The a16z Show - Ryan Petersen on Rearchitecting the Supply Chain

Starting point is 00:00:00 The brands were in control. Those who could afford mass media were in control. Now with the internet, there's just like a million choices. In today's episode, we have a special treat. Flexport's CEO and founder Ryan Peterson sits down with A16's growth editor, Das Rush. They start with the question of why Ryan has chosen, of all the problem spaces out there, improving the resiliency of the supply chain. They also covered just how complex the supply chain is, especially in the era of e-commerce, evolving customer expectations, and ultimately how we can re-architect the supply chain to meet them. Given the holiday shopping coming up, you won't want to miss this. If you like this episode, I have a feeling you'll also like our recently published and

Starting point is 00:00:38 first ever American Dynamism 50 list, the list of 50 companies building in the national interest that embody the ethos of American Dynamism. You can find it at our homepage at A16c.com or at a16c.com slash American dash dynamism dash 50. The content here is for informational purposes only should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. So I kind of want to start at the beginning because you've really chosen to dedicate a lot of your adult life to this mission of improving supply chain and global trade.

Starting point is 00:01:35 Why? Why that mission in that problem space? Yeah, well, thanks for having me here. It's a, I think, there's a couple of angles that I approach this from. One is, you know, you kind of look at the pie chart of GDP, like, where is all the money spent, where are all the activity in the economy? And if you were to divide each of those slices by the number of hours of computer programming that have been applied, I think you would see that logistics is one of the biggest opportunities in the world. Of like, there's just, this is like an incredibly important space. trade is 47% of GDP.

Starting point is 00:02:10 And yet anyone who's ever tried to do it actually actively, and when I used to run a business importing products from Asia, motorcycles from Asia and selling them on the internet back in the early 2000s, late 90s, and it was just a nightmare. And so you're like, wait, here's something that's really important. I mean, you can measure its importance by the number of dollars that are spent and the size relative to GDP, but also just like it has been the backbone of the world economy. It's the circulatory system of the world economy.

Starting point is 00:02:36 And on many levels, I might argue that the shipping container was the most important invention of the 20th century. I think we've reduced the cost of shipping things by like 99%. We used to have to load these ships backbreaking labor and carrying stuff onto the ships. And yet, the shipping container was invented in the 60s and deployed in the 70s and really hasn't changed much since that. Almost no innovation. And again, anyone who's tried to do it, tried to actively ship something across board. will tell you it's a nightmare. And most small businesses never can do it.

Starting point is 00:03:11 Only 3% of companies are buying and selling goods across borders right now. And what are the odds that every other company has all their best vendors locally? So you see this something that's this important and this hard, it's like a good heat map for, and as many dollars being spent, right? Good heat map for where to apply yourself. And so I started doing that 20 years ago. I mean, it's interesting because you use this metaphor of like the circulatory system and kind of all the pain points, which I think explains why people haven't really tackled it before.

Starting point is 00:03:40 It's one of the hardest, most complex things or spaces to be in with the supply chain. So knowing that kind of going in, how did you decide where to start? And then how have you thought about kind of when and where to expand? Yeah, so we benefit a lot from my own naivete and that kind of naive optimism, I like to call it. I was like, I didn't understand all the – I never worked in the industry. I was a customer of the industry, buying motorcycles and later selling data to the industry in another company I started.

Starting point is 00:04:10 And so I knew enough to be dangerous. I knew what the customer experience should be. I wanted this dashboard to give me visibility over all my freight. Tell me what it was going to cost, when things were going to arrive, what all these weird terms mean. The industry still uses Viking English. We say Bill of Lading instead of loading.

Starting point is 00:04:30 I didn't know that. There's a lot of acronyms and code words and stuff. So I wanted a simple dashboard to teach me what all stuff means. You might call it like turbo tax for importing. And the place that we started was kind of turbo tax like it was Customs, which is where you pay your taxes to enter into the country. This was, I felt where most of the complicated paperwork lives, where the data lives.

