Innovation Footprints

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Archives for July 20, 2019

Key Supply Chain Innovation Issues to Consider as the World Becomes More Volatile, Uncertain, Complex, and Ambiguous

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Note: A version of this story was first published on June 11, 2019, at FreightWaves.

For a couple of years now, I wake up each morning thinking to myself; “I wonder what insane thing happened while I was asleep.” Initially, it was an enervating experience. Now, I have become accustomed to it, and I do not feel the same sense of dread when I wake up, or of being drained of energy even before my workday has begun.

In the same way that I have adapted to a less serene world, people who buy, build, or operate new technology and innovations for supply chains must adapt and adjust to a world that is characterised by instability and chaos.

This article will briefly touch on 3 approaches for doing so. It is based on observations I made during The National Retail Federation’s Big Show 2019, when my co-founder, Lisa Morales-Hellebo, and I led 9 different groups of visiting executives on tours of the expo hall to learn about innovations in supply chain that they might buy for their respective companies. Being a tour guide gave me a great opportunity to listen to them describe their problems in their own words.

What are the origins of the acronym VUCA, and what are its implications?

The term VUCA first appeared in the US Army War College’s curriculum in 1987. Subsequent attempts to trace its origins in the curriculum suggest that it may have resulted from a synthesis of ideas in the book “Leaders: The Strategies for Taking Charge” by Warren G. Bennis and Burt Nanus.

VUCA is an abbreviated description of a world that is simultaneously

  • Volatile — change happens more often than usual and the accompanying swings become more extreme with the passage of time,
  • Uncertain — our ability to make predictions of any meaningful nature deteriorates dramatically,
  • Complex — the number of variables we have to track, analyze, and interpret increases beyond our ability to synthesize the accompanying deluge of data and information for decision-making, and
  • Ambiguous — even when we can synthesise data and information, it can appear to lead us towards meaningless and even contradictory conclusions.

It is debatable if the world in general is more VUCA now than it has been at any time in the past. What is not open to debate, however, is that due to the evolution of information technologies, we now become more quickly aware of events around the world. The speed with which news of unexpected and destabilizing events travels contributes to our sense that the world we live in now is more unstable than it was in the past.

Observation #1: Supply chains are becoming less centralized, more distributed, and more integrated.

The days of centralised distribution appear to be well behind us. The trend now is towards more decentralized and localized distribution, and less reliance on centralized and massive distribution centers. This is happening because companies want to increase their responsiveness to changes and disruptions within their supply chain. To accomplish this companies seek to more tightly integrate local stores with one another, as well as to more tightly integrate existing centralized distribution centers with local stores. To accomplish this companies are looking for;

  • Increased automation — freeing human experts to focus on complex cases and issues that arise in the supply chain,
  • More sophisticated forecasting and network optimization capabilities, and
  • The potential to eliminate central distribution centers altogether, so that suppliers ship product directly to local stores.

Observation #2: Supply chain visibility is becoming a more pressing concern.

Supply chain visibility enables customers, producers, and other participants in the supply chain, to track and trace goods as the goods travel through the supply chain from a producer to a customer. Supply chain visibility is a problem of information creation, storage, transmission, retrieval, and delivery. Supply chain visibility is also an issue of information security. It depends on data standardization between organizations. This is something that has been rather difficult to accomplish in the past. However, the push for supply chain visibility will only increase as former arch-rivals and competitors move towards integrating certain aspects of their supply chain operations in order to collaborate more closely with one another.

Observation #3: Simplicity is a virtue to the users of supply chain software.

This thought occurred to me as I listened to the executives ask questions at each of the stops on the tour; The consumerization of enterprise software is now affecting people’s expectations of how supply chain technology should function.

What does this mean?

  • First, people now expect supply chain software to be as intuitive to use as the software they rely on at home. They expect unnecessary complexity to be abstracted away.
  • Second, people expect supply chain software to be always available, and ubiquitous. That is, it must be seamlessly available across computing platforms, with no degradation in experience or efficacy.
  • Third, customization and personalization are key. In this context, customization means that the software is easily configured to match an organization’s unique business operations and structure. Personalization means that within that customized organizational configuration, each user has an experience that is further configured to that individual user’s role and responsibilities within the company, in a way that maximizes the individual users on-the-job effectiveness.
  • Fourth, more so now than in the past, buyers of supply chain software expect speed, responsiveness, and redundancy.

