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RESEARCH NOTE FROM: Mia Hegazy, Courtney Nelson TO: Catalyst Investors SUBJECT: Supply Chain Management BPO WHY SUPPLY CHAIN? Based on the analysis in our BPO Primer, we felt that Supply Chain Management was an underpenetrated sector in which there was ample room for tech-enabled solutions to successfully gain market share and disrupt legacy systems. This report is our first deep-dive into a specific BPO segment. Catalyst previously published a report on Supply Chain Management (“SCM”) in 2013 with a specific focus on cloud-based, SaaS solutions. This memo provides an update on the SCM market and SCM outsourcing in particular. We’ve expanded our overview to include both non-tech (e.g., warehouses, 3PLs, etc.) and tech companies (e.g., SaaS-based analytics, tracking, planning platforms) or business process outsourcing providers that employ both. Here are our key takeaways on the space. Overview of Supply Chain

Any company that makes and/or sells physical goods has a supply chain SCM describes monitoring and facilitating the movement of materials, work-in-progress inventory,

finished goods, information and capital from the original supplier to the end consumer The supply chain continuum is comprised of the following steps:

o Supply Chain Strategy and Demand Planning o Procurement and Sourcing o Inventory Management / Warehousing o Fulfilment o Transportation and Logistics

Supply Chain Management Market Size

Global SCM software spend is more than $10bn, growing at an 11.6% CAGR from 2009 through 2014 o Estimated to grow at a 10.0% CAGR through 2019, reaching more than $16bn by 2019

The addressable market for supply chain business processes and IT services (e.g., excluding physical operations outsourcing) was estimated to be between $170bn and $270bn in 2014

Supply Chain Outsourcing

Supply Chain Outsourcing (“SCO”) describes delegating certain processes in the Supply Chain Management continuum to outside service providers

The level of outsourcing will depend on a company’s choice to either manage the manufacturing process or outsource the manufacturing process

Transactional, operational and repetitive processes are most frequently outsourced Key Industries

We’ve done a deep-dive on Ominchannel & eCommerce, Healthcare and Food Tech in order to analyze what the supply chain looks like for each industry and determine areas ripe for disruption

Trends in Supply Chain Management

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We see general SCM trends as the following: o Shift from on premise solutions to cloud-based solutions o End-to-end supply chain strategy o Focus on analytics o Vertical Integration

We see up and coming SCM trends as the following: o Internet of Things o Virtual Supply Chains o Drone delivery o Robotics

Investment Opportunities

Supply Chain Strategy and Demand Planning o Most companies have an internal team that manages supply chain strategy and demand

planning, but will rely on a broader ERP system or analytics software for assistance o We see opportunities in real time visibility systems and analytics services

Procurement and Sourcing o We see this as a very attractive segment in the supply chain, as a number of companies in

various industries have communicated that it is extremely difficult to identify the correct partners when attempting to establish a supply chain

o We are interested in companies who assist with setting up relationships with procurement companies or manufacturers, both domestically and internationally

Investment Management / Warehousing o Many companies outsource their warehousing operations; would entail a more service-

heavy investment Fulfillment

o If a company outsources its warehousing operations, it tends to also outsource fulfillment operations, which are then often handled by the same provider

Transportation and Logistics o Many companies rely on 3PLs and / or regional distributors, which would entail a more service-

heavy investment o We see actionable opportunities to be companies who provide services and technology to assist

omnichannel / eCommerce companies with their logistics operations o We believe after-market operations are under addressed, and believe that companies that help

deliver customers an engaging post-purchase experience are compelling

1. Overview of Supply Chains Any company that makes and/or sells physical goods has a supply chain. Supply Chain Management describes monitoring and facilitating the movement of materials, work-in-progress inventory, finished goods, information and capital from the original supplier to the end consumer. Objectives include:

Create net value Build an efficient, competitive infrastructure Leverage worldwide logistics Synchronize supply with demand Measure performance globally Manage material and acquisition costs

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As outlined in our 2013 Supply Chain report, the objectives of Supply Chain Management are realized through a continuum of SCM functions, including (I) supply chain strategy and demand planning, (ii) procurement & sourcing, (iii) inventory management / warehousing, (iv) fulfillment and (v) transportation and logistics. Many companies offer services across the SCM spectrum.

