#SupplyChainTech: What Is Supply Chain Technology, and Why is it the Biggest Investment Opportunity of Our Lifetime?
Everywhere You Look, the Global Supply Chain Is a Mess ($). That is the surprising title of an article published by the Wall Street Journal on March 17, 2021. However, it is only surprising if you have not been paying attention to the state of the world since the World Health Organization declared the COVID19 pandemic just over a year ago.
Moreover, as I observed in my OpEd published by Morning Consult, during the time since that declaration: The UN Secretary General, Democratic members of the House Select Committee on the Climate Crisis, President Biden, and the CEO of BlackRock — the world’s largest asset manager, have found agreement on one thing: We can no longer ignore climate change.
Increasingly, as my partner, Lisa Morales-Hellebo, and I have been speaking with potential investors in our venture fund — REFASHIOND Ventures, about our investment thesis, we are asked the question; “What is supply chain technology?”
We have previously touched on this topic indirectly in our October 2019 blog post, which we turned into a booklet in March 2020, The World Is A Supply Chain. However, given the frequency with which the question has come up more recently, a more direct answer seems in order.
In this blog post;
- I will put forward a definition of supply chain technology (#SupplyChainTech) that builds on our previous work,
- I will explain how we think about the scale and scope of the opportunity — in other words I will explain why #SupplyChainTech is important,
- I will discuss some areas of application that we are focused on at REFASHIOND Ventures,
- I will discuss some of the opportunities for different categories of investors, and finally
- I will conclude with some final observations.
This blog post is centered on our observations, since 2015/2016, that unstoppable environmental, socioeconomic, and technological forces are ushering the world towards a golden age of technology-driven innovation in global supply chains.
Those observations motivated us to launch The Worldwide Supply Chain Federation in late 2017, and this blog post reflects what I have learned over the years of building the community into a distributed community with 12 chapters and nearly 10,000 members and followers across various social networking platforms.
What is the definition of Supply Chain Technology?
In his book, Logistics and Supply Chain Management, Martin Christopher shared a definition of supply chain that I find particularly useful in the world that we live in today. It is taken from a 1998 Ph.D thesis by James Aitken, Supply chain integration within the context of a supplier association: case studies of four supplier associations.
Here’s the definition: A supply chain is “ A network of connected and interdependent organisations mutually and co-operatively working together to control, manage and improve the flow of materials and information from suppliers to end users. “
This means that: #SupplyChainTech is any technology or innovation that enables and facilitates the control, management, and improvement of the flow of materials and information from suppliers to end users in the context of a network of connected and interdependent organizations working mutually and cooperatively with one another to satisfy the needs and wants of customers or end-users.
Why is #SupplyChainTech important?
#SupplyChainTech is important because everything that we depend on for the life that we have become accustomed to exists because there’s an underlying supply chain that makes its production, storage, transportation, and delivery to us possible. The world we know would not exist but for supply chains. Technology and innovation applied to supply chains ensures that we can meet the environmental, sustainability, and governance requirements necessary to ensure that life on earth continues to be possible for an indefinitely long period of time in the future.
In The World Is A Supply Chain, we made the observation that: “If current trends hold, between 2015 and 2050 the world’s population is expected to increase by about a third, to roughly 10 billion people. According to Our World in Data, the world’s population stood at about 190 million people in the Year 0, and approximately 4 billion in 1975. In other words, the world’s population will jump by about 6 billion people over the 75 years between 1975 and 2050 after having only climbed to 4 billion people over the previous 1,975 years. This is happening, according to Our World in Data, despite the world’s population growth rate peaking at 2.2% per year in 1962 and 1963, and then declining to its current rate of about 1% per year.”
The image below drives home what’s happening very clearly.
Concurrently: The Climate Crisis is leading to an increasing frequency of severe weather events that are causing more frequent disruptions to global supply chains. Trade, economic, and political disputes between countries are causing disruptions to trans-national supply chains. Consumption continues to put a strain on the earth’s resources. Dynamic resource allocation is becoming a more pressing need in the context of everything else that is happening.