It is clear the trends I have described create an opportunity for early-stage startups building new software-enabled innovations to help businesses simplify and streamline supply chain operations. What remains unclear is the degree to which switching costs will hinder the adoption of new software products from young startups in a world in which VUCA is the norm.

Disputes Will Disrupt Global Trade and Supply Chains

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Note: A version of this story was first published on June 04, 2019, at FreightWaves.

The United States is now in the midst of well publicised trade disputes with China, and Mexico, two of its biggest trading partners. There are also simmering trade tensions between the European Union and the United States. Supply chains are networks of interdependent organizations that cooperate and collaborate with one another to move goods and information between producers and consumers. Global trade has become more complex as supply chains have become increasingly more global. The current tendency towards raising barriers to trade will be disruptive to supply chains, global trade, and economic well-being.

My upbringing, having grown up in Ghana and Nigeria, and then attending college, graduate school, and pursuing professional credentials after that in the United States, coupled with my professional experience since college, and my past decade pursuing a career in early-stage investing, hopefully gives me a unique perspective on this topic.

Today, the most accurate way to think of supply chains is in three ways;

  • First, information and data supply chains are non-physical and typically traverse national borders.
  • Second, conventional supply chains used to move physical goods can’t function effectively or efficiently without tightly integrated information and data supply chain infrastructure.
  • The production of the most valuable physical goods that people consume today relies on complex supply chains that source raw materials in certain parts of the world. Then manufacturing into finished goods, or parts, occurs in other parts of the world. Finally, the goods are shipped to consumers for final consumption in yet other parts of the world.

In sum; Modern supply chains are complex systems which are susceptible to cascading unintended consequences. These consequences may arise due to policies pursued by national governments that do not take a holistic view of global trade and supply chains, and which are not guided by or based on a common understanding of the basic principles of economics.

Barriers to trade affect consumers directly and indirectly. The direct impacts arise when businesses that have pricing power pass 100% of the financial burden that barriers to trade create onto their customers. The indirect impacts arise when businesses that do not have pricing power absorb some or all of the increase in operating expenses, forcing them to make some employees redundant as these businesses attempt to maintain their profit margins. In both cases, it is not difficult to understand how the broader economy starts to buckle; Lower consumer consumption leads to reduced business sales. Lower business sales and increased operating costs lead to reduced production. These interact to create a reflexive spiral of negative business and consumer sentiment about the state of the economy.

Here are some highlights from Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions by Erika York, Kyle Pomerleau, and Robert Bellafiore of the Tax Foundation, based on the Tax Foundation’s Taxes and Growth Model, as of April 2018. If all the tariffs announced by the Trump Administration as well as other national governments as of April 2018 were fully implemented;

  • United States GDP would fall by 0.79%, a reduction of $196.77 billion, over the long run.
  • Wages would fall by 0.51%.
  • Employment would fall by the equivalent of 609,644 full-time jobs.

Given this administration’s tendency towards belligerent and ad-hoc decision-making on these issues, one may safely assume that April 2018 represented the optimistic scenario.

Concurrently, according to data on Global Government Bonds as of May 31, 2019 at the Wall Street Journal’s Market Data Center, yield rates and spreads over U.S. Treasurys of 2-year, 5-year, and 10-year maturities are respectively below their levels over the previous month, and the previous year. This is the case for government bonds in Australia, Belgium, France, Germany, Japan, the Netherlands, Portugal, Spain, Sweden, and the U.K.

Furthermore, according to data on International Stock Indexes as of May 31, 2019 at the Wall Street Journal’s Market Data Center; The Global Dow, The Global Dow Euro, the DJ Global Index, and the DJ Global ex U.S. each closed the session an average of 3.8% below their level 52 weeks ago.