Starting point is 00:04:55 Because if you want to clear a good through U.S. customs, you have to provide the commercial invoice with a bill of lading, hacking lists, all this incredible, rich documentation, and ultimately structured data that now lets you understand, okay, what is this company doing? What other services would they want to buy? So we started as customs brokerage.

Starting point is 00:05:12 It's the stickiness. We say in the industry, you date your freight forwarder, but you marry your customs broker. And it's a compliance service. It's not where you're trying to cut costs. Like freight is kind of a commodity, and everyone wants to go

Starting point is 00:05:25 with the cheapest freight provider they can find. But customs, you're not trying to save money. You're trying to make sure you're compliant. You're not breaking any rules. You want it to be your system of record. where you're tracking everything for future audits, etc. So started as a customs broker and then kind of have expanded from there. What we found pretty early, to my dismay,

Starting point is 00:05:44 was that we had to do it all much sooner. I thought we'd just hang out as a customs broker for many years, be the world's best, most dialed in customs broker. We found out as a startup customs brokerage, nobody really trusted us in the beginning. We had to build our brand. And so we were getting all the problem cases of people, who like didn't, they were, other freight forwarders didn't want to do their customs.

Starting point is 00:06:08 It's a red flag, right? You're like, wait, why is this person doing customs with me and freight with somebody else? So we had a lot of problem cases in the beginning, quickly had to expand to offer freight services. Now we sell insurance, cargo insurance. We offer financing for the goods. And probably the most important product we have is our order management product. So this is where you place orders to your factories, convert those to shipments. And then now we've got that transaction running through our rails, and we can offer you all the other services on top of that.

Starting point is 00:06:37 Wow. Okay. So, you know, kind of from that initial expansion, you've kind of reached this point now where you are like a global logistics company. And I've heard you refer to Amazon as kind of, you know, this company you really admire for how they handle the complexity of logistics. And in fact, you have kind of right now as your co-CEO, Dave Clark, who came over and was formerly CEO of worldwide consumer at Amazon. Can you talk a little bit about that decision, like how and why you brought Dave in? Yeah, I mean, I think Amazon's the most interesting, important company in the world, frankly. They have figured out a lot around how to be entrepreneurial at scale. And I think a lot of it comes from operating in relatively low-margin businesses that you don't have, luxury of just like hiring lots of people and hoping that they do something interesting someday,

Starting point is 00:07:28 like some of the other tech, you know, the big tech companies, they got to keep executing constantly and delivering innovation. And it's pretty rare to see like a big giant corporation that's figured out how to really be a team of small companies, small business units. And it's, for me, it's like a wrinkle in the law of large numbers. The law of large numbers says, you get really big, you can only grow, you know, your growth rate slows down. But if, in fact, all you are is an agglomeration of small companies, well, each one of those small units can grow really fast. And then all of a sudden, the whole thing can grow really fast. So I've been a big fan of Amazon for one time, studying them from the outside.

Starting point is 00:08:02 And it's not like, I'm learning about this. I really enjoy the process. I think it's intellectually stimulating. How do you drive efficiency from a workforce studying things like the Toyota production system or W.E. Deming. There's a lot of great kind of almost deeply philosophical work about how do you get operational excellence and drive quality. But I'm like learning on the job, which is kind of there's no excuse for that,

Starting point is 00:08:27 given our industry, like we need more experience. So I was looking for a strong number two that could immediately upgrade our ability to like run really high quality and highly efficient operations on behalf of our customers. And naturally, Amazon's a place I'm looking. And one of my secrets for recruiting, first of all, I do it myself when I'm doing exec recruiting. I don't rely on outside search firms. and build my own list and track that in Google Sheets, nothing fancy.

