Supply Chains Are Preparing for the Next Shock. These Are the Technologies Companies Will Use.

Trung Phan

Source: VoxEU

The Signal: When it comes to coronavirus-induced supply chain issues, toilet paper and masks quickly come to mind. But with the interconnected state of global commerce, there are many other notable supply chain disruptions affecting billions of dollars in goods (including smartphones and automobiles).

One study by VoxEU, the Centre for Economic Policy Research’s policy portal, set out to put a dollar figure on exactly how costly supply chain disruptions can be:

When Wuhan, one of China's "Detroits," was locked down, it is
reported that some automobile manufacturing plants in Japan shrank their production due to a lack of supplies of parts and components from China. When we consider the economic impact of a lockdown, we therefore need to take this propagation to other economies into account...The economic shock of a disaster propagates downstream to customers through lack of supplies, and upstream to suppliers through lack of demand.

Specifically, VoxEU’s study looked at how the Great East Japan Earthquake of 2011 affected Japan’s economy and found that "production loss in regions not directly affected by the earthquake because of the propagation effect was 100x greater than the production loss in the directly affected regions."

Applying the same model to the current crisis, the study posits that -- because of supply chain issues -- a lockdown in Tokyo leads to a non-linear rise in economic disruption (defined as loss in value-added production):

  • 1-month lockdown = a 5.25% loss of Tokyo’s GDP
  • 2-month lockdown = a 12.90% loss of Tokyo’s GDP

Clearly, supply chain disruptions are costly, and the case for supply chain business solutions are as strong as ever.

The Opportunity: Perhaps the biggest macro supply chain trend is reshoring, the process of returning manufacturing back to a country.

According to a February 2020 BAML report, a number of factors were driving this trend even before coronavirus:

  • Improved automation lowered overseas cost advantages
  • Bringing manufacturing closer to customers and R&D supported the business case for in-country production
  • Greater concerns over carbon footprints and employment practices
  • The changes led to a narrowing of tax arbitrage
  • Foreign regulations are rising in countries across the globe
  • Supply chain dependencies create national security issues

The biggest opportunities that BAML identified in the case of widespread supply chain reshoring was in automation and trade finance. BAML believes that by 2025, industrial robots will double to 5m units in the US while North American banks will "benefit from greater activity in trade finance, working capital loans, forex and treasury services, middle market and transaction management services."

Here are examples of companies taking advantage of these trends:

  • Automation: When it comes to supply chain automation, a notable example in the past decade is Kiva Systems, which built an automated robotics fulfilment system. Kiva was acquired by Amazon for ~$800m in 2012 and was renamed to Amazon Robotics in 2015.

A recently funded solution in the same space is Fetch Robotics, which raised $94m in June 2019. Fetch offers autonomous mobile robots (AMR) to handle warehouse logistics, but with an interesting on-demand business model.

Essentially a robotics-as-a-service (RaaS) offering (cc: XaaS), Fetch can quickly deploy across warehouse and industrial customers of all sizes. You pay for the AMR services you need; this is a less significant IT or hardware investment than if a company was to build the entire operation in-house.

The aforementioned robotics solutions still require human pickers to a large degree but, to be sure, there are technologies being developed that can potentially replace human warehouse labor.

Ocado Technology is one such AI robotics firm working with retailers to increase automation across the food supply chain, including highly sensitive "robotic fingers" to pick small items (cc: soft robots).

A look through the company’s career page shows how many different hardware and software engineering tools are required in automation and gives a view into the type of solutions the industry can use as standalone companies: 1) real-time controls; 2) cloud platform integration; 3) robotics data analyst; 4) stores data analyst; 5) maintenance.

  • Trade Finance: Trade finance facilitates the movement of trillions of dollars in global trade via letters of credit, bank guarantees, and other key documentation. However, much of this business is still done via phone, email, and snail mail.

    According to the consulting firm Bain, "technological developments in documentary trade finance could boost bank revenues by as much as $2B and increase trade volumes by over $1T."

    The reshoring of manufacturing to America will accelerate innovation in trade finance. Fintech firms looking to disrupt the trade finance space offer a number of solutions:

    • Mitigram allows banks and non-bank financial institutions to better coordinate funding and hedging of risk in trade.
    • Traydstream automates trade finance document filling and checking.
    • Demica is a working capital solution that provides large corporates and banks with a broad range of receivables, inventory, and payables products.

Outside of automation and finance, investors were already pouring money into supply chain technology prior to the coronavirus pandemic, with more than $30B across hundreds of deals in the past 2 years (2018, 2019):

  • Tracking & Analytics: Product tracking and analytics is a popular vertical for supply chain tech funding. Global supply chains are extremely complex, and managing hundreds (or thousands) of inputs is even more challenging.

    Companies creating relevant solutions in this space include:
    • Elementum is a mobile-first supply chain management platform that helps companies streamline procurement, logistics, and manufacturing ops.
    • Riskmethods is a SaaS service that automates risk monitoring and sets up mitigation programs for corporate supply chains.
    • FourKites is a real-time supply chain visibility platform that tracks shipment location and temperature, and calculates shipment arrival times.
  • Flexible Warehousing Storage: The supply shock experienced by many industries during the current crisis highlights the need for flexible warehousing solutions. Companies attacking this problem can help other companies scale inventory quickly.

    • Flexe is an on-demand warehousing and fulfilment platform with 1k+ warehouses in the network, allowing a company to add capacity and services of any size and any need.
    • Stord is a multi-warehouse distribution network that allows companies to efficiently move goods via a platform that monitors products, streamlines inventories, and routes inventory to the best warehousing options.
    • Spacefill is an Airbnb for warehousing, allowing companies to rent space on a short-term basis and warehouses to monetize excess storage capacity.

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