The fundamental argument, which Lisa and I have made many times is this: Human activity is causing climate change. All human activity is driven by supply chains. We can’t solve the climate crisis until we refashion global, man-made supply chains so that they cause less harm to the environment.
What changed starting in March 2020 is that the outbreak of SARS-CoV-2 and #COVID19 have made supply chains everyone’s business.
We experienced this first hand, in 2019, whenever we met with potential investors in our fund, we often encountered blank stares and a lack of interest, summarized in statements like, “Isn’t supply chain just boxes and trucks? Why does anyone care about supply chain? Why would anyone build a technology venture fund for supply chain?”
These days we encounter a much more nuanced appreciation of the role that supply chains play in the world. However, in my opinion, the signals have been talking since 2015/2016 when I started paying attention to supply chain logistics specifically. Each year since then, the evidence that supply chain is becoming more of a fixture in the public consciousness has become increasingly apparent to me as I have quietly observed what’s been happening around me, and in other parts of the world.
Nothing else that human beings do matters as much as how manmade supply chains interact with natural supply chains to create the environment that we each experience daily.
The bottomline conclusion reached by the Intergovernmental Panel on Climate Change, and documented in the October 2018 Special Report on Global Warming of 1.5°C is that reigning in and adapting to climate change will require economic, social, technological, and infrastructural transformations that are unprecedented in the history of humanity in scale, scope, and depth.
Another way to think about this is that global GDP, which is entirely dependent on man-made supply chains is at risk. The image below from Statista shows how global GDP has grown since 1985. The #COVID19 pandemic demonstrates that all the progress that has been made in improving life for people in different parts of the world is put at risk when supply chains fail.
#SupplyChainTech matters because it plays a central and critical role in the world’s ability to confront the challenge posed by the ongoing climate crisis. No other area of technology and innovation matters as much as #SupplyChainTech.
How does the team at REFASHIOND Ventures think about Supply Chain Technology?
Supply Chain can be broken down into 3 broad, distinct, but tightly interlinked categories;
- First — Supply Chain Management, which is concerned with the design and management of upstream and downstream production AND consumption networks. Supply Chain Management is mainly focused on consistently delivering superior customer service at reduced cost. Supply Chain management has the goal of improving the long-term financial performance of both each individual company within a supply chain AND the supply chain as a whole.
- Second — in the words of Martin Christopher, Supply Chain Logistics is “ . . . the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organisation and its marketing channels in such a way that current and future profitability are maximised through the cost-effective fulfilment of orders.”
- Third — Supply Chain Finance, which is a network of intermediaries, processes, relationships, and technologies that provide funding and financing methods to facilitate and enable the activities that occur within global supply chains. This is sometimes referred to by the term Trade Finance.
It is important to note two things;
- First, everything around us exists because of a man-made or natural supply chain.
- Second, every industry has a unique and distinct supply chain as its foundation.
At REFASHIOND Ventures, we think of ourselves as #SupplyChainTech specialists as it pertains to these broad categories of supply chain. However, we are generalists when it comes to the application of supply chain innovation, and technology to industry specific problems.
This makes sense. The fundamental problems that supply chains solve are the same no matter the region of the world, or the industry. The specific details are different, of course, but the basic problem is the same. So we see our duty as early stage technology investors as taking what we learn in one industry, adjusting for the variables that are different in other industries, and then applying our knowledge to new opportunities where we believe the potential for venture scale returns exists.
We think about supply chains in these broad segments;
- Decision Analytics (aka Data & Predictive Analytics) — which is about using data, information, and computational technologies to make better decisions in the face of uncertainty by harnessing the best of human creativity AND computational power. This was the focus of REFASHIOND Ventures’ inaugural Quarterly Executive Salon which we announced on March 11, 2021, featuring the work of Warren Powell — a professor emeritus of Princeton University, cofounder of Optimal Dynamics, and world renowned expert in Computational Stochastic Optimization and Learning. It is available on video here.
