Listen: Next in Tech | Episode 154: Supply chain is back

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Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, Chief Analyst for Technology, Media and Telecom at S&P Global Market Intelligence.

And today, we're going to be coming back to supply chain. So a topic we haven't touched on for a while, but something we've just actually had a recent webinar on with Mark Fontecchio.

Mark, it's great to have you back on the podcast.

Mark Fontecchio

Hi Eric, thanks for having me.

Eric Hanselman

And great to have you here. It's one of those things we got into such a strong focus about supply chain through the pandemic. And I think maybe there was that thought that, well, geez, aren't we done with supply chain?

And in point of fact, we're right back at it. I guess on the webinar, we were talking about the aspects of digital infrastructure and what's happening. But a lot of the work that you've been doing of really talking about or really looking into what's happening with transitions in supply chain, issues with digitization and sort of where we're going.

So what do you see is really where we are and how things are moving forward?

Mark Fontecchio

Yes, yes. So definitely, so some historical context here like you were kind of mentioning. And is back in the 2020, 2021 and into kind of half of 2022, was kind of all the talk of the town. The supply chain and the disruptions that were going on with COVID and the Suez Canal and then there were conflicts in the Ukraine and is causing a lot of disruptions and supply shortages in stores and you saw the empty shelves and everything. And so supply chain was really kind of the hot topic.

So as a result, a lot of companies decided they needed to solve their supply chain problems. And how would they do that? A lot of them felt like maybe they could just adopt some technology and that would sort of fix it all. And so that was kind of the mindset among many companies in sort of that 2021, 2022 time frame.

And then what kind of ended up happening, and we can see this in the surveys that we do of enterprises in the supply chain sector, is that a lot of companies figured out that technology doesn't always solve everything. So there is...

Eric Hanselman

Wait, wait, wait. Mark, Mark, Mark. Hold on. Hold on. Technology doesn't solve everything!? We did get to that -- well, and I guess some of the urgency wore off because at point at which when shipping capacity was maxed out, everybody was looking for an edge or an angle and technology was going to fix it. And yet, not so much.

Mark Fontecchio

And the freight market in general is very cyclical. So in terms of capacity management and the cost of shipping freight, it tends to go in waves up and down. And in the 2020, 2021 time frame, it was kind of a boon for companies that were in that sector. Not only for sort of like the shippers and the logistics service providers, but also those technology companies that were providing the technology to those companies to kind of make freight management more efficient.

And then in mid-2022, kind of early '22, it started getting a little bit -- the freight market started getting a little bit more soft. And so then the profits weren't there as much and a lot of companies last year started pulling back on their technology investments, or at least kind of recalibrating what they wanted to invest in, or getting a better sense of what business problems they actually needed to fix with their technology rather than just saying, "Well, let's adopt this technology and that will fix everything."

Eric Hanselman

Well, in some of that -- I mean, if you take a look at what that return on investment is going to be, it's always that calculus. And when costs are high, when you've got extra margin to invest, things that can make sense in that environment that, when those margins get squeezed, suddenly start to look a lot less attractive.

Mark Fontecchio

Yes. And I do think that's what happened, is -- and you could -- like I said, you could see this in the surveys that we did. We did them 2 years in a row. So we surveyed enterprises in late 2022 about their technology adoption. And these are just companies that are in the supply chain sector, particularly on the distribution side. So kind of the shippers or beneficial cargo owners, those are the companies that actually manufacture the goods and need them shipped from one place to another.

And then we also survey carrier, they're called asset-based transportation carriers. And those are the transportation companies that actually move the goods, the trucks that are on the road and the vessels that are in the ocean. And then the middle group is the logistics service providers who kind of provide that connective tissue between the two previous groups.

And in late 2022, they were all kind of gung-ho about digital transformation, ready to go. They all had formal digital transformation strategies in place and they were actively digitizing their business processes.

And then when we surveyed them late last year, there was kind of a pullback. So not as many have formal digital transformation strategies in place, and a lot of the projects that they're actually adopting are a lot more -- I don't want to say basic, but more sort of foundational to the business, so they're not as aspirational in some sense.

