to know if the driver hit weather or traffic or whatever,” Feasby said.

The granularity Haworth sought wasn’t just a Band-Aid in a crisis – it’s now a permanent feature. C-suite executives across the world are increasingly convinced that such upgrades are needed after the pandemic exposed supply chains as rife with tech deficiencies and lagging in their embrace of digital commerce.

As supply snarls recede this year, they’re giving way to a different kind of disruption in the $10 trillion global logistics industry: a tech transformation, where everything between an assembly line and a store shelf will be tracked in real time where possible, fortified with artificial intelligence and automated. The long-term economic upside of the shift will be a disinflationary force after three years of price pressures from the supply side.

The smart money is betting it’s not a fad. Venture capitalists and other private-equity investors have been funding logistics tech companies at a rate of $9 billion a quarter since late 2020. The number of unicorns — startups valued at more $1 billion — has doubled to more than 60 in just 18 months, according to CB Insights, a New York-based tech market researcher. 

Online Shift

From newcomers like Chicago-based FourKites to mainstays like shipping lines A.P. Moller-Maersk A/S, the companies leading the upheaval are racing to shift all stages of a transaction online.

That’s because so much in logistics still runs through middle men and is done manually — pricing handled over emails and telephones, visibility tracked on Excel spreadsheets, backbreaking work done by humans that robots can now do. According to Cowen Inc., less than 10% of warehouses globally are fully automated. 

“What worked 30 years ago is not going to work going forward,” said Corey Tollefson, president of worldwide field operations with Scottsdale, Arizona-based Blue Yonder Group Inc., a digital supply-chain solutions provider that Panasonic Corp. bought in 2021 for about $7 billion. “This is just the first step of a multi-year, probably multi-decade transformation of many supply chains.”

Said Daniel Swan, the co-head of McKinsey & Co.’s global operations practice: “I do think we’re in kind of a golden age over the next three to five years of companies reinventing their supply chains.”

The opportunities are huge, said George Sutton, a senior tech analyst at Craig-Hallum Capital Group LLC in Minneapolis who was an early supporter of Amazon.com Inc. 

“This marketplace has not really been disrupted yet,” he said at the FreighTech 2022 conference in Barcelona in September.

In an separate interview, Sutton said supply chains have many characteristics that make the industry ripe for a full digital upheaval: global scale, enormous complexity, multiple unconnected sectors and a plethora of available data that lacks transparency. 

“You literally have a world where fax machines are still used in many cases,” he said. “This is an absolutely enormous total addressable market, bringing together all of this demand and supply and all these different modalities with all the valuable data involved — to us that smacks of a really big opportunity.” 

More Unicorns

According to CB Insights, there were 64 supply-chain tech companies valued at more than $1 billion as of October, almost double the number of unicorns since late 2020 and putting the group’s total valuation to $173 billion. Funding in the sector reached $37 billion in 2021, almost double the amount in 2020, and totaled $9.4 billion the first three months of 2022.

Sutton sees parallels in logistics services to 25 years ago, when consumers who wanted to book a flight had to go through travel agents. “I really think that this market, 10 years from now, could look very similar,” he said. “You can just imagine the efficiencies that could get created.”

Credit Covid-19 with accelerating the otherwise dawdling shift in logistics from an analog world to e-commerce.

“The pandemic demonstrated that digitizing supply-chain operations was far less expensive than absorbing the financial and reputational cost of constant disruption,” said Julie Gerdeman, the CEO of Everstream Analytics, a supply-chain risk analytics company that raised $24 million last year in a funding round that included Morgan Stanley Investment Management.  

Sacks of Cash

The pandemic push to modernization has also extended to how payments are made.

It wasn’t long ago that cargo owners in some emerging markets turned up “with sacks of cash, literally” despite online-payment options, said Christian Gonzalez, executive vice president of International Container Terminal Services Inc., a Manila-based operator of 34 ports in countries including the Philippines, Mexico and Madagascar.

“Unfortunately it required a global pandemic to get people to adapt to what was very simple, basic-form payment,” Gonzalez said. 