If that is not persuasive enough, the June 3rd 2019 J.P. Morgan Global Manufacturing PMITM produced by J.P. Morgan and IHS Markit in association with ISM and IFPSM says; “Global PMI surveys signalled that manufacturing downshifted into contraction during May. Business conditions deteriorated to the greatest extent in over six-and-a-half years, as production volumes stagnated and new orders declined at the fastest pace since October 2012. The trend in international trade continued to weigh on the sector, with new export business contracting for the ninth month running. Business optimism fell for the second month in a row and to its lowest level since future activity data were first collected in July 2012.”

While this data is interesting, and relevant, the real issues of concern are those that aren’t adequately captured in data, the information about hardening attitudes and perceptions towards economic-cooperation and free-trade amongst countries. In what I consider an unexpected and unusual move, the Government of China has published a white paper: China’s Position on the China-U.S. Economic and Trade Consultations. Readers of the white paper can agree on one thing; We are entering uncharted waters as far as global trade is concerned. How will current disputes affect how countries interact with one another as it relates to global trade? Will the progress of the past few decades be eroded due to political sentiments around the world which have led us to these specific trade disputes between the United States and its most important trading partners?

Coupled with the trade disputes between Mexico and the United States, prior disagreements between Canada and Mexico on one-hand, and the United States on the other, about NAFTA, this dispute between China and the United States, as well as other trade related disagreements that appear to be simmering just beneath the surface, one can only conclude that the global economy is in for bumpy 18–36 months.

There’s extreme turbulence ahead. Buckle-in your seatbelts.

The Democratization of Data for Supply Chain Logistics

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Note: A version of this story was first published on May 29, 2019, at FreightWaves.

Almost every day, there are reports warning of severe weather events, across the United States and in other parts of the world. About two weeks ago, while listening to one of those reports I thought to myself “I wonder how easy it is for someone responsible for supply chain operations at any company to proactively get a sense of where there may be severe weather events worth worrying about?” I couldn’t think of any.

Since that day, whenever I have some slack in my day, I go to Google to see if I could find something that provides a simple to use, and holistic source of data and information to enable all types of businesses make preemptive decisions related to their supply chain operations.

The closest I have found is FreightWaves’ Sonar — specifically, for the particular issue I am thinking about, the Critical Events view.

According to Zurich Insurance Group, an extreme weather event is an unexpected weather incident that is at the extremes of historical ranges for a specific location. The record amounts of precipitation that led to flooding in the midwestern United States in March, and the flooding earlier this month, again in the midwestern United States, are both extreme weather events. As bad as the problem is now, it has been getting worse, and will continue to get worse.

In “Economic Losses, Poverty & Disasters: 1998–2017”, the United Nations Office For Disaster and Risk Reduction (UNDRR) and the Centre for Research on the Epidemiology of Disasters (CRED) state:

“The report finds that between 1998 and 2017, climate-related and geophysical disasters killed 1.3 million people and left a further 4.4 billion injured, homeless, displaced or in need of emergency assistance. While the majority of fatalities were due to geophysical events, mostly earthquakes and tsunamis, 91% of all disasters were caused by floods, storms, droughts, heatwaves and other extreme weather events.

In 1998–2017, disaster-hit countries experienced direct economic losses valued at US$ 2,908 billion, of which climate-related disasters caused US$ 2,245 billion or 77% of the total. This is up from 68% (US$ 895 billion) of losses (US$ 1,313 billion) reported between 1978 and 1997. Overall, reported losses from extreme weather events rose by 151% between these two 20-year periods.”

The ability to know where critical weather events may be developing so that a business can adapt it’s plans for moving goods around is quite important. Severe weather events simultaneously increase costs and decrease revenues.

As I write this article, Sonar is showing me;

  • 591 Severe Weather Watches and Warnings around the world,
  • 5 Severe Thunderstorm Outlooks
  • 2 Tropical Cyclones
  • 40 Earthquakes, and
  • 2 Wildfires.

Sonar also allows me to drill down further, to get local data wherever there’s an asset providing data to the system. I drilled down to see more detail from data assets and sources in Kaduna, Port Harcourt, and Warri — cities in Nigeria. It’s the beginning of the rainy season in West Africa so I may come back periodically to see what the data says.