Supply Chain Management Continuum

Supply Chain Strategy and Demand Planning – Strategy and demand planning is a multi-step operational process used to create reliable forecasts intended to match supply with demand. Effective planning can guide users to improve the accuracy of revenue forecasts, align inventory levels with peaks and troughs in demand, and enhance profitability for a given channel or product. Although part of the supply chain, demand planning is more closely aligned with enterprise resource planning (“ERP”) solutions and has been deemphasized for the purposes of this report. Procurement & Sourcing – Procurement applications automate sourcing activities (e.g., market research, vendor evaluation, negotiation of contracts) which inform the purchase of goods and services, as well as the actual purchasing activities required to order and receive goods. Ideally, a procurement system will connect the various procurement activities to create a single view of the spending levels at a company. As a result, purchasing activities are integrated into a supplier community that can be easily tracked, benchmarked and analyzed by both buyers and suppliers. Inventory Management / Warehousing – Warehouse management systems (“WMS”) provide a set of procedures for management of warehouse inventory with the goal of minimizing cost and fulfillment times. Inventory must be correctly logged, processed, sorted and tracked when it is received by warehouses. Fulfillment – Order fulfillment applications are designed to automate sales order processing from capture to invoice and settlement. Item lookup and order placement are the prerequisites of order fulfillment applications, followed by issuance of receipts, advance shipping notices and payment processing functions. Order and product configurations, as well as pricing options, freight calculation, and credit checking, are being combined to form an integrated order fulfillment application across all sales channels. Transportation & Logistics – Transportation management systems (“TMS”) are focused on transport logistics and facilitate interactions between order fulfillment systems and the warehouse or distribution center. The functions of TMS include:

Define the most efficient transport schemes according to given parameters Execute transportation (e.g., carrier rate acceptance, carrier dispatching, EDI) Track physical and administrative operations (e.g., traceability, invoicing & booking, transport alerts)

Supply Chain Strategy and

Demand Planning

ERP Process design Forecasting and

analytics Customer contracts

Procurement & Sourcing

Strategic sourcing Procurement

(direct and indirect) Vendor & contract

management

Inventory Management / Warehousing

Warehouse logistics Barcode RFID

technology Inventory

management

Fulfillment

Quality and product testing

Packaging and staging

Order processing Returns

management

Transportation and Logistics

Load, rate, route optimization

Carrier dispatching Inventory

management Tracking Reporting

CONSUMERCOMPANY

SAP, Oracle, AccentureSource One, GEP,

AmberRoadNFI, Kiva Systems

Shipwire, Rakuten, Dematic

PGL (Perimeter Global Logistics), JB Hunt, APL

LogisticsExam

ple

C

om

pan

ies

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KP MacLane: What’s Behind the Price Tag? Here’s an illustrative example of how a new product comes to market. KP MacLane, a retail company, explains the process for selecting inputs and navigating outsourced service providers in further depth here. KP MacLane has chosen a strategy that incorporates some degree of outsourcing (e.g., manufacturing is outsourced, while warehousing is not).

2. SCM MARKET SIZE

Global SCM software spend is more than $10bn, growing at an 11.6% CAGR from 2009 through 2014 o Estimated to grow at a 10.0% CAGR through 2019, reaching more than $16bn by 2019

The addressable market for supply chain business processes and IT services (e.g., excluding physical operations outsourcing) was estimated to be between $170bn and $270bn in 2014 (see chart below)

Distribution of Spending for Supply Chain Business Process and IT Services Source: Gartner

According to the 2015 Third-Party Logistics Study, companies are investing in the following services,

ranked by % respondents indicating they are investing in the service over the next year o Warehouse Management Systems (“WMS”), 58%

Founder of KP MacLane designs product

Source cotton-modal fabric blend from France for polo; took 6 months to find the source of the fabric

Hang tags come from a printer outside of Atlanta, using string from a Texas firm

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Difficult to find a factory to manufacture goods; wanted to manufacture in U.S., but China is much cheaper (produce shirt for $1 - $2)

Eventually found Brooklyn factory to make polo

Linen bags for shipping were made in Vietnam and shipped back to U.S.