ICTSI plans to roll out an application in some markets that would send push notifications to customers about the whereabouts of their containers – an initiative that will provide instant visibility and perhaps added revenue eventually, he said. There are productivity gains, too, in a port like Manila’s where containers might sit for seven days.

“If we can bring that down to what it was pre-pandemic, which is five days, simply by giving someone free information, free transparency, that increases our capacity tremendously and reduces the need to reclaim more land, build more quay,” Gonzalez said. “It’s free capacity as far as we’re concerned.”

Pradeep Desai, the chief technology officer with DP World Ltd., said the Dubai-based port operator responsible for handling about 10% of global trade has hired about 500 engineers over the past year and a half “specifically to focus on a variety supply chain problems,” including “providing end-to-end logistics solutions, tracking and visibility.”

Industrywide, he said there’s a “long road ahead” to create online systems where there’s better forecasting, detailed planning directed by those predictions, and capacity that increases as a result.

Among the disruptors is Flexport Inc., a San Francisco-based digital freight-forwarding company that hired Dave Clark, the former worldwide consumer chief at Amazon, as its new co-CEO in September. (Bloomberg Beta, the venture capital arm of Bloomberg LP, is an investor in Flexport.)

Flexport plans to double the size of its engineering team this year by hiring 350 to 400 software programmers. “It’s probably the best time in the last few years to hire technical talent,” Clark said.

He said the digitization of supply chains still has a ways to go — and data transparency isn’t enough.

Early Innings

“We’re early innings still, or maybe the late innings of the first phase, which is people starting to get their data digitized and have visualization of their data,” Clark said. “Today we’re getting data in a better condition to humans who are doing analysis on it. Where we need to be is automating much of the decision-making along the way so that people can focus on how to add other incremental value to the process.”

Some container lines are jumping on the digital bandwagon. Germany’s biggest carrier, Hapag-Lloyd AG, is adding sensors to its fleet of 3 million 20-foot containers and this year will offer customers “full visibility of any container movement worldwide.”

Last month Maersk Growth, the venture arm of Danish shipping giant, joined a group of investors providing $20 million in funding to Silicon Valley-based Pactum AI Inc., which offers software that helps big companies like Walmart Inc. automate thousands of routine supplier negotiations.

Maersk, the parent company, used Pactum’s algorithms to expedite contract talks with truckers as rates moved quickly at the height of the driver shortages in 2021.

Pactum Co-Founder and CEO Martin Rand said such time- and labor-saving technology will bring broad economic dividends. “If we’re able to create a bit more value in those negotiations we can basically raise the world’s GDP,” he said. “This is value for the whole economy — this is a counter-cyclical force to combat inflation.”

Weeding out another form of waste in the system — carbon emissions — is another big driver of data transparency. “Companies that can’t see their extended supply chain can’t accurately calculate their total emissions, let alone improve them,” Gerdeman said.

Lessons Learned

The industry’s tech initiatives haven’t all stayed on track. Maersk is dropping its previously hyped blockchain-based platform, called TradeLens, after it failed to catch on.

The lessons from all the disruptions since 2020 have underscored how the term “supply chain” itself is something of a misnomer because it suggests global trade is seamless and unbreakable.

“The fact that we can get freight from one place to another does not mean that we’ve already created those digital connections,” according to Ruthie Amaru, chief product officer of Freightos Ltd., which is set to go public this year under the ticker “CRGO” after its merger in 2022 with blank-check company Gesher I Acquisition Corp. “We’re still today in a situation where much of the pricing is manual, much of the booking is manual — rate sheets, emails, faxes, telephones.”

That’s changing fast, though, as boards of directors and chief executives see their supply chains as overdue for investment rather than as mere cost centers, said Chakri Gottemukkala, CEO and co-founder of o9 Solutions, whose software helps identify supply disruptions and forecast demand. The Dallas-based company received equity investments totaling $295 million last year from investors including KKR & Co.

“The past three years have accelerated the importance of what we do for companies and elevated it to boardroom situations,” Gottemukkala said. “Everyone is saying, ‘how do we deal with all the complexity and variability and uncertainty on demand and supply that every company is facing.’” 

© 2023 Bloomberg L.P.

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