In addition, I can zoom in on parts of the United States, and identify the specific cities that are most likely to be hit by the storms that are mentioned daily in the news. For example, I as I write this article, can see that there are 160 different assets collectively warning of wind gusts, severe weather, hail, flooding, and tornados across the midwestern United States. If I were expecting a shipment of goods from that region, I could make contingency plans to account for these developments.

FreightWaves isn’t the only company building a platform of this sort. In January 2016, IBM announced that it had acquired The Weather Company. Presumably with the data that it has gained from that acquisition its Watson Supply Chain platform is better placed to help IBM’s enterprise clients take proactive measures to prevent disruptions to their business operations.

The power of systems like the ones I have described will be realized when they are as ubiquitous for businesses as Google Maps and Waze are for consumers. The technology keeps getting better, and the need keeps becoming more acute. The days when such information is only available to big companies that can afford to pay significant sums each year for such data and information are now behind us.

Our Trash Is Creating A Coming Supply Chain Crisis

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Note: A version of this story was first published on May 22, 2019, at FreightWaves.

News reports about the 2019 Copenhagen Fashion Summit (May 15 — May 16, 2019) highlighted current efforts by the French government to encourage fashion companies to establish sustainability goals for the industry. French President, Emmanuel Macron, has appointed Francois-Henri Pinault, CEO of Kering SA to lead the charge. This is part of increasing concern around the world on the issue of waste, and waste management. Initiatives like the one in France, and others around the world, are also shifting focus from our past of linear supply chains to a future of circular supply chains.

Putting things in context

According to the World Bank Group’s “What A Waste 2.0: A Global Snapshot of Solid Waste Management to 2050”;

  • In 2016, 2.01 billion metric tonnes (4,431.3 billion pounds) of municipal solid waste was generated globally. If nothing changes, this is expected to increase to 3.4 billion metric tonnes (7,495.7 billion pounds) by 2050.
  • Food and green waste make up about 50% of waste in low-income and middle-income countries. In high-income countries, this proportion is 32%.
  • Recyclables — paper, cardboard, plastic, metal, and glass, makes up about 16% of the waste stream in low-income countries, and up to as much as 50% in high income countries.

Assuming that a full garbage truck weighs 23 metric tonnes or 50,000 pounds, this means that global waste produced in 2016 was the equivalent of about 87,391,304 garbage trucks a year, or 239,428 garbage trucks per day. If nothing changes, in 2050, global waste will be the equivalent of 147,826,087 trucks, or 405,003 garbage trucks per day.

What are the biggest culprits in post-consumer waste?

Fashion, apparel, & textiles is attracting a lot of attention. The following data and information in Figure 1 — Figure 6 below, from The Ellen MacArthur Foundation’s “A New Textiles Economy: Redesigning Fashion’s Future” report proves instructive. In summary, the problem is growing and solving it will require a new way of thinking, and concerted collaboration to create systemic solutions rather than isolated solutions.

Figure 1

Figure 2

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Figure 4

Figure 5

Figure 6

Plastic waste has also been attracting a lot of attention. Here too, The Ellen MacArthur Foundation’s New Plastics Economy initiative is uniting companies, governments, and multilateral organizations in an effort to curtail and reverse the adverse impact plastic pollution is having on the world. To properly understand the problem posed by plastics, consider that reports suggest that popular everyday items made from plastic can take anywhere from 10 to 5,000 years to decompose through biodegradation. Figure 7 and Figure 8 below put things in further context.

Figure 7

Figure 8

The gravity of the problem posed by plastics especially is captured by media reports that;

  • May 2019 — The National Geographic reported that “more than 180 nations agreed in Geneva to add mixed plastic scrap to the Basel Convention, the treaty that controls the international movement of hazardous waste.” This has become an issue of growing international concern ever since China stopped buying non-industrial plastic waste in 2018 — China is the biggest importer in the $200 billion global market for non-industrial plastic waste. It is becoming increasingly difficult for wealthy countries to export their trash to poor countries.
  • May 2019 — National Geographic and CNN reported that plastic debris was discovered at the bottom of the Mariana Trench, at a reported depth of 35,849 feet (6.79 miles) or 10,927 meters (10.93 kilometers).
  • March 2019 — The New York Times and The Washington Post reported that a dead whale was found on a beach in the Philippines with 88 pounds (39.92 kilograms) of plastic in its stomach.

