Insights Article

Future of supply chain - sourcing and procurement software

In past newsletters we have covered supply chain pain points, end-to-end visibility, fragmentation challenges, and the impact of the COVID-19 pandemic on logistics. For this newsletter we turn our attention upstream, to sourcing and procurement.

Procurement is a key insertion point for end-to-end supply chain management as it is one of the first steps taken in the supply chain journey. Suboptimal procurement strategies or processes can have ripple effects throughout the entire supply chain, down to the end customer and company cash flows. A worst-case example is mass recalls – a scenario that can deteriorate both brand equity and cash flows for months or even quarters after the procurement decision. The below chart illustrates the complexity of supply chains as well as the transparency and collaboration requirements that organizations face in building resilience and managing cost.

Chart I: Illustrative supply chain overview

More than $5 billion is spent annually on procurement software, and the category is growing at 12% annually. Coupa, a spend management platform founded in 2006, manages over $2 trillion of annual spend.  IDC reported that Coupa generated $220M in procurement software revenues last year with 27% growth. Yet Coupa is the number three player, with a 4% market share. SAP and Oracle control one-third of procurement software spend.

Given the scale of procurement spending, incremental improvements can have a meaningful impact on cash flow and profit margins. Procurement is highly strategic for many companies, especially for companies with physical products.

Procurement can be split into two broad categories: Sourcing and Procurement. Sourcing starts with identifying requirements and discovering suppliers, then moves on to selection, closing, and managing the supplier relationships. Procurement is more process driven and repetitive in nature, and includes tasks ranging from purchase requests to invoice management and payments. Analytics and spend optimization apply to both categories.

Chart II: High-level source-to-payment flow

The strategic nature of spend categories is driven by multiple factors. Product-related categories are highly strategic and are defined as direct procurement. This means that the choice of suppliers and contracts will impact everything from gross margin to inventory levels, product quality, and brand equity. Spend categories like travel and logistics are defined as indirect procurement. While travel and logistics are not directly part of the end product, these are typically large spend categories, which increases the importance of optimization. Logistics, as previously explained, is also a key enabler for unlocking competitive advantage throughout the supply chain. Some spend, like office equipment, is not strategic, but nevertheless must be monitored from a cost optimization perspective. 

The strategic nature of sourcing is demonstrated in a recent McKinsey report on supply chain resilience. The report cites sourcing-related actions as three of the top five actions that can increase supply chain resilience.

Chart III: Planned actions for building supply chain resilience(3)

The topic of supply chain management and resilience has gained increased attention due to the dual shocks of the COVID-19 pandemic and US-China trade tensions. These shocks are on top of longer-term trends such as rising demand volatility, ESG requirements, and shortened lead times. Complex global supply chains must now re-evaluate their sourcing strategies. We believe categories that include planning, optimization, automation, discovery, and collaboration are ripe for disruption.

McKinsey estimates that ~40% of procurement tasks, from spend strategy and planning to payments and analytics, can be automated with currently available technologies. BCG predicts that digital solutions can reduce the end-to-end time for procurement processes by up to 80% for standardized items like office supplies and by 40% for more complex items like capital spend. The combined improvements could generate savings of 1% to 3%.

Chart IV: Automation potential of procurement

The opportunities in sourcing and procurement have yielded significant venture-backed outcomes, including market leaders Ariba (acquired by SAP) and Coupa (trading at a $17 billion market cap). However, we believe that the field is open for best-of-breed solutions to accelerate growth in the category, empowering procurement teams with the required tools for the complexities of today. Why?

1.      Market leaders like Coupa and Ariba do not solve all customer problems.

2.      Management consultants remain widely used for procurement projects.

3.      There is a prevalence of in-house tools.

4.      The potential of AI remains largely unleveraged.

5.      We see strong momentum for companies like Globality, Keelvar, Scoutbee, and Sirion.

With supply chain shocks from both trade wars and the pandemic, sourcing and procurement are likely to gain further attention in boardrooms as enterprises continue to invest in real-time, end-to-end supply chain management. This past week, Coupa announced the acquisition of Llamasoft for $1.5 billion, a timely reminder of the demand for data-first approaches to supply chain design. Enterprises cannot afford relationship-first supply chain processes. New solutions are emerging that use machine learning to establish competitive advantage through procurement and supply chain management.

A new crop of companies is emerging, and we expect more activity in the procurement space going forward as momentum builds.
 

Smart Logistics Update

COVID’s impact on demand for delivery continues to translate into investment dollars. In Thailand, Flash Express announced a $200 million Series D to grow its door-to-door and express delivery operations. In Europe, Barcelona-based Glovo has agreed to sell its Latin America operations to Delivery Hero in a deal priced at €230 million. Delivery Hero will assume the Glovo operations in Peru, Ecuador, Argentina, and several smaller markets, expanding its footprint to 44 different countries.

The significant uptick in online grocery adoption has resulted in grocers investing in their delivery and fulfillment infrastructure. UK-based Ocado announced two acquisitions to enhance its grocery pick and pack technology.  The company paid $262 million for San Francisco-based Kindred AI and $25 million for Las Vegas-based Haddington Dynamics, both of which develop robotic picking arm technology.  Elsewhere, InstaCart recently raised another $200 million at a $17.7 billion valuation and food delivery competitor DoorDash announced that it would enter the grocery delivery business.

Coupa announced that it will acquire Llamasoft for $1.5 billion. The business combination unites Llamasoft’s supply chain management platform with Coupa’s spend management applications. Coupa has grown to become the number three player in the procurement market behind SAP and Oracle.

Ryder announced that it has committed $50 million to RyderVentures, its new corporate venture arm. The fund will invested in startups focused on e-commerce fulfillment, automation, asset-sharing, data analytics and AI.

Flaschenpost, a drink delivery startup based in Germany, will be acquired for €1 billion by the Oetker Group. Flaschenpost grew to €320 million in sales just four years after founding. The Company presents a good example of how a sharp focus – in this case the glass bottle market – combined with excellent execution can result in phenomenal growth.

Smart Commute Update

McKinsey released an interactive that details transportation and safety preferences from consumers around the globe. People are still avoiding public transportation and ride-hailing, instead replacing those trips with walking and biking. As a result, the unwavering demand for bikes seen in the Spring continues into the Fall.  Suppliers are still struggling to ramp production and shops are stocking out. In response, there have been several venture-funded bicycle companies.  Dance, which was started by the co-founders of SoundCloud, raised $17.8 million to bring a subscription e-bike model to riders in Germany.

Root became the second insurtech company to file for an IPO in 2020. The insurer prices policies based upon driving behavior. Customers are required to download the Root app and their driving performance is used as a key factor in determining the cost of their premium. Like Lemonade, the other full-stack insurer that listed this summer, Root is yet to turn a profit.

Virgin Hyperloop chose West Virginia as site for its new hyperloop testing and certification center. The company estimates it will invest $500 million in building out the testing and validation site. While the technology is still under development, Virgin Hyperloop has selected India as the site for its first commercial system.

Funding and Exit Update

Smart mobility companies raised over $6 billion in September and October. Several big funding rounds contributed to the overall total, including $1.47 billion for Weltmeister, $600 million for Northvolt and $500 million for Uber Freight. See the full details below.

SPACs have repeatedly made headlines this year by facilitating reverse listings for venture-backed companies in the smart mobility space. Nikola, Hyliion, Velodyne and Lordstown Motors are some of the recent targets that we have highlighted. E2Open is the latest addition to the list, as the supply chain software plans to list at a value of $2.57 billion through a reverse merger. Year to date, there have been 169 SPAC IPOs, a 186% increase compared to 2019.

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