A Software Pick to Accelerate the Supply Chain
Deep Dive
Supply chain management software is an extremely sticky business. It takes enterprises multiple years to roll it out across all their geographies and business units, creating substantial switching costs in the process.
Currently there is a strong drive to move to modern solutions. Legacy apps in the space offer a non-live view of the supply chain, where data is transferred with batches between the various point solutions which creates significant time lags. This is supplemented by workflows in Excel spreadsheets, creating a Byzantine web of data.
Modern SaaS solutions can offer a live and unified view of the entire supply chain. This brings in a substantial ROI — inventories can be optimized, products get better geographically allocated based on demand, and sourcing risk can be reduced by ordering from a variety of manufacturing sites. Going forward, all these benefits will only increase with the rise of a smarter AI.
The demand for AI will likely speed up the adoption of state of the art supply chain solutions. A consultant for supply chain operations mentioned that legacy apps are struggling to implement AI into their platforms, while it brings in compelling advantages for customers. Such as most notably increasing levels of automation and smarter insights. So his view is that new cloud-based solutions will be the winners in this market.
An executive at Bristol-Myers Squibb, the global pharmaceutical giant, explains the challenges that multinational enterprises have to deal with in the management of their supply chain:
“For new products, it's typically unknown how much you need to make and how much inventory you need. You're always at risk of either producing too much or not enough. It's also the distribution of your goods, if you've got a global launch for your product, the biggest issue is how much are you going to have located in different countries and different regions. Because when you have your product label for one market ready, no matter what the issues are, you're not allowed to distribute a regulatory product to another country. So we have to follow local regulations and it could be a pretty big issue depending on the product and the volumes in countries.
Then you always have to plan for unforeseen events that you have no control over. We need to be able to supply products to customers and patients with a high degree of reliability. There's an aspect of reputational cost, some of those products are critical in nature and so if you have issues to supply to a certain market, people there are dependent on these products.
Having dual sourcing is crucial, which means that we don't tend to keep all our product manufacturing at a single site. As an example, you recently heard about the Pfizer facility in North Carolina that was impacted by a tornado that took out the whole site, and they were manufacturing there some critical sterile products. So we have to plan around those things and make sure that we have a suitable supply in place, as well as the proper levels of network capacity and inventory buffers.”
The company which we’re going to look at is a play on the above themes. So this is a leading and real-time software in the supply chain management space, that is especially strong in its ability to connect to a wide variety of enterprise systems and extract data on a live basis. The company has been investing heavily to make AI a central part of their platform, both to automate workflows and derive better insights and recommendations. Additionally, large system integrators are investing into the platform as well, which is usually a bullish indicator for future revenue growth given their wide relationships with the enterprise world.
As a result, analysts’ forward EPS projections have been strongly trending upwards — the green line in the chart below — while the share price hasn’t been responding with the PE multiple derating to historical lows:
Taking reasonable assumptions, we get to a 25% IRR (annualized return) over the coming five years. To get a deep understanding of this space, we’ll also talk to a number of executives from blue chip companies on how they’re using these solutions to operate their supply chains and we flag one name to be on the lookout for when it IPOs..