Given the enormous size of the entire supply chain market, verticals (and the start-ups within) are mostly discussed in isolation. I thought it would be interesting to examine start-ups in relation to the supply chain as a whole and soon noticed a pattern. Companies fell into one of three buckets: technology enabled, software infrastructure or automation infrastructure and each bucket seemed loosely tied to particular verticals.
For more detail on the framework, I’ve defined the categories below.
Business models that easily integrate into a supply chain network and are generally characterized by a high service component and transactional pricing. Most start-ups in this category are disrupting brokerages, one of the largest verticals within supply chain composed of ~$125Bn in transaction fees. At first glance, start-up offerings can appear similar to incumbents but innovation lies underneath the surface. Automation through software achieves better operating margins which are leveraged for faster growth, better product, higher levels of service or lower pricing. If a start-up company in this category cannot automate labor-intensive processes, it heads down the challenging path of raising significant capital and chasing economies-of-scale. Transactional sales are easier to close than software or hardware sales meaning lower barriers-to-entry and more competition.
Software businesses balance all the levers in a supply chain for optimal utilization. Even without adjustment to physical infrastructure, the opportunity for cost savings through optimization is massive. Software has been a part of supply chain networks since the early stages of the Internet and the major verticals (MES, SCP, TMS, WMS, ERP, etc.) are now dominated by large software companies. While this can mean considerable challenges for start-ups, incumbent platforms carry the baggage of decades-old technical design allowing start-ups to outperform on price or product offering. Alternatively, start-ups can seek to create new markets by digitizing formerly analog processes. This approach has little competition but a more difficult sales hurdle of justifying a new expense line item to the customer. In either case, the sales process can be difficult whether disrupting incumbent platforms or creating new markets. To get around this difficulty and lengthy hardware integration, software start-ups sometimes rely on systems integrators for channel sales.
Robotics & automation are the holy grail of supply chain technology; the idea of a physical internet with near-zero marginal cost for the transportation of goods. With e-commerce growth and the still unrealized potential for mobile commerce, existing supply chain networks cannot continue to satisfy rising consumer expectations on price and service without robotic automation. To meet this need, start-ups are leveraging advancements in other technology sectors (drones, virtual reality, self-driving cars) for autonomous trucks, last-mile drones and warehouse robotics. This market comes with challenges as physical infrastructure requires massive capital expenditure oftentimes expected to last for over ten years. Risk-averse customers may be unwilling to work with unproven start-ups without significant funding or sector experience on projects of such scale. Even in seamless design situations, cultural obstacles can stall transition from labor to automation; despite measurable benefits, companies may not be ready or willing to make the change.
Thought I forgot about air & rail? Well, the above landscape includes start-ups that I personally track and I’ve yet to encounter more than one start-up operating in air or rail. My best guess is that the high barriers-to-entry (regulation, capital intensity, sales cycle, concentrated market share) make launching a start-up in those industries very difficult.
The supply chain market encompasses more than one trillion dollars and is an exciting, difficult market for start-ups. Innovation in this sector could bring near-zero marginal cost of delivery that will revolutionize where / how we live and what our cities look like. Needless to say, I’m excited to meet any founder willing to take on this challenge.
If you would like to be added to the landscape or have any questions, please shoot me a note at julian@schematicventures. Thanks for reading!