Specialized Modules and Integration Infrastructure for TMS: The New Opportunity for Logistics Software Start-ups

Puneeth Meruva, Associate, Trucks Venture Capital

Logistics software has become a major area of focus for start-ups and investors. According to a recent McKinsey report on start-up funding in logistics, total funding in logistics start-ups has been growing at a staggering 76 percent CAGR from 2014. In 2018 alone, $10 billion was invested into logistics start-ups. This newfound interest is of no surprise; it’s a large, structurally attractive market with many fast-growing niche sectors.

There have also been a number of trends that accelerated the growth of this industry: the ELD mandate driving more software in and around commercial vehicles, the Amazonification of consumer expectations with e-commerce logistics, and, of course, COVID-19 emphasizing our reliance on logistics. Given the sluggish inadaptability of today’s supply chains in the face of shocks to the system, as well as the fragmented nature of the market, logistics is a natural contender for the next industry to be eaten by software.

The software in logistics today revolves around the transportation management system (TMS). The TMS is a fantastic tool for logistics players to optimize all aspects of their supply chain. It has a proven ROI, and, as per Tim Fawkes of the 3T group, it’s market is expected to almost triple by 2025. This growth is largely fueled by the movement of the TMS from on-premise to the cloud, making it more accessible to the logistics long-tail.

However, building a 10X better TMS is incredibly difficult. First, most shippers, carriers, 3PLs, and others have significant commitment biases that cause a lot of resistance when transitioning from existing software tools to new ones. However, an even more significant hurdle is that the TMS is often more about customer service than it is technology. TMS is the core digital layer of most logistics providers, and as such, requires significant enterprise or customer experience services. Ultimately, this is where start-ups struggle to compete with incumbents.

"TMS is the core digital layer of most logistics providers, and as such, requires significant enterprise or customer experience services. Ultimately, this is where start-ups struggle to compete with incumbents"

Nonetheless, the industry is starting to understand that one tool can’t solve all logistics problems, and that niche tools developed for the unique problems of unique supply chains are the best ways to stretch profits in an industry of razor-thin margins. This opens up two key software opportunities for start-ups: Hyper-functional, specialized modules and the platforms or infrastructure that allow you to integrate these modules.

Hyper-functional, Specialized Modules:

This is a vastly fragmented industry, and different providers have very different needs and pain points based on where they operate, what they’re transporting, and where they sit in the supply chain. Given that the core differentiators for start-ups often revolve around their superior technology competencies and their ability to hyper-focus on specific problems, new start-ups entering the space need to target niche segments of logistics providers and develop technically superior software modules that can solve their pain points faster, cheaper, and more efficiently than a TMS designed to solve more generic logistics problems.

The industry is realizing that one generic TMS cannot solve all logistics problems. Consequentially, the market is starting to show a willingness to partner with multiple tools, as long as they are easy to integrate into existing workflows. Therefore, these modules need to easily integrate into a customers’ existing TMS or other software tools, lowering that integration and transition hurdle as much as possible.

Some niche segments we are most excited about are:

• Tools traditionally used in long-haul (i.e. routing, dispatch, and cross-docking) cascading downstream to improve last-mile delivery logistics

• Tools improving e-commerce logistics and replicating the Amazon Prime Delivery experience (i.e. one-day delivery and reverse logistics)

• Driver focused tools (i.e. detention tracking, on-time payments, and sharing contextual knowledge across a fleet of drivers)

• Tools improving fleet-vehicle maintenance

• Fin-tech tools around payments, auditing, and guaranteeing transactions and contracts

Integration Infrastructure and Module Platforms:

As mentioned above, new modules can only succeed if they integrate easily into a customer’s existing TMS or other internal software systems. A key component required to enable this ecosystem of new modules is the piping and infrastructure that can help with module integration.

For many customers that already have a TMS, they often do not have the resources in-house to deal with integrating and maintaining the integrations of many 3rd party modules. An integration layer would allow such customers to incorporate multiple 3rd party tools into their workflows without worrying about the technical hurdles of integration. On the other hand, customers that don’t already have a TMS may not actually need a whole TMS, to begin with. A flexible integration infrastructure layer allows these customers to pick and choose only the tools necessary to their core logistics tasks.

In addition to tools helping with integration, the proliferation of these niche modules also exposes the opportunity for a platform that these modules can sit on top of. These platforms can act as marketplaces connecting modules to customers’ existing systems.

Additionally, platforms also allow for interplay between different modules. A great example is the ecosystem of modules that operate on vehicle data. There are many vehicle OEMs that collect vehicle telematics data, but don’t have the software competencies to build tools that fully utilize the data collected. Similarly, there are many software companies with the algorithms to solve vehicle pain points, but don’t necessarily have a reliable, practical way to access the relevant vehicle data. A platform that sits in between the OEMs and software companies allows each player to complement the other.

Some of the brightest software talent in the world is looking to tackle the industry’s structural inefficiencies. We, at Trucks Venture Capital, believe that software opportunities in this space revolve around highly-specialized modules that integrate with the TMS or platform and infrastructure layers that unbundle the TMS altogether. An ecosystem built upon these two opportunities makes software for the logistics industry as a whole more ubiquitous, as it not only allows larger providers to incorporate new efficiencies into their workflows, but also allows smaller providers to pick and choose the specific tools required to optimize their businesses.

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