So for example, a big project that they have in adoption now is document digitization and purchase order management. So these seem like very basic things, but the logistics industry in general has kind of historically been a lagger in technology. And so being able to digitize these sort of very basic foundational business processes in the supply chain and with their logistics is really important for them to eventually be able to adopt more advanced projects.

Eric Hanselman

Well, it's something that we've talked about when you were on the podcast last, around the TPM conference and talking about really the state of the industry. And a lot of that concern about how much disruption could they really absorb in an environment where still a lot of the data exchange was by fax. And it was the least common denominator, but it worked.

And in a business that was pushing hard, you really want to be cautious, this concern about risk, of this disruption, for some, that transformation that could cause.

Mark Fontecchio

Yes, for sure. And so one of the things that we asked companies is what their biggest hurdle to digital transformation is, like what's one of the biggest challenges? And this most recent survey, there was a marked increase in two answers: The lack of executive support and the lack of a proof of ROI.

So those two things really kind of come hand-in-hand go hand in hand, right? So if you don't have the proof of ROI, then it's going to be a lot harder to get that support from the C-suite in order to adopt those particular technologies or put those projects in place. And so I think that's why you're seeing these sort of basic foundational projects become even more popular than they were a year ago because they bring ROI a lot faster in the near term.

Eric Hanselman

So these are quick-hit projects. These are things that we know there's some return on. Is that getting to a point at which, if you look at digitization of documents, is that something where we're now getting to a critical mass of people who can actually do the digital exchange? Are there some of those other pieces that are coming into play that are making this reality? Or what are some of the other aspects of that?

Mark Fontecchio

I think that's sort of the next stage. So I think organizations are digitizing their documents now, and there's some sharing of that information and there is some kind of incentives and projects going on between organizations to try to be able to share that data. Because sort of the more data that's shared across industry at large, the more insights that can be gained from it that everyone can benefit from.

I don't think it's at that stage quite yet. A lot of companies in the sector still have kind of the mindset that their data is their data and they want to kind of hold on to it as much as they can because they think it could be a competitive differentiator.

But there are some things in place right now, not only regulatory, but also some kind of organizations and associations that include a lot of these organizations in the logistics sector that are coming together to sort of collaborate and agree on, say, all the organizations will digitize their bills of lading by a certain date. I think there's a particular project in place where they'll digitize bills of lading by 2030, and some of the major sort of ocean carriers and other companies in the supply chain sector are on board with all of this.

So there is some recognition that this data needs to be -- or these documents need to be digitized and then that data needs to be shared collaboratively, but it's not quite there yet. I think it will be there in a few years or so, a little bit better. It will improve as the time goes on.

Eric Hanselman

But we're talking relatively long term. I mean, that's 2030s, sort of where some organizations' sustainability goal targets are set for. So we're looking at ways out there.

Mark Fontecchio

Yes, for sure. When we did the survey last year, it was striking that so many companies said that they had a formal digital transformation strategy in this sector because this sector tends to be very slow-moving and a little bit hesitant to adopt technology. But it was so frothy in that sort of 2020, 2021 time frame with supply chain and logistics technology that there were a lot of organizations that kind of jumped in with both feet that maybe previously would not be willing to do that.

And so there's some pullback now. And so yes, there's a little bit more conservative estimates of when things might actually get digitized now.

Eric Hanselman

Well, as with anything where you've got a large community, you've got counterparties that all have to be participating. Everybody has got to be bought in to have that exchange actually really work. So that creates its own challenges.

Mark Fontecchio

Yes, it's not only like a philosophical issue, like do we want to share -- be able to share our data with other organizations. But there's also a lot of technical work that has to go into what this data will look like. How will it be harmonized and standardized among all of our organizations so that all of us can benefit from everyone else's data as well? So there's some technical aspects to it, too. But I would say probably the #1 challenge to it is just these organizations agreeing to digitize their documents and start sharing that data.

Eric Hanselman

So you talked about some of the importance of data. I mean, what are those next stages? Okay, clearly, you got to get digitized first. There are other aspects, the digital infrastructure that have to be in place to truly leverage practical use of that data, too, right?