Starting point is 00:08:54 But I just go through my own network and ask everybody in my network to who they would introduce just to learn from and say, look, non-attachment outcomes, I just want to learn. And if each of those people gives me three people and each of those people give me three people, you have kind of this cancerous growth that eventually you get to everybody. I was going to say talent supply chain. You know, I want to circle back to, I think, this idea of like what it's going to take to become that, you know, world best operational company. but I want to actually step back first and talk a little bit more generally about the supply chain. You've mentioned the admiration that you have for Amazon

Starting point is 00:09:27 and really nobody epitomizes the rise of e-commerce more. What have you seen as the impact really of e-commerce and the internet on the supply chain and I don't know how it works? Yeah, well, I think you want to start with the customers with all of us and the internet has really put us,

Starting point is 00:09:46 you and me and everybody else out there in charge in a way that we'd never seen before. In the era of mass media, companies only would run a television ad for whatever product they were selling. And then they would just kind of pump that down your throat and they only needed to have a limited number of skews, whatever was on television, basically.

Starting point is 00:10:09 Customers didn't have a lot of choice. They could buy this, you know, the Energizer or the Dura cell and there were two choices for what battery and there happened to be in the stores. and you, and so the brands were in control. Those who could afford mass media were in control. Now with the internet, there's just like a million choices. You have every kind of possible brand of battery that's out there.

Starting point is 00:10:29 Battery is probably a weird case. But so for every product category, there's a million choices. Everybody's unique. You can get the thing that matches your own personal taste. You were in charge as well in that they better have that product now. You're not willing to wait a week. Like in the Sears catalog era, you could order and you get it in three weeks. Well, you're going to go out of business if you can't deliver.

Starting point is 00:10:53 You know, it's becoming two-hour delivery, like if you can't deliver two hours. And so that is a very different supply chain. And what's happened is companies that haven't been able to run a supply chain that's that responsive, that can have many wider assortment of choices because we're all unique and we want our choices and have it sort of edge cached to use an internet analogy, like a CDN. Like you want to have these goods close to the customer so that it can get there really, really fast. The old world, you could have one distribution center in the middle of the United States

Starting point is 00:11:25 and distribute out to your store network from there. But it didn't have to be super responsive to customer demand. Customer demand was pretty predictable, kind of always bought the same number of these batteries or whatever product. And it didn't have to be very agile. The modern world all of a sudden, there's this proliferation of brands, and it all has to be stored close to the edges. So brands need to have multiple fulfillment centers.

Starting point is 00:11:50 You need about five fulfillment centers to get two-day delivery nationwide, and you need probably to do next day, it's more like 16 fulfillment centers, and you want to do same day while you need one in almost every zip code, right, if you want to have two-hour delivery. So that's a really, really different configuration of supply chain. and now you want to be able to get to that world where you're doing same day or next day delivery, you now need to load balance your inventory.

Starting point is 00:12:17 Because if you put too much inventory out there and it doesn't sell, you're going to go bankrupt. You're sitting on all this working capital, as inventory that's not earning a return too little and you lose the customer. And they'll never come back, right? They buy your competitor's brand. And so that's the fundamental problem.

Starting point is 00:12:32 And these logistics teams don't even really, at the typical brand, don't even really know that that's the problem they're solving. they're just still used to a world where all they care about is the price of freight. And they want to buy the cheapest freight. And that's what they think their job is. When their job has become, how do I ensure a customer experience? How do I enable our sales and marketing to have the product in stock so that they can win those customers,

Starting point is 00:12:58 be a growth engine and a customer experience engine? And then how do they empower their CFO to not sit on too much inventory? And so it's a really different proposition. And frankly, most of the companies that we grew up with these iconic brands have been going bankrupt, left and right. If you Google retail apocalypse, just look like the number of companies that have failed that are iconic brands that we grew up with, it's really sad, actually. And I don't think it has to be that way. So we kind of have dual purpose here. One is help the new age of brands rise up and not need to hire this big logistics supply.