Finished shirts are sent to founders’ home in Atlanta, GA

Founders fulfill daily orders, and pay for shipping to customers

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3

4

5

Source: Wall Street Journal

3rd Party Logistics, 6%

Supply Chain Consultants,

10%

Traditional BPO / BPaaS

Providers, 13%

Contract Manufacturing,

71%

Distribution of Spending for Supply Chain Business Process and IT Services

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o Enterprise Resource Planning (“ERP”), 54% o Transportation Management Systems (“TMS”), 54% o Supply Chain Visibility, 43% o WMS Add-Ons, 33% o Technology for personalization / customization of customer shopping experience, 33% o RFID, 21%

Market Size by Segment

Enterprise Resource Planning o According to Allied Market Research, the global ERP software market is expected to reach

$41.7bn by 2020, representing a CAGR of 7.2% between 2014 and 2020 On-premise ERP software is estimated to continue to have a larger % of market,

holding 57% by 2020 Cloud-based ERP software is expected to have a higher growth rate than on-

premise software, growing at a 10% CAGR from 2014-2020 Warehousing / Inventory Management

o According to Armstrong & Associates, the total U.S. warehousing market for 2015 will be $141bn, with commercial warehousing estimated at $65bn

o Third-Party Logistics (“3PL”) and Value-Added Warehousing and Distribution (“VAWD”) market is estimated at $69bn

Transportation Management Systems o According to Transparency Market Research, the global TMS market was estimated at

$6.9bn in 2013 and is expected to reach $19.2bn by 2020, growing at a CAGR of 12.2% from 2014 to 2022

o On-premise solutions represented 67% of 2013 revenue, and are expected to remain the largest application segment over the forecast period, although SaaS solutions are expected to grow at a faster rate

o Parcel delivery service alone is expected to grow 9% annually, to reach more than $343bn globally by 2020

3. SUPPLY CHAIN OUTSOURCING When bringing a product to market, a company must evaluate the aforementioned five supply chain stages and sub stages, and decide to either (i) manage these functions in-house (vertical integration / DIY) or to (ii) outsource these functions to a BPO service provider.

Supply Chain Outsourcing (“SCO”) describes delegating certain processes in the Supply Chain Management continuum to outside service providers

SCO has existed for decades and is seen as an intrinsic part of SCM Original SCO focused primarily on manufacturing and distribution supply chains Relationships between clients and their outsourcing partners involve interdependence, with each

partner holding a vested interest in the other’s success o This trend is universal across the BPO market o Holds particular importance for companies who rely on partnerships to bring a product to market

The level of outsourcing will depend on a company’s choice to either manage the manufacturing process or outsource the manufacturing process

Why Outsource? Through outsourcing, a company is able to focus on core competencies and assemble a network of best-in-class partners, who increase the overall performance and efficiency in the supply chain.

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Objectives of supply chain outsourcing: o Reduce costs o Improve speed, capability and delivery o Increase competitiveness o Enhance growth potential o Improve agility

Risks to outsourcing: o Integration difficulties o Quality control o Information security / privacy concerns o System reliability o Data integrity

Key criteria for selecting an SCO provider: o Understanding of client’s business operations and significance within the broader industry o Ability to manage complexity of an operation that is often spread across continents o Ability to deliver business outcomes, such as increased revenue and reduced expenses o Modern application and interface o Advanced analytics, with predictive / prescriptive capabilities o Ability to provide internal and external process improvements o Improved end-to-end supply chain visibility o Access to strong connections to trading partner networks O Seamless integration with other facets of the supply chain

Which Segments of the Supply Chain are Most Often Outsourced? There has been a trend towards increasingly outsourcing components of the supply chain unless a company sees SCM as a core competency or competitive advantage. We believe that technology-enabled outsourcing services are most relevant in the “middle ground” where a company does not handle all processes internally, but does not completely relinquish control to outsourced providers.