Mark Fontecchio

Yes, absolutely. So in terms of the digital infrastructure that needs to support all of this data, there's certain technologies that companies in this sector adopt. And so we ask companies what technologies are the most important in supporting their digital transformation?

And so connectivity is one of them. So IoT connectivity, such as 4G and 5G. So without that connectivity, the data is being collected on an island. It might be able to be analyzed at the edge or on a vessel or on a vehicle. But if you want to do any sort of predictive analysis or any deeper analysis, usually, that needs to get away from the edge or at least get to an edge data center or to a multi-cloud data center, data centers. So the limitations arise to its usability unless you have good connectivity.

And then cloud computing. You need a place where you can store that data as well as a way to use that data and integrate it throughout all of your business systems, your ERP systems and your CRM and your TMSs, your transportation management systems.

And then another one is security, cybersecurity. It's always one of the top priorities for any organization that's undergoing digital transformation, and this is no different.

And then finally, artificial intelligence and machine learning is one of the top technologies that companies in this sector are using for their digital transformation. So once you collected all that data and kind of standardized it and harmonized it and send it to the right location, then what do you do with it? How do you make sense of it? What does the data matter if we can make sense of it?

So those are kind of like the four key technologies, at least in this particular sector, that these companies are citing as the most important technologies in their digital infrastructure to support digital transformation.

Eric Hanselman

Similar points to what Zoë Roth was making in a previous episode. Really, just that point that you can't silo your environment. You got to make sure that data is broadly available. You have to make sure that it's available for the analytics that are actually going to help you extract more value out of it. Yes. All sorts of things that have to work out to make that actually deliver some of the value that is promised by some of this transformation.

So where do you see that going in the future? What are those next stages? You mentioned AI. And I guess it's one of those things where we can talk about differences between, I think, a lot of the AI and machine learning and some of the pieces that are involved in that. Generative AI, of course, brings in new and different perspectives, but this is an area where there's been an awful lot of work already with machine learning, and for lack of a better term, legacy AI kinds of applications to logistics for a while.

Mark Fontecchio

Yes, absolutely. You can't go to a conference nowadays without caring about Gen AI or just AI and ML in general and how important that is to all industries out there. And this sector is no different at all. So these companies are looking to AI and ML to, number one, automate their IT operations; and number two, to improve their logistics operations. Those are the top two. And then the third one is to improve their customer experience and self-service capabilities.

So one of the things we asked to the logistics service providers is what are your customers looking for in terms of AI and ML self-service tools? So in other words, the logistics service providers, their customers tend to be those shippers and beneficial cargo owners, the ones that need the goods moved from one place to another. Those are their customers. And the logistics service providers told us that most of their customers are looking for some kind of self-service tools more than they're kind of more looking for human-provided assistance.

So they're really looking for AI and ML to power some self-service tools so they can get a lot of stuff done, logistics operations on their own without needing assistance from the logistics service providers or freight brokers or freight forwarders, 3PLs, companies like that. So we're seeing that quite a bit.

Gen AI, I would sort of liken that, at least in the supply chain sector right now, I would kind of liken it to blockchain in that there's a lot of discussion...

Eric Hanselman

I'm not sure if that's a good thing or a bad thing.

Mark Fontecchio

I know. I'm not trying to denigrate blockchain at all. Just saying it's maybe not ready...

Eric Hanselman

[ Well, from just we were ] talking in the past. We went through this whole enthusiasm for blockchain as an information exchange medium in shipping and logistics. And just for lack of practical use, that just sort of faded out after a while because it turned out that, again, chicken and egg kinds of things of you had to build the community. You had to have the technology. You had to have some beneficial use for both sides of that equation. And as we discussed, it became sort of a symbol for pie in the sky, overly optimistic estimations for where it was headed.

Mark Fontecchio

Yes. We kind of talked about that earlier, right? You need to build the community, you need to -- and there was. With blockchain, there was an alliance, a blockchain alliance with some major organizations. But talking about it is one thing and then getting these organizations to share some of the data that they previously would not share because they thought it would kind of give them an advantage in the market is a tough ask.