News media reporting, and statistics, on other categories of waste paint an equally damning picture: For example, according to the United Nations’ Food and Agriculture Organization, about one third of the food produced in the world goes to waste every year.

So, what’s being done about this problem?

Companies, national governments, and multilateral organizations are teaming up to try to tackle the problems posed by increasing amounts of waste. For example: News reports about the 2019 Copenhagen Fashion Summit (May 15 — May 16, 2019) also highlighted Nike’s creation of an open source design guide aimed at nudging the fashion industry towards a future of circular and sustainable supply chains.

There are a few difficult problems in relation to the creation of circular and sustainable supply chains;

  • First: There is a dearth of voices from supply chain logistics in the discussions so far. How we move post-consumer waste to sorting and recycling centers will be a key component of creating circular supply chains.
  • Second: A clean and sustainable environment fits the definition of a public good. So efforts to build circular supply chains could very easily be susceptible to the free-rider problem unless political and economic structures are put in place to prevent that from happening.
  • Third: The success of circular and sustainable supply chains will rest on big behavioral changes for people all over the world — from a linear culture that glorifies consumption and generates a lot of waste, to a cyclical culture that minimizes unnecessary consumption, minimizes waste and maximizes sustainability and the reuse of products.

On the bright side, there are several startups creating innovations to tackle the problem of waste, in different industries. Social movements like #FridaysForFuture could potentially gain strength, and drive the tougher political action that may be required to spur private industry into taking more concrete steps to bring circular supply chains out of the lab and into the real world, at scale.

Why You Should Be Rooting for Startups Like Uber

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Note: A version of this story was first published on May 13, 2019, at FreightWaves.

Disclaimer: The author is not an investor in Uber, or any of its competitors. Steve Case’s Rise of the Rest is an investor in FreightWaves.

On May 9 — just one day before Uber’s I.P.O., The New York Times published; Why You Should Root for the Uber I.P.O. to Fail, an OpEd by Mihir A. Desai — a professor at Harvard Business School and Harvard Law School. He is also the author of “How Finance Works.”

I couldn’t disagree more. We should all be rooting for startups like Uber to succeed. Our future depends on it.

This article is not an exhaustive examination of Uber’s business model, corporate governance, or how it treats its employees and drivers. That is beyond the scope of this article given that Mr. Desai does not critique Uber on those issues specifically.

What is the case for rooting against Uber?

In his article, Mr. Desai argues that Uber’s pre-I.P.O. investors have thrown an unprecedented amount of capital at Uber — $24.7 billion over 23 funding rounds, to be exact, according to Crunchbase. That capital helped Uber sustain more than $10 billion in operating losses in the 3 years preceding its I.P.O. Mr. Desai urges us to pray for a comeuppance for those investors. Here’s a summary of his reasons;

  • First; The era of bloated venture capital funds, like Softbank, distorts the allocation of capital, talent, and entrepreneurial energy toward unviable business models.
  • Second; The success of a company like Uber can lead young people and investors astray. Young people can view their jobs as lottery tickets. Investors of all kinds can be seduced into imitating these giant venture funds.
  • Finally; The venture capital world will become even more clubby. Startups will compete on funding rather than on the merits of their products.

He makes a seductively compelling case, and I understand his complaints. That being said, his argument fails because it takes a rather narrow view of the issue. Let me explain.

We are entering a new era

In his book, “The Third Wave: An Entrepreneur’s Vision of The Future”, Steve Case — former CEO and chairman of AOL makes the argument that we are entering a Third Wave of the internet. Briefly;

  • The First Wave extended from 1985 to about 1999. This was the era during which technologists and entrepreneurs laid the foundation for the online world. It was driven by people, products, platforms, partnerships, policy, and perseverance.
  • The Second Wave extended from 2000 to about 2015. This was the era of the mobile revolution and the app economy, characterized by search, social networking, and ecommerce. This era was driven by people, products, and platforms.
  • The Third Wave extends from 2016. This is the era of ubiquitous connectivity and pervasive computing, enabling entrepreneurs to use digital technologies to transform real-world sectors of the global economy. This is the era during which software — made up of bits, and physical products — made up of atoms, intersect and collide. This era is driven by people, products, platforms, partnerships, policy, and perseverance.