Transactional, operational and repetitive processes are most frequently outsourced o Within SCO, these activities typically include domestic and international transportation,

warehousing, customs brokerage and freight forwarding (see chart on page 10) Supply chain strategy and demand planning are less likely to be outsourced, as companies often

have internal teams dedicated to strategy and execution management o Would rely on outside software or services organizations for assistance, however

Procurement and sourcing is an area for potential disruption o Based on conversations with GLG experts and executives, procurement and sourcing is

difficult for SMBs in particular Inventory Management, Warehousing, Fulfillment, Transportation and Logistics are all segments of

the supply chain that are frequently outsourced o According to the 2015 Third-Party Logistics Study:

‒ 36% of total logistics expenditures were directed to outsourcing ‒ 51% of transportation spend is managed by third parties ‒ 36% of warehouse operations spend is managed by third parties

o According to Armstrong & Associates, 86% of U.S.-based Fortune 500 companies use 3PLs for logistics and supply chain functions

‒ For example, General Motors, Procter & Gamble, and Wal-Mart each use 50 or more 3PLs

‒ The average 3PL customer is using each 3PL for ~3 different logistics services, with Transportation Management being the most frequent

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o We believe companies will continue to rely on 3PLs for all logistics needs rather than developing this capability internally

Aftermarket solutions are an area that is underserved o Less crowded category, brands need assistance with customer management and

engagement with the post-sale context Other specific opportunities for outsourcing include:

o Tracking / labeling products correctly and efficiently o Customer experience & engagement mgmt., to forecast preferences & purchasing behavior o Proper distribution and storage techniques for specialty products, such as perishable goods

or pharmaceutical products Supply Chain: Tech-Enabled vs. Services In the supply chain continuum, different segments involve a higher degree of tech-enablement.

We define “tech”-heavy segments as software, robotics or IoT We define “outsourced” as primarily physical or people-based services Please see graphical depiction on the following page of the supply chain continuum and the

technology focus of each segment

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Supply Chain Strategy and

Demand Planning

Procurement & Sourcing

Inventory Management / Warehousing

FulfillmentTransportation

and Logistics

CONSUMER

Product and Strategy Team; planning and management handled by team

Software and Consultants assist internal strategy team with plan development and oversight

Identify and source vendors and inputs; often own manufacturing operations

Manufacturing handled by third party, who also identifies vendors and inputs, coordinates contracts

Own warehouse and distribution centers

Rents warehouse / DC space, warehouse / DC arranges contracted labor

Pick-and-pack operations handled by company, coordinates with logistics team

Pick-and-pack specifications communicated by company to outside contractors, who coordinate with 3PLs

Company owns fleet which distributes products to retail stores or customers

Company hires logistics providers to deliver goods to retail stores or customers

COMPANY

Managed Internally Outsourced

Inte

rnal

BP

O /

Se

rvic

es

Warehouse Management Systems

SCM Software, Summary analytics

Marketplaces / virtual auctions for inputs, pricing comparisons

Purchasing analytics, logistics coordination

Trace and track technology, 3PL

sourcingTech

Supply Chain Management Continuum: Managed Internally vs. Outsourced

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4. KEY INDUSTRIES Even if companies are pursuing vertical integration, their operations will still incorporate some degree of outsourcing. Although SCO is prevalent in all industries, there is an emphasis on different elements of SCM depending on the industry’s end user and product complexity. We have outlined the supply chain operations for three of our target industries. Omnichannel and eCommerce (Page 10)

Customers engaging with brands and making purchasing decisions through a variety of channels Retail companies can sell their products through a number of channels:

o (i) sell only via their website (e.g., Dollar Shave Club, Casper, BaubleBar) o (ii) sell online and also at a brick and mortar location (e.g., Warby Parker, Bonobos) o (iii) sell online/in person through their own store, and also allow other retailers to sell the

product Platforms like Shopify and BigCommerce enable brands to sell their own products directly to

consumers on their own websites; can remain more lean with platforms assisting with go-to-market Supply chain will vary based on level of vertical integration / selling through third parties downstream Customer-facing operations emphasize engagement; retailers attempt to create a unique experience

o According to IDC, shoppers who buy in-store and online have a 30% higher lifetime value than those shopping via one channel

Healthcare (Page 11)

Heavily regulated industry for both pharmaceutical drugs and medical devices, with pressure from government, private insurance programs and patients to reduce costs; all demand lower prices and more choices