And generative AI, I'm not sure if the challenge is there. In terms of the technology, like the challenges are somewhat different. It's different than just organizations wanting to hold on to their data.

I think it's more that it's -- they were a little bit snakebitten by blockchain in blockchain was a new technology and there was a lot of hype around it. And now generative AI is a relatively new technology or a new version of AI and there's a lot of hype around it. And so a lot of the companies in this industry kind of have that sort of like reflex, like, oh, we got burned by blockchain, so maybe we should just kind of take it easy on Gen AI.

Eric Hanselman

Going to be a little more cautious.

Mark Fontecchio

Right. But there is some hope there. So we do -- we did ask them about Gen AI and what they think. And organizations said that, most of all, Gen AI could improve customer service and freight tracking more than any other supply chain operation.

I'm not sure if we talked about this before, maybe in a previous broadcast.

Eric Hanselman

No, but that's sort of one of those typical good first-order use cases. It's the end user customer interface stuff, of being able to say where -- what's the status of my shipment, where is it? Those sorts of things. Being able to do the simplification of the user engagement pieces that Gen AI is so good at.

Mark Fontecchio

Yes, right. Exactly. So it's a conversational way to book freight shipments, for example. And if the Gen AI model is good enough, then it can tap into whatever sort of normal English language answer the customer has and translate that into whatever sort of freight booking and freight tracking software they have in the back end to give them a good freight quote, for example, that's based on a lot of historical data and machine learning. Or be able to tell them exactly where their shipment is at any one time based on what the shipment is, or what's in it, or what's the bill of lading number, or what have you.

Eric Hanselman

Yes, it makes sense. Well, and getting, I guess, to that next stage of sort of the digital infrastructure piece of not only being able to get quotes, but actually to do those kinds of system-to-system direct connections that start to automate some of that process. But that sounds like that's maybe a little further down the road.

Mark Fontecchio

Yes. I think whenever you talk to companies in this industry, this is probably an issue among many industries, is that data integration piece is so, so important. We've asked companies about that in terms of their challenges around the data and what's kind of important about managing that data, and data integration is always kind of a big one.

Data privacy is always huge, and data integration, and data quality. So those last two are really important when you're building your systems to be able to make sure that you're getting good data, data quality because garbage in, garbage out, that whole thing.

And then data integration, making sure you're able to send that data in whatever format needed to all the business systems you have. So it might be accounts payable or it might be a CRM or an ERP system or it might be a transportation management system. And getting the right data in the right format into those systems so that line of business employees can use that data in their day-to-day operations without having to go into like a specific like IoT device software platform that only a certain number of employees have access to.

Eric Hanselman

It's again getting into those situations where you can get data to the people who can put it to work and getting it out of those silos of the specialized silos and which tends to accumulate. Now you've got data also in terms of looking at some of the use cases that different classes of participants in the supply chain are leveraging and some of the things that they thought would be interesting to actually leverage that data and put it to work.

Mark Fontecchio

Yes. So it really depends on the type of logistics company you're talking about. So depending on what kind of company it is, we ask them about different projects. So I'll talk to you about carriers, for example. So those are the transportation companies that are actually moving the goods.

And their biggest projects are around what I'd like to call the trifecta of fleet management. So that trifecta is being able to keep track of and protect their three most important assets, which are: Their vehicles or their vessels, the cargo that they're transporting, and then of course the operators or the drivers of those vehicles and vessels.

And so you see that reflected in the use cases that these companies are adopting, with 3 of the 4 -- like some of the top ones being, one is cargo tracking, is like the #1 project they're adopting. And then fleet tracking and telematics, so that's about tracking your vehicles.

And then the other one is operator monitoring. So this can be like cameras, dash cams that can be one way, just facing the road, or two-way, facing the driver as well. And companies are even coming out with more cameras like that go on the side mirrors and things that can watch for, say, sideswipes or can even look back at kind of like the trailer to make sure there is perhaps no cargo theft going on or things of that nature.