Though Uber was founded in 2009, and Lyft’s predecessor company, Zimride, was founded in 2007, it is not difficult to see that they fit squarely in The Third Wave. Together with other startups that were also founded before 2016 you may not know yet, they represent the canaries in the coal mine of Third Wave Startups.

So, what’s the problem?

The problem is that, with only a few exceptions, in general, Third Wave startups have not been very popular with venture capitalists. Indeed, this is the impetus behind Steve Case’s Rise of the Rest® initiative. Third Wave startups are unlikely to be founded by entrepreneurs who grew up or live in San Francisco, New York, or Boston. Third Wave startups are likely to be building innovations to reinvent supply chains in industries like manufacturing, agriculture, energy, transportation, healthcare, fashion and apparel, consumer packaged goods, real estate — huge, global industries in which the opportunity to exploit the latest advances in software technology to increase efficiencies in the conventional economy has not yet been fully realized, if at all.

Some of the reasons Third Wave startups have been unpopular with VCs are;

  • First, generally speaking, they require significantly more capital than the Second Wave, or even First Wave startups.
  • Second, initially, it can appear that they are operating unviable business models and that they may require more time to mature and experience a liquidity event than VCs can stomach — in fact it can often seem as if they will never become profitable businesses.
  • Third, at the outset it can seem as if such startups will never be able to overcome entrenched norms in legacy industries, overcome existing anti competitive barriers, or work in partnership with regulators and industry incumbents to achieve mutually beneficial outcomes.

The long-term success of Uber, Lyft, and other startups like them can help start to change that narrative.

Every Third Wave innovation is about refashioning supply chains

A supply chain is a network of interdependent organizations that cooperate and collaborate with one another to manage the movement of goods, services, and information between producers and consumers. The world as we know it would not exist without supply chains. Every Third Wave startup reflects an effort to rethink and reinvent the way the world’s supply chains function and operate. These innovations are critical if we are to have any hope of reversing climate change and creating a more sustainable future for our planet.

I am not suggesting that Uber is without blame or blemish. I am not suggesting that it is the very best example of a Third Wave startup. It is not yet clear that Uber or Lyft, or any of their competitors is good for the environment — I rarely use Uber or Lyft, preferring mass transit whenever I have the choice. I do not seek to dissuade, Mr. Desai, and others like him who would critique venture capitalists in general, and Uber’s investors in particular. However, while we critique Uber and its investors, let’s also demand that regulators and government fix the problems that are best fixed through policy as Third Wave Startups grow, mature, and implement new business models. Merely praying for Uber’s comeuppance doesn’t fix the very real shortcomings of regulatory authorities.

There is much to critique about Uber. Others have done so ably elsewhere. However, many of the issues that Uber, Lyft and some of their early Third Wave counterparts are facing may be emblematic of the same sorts of issues and obstacles that successive generations of Third Wave startups will face. Reinventing the way the world produces, transports, and consumes the goods and services that characterize life as we know it is a difficult and complex task that will take time and require many trade-offs and compromises.

Third Wave startups are the startups that excite me most. I believe that supply chain innovation is the foundation for all other sustainable innovation, and that supply chain innovation functions as a powerful economic multiplier. We should celebrate the era in which venture capitalists become more willing to fund startups taking on problems in unsexy but important industries — industries in which entrenched interests profit off inefficiencies that harm consumers and damage our environment. We should encourage, celebrate, and champion entrepreneurs of the Third Wave, even while we hold them accountable for their personal shortcomings. We should all be rooting for startups like Uber to succeed.

Is disruption finally underway in the freight brokerage industry?

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Note: A version of this story was first published on May 10, 2019, at FreightWaves.

On April 25, Amazon announced that it was making an investment of $800 million to reduce delivery times, from two days to one, for members of Amazon Prime. The next day FreightWaves was first to report that, without any fanfare, Amazon had also launched a digital freight brokerage website at freight.amazon.com. Before that, on February 5, Convoy, a startup in Seattle that operates a digital freight marketplace, announced that it can now automatically match 100% of loads to carriers, without human intervention.