3 major groups comprise the healthcare supply chain: o Producers: Companies that make pharmaceuticals, medical devices and healthcare supplies o Intermediaries: Wholesale distributors and group purchasing organizations (GPOs) that bring

healthcare products to the marketplace o Providers: Hospitals, medical practices and large integrated delivery networks (IDNs)

Supply chain characterized by need for clinical testing to bring product to market, which can seriously impede the flexibility and timing of product development and product sales

o Requires extensive interaction with FDA

Food Tech (Page 12) Low margin, highly competitive industry characterized by relatively undifferentiated products that

need to be replaced frequently ($165bn worth of food wasted every year in the U.S.) Some food companies manage their own distribution chains, unlike other industries (e.g., Frito Lay

manages entire supply chain, excluding farms that product inputs) 3 major groups comprise the Food supply chain:

o Food and CPG companies o Restaurants and other food prep institutions o Retailers

Ex.: Whole Foods recently announced a partnership with Infor for a retail management solution that leverages cloud-based automation and more efficient strategic merchandising and SCM functions; will provide insights to (i) drive operational efficiencies and (ii) deliver enhanced shopping experiences for Whole Foods Market customers in-store and online

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Illustrative Supply Chain: eCommerce

Challenges Opportunities

Supply Chain Strategy and

Demand Planning

Develop product design and retail strategy, often in-house

Analyze past orders, est. future orders and assess real-time trends in customer purchasing behavior & preferences

Unpredictable customer preferences for products Demand for product customization Seamless experience for customers Seamless omnichannel experience

Analytics to evaluate distribution channels and selling strategy (e.g., Wholesale, private label only, through partners)

Analysis on customer preferences, behavior an interaction (please see our prior retail analytics post); tie-in with targeted product promotions

Procurement and Sourcing

Identify desired inputs and providers of inputs for products

Find lowest cost / highest quality inputs ‘Marketplaces’ to match manufacturers / input providers with companies seeking to bring product to market

Inventory Management / Warehousing

Receive, sort and store incoming bulk product from manufacturer

Real-time tracking Managing various distribution strategies (incl. filling

both e-commerce and brick and mortar product replenishment from a single distribution center, running separate fulfillment operations, or filling e-commerce orders via brick and mortar store shelves)

Automated WMS technologies, including RFID, other methods of real-time tracking and analysis

Fulfillment

Compile products into different orders and coordinate with logistics team

Receiving and packing errors Inefficiencies leading to missed delivery timelines Managing various delivery methods (incl. courier

delivery services, such as FedEx and UPS, direct shipping from a partner DC, 3PL partners, and store fleet)

Robotic assistance with pick and pack operations

Transportation and Logistics

Deliver products to brick and mortar locations or end consumers

Demand for delivery customization Fluctuating freight costs Lack of accurate inventory / out-of-stocks / theft Markdowns

After-sale customer experience and engagement management

Customized delivery methods such as crowdsourced delivery

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Illustrative Supply Chain: Healthcare

Challenges Opportunities

Supply Chain Strategy and

Demand Planning

Research and develop new product

Analyze existing industry regulation

Identify target end user (see 3 major groups outlined above) and assess customer contracts and key stakeholders

Heavily regulated industry across all segments of supply chain; necessary to proactively manage rules and regulations

Constantly monitor product efficacy and adjust operations as necessary

Software that coordinates with end user reviews and concerns; appropriately logs changes that need to be made

Analytics communicating production and replenishment problems

Procurement and Sourcing

Identify required inputs and providers of inputs

Determine relationship with manufacturer and degree of sourcing managed by manufacturer

Complex component ingredients which are sourced globally

Inputs can have specialized transportation needs, e.g., require high security or are temperature sensitive

Communicate with FDA; meet compliance

Tracking and filing of information for review by FDA or other regulatory agencies

Advanced reverse auction technology to assist with procurement

Inventory Management / Warehousing

Receive, sort and store incoming bulk product from manufacturer

Warehouse regionally

Real-time tracking of high-worth products Managing security and specialty storage needs

Track-and-trace technology Temperature sensitive technology

Fulfillment

Compile products into different orders

Coordinate logistics

Receiving and packing errors Managing various delivery methods (e.g., to

hospital, pharmacy, regional facility)

Order management systems Serialization for devices and batch numbers Track-and-trace technology

Transportation and Logistics

Deliver products to requisite destinations, e.g., clinical trial facilities, hospitals, pharmacies, etc.