So the carriers are really focused in on protecting those three most important assets in their organizations, those vehicles, people and cargo.

Among the shippers and logistics service providers, you kind of see some overlap. And so I kind of talked about it a little bit earlier, they're really kind of going back to the basics: Document digitization, purchase order management, freight booking and capacity management. Those are all kind of like top three projects for both shippers and logistics service providers.

Eric Hanselman

That's fundamental business process tools in terms of making the business run more efficiently.

Mark Fontecchio

Yes, you're right. Exactly. Supply chain planning and route optimization is a big one for shippers. And kind of similar to that for logistics service providers, real-time tracking is a big one. So that's something that they're adopting for their customers. So they provide that tracking information to the shippers, and then the shippers, and they can do their supply chain planning off of that. So those are the big projects for those groups.

Eric Hanselman

It's interesting to see that overlap between some of the carriers and then some of the logistics folks on the other side. And again, they've got some common interest in making sure that delivery is actually going to where it's expected to go, and that in fact they know when it's going to get there. Interesting to see where this ship...

Mark Fontecchio

Yes, one thing that's interesting, Eric, if I could, is last year, we talked a lot about supply chain visibility, right? Comprehensive supply chain visibility was a phrase that we kind of grew out and tossed around quite a bit in how important that was. And I think that wasn't as popular this year.

And I think the reason for that is that you can see things as much as you want. You can have great, great visibility. But if your cargo is stuck somewhere, then you're just looking at a dot on the map and that's not solving any of your problems. I think the visibility is almost like table stakes, like you need to be able to be tracking your goods and where they are. You need to see where they are. Now maybe it's not, every 15 seconds, you need to know that, but maybe it's every 15 minutes or once an hour or whatever.

So I think that visibility is table stakes, but it's really a means to toward other projects that are more important. So developing ETAs and using machine learning to use historical data to provide some kind of prediction or somewhat accurate prediction on where -- on how long it might take goods to go from one place to another, depending on the season and the day of the week and the time of the day and all that sort of thing.

Eric Hanselman

So it's really getting to that next level of, not just knowing where it is, but ratcheting that up to understand what that means. Of hey, it's currently -- it's on the ship. So that means it's still got to transition to the port. And we know that the port transition right now is taking about this long. We know all those things we went through during a lot of the supply chain crisis, we don't have enough drivers, we don't have enough trucks, we don't have enough containers, to actually be able to predict some of those things.

Mark Fontecchio

Yes, absolutely.

Eric Hanselman

Interesting. Well, I guess we'll have to see where this shakes out. I think we all hope for greater and smoother supply chain operation. But it sounds like certainly, we're headed in some useful directions. But this has been great. Thanks, Mark. I appreciate all of these insights.

Mark Fontecchio

Yes. Thanks for having me. Yes, it's definitely -- I think kind of it has come into focus again with the conflict in the Middle East and some disruptions in the Red Sea. And so a lot of these organizations that went from kind of just in time to supply chain to just in case in the pandemic era and just after that, and then kind of slipped back into just in time. They're getting hit again. And so supply chain is kind of like starting to get hyped up again this year.

Eric Hanselman

So arrival time -- well, suddenly, when you add, what? I guess they're saying an additional 3 weeks if you have to take the extended route that doesn't go through the Red Sea, suddenly, your just in time starts to get a little tighter.

Mark Fontecchio

Just out of time. Yes.

Eric Hanselman

Well, more topics to discuss on our future episodes, but we are at time for today.

That is for this episode of Next in Tech. Thanks, Mark. And I guess more to discuss next time you're back.

And thanks to our audience for staying with us. And thanks to our production team, including Caroline Wright and Kaitlin Buckley on the Marketing and Events teams; and our agency partner, The 199.

I hope you'll join us for our next episode, where we're going to be taking a look at a different aspect of technology. I will be doing a preview for what's going to be happening at Mobile World Congress. So all things, telephony, mobile, the interactions of a little bit of 4G, 5G, maybe even sprinkling in some 6G. But I hope you'll join us then because there is always something Next in Tech.

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