- Next-Generation Logistics — which is mainly about using technology to improve how society manages the logistics infrastructure and networks that facilitate the storage, transportation, and distribution of physical goods AND in the process to reduce harmful emissions and waste.
- Advanced Materials — which is about using advancements in computational technology AND material science to reduce waste through the creation of circular and regenerative supply chains.
- Advanced Manufacturing — which is about using advancements in computational technology, materials science, AND manufacturing processes to shift towards manufacturing that fulfils actual demand AND away from manufacturing that is done to fulfil anticipated demand which may never actually materialize.
It is worth reiterating this point, which I am repeating from The World Is A Supply Chain.
Supply chains play two critical functions:
- First, they enable the flow of goods and services from producers to consumers.
- Second, they facilitate the transfer of information about the movement of goods and services between every entity that is part of the supply chain network.
What are some of the opportunities for different categories of investors?
To keep this discussion as simple as possible, I will group investors into 3 broad groups; Part-time investors, Full-time investors, and government agencies.
Part-time #SupplyChainTech Investors: In this group, I am including actual individuals as well as single- and multifamily offices making capital allocations, BUT who do not intend to pursue investing in supply chain technology as a full time focus. ALSO, I am thinking of investors in this group as investors who wish to pursue the risk and uncertainty that is characteristic of early-stage technology and innovation. Depending on the willingness such investors have to delve into the nuances of each investment that they might encounter, I suggest that they invest in a fund whose principals focus on supply chain as an area of specialization.
Full Disclosure: Lisa and I are co-founders and general partners of REFASHIOND Ventures, and we are currently raising REFASHIOND Seed — the world’s first supply chain technology Rolling Fund TM, on AngelList. REFASHIOND Seed is open to every category of investor, with no geographic limitations.
The reason I believe strongly that this is the best approach for individual investors to take is because supply chain technology is so complex and nuanced that encouraging investors to engage with #SupplyChainTech on a part-time basis would be both irresponsible and unethical.
An important question these investors should ask themselves about the funds and managers they consider is this; What’s the manager’s ability to tap into an extended community network for all the benefits such a network could offer as it relates to the sources of persistent returns over time for an investment fund? As I have already pointed out previously in this article, Lisa and I have been building The Worldwide Supply Chain Federation since 2017.
Our community gives us access to relationships, expertise, and other intangible assets we would not have access to without it. It is a cornerstone of our investment thesis and strategy. Over the long term the community and the fund have a symbiotic relationship with one another. We are constantly thinking about ways to strengthen and enhance the positive impact that each has on the other.
Full-time #SupplyChainTech Investors: In this group I am thinking of any entity that is pursuing #SupplyChainTech as an area of full-time investment focus — across stages. This might occur in the context of a specialist supply chain technology investment thesis, or it might occur in the context of a generalist investment thesis.
The challenge that could arise in the context of a generalist fund, especially at the early stage, is that if the key decision-makers are not innately and personally excited about supply chain technology, there’s a very high likelihood that the fund will fail to invest in startups and companies that subsequently go on to become some of the best opportunities one could have found and invested in.
Also, it is important for capital allocators to investment funds to determine what the fund manager means when they describe themselves as a supply chain investor. As an acquaintance said to me; “In Asia when someone says ‘supply chain’ they probably really mean to say manufacturing. In North America when someone says ‘supply chain’ they probably really mean logistics.”
She’s right. I know a few early stage funds that are actually logistics technology investors. There’s nothing wrong with that, but investors allocating capital to fund managers should know the difference between a more holistic supply chain fund as I have defined it here versus a fund that is taking a more focused approach.
There are pros and cons to each approach, and limited partners should think this through before allocating capital according to their unique preferences and assessments of each manager’s capabilities.
The reader might ask where corporations fit. I’d lump them with full-time investors. The reason is quite simple; Supply chain is the basis on which companies compete. Any company that is not harnessing technology and innovation to improve its operations both internally AND across its extended supply chain is courting loss of market share and competitiveness.