These announcements have pushed us farther along a curve tracing the evolution of the freight brokerage market, one that has historically operated on the basis of personal relationships, trust, and phone calls.

What is a market disruption?

A market disruption occurs when new entrants into a market supplant incumbent companies within that market in terms of market share and market power, leading to financial distress for some incumbents.

In his book, The Disruption Dilemma, author Joshua Gans distils what we know about disruption into two major categories;

  • The Demand-Side Theory of Disruption (Demand-Side Disruption) is the more popular and widely known version of disruption because it is the process described and explained in Clayton Christensen’s book The Innovator’s Dilemma. A Demand-Side Disruption is driven by changing customer demands and expectations.
  • The Supply-Side Theory of Disruption (Supply-Side Disruption) is much less well known, and results from research by Rebecca Henderson and Kim Clark. A Supply-Side Disruption is driven by a change in the architectural knowledge that forms the basis by which suppliers satisfy market demand for a service or product.

The freight brokerage market is being attacked on two fronts

Amazon’s entry into the freight brokerage business threatens to shift the basis on which the services of a freight broker are delivered to the market from one reliant on personal relationships, trust, and telephone calls to one that relies on a combination of software, cloud computing, connected devices, stochastic optimization, and automation. These platforms will automatically match carriers to only the most profitable loads, and they will minimize operating costs by automatically optimizing delivery routes. A relatively small number of people trained and licensed as freight brokers would be required to handle complex, unusual, and exceptional situations on an ongoing basis. Such a platform would be tightly integrated through application programming interfaces with all the other supply chain management software that customers rely on, as well as other external sources of relevant data. These platforms will eventually surpass the performance thresholds achievable by the best human freight brokers, and they are already being tested by some of the world’s largest companies. If they pass the preliminary tests and become widely adopted by shippers and carriers, they will represent a supply-side disruption.

Simultaneously, there is already a sizeable population of startups building on-demand digital freight marketplaces with the goal of cutting freight brokers out of the picture. For now, these marketplaces mainly fulfill the function of automatically matching loads to carriers, and they typically target the 10% of the carrier market that is made up of owner-operators. Given the razor-thin profit margins that characterize the trucking market, and the reality that brokers can command fees as high as 40% or more of each transaction, it is not difficult to understand why such marketplaces could potentially win market share from some incumbent freight brokerage businesses as time progresses. These marketplaces also compete directly with load boards. If these digital freight marketplaces succeed, they will represent a demand-side disruption.

There are two wildcards

There are two conditions that have to be met before freight brokerage confronts disruption;

  • First, new entrants have to solve the trust problem. Shippers interests are aligned with those of their freight brokers, and freight brokers act as arbiters of trust between shippers and carriers. Conventional wisdom among industry professionals is that this trust relationship cannot be replicated with software.
  • Second, new entrants have to overcome the cognitive and psychological switching costs that keep carriers and shippers firmly locked into the old way of doing things.

Even just a few years ago it might have been difficult to see how these problems could be solved systematically and satisfactorily with a software-centric approach. Conventional wisdom among industry professionals is that the trust relationship between shippers, carriers, and brokers cannot be replicated through software. I am not so certain. Carriers and shippers have the fundamental need to increase throughput, increase efficiency, and improve profit margins. The new entrants can gain market share by proving that they can satisfy those fundamental needs better than their incumbent counterparts on an ongoing basis.

To be clear, none of the innovations I am describing is a perfect replacement for the best freight brokers. Not yet. That said, venture capitalists have already invested $1.6 billion in FreightTech during the first quarter of 2019. This exceeds the $1.3 billion that was deployed in 2017 and is already 55% of the $2.9 billion invested over the course of 2018. Moreover, REFASHIOND Ventures’ analysis showed that Amazon had $31 billion of cash and marketable securities on its balance sheet as of August 26, 2018. That is more than enough capital to fund a sustained push to redefine the basis of competition in freight brokerage — the $800 million investment it announced is just a beginning.

No industry can escape turmoil if a supply-side disruption occurs within the same period as a demand-side disruption. Fasten your seat belts. We’re embarking on a long and bumpy ride.