Starting point is 00:13:35 chain team who just pushes paper and, you know, just all they care about is the price of freight, but actually is empowered to solve these problems without hiring a big team because you don't need it anymore. You kind of outsource that to the cloud. That's one aspect of what we do, help these small businesses grow really fast without the bureaucracy. The other is how do you help these enterprise brands, these famous companies transform themselves for a world of e-commerce and not die? I think that both of these are really important missions for us. And in some sense, the second one, I think, can almost be harder. And I've heard. you say kind of in the past that like one of your goals is to make the supply chain like as resilient

Starting point is 00:14:10 and reliable as the power grid you know it's like one thing to do that you know in the in normal times it's another thing to do it as you kind of have like a pandemic occurring you know you now have like a war in ukraine that are creating these kind of delays and disruptions and shortages that we that we read about how like what will it take to get the supply chain kind of to that point and in particular kind Because you're talking about an architectural shift, really, in the supply chain. What will it take to help those legacy players get there? Well, the fundamental problem in supply chain is that it is that word chain, that there's many companies. In fact, on a typical transaction where we're moving, let's say, a palette of goods,

Starting point is 00:14:52 cubic meter of goods from a factory in pick a city in Hongzhou, China, to St. Louis, Missouri. On a transaction like that, you'll have at least 12 companies that either touch the goods physically or are involved providing capital, like a trade finance or a letter of credit, cargo insurance, kind of bank payments, at least 12 and as many as 20 companies involved in that transaction. And so you get information bottlenecks. The goods bottlenecks are famous and we see the ship's waiting offshore. all the problems, but what's happening in parallel is that the data is not flowing, that people at each stage are having a re-key data into a system, we're not bothering,

Starting point is 00:15:42 forwarding PDFs. We call it freight forwarding. I often joke it should be called freight email forwarding, because you're just email attachments between all these different companies and trying to wrangle it. And so it leads to suboptimal decision making. If you had perfect information, you would be able to make sure that that truck is waiting at the airport. when the plane lands or at the seaport when the container shows up,

Starting point is 00:16:05 and you would get it all dialed in. And, you know, every truck would be scheduled appropriately, and you would be replanting every five minutes so that if there's any delay, you're like automatically generating a new plan and reallocating containers. Almost none of that can happen because there's not a system. It's 12 different companies each running their own IT system, or in many cases, guys with clipboards and warehouses,

Starting point is 00:16:29 like no IT system at all on paper. And so there's two possible solutions to this. One is a giant megacorporation owns all the assets door to door and creates one IT backbone for everybody. The other is use machine learning and data science and make it in the interest of these asset owners to participate, to come onto the platform. Almost like data is the new kind of killer asset.

Starting point is 00:16:54 It should be. And you should be able to really generate insights. The more transactions that are flowing, the smarter you get. how are we going to route this container? No in advance. Oh, you know what? There's actually a bottleneck in L.A. right now. Let's route it through Oakland.

Starting point is 00:17:08 Yeah. Things like this that, you know, the industry hasn't been that good at. It was really interesting to watch last year. We had 100 container ships waiting off the port of L.A. And only five waiting off the coast of Oakland here in the bay. You're like, why don't it's, you have to go past Oakland to get to L.A. Why don't they stop? You know, it just unload the stuff.

Starting point is 00:17:27 And it's hard. They don't have the data. They're not able to communicate in real time. make agile decisions, et cetera. So, but that's going to be the future is actually like using tech, using data to to route assets in a smarter way. Yeah. Well, I know I could easily stay and talk all day about supply chain, but I know that we

Starting point is 00:17:45 are at time now. So I want to thank you so much, Ryan, for coming in and talking to us today. My pleasure. My pleasure. Thanks for having me. Thanks for listening to the A16Z podcast. If you like this episode, don't forget to subscribe, leave a review, or tell a friend. We also recently launched on YouTube at YouTube.com slash A16Z underscore video, where you'll find exclusive video content.

Starting point is 00:18:07 We'll see you next time.

The a16z Show - Ryan Petersen on Rearchitecting the Supply Chain

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.