If I were managing an innovation program for a corporation and operating a corporate venture capital firm was part of our strategy, I would adopt an outside-and-inside strategy. What does that mean? The inside strategy would center on having an internal team making venture investments on behalf of the firm. The outside strategy would involve the firm making a number of limited partner investments in a number of independent venture firms whose investment theses complement the firm’s long term interests, but whose investments would be more bleeding-edge than those that would reasonably be made by the team executing the inside strategy.
Think of any company that we objectively consider dominant within its industry. Invariably, that company will also be one that is objectively judged as having a superior supply chain in relation to its industry peers. It will also invariably be the firm that’s comparatively more willing to push the envelope when it comes to deploying technological innovations within its internal operations, and across its extended supply chain.
Government Agencies and #SupplyChainTech for Economic Growth: As we state in The World Is A Supply Chain, the technological transformation of global supply chains is both an economic problem and an economic opportunity.
Furthermore, In The Supply Chain Economy: A New Framework for Understanding Innovation and Services, Mercedes Delgado and Karen Mills state that; “The U.S. supply chain contains 37% of all jobs, employing 44 million people. These jobs have significantly higher than average wages, and account for much of the innovative activity in the economy.” ( Summary, 05/2016 Paper via Harvard Business School website.)
The observation by Delgado and Mills poses an interesting question to government agencies seeking to create jobs and boost economic productivity and performance for their constituents; How could this insight, and others in Delgado and Mills’ research be harnessed to develop engines of job creation and prosperity?
I made a tentative attempt to tackle that question in my January 22, 2021 FreightWaves column, Commentary: Time to turn rest of US into innovation factory. It is also one of the long-term visions of the community we are building through The Worldwide Supply Chain Federation — to partner closely with organizations like Blue North, as well as state and local governments to harness the power and potential of grassroots-driven supply chain innovation and technology communities to serve as catalysts and engines for job creation and economic growth.
Some Closing Thoughts
My intention in writing this blog post is to start a conversation amongst investors, entrepreneurs, corporate executives, and any other group of people interested in the future of the world and the role that supply chain, innovation, and technology will play in that future.
To end this post, here are two observations I feel are worth highlighting;
- First, although I argue that climate change is driven by mankind’s choices in designing, managing, and operating man-made supply chains, I do not think that all climate change technology (#ClimateTech) should be classified as #SupplyChainTech. I believe that all #SupplyChainTech is #ClimateTech, but not all #ClimateTech is #SupplyChainTech. For example, carbon capture and sequestration technology would not fall under my definition of #SupplyChainTech although it is clearly #ClimateTech.
- Second, because supply chains run on energy, innovation and technology transformation in energy supply chains is one of the areas of greatest promise and consequence. Mankind’s transition from fossil fuels to more sustainable and renewable sources of energy is one of the most exciting opportunities there is. However, I am of the opinion that the transition will be slower than we would like, and so I am as interested in technologies that disrupt energy supply chains as I am interested in technologies that incrementally but meaningfully make our use of fossil fuels less harmful to our planet.
True disruption in supply chains will be of both the demand-side and supply-side varieties, and the effects will only be felt by incumbents when the two forms of disruption happen simultaneously. This a topic I started exploring on my own in July 2015, in Notes on Strategy; Where Does Disruption Come From?, and again, in October 2018 with Lisa, in Where Will Technological Disruption in The Fashion Supply Chain Come From?
At REFASHIOND Ventures we understand that because of climate change, industrial supply chains have become the single source of the world’s biggest problems — COVID19 has made that blindingly obvious.
This also means that the transformation of global supply chains offers the world’s biggest business opportunities. Our job as managers of our investors’ capital is to develop prescience about where venture scale investment opportunities exist within the vast and humongous landscape of global supply chains, and then to harness uncertainty and risk in favor of generating investment returns for limited partners in REFASHIOND Ventures’ funds, while simultaneously empowering risk-taking entrepreneurs and innovators as they set out to secure our future and our childrens’ futures.