I interviewed Rob Lemos who discussed new investment opportunities and emerging inovations in the supply chain.
Dustin: Thanks, Rob, for spending your time today to share your views on the supply chain industry from an investment perspective. Can you start by providing a brief background of yourself?
Rob: Sure. Before I started the current fund that I have here, called Rail Fence Capital, I was at grad school, getting my M.B.A. at MIT in Boston. Previous to that, I was working for United Technologies, the large conglomerate headquartered out of Hartford, Connecticut. When I was with UTC, I worked in a number of operational capacities, from shop-floor foreman to manufacturing consultant, to working as a supply chain manager, and doing a lot of work with our distribution for optimal performance, working with truck routing and that sort of thing. I also did financial analysis and business analysis, so I kind of ran the gamut when I was at UTC in terms of all the operational disciplines. I decided to head to MIT to get my M.B.A. and focus more on entrepreneurial endeavors. While I was there I was really focused on entrepreneurialship and studying finance as well.
While I was there I really dove into a lot of different technology and science disciplines that they have there and really looking across industries. One of the things that really struck me was how math is being applied and science is being applied and engineering is being applied to industries that have really, haven’t used those kinds of techniques, haven’t really used statistics in the past, haven’t really used the scientific method to apply to their own businesses and to their own industries and that sort of thing. That’s when I really started to notice the big opportunities that exist in supply chain.
Now, with Rail Fence Capital, I’ve been spending a good deal of time looking at the logistics industry and trying to uncover where the opportunities are for an entrepreneur like myself to invest in or buy a business and contribute operationally to help grow the business. I’m really looking for big opportunities that apply the same disciplines that I uncovered at MIT—math, science, technology, engineering—to really extract value and create new value in many cases as well.
Dustin: Thank you. Can you discuss your views on the supply chain industry from an investment perspective?
Rob: Clay Christensen, who is a professor at Harvard Business School, outlines three types of innovation that occur. There’s emerging innovation, there’s sustaining innovation, and there’s efficiency innovation. Emerging innovation creates new markets, creates new products and new services; it’s an entirely new platform. Sustaining innovations just replace the old; they just replace what was already in existence. Efficiency innovations, they take what’s currently there and make it more efficient, typically by reducing the number of people that are required.
When I look at supply chain, the spend that exists in the industry, the amount of money that is spent on supply chain and on logistics across the United States alone is enormous; globally, it’s absolutely huge when you’re moving goods. Everything that you see and touch had to get there somehow. It was on at least one truck at some point; probably an ocean freight, maybe even as air cargo.
So, I’m looking at what kind of innovations are happening in supply chain. Are they emerging innovations, are they sustaining innovations, or are they efficiency innovations?
By and large, I see a lot of efficiency innovations, meaning reducing the cost of moving goods. I’ve heard it said that in the 1990s and in the early 2000s, the cost of shipping goods to a single household was reduced by a thousand dollars per household per year. That’s huge efficiency gains over that period. The question I’m asking is: What’s going to create the next thousand-dollar reduction? Is it even possible? What verticals within supply chain are gonna make that happen?
On the emerging innovation side, I’m curious: What’s creating new opportunities, new ways of distributing products, new ways of creating value for shippers and for truck carriers? And what are the emerging innovations that are really platforms for later investment and later opportunities. Sustaining innovations I don’t find quite as important or quite as intriguing simply because they’re just replacing the old. But, ultimately, those are important because you have to continue to innovate to stay relevant in the industry. But I’m mostly interested in the emerging innovations and in the efficiency innovations, which, by and large, are happening in the software side, but there’s also some other interesting pockets as well.
Dustin: Is there anything more you can say about the market potential?
Rob: Absolutely. The market is absolutely huge. Trucking alone is a several hundred-billion-dollar industry. Same with ocean freight; same with cargo. The third-party logistics industry continues to grow rapidly, ten to twelve percent per year, on the high side; on the low side, six to eight percent. There’s just tremendous growth potential. As technology, as software, as new business models like SAS, software-as-a-service models, start to pervade the industry, it allows companies to go from fixed costs to variable costs, which completely changes the way that business has been done in the freight industry. There’s certainly opportunities in deploying those technologies across warehouses, across transportation systems, across global trade, across truck carriers, across freight forwarders.
Really, the market potential here is absolutely huge because the market continues to grow. There are more people who want more goods and services all around the world. Just purely looking from a demographic standpoint, more things will be shipped in the future than are shipped today. So, I see a growing market, and that’s a market that’s already huge.
Dustin: And where are some of the opportunities that you see?
Rob: I see a lot of opportunity, as I mentioned, in the technology space. New software that really can unite shippers with carriers and with their intermediaries. There’s some interesting things happening in the application of technology, particularly software, to the trucking carrier and trucking industry, and also on the freight-bill auditing and on payment processing and that sort of thing. There’s tremendous opportunity in those spaces. For enterprising entrepreneurs who want to start companies, there’s great opportunities there with low cost of start-up.
And for existing companies that already have huge transportation-spend budgets, there’s great opportunities to take cost out of your business simply by deploying these software models. I think that’s interesting. There’s a lot of robotics that’s interesting. Look at the purchase that Amazon made of Kiva Systems, I believe it was earlier this year. They’re making a pretty strong statement about how important robotics is to their business, and the number of robotics companies that are merging is quite significant. There are great opportunities in that space as well.
New methods for processing payments and using computers to analyze and track how things are shipped and performance and dollars spent will also help to decrease the costs across the industry. I also think that there’s a lot of interesting things in terms of new partnerships that are being formed and the way that companies are uniting geographically to partner in terms of creating more density in their networks in terms of their delivery and that sort of thing. I think it’s a pretty interesting space right now, and it’s a wide-open market for enterprising entrepreneurs.
Dustin: Thank you. Do you have any final comments or recommendations?
Rob: Well, if I were running a large company with a big transportation budget, I would be having very significant conversations with anybody on the software side and also be looking at the application of statistics to my business and where I’m spending money. I’d be looking at how data can influence and drive my decisions using decision analytics and new decision-making processes to capture data, to process the data, and then to implement the data.
If I am a smaller company who’s looking to break into the market, these types of things that I just outlined are…those features, you can add those on to your business quite easily, and they can produce a new product feature set that you could offer to medium-size companies that will make you more enticing, that will allow you to capture new customers and new markets.
Ultimately, the name of the game in logistics is about service. Having great service is really what creates staying power. It’s all about getting customers, but, really, it’s more important to retain them. I see tremendous opportunity in supply chain, I see tremendous opportunity in logistics, and I think it’s a great space, a really exciting space to be in and will be for the next ten years.
Dustin: Thank you, Rob, for sharing your views on the supply chain industry from an investment perspective.
Rob: Absolutely, Dustin. It’s been my pleasure.
Dustin: Thank you.
About Rob Lemos
Rail Fence Capital