Venture Capitalists in the Supply Chain Arena: An Interview with James Watson
Q: What trends do you see regarding e-commerce and supply chains in the companies
you deal with?
A: Two key trends pop out. Many opportunities now exist to eliminate inventory touches. Every time we can do that, we increase productivity, lower cost, and create a better business model. This leads to the second trend: information is replacing inventory. This trend lets us track the flow of inventory in a far better manner than ever before. It also helps us realize just how much brick and mortar - and related capital assets - we can get rid of. And that, to me, is where the Internet comes in.
Q: Well, that didn't take long - mentioning the Internet.
A: No, it didn't. However, I don't see the Internet as any big piece of magic. It's just a better utility for communication and connectivity. It has become the backbone for watching the flow of finished product, knowing at all times where that product is - down to the part number and quantity - and maybe eliminating one or two touches along the way.
Q: Well, if the Internet is nothing special, what is?
A: In my business, which is primarily venture capital (VC) and working with VC companies in terms of due diligence and consulting, we try to identify trends that are along for the long haul. We have this perspective because we know it's very difficult to change how people do business.
We look for two things. First, we look for enabling software. Obviously, this software will use the Internet as a backbone, but it will also have to make some breakthroughs in terms of connectivity and in the ability to identify key information in the supply chain. Drilling down from that, I believe XML (eXtensible Markup Language) technology will let us pick out key inventory, location, and time data from the vast amounts of data being collected by disparate data sources. This will enable manufactures to make valuable decisions regarding that inventory.
Second, we look for breakthroughs that are, frankly, faster-better-cheaper and that let us deal with this incredible escalation of data in real time.
We think supply chain visibility is a major area of opportunity. The breakthroughs in this space include radio frequency tags, global positioning systems, and wireless tracking. With these, you never lose sight of a part from the minute it's manufactured until it is in the hands of the end user. Tracking this part through the whole distribution network provides the potential to optimize product flow, as well as to add value to the whole customer service side of the equation. Your end customers, using the Internet, can actually track their orders, in real time, 24 hours a day.
Q: What new business models are companies employing to address these trends?
A: Outsourcing. We think that's really one of the biggest trends in industry today. The fallout from this is going to affect almost everything in the supply chain.
In particular, contract manufacturing is big because the productivity gains left to be had inside the four walls of manufacturing are relatively few compared to the gains we can pick up outside those four walls. Outsourcing provides three big benefits: you get expertise that you don't have in-house; you get better information technology that you couldn't afford to build yourself; and you have economies of scale because whoever you're outsourcing with, presumably, has other customers to spread out the costs.
Q: Is outsourcing confined only to manufacturing?
A: Certainly not! Peter Drucker recently said in Red Herring that we can't look to manufacturing to really provide us with any productivity or cost benefits at this point; we really have to look beyond that to the whole distribution and value chain outside manufacturing.
Companies are already outsourcing manufacturing lines, so why would they want to have distribution centers? Outsourced distribution also yields economies of scale and brings costs down. And that's causing the VC industry to look for technologies that provide the connectivity between outsourced distribution centers, suppliers, and customers.
Q: Don't trading exchanges and other forms of electronic marketplaces provide that connectivity?
A: Yes, but I'm not a big fan of the big public exchanges and industry consortia marketplaces where competitors, if you will, come together to form procurement exchanges.
Here's why, based on my views on human nature. We've spent years talking about strategic partnerships and suppliers working with manufacturers co-designing products. You can enable those processes with things better-faster-cheaper such as the Internet. But you just can't change human nature and change what has worked for years and years by announcing that you're now creating a three-way exchange to buy all your products.
So what's left to differentiate suppliers? It won't be this ability to buy items off some industry Internet marketplace. No, the differentiator will be the specific strategies or specific designs that suppliers develop and translate to market share. Plus, they will need strong, deep, strategic relationships to make that work.
I expect that of the thousands of exchanges out there now, only about 5% of them will exist in the future. Some of the specialized exchanges offer tremendous value, such as those in the chemical, gas, and energy industries. Then there are some private exchanges that corporations have created to rebuild their whole procurement process in order to take advantage of market and hedge market trends. But on the whole, I think exchanges are more a fad than trend.
Having said that, any software that gets people to work together and increase productivity and increase communication and enhance their ability to share and to look at technical drawings and all that - that's great stuff. That's what software has always been best at. If you can increase productivity and do things better-faster-cheaper, you win. You'd be crazy not to look at anything that you think enhances productivity in any area.
Q: What role do the venture capital firms play in promoting better-faster-cheaper?
A: Nobody in the venture capital business will claim any altruistic motives. We're in it to make money! The VC business is kind of the purist form of capitalism: We like ideas that make money.
We try to find people who we think are smart and are specialists in certain areas. We look for and identify trends. From those trends, we start looking for whatever enables that trend to continue. And we fail 60% to 70% of the time.
The other side of this business is the old fashioned hard work in helping new companies with the basics of business. This tends to be more about how to hire the best people, how to create a good message, and where to find unique value that a company can add. These basics apply whether you're talking to a biotech startup or a software startup.
Q: You mean, the "build it and they will come" approach doesn't work?
A. Right. It's nonsense.
I do a lot of work with startups. I can't tell you the amount of time I spend on Sales Training 101. You can't just build a product and ram it down a person's throat. You have to actually find a need, find the pain, figure out if you have a solution to that, and then determine if it's an elegant solution, better than everybody else's, and easily installed. If you meet all these criteria, you probably have a good chance of getting some customers and getting real revenue.
Some of the startups are just starting to learn that. This is why I find the whole idea of the "new economy" and how everything is supposedly going to change overnight so interesting. Everything isn't; by and large. People change very slowly and trends evolve very slowly.
The good news is that we're really just on the front end of some major changes that will affect the supply chain dramatically. The bad news is that these changes are going to take 10 years to play themselves out.
Q: Doesn't this reasoning increase the value of management consulting firms?
A: You joke, but that's an interesting point. I'm bullish on the growth in that area. Companies are losing their in-house experts left and right. Consultants are becoming the only experts that live through some of the implementation and change management fiascoes we see and read about. Consequently, the consultants are becoming the leaders in-house who can provide pure leadership talent, rally a team together, follow a process, and make change happen.
Q: Is that across the board?
A: Attracting top manufacturing people is absolutely no problem; those people see the trend in outsourcing and they all understand that if they love manufacturing, working for a contract manufacturer is where they have to be. However, the trick now is for companies to attract the true leaders and visionaries in Supply Chain Management - the next thing to be outsourced.
Getting those experts in-house turns out to be a big recruitment challenge - so big that it is becoming a major differentiator between suppliers. And as we know, the best players win.
James Watson is one of the founders of Monterey Bay Partners (Pebble Beach, CA), a venture management firm specializing in high-technology start-ups. He consults to professional services firms and venture capital partnerships in the areas of strategic planning and partnering, board development, and Supply Chain Management. Mr. Watson is also on the board of directors of iSuppli Inc., a supply chain procurement firm; GlobeRanger, a supply chain visibility company; and Nimble Technology, an XML-based software enterprise. He also serves on the board of advisors to DBSI, a satellite communications firm; and Symbius, a leading supply chain consulting company. In 1977, Mr. Watson was one of the founders of the high-technology logistics company, Skyway Systems, becoming its president during the time the company twice landed on the Inc. Magazine list of fastest growing U.S. companies in the 1980s.
