Since 2014, we’ve seen a number of startups in the logistics and supply chain space and a considerable amount of funding pouring into this sector. According to an article by CB Insights, 2016 funding in logistics startups was 70% higher than 2015, with $4.2bn invested across 253 deals (until Oct 2016).
The interesting thing to add is that the startups we’ve seen spread across the breadth of the value chain in the industry, i.e. 1) Transportation: full scope of international shipping, domestic trucking and last mile logistics; 2) Warehousing and fulfilment: storage, packaging, asset tracking; as well as 3) Inventory management, visibility solutions, tracking, ERP.
I wanted to see if there are any commonalities in the startups seen in this space. Are there are common themes or white spaces in the value chain which are being targeted? What are the high level characteristics common to these startups?
To understand this, let me paint a picture of the traditional logistics industry. The companies which have traditionally dominated the logistics and supply chain space can be classified into two main categories:
- Asset-based logistics providers: Companies who own and/or operate asset-heavy logistics solutions e.g. warehouses, trucks, cargo planes, shipping lines, etc. They invest in the mentioned assets to achieve economies of scale, which translates into cost optimization, productivity and specialization of task for the customers. The barriers of entry in this business are considerably higher as it requires high level of investment and the ability to have a ‘network’ of assets, not just a single warehouse or plane. Companies like Fedex, DHL, Kuehne and Nagel, Maersk, etc. have invested in their assets for decades to reach the global leadership status of today.
- Skill-based logistics providers: Companies who specialize in skills related a part of the supply chain e.g. customs and brokerage, inventory management, consultancy, technology (e.g. warehouse management system), etc. The assets for this segment of companies are its resources/ people or the technology. Increasingly, the larger asset-based logistics providers have tried to become integrators or full-service logistics companies by providing skill-based logistics services in-house.
The main challenges in the traditional logistics industry setup has been broadly due to the unorganized market dynamics and multiple handovers in the value chain – both of which lead to complexities and uncertainty. This impacts the 3 most important dimensions that define logistics efficiency and effectiveness – speed, cost and information availability.
While, for a new startup entrant, becoming an asset-based logistics provider can be a deterrent given the existing large players, high investment need and limited differentiating proposition; the skill-based logistics arena can still offer additional services and products. These startups must, however, meet the dimensions described above and aim to improve speed (on-time delivery), reduce costs / improve productivity and/or improve information availability.
The main dimensions to classify these startups are:
- Innovation dimension – product or service: Most startups leverage the service innovation dimension rather than developing a product.
- Asset Investment dimension – light or heavy: Most startups leverage the asset-light business model, rather than high investments in R&D or assets.
Figure 1. Classifying logistics startups to find commonalities in business models
Based on the above classification, the business model of most startups in the logistics and supply chain industry can be categorized as follows:
- Aggregators – Service Innovation | Asset light: Being the platform to consolidate the supply and demand across multiple players and reduce the time/ cost to access the relevant product/ solution (e.g. Freightos for containers, UberCargo for trucking, Flexe for warehousing, Flexport for forwarding, etc.). By aggregating demand and/or supply, these companies aim to reduce the speed to transact, get the most efficient pricing and increase information visibility in the transaction.
- Software as a service (Saas) – Service Innovation | Asset light: Software solutions that improve the information availability and use data to help improve decision making – thus reduce cost and improve speed in the supply chain e.g. visibility solutions, inventory optimization, tracking solutions, geometric fencing, etc. (e.g. Locus for routing and capacity optimization, SKUVault for cloud based warehouse management system, Taulia for financing and invoicing management, etc.)
- Automators – Product Innovation | Asset Heavy: Robotic and automation products that fulfil the primary goal of improving productivity in the supply chain e.g. Kiva’s warehouse robots, Matternet’s unmanned aerial vehicles (UAVs)/ drones, etc.
- Product enhancers – Product Innovation | Asset Heavy: Enhanced features of existing products that fulfils the primary goal of reducing cost in the supply chain e.g. Holland Container Innovations’ foldable containers.
Majority of the existing innovation is in the aggregator space, followed by SaaS – and is expected to continue the same given the high amount of uncertainty in the existing supply chains. This, for me, implies that the existing large logistics players (the asset-based logistics providers) will continue to dominate the industry at its core; while allowing these new startups (primarily aggregators, SaaS, and automators) to flourish. At some point in the near future though, there is an opportunity for consolidation – with either the large asset-based providers developing their own aggregator/ SaaS solutions or acquiring some of the more dominant startups by that time. Nevertheless, it is definitely an exciting time to be in logistics with the new ideas and opportunities coming into the industry.