Mission critical, time sensitive delivery of goods Global delivery destinations Complex requirements depending on size of

load (e.g., devices) or environment requirements (e.g., temperature sensitive drugs)

Product security and tracking Specialty logistics accommodations Inventory management technology for end users,

such as hospitals to minimize surplus ordering Continuous monitoring and communication (tracking

customer complaints/efficacy concerns) Integrating cust. support with manufacturing data

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Illustrative Supply Chain: Food Tech Challenges Opportunities

Supply Chain Strategy and

Demand Planning

Analyze past orders, estimate future orders and assess real-time trends in customer purchasing behavior and preferences

Short inventory lifetime requires accurate planning

Real-time insight into supply and demand

Procurement and Sourcing

Identify producers of inputs and coordinate delivery to manufacturing facilities

Manage relationships with multiple input providers (e.g., “core” product producers such as corn, as well as other ingredient producers)

Cost evaluation tools Technology to connect with new suppliers and product

innovations Software assisting retailers / restaurants / caterers with

purchasing decisions

Inventory Management

/ Warehousing

Receive, sort and store incoming bulk product from manufacturer in time-sensitive manner

Assess if supply is matching demand; appropriately communicate changes that need to be made to manufacturer real-time

Capacity management

Supply / demand tracking; real-time analytics Production capacity planning Inventory optimization

Fulfillment

Compile products into different orders and coordinate with logistics team

Receiving and packing errors Inefficiencies leading to missed delivery

timelines

Trade spend management tools Track-and-trace technology

Transportation and Logistics

Deliver products to retail locations Relationships with logistics providers in various region

Swift delivery time frames Product spoilage

Temperature-sensitive transportation Transportation route and provider optimization Trace and track technology to easily manage and isolate

any product spoilage or recalls “Specialty” distribution (e.g., farm-to-table) Software assisting retailers / restaurants / caterers with

purchasing decisions

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7. TRENDS IN SUPPLY CHAIN MANAGEMENT General SCM Trends

Shift from On-Premises Solutions to Cloud-Based Solutions

Historically, SCM software systems required significant large-scale implementations of customized solutions

o Access to information and data limited to the company running the software o Must choose if and when to share data with other segments of the supply chain

Companies are shifting towards SaaS offerings to leverage the advantages of cloud-based SCM solutions, which will dominate 60% of new SCM application spend by 2020

According to Gartner, SMB adoption of SCM will increase from 15% to 22% of all organizations by 2020

End-to-End Supply Chain Strategy End-to-end supply chain strategy involves visibility and influence over every stage in the supply chain,

and requires a constant feedback loop The strategy does not refer to an M&A strategy whereby a company would seek to become a “provider

of choice” for multiple services in different points along the supply chain Strategy refers to the idea that software providers need superior integration capabilities Achieved by (i) providing end-to-end managed / consulting services or (ii) integrating seamlessly with

other SCM providers that address a specific “pain point” on the supply chain Focus on Analytics

Shift in supply chain management from relying on descriptive, retrospective and diagnostic analytics (e.g., “after the fact”) to forward-looking analytics (e.g., predictive and prescriptive)

Supply chain support tools include supply chain traceability, multi-level inventory optimization, demand signal repository, sales and operations planning, and leveraging point of sale data

Analytic needs differ depending on supply chain structure o Ex.: Length supply chain, with long inventory turnover requires proper forecasting o Ex.: Short supply chain, with frequent inventory turnover requires real time responsiveness to

changes in supply / demand Vertical Integration

Many new retail companies, especially eCommerce companies, are pursuing vertical integration Directly control price, quality and branding and avoid high markups and intermediary costs Vertical integration does not necessarily mean that a company will internally manage every aspect of the

supply chain Shoedazzle, Bonobos, Harry’s, Casper, Everlane, The Blk Tux, and Warby Parker are all examples of

vertically integrated retailers Ex.: Harry’s Shaving Club Supply Chain

o Harry’s bought Feintechnik, a company and factory that manufactures razor blades, for $100mm in 2014 due to the manufacturer’s flexibility and ability to produce a number of different blades

o Strategy mimics startups like Casper, Bonobos and Warby Parker who work extensively with manufacturers to make products that are then sold online directly to customers

o With new investment and vertically-integrated supply chain, Harry’s plans to add to its product roster

o Schick and Gillette are also vertically integrated – Harry’s saw this as a competitive advantage they should replicate

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Forecast: Up and Coming SCM Trends Internet of Things

Provides greater insight into supply chains and can facilitate responsiveness that can lead to improvements in transportation safety, product safety, loss reduction and product tracking

Gartner estimates that through 2018, there will be multiple providers (no dominant ecosystem platform) By 2018 50% of all durable goods are estimated to be remotely configurable using embedded IoT Risks: More devices to secure against hackers, bigger downsides from failure, difficult to scale revenue if

companies are merely system integrators and / or provide heavily customized solutions Virtual Supply Chains

Designs and architects 3D supply chains to assist in decision-making (e.g., new products, customer buying patterns) for retailers, manufacturers, distributors and suppliers

Compelling for retailers of (i) specialized goods or larger products (e.g., appliances, furniture) or (ii) clothing / accessories

Compelling for consumers who can visualize product in context of (i) end environment or (ii) on end user, reducing shipping & returns costs, or need for showrooms

Risks: Technology that can replicate a number of environments / incorporate several variables, vulnerability to cyber attacks

Drone Delivery Unmanned Aerial Vehicles (“UAVs”) completing transportation and logistics tasks, such as batch picking

in warehouse or offering new end point delivery methods for products A growing number of companies (e.g., Amazon, Alphabet) are developing drone delivery services Amazon recently unveiled its drone prototype for its 30-minute unmanned delivery service Risks: Significant regulatory barriers (e.g., must manage agreements with FAA)

Robotics

Completes rapid order fulfillment and alleviates labor shortages particularly in manufacturing and logistics

Amazon uses Kiva Systems in warehouses, where robots move stacks or individual boxes Robots can complete fast, precise, repetitive tasks; also take on burden of more dangerous tasks Future trends in robotics include improving dexterity and ‘smart’ task execution / problem solving Risks: High costs of research & development, implementation and maintenance

8. INVESTMENT OPPORTUNITIES SCM is a growing industry that intrinsically incorporates outsourcing.

Market continues to be dominated by larger ERP / BPO companies that often lack agility to efficiently develop new, specialized technologies; look to smaller companies to develop these capabilities

Supply chain management can involve outsourcing at every point in the continuum Companies that are especially interesting are those that are providing SCM SaaS solutions to SMBs,

particularly those that either (i) provided a point/specialized SaaS solution for SMBs or (ii) provided vertically-focused product suits and point solutions

Service-heavy supply chain companies will always address crucial needs in supply chain Below, we’ve outlined key sections of interest in each step of the supply chain continuum:

Supply Chain Strategy and Demand Planning

Most companies have an internal team that manages supply chain strategy and demand planning, but will rely on a broader ERP system or analytics software for assistance

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We see opportunities in real time visibility systems, which help address supply/demand mismatches on a rolling basis

We also see opportunities broadly in analytics services

Procurement and Sourcing A number of companies in various industries have communicated that it is extremely difficult to identify

the correct partners when attempting to establish a supply chain This is particularly difficult for entrepreneurs / SMBs, but larger enterprise clients are also looking for a

solution We are interested in companies who assist with setting up relationships with procurement companies or

manufacturers Inventory Management / Warehousing

Many companies outsource their warehousing operations, and true “outsourced” investments in this segment will be service-heavy

Add-on Warehouse Management System applications could be compelling, but are not strictly defined as outsourcing

Based on discussions with executives, we believe the primary needs within this segment is track and trace technology, as well as real-time analytics related to inventory levels

Fulfillment

If a company outsources its warehousing operations, it tends to also outsource fulfillment operations, which are then often handled by the same provider

Again, add-on Warehouse Management System applications could be compelling, but are not strictly defined as outsourcing

Transportation and Logistics

Many companies rely on 3PLs and / or regional distributors We see actionable opportunities to be companies who provide services and technology to assist

omnichannel / eCommerce companies with their logistics operations We believe after-market operations are under addressed, and are interested in companies that help

deliver customers an engaging post-purchase experience