00:00:07 Supply chain software and innovation challenges.
00:01:44 Passion and motivation in supply chain software development.
00:03:30 Fragility of supply chains and how software failures impact them.
00:05:26 Market factors and centralization of supply chain networks.
00:06:34 Large players dominating supply chain software and acquisitions of smaller companies.
00:08:01 Challenges large companies face with innovation.
00:09:22 The impact of company culture on innovation.
00:11:18 The M&A strategy and its relation to product development.
00:12:50 Pitfalls in creating great products in enterprise software.
00:14:00 Balancing between listening to customers and developing innovative solutions.
00:16:00 The difficulty of reinventing companies and selecting different vendors.
00:17:57 Lokad’s growth and acquisition challenges.
00:20:09 Utilizing apps with tightly defined boundaries in supply chain management.
00:20:50 The future of toxic patterns in the supply chain industry.
00:21:30 The value of negative knowledge and learning from failures.
Summary
In this interview, Kieran Chandler and Joannes Vermorel, Lokad founder, discuss the lack of innovation in supply chain software. Vermorel believes the industry lacks passion compared to gaming and lags behind popular products like Instagram and Facebook. He attributes this to the complexity of supply chains, dominance of large players like SAP and IBM, and difficulty in changing large companies’ cultures. Vermorel suggests that companies should focus on specific problems, avoid a one-size-fits-all approach, and maintain a tightly defined scope for software solutions. He also emphasizes the value of negative knowledge in driving innovation and improvement in the supply chain industry.
Extended Summary
In this interview, Kieran Chandler, the host, discusses with Joannes Vermorel, the founder of Lokad, about supply chain software, the lack of innovation in the industry, and some of the root causes behind these trends.
Joannes believes that the software industry, particularly in the realm of supply chain, lacks the passion and drive found in other industries such as gaming. He highlights that individuals who have dedicated their lives to creating exceptional video games have pushed the gaming industry to be state-of-the-art, while supply chain software lags behind. Joannes points out that very few people are passionate about enterprise software development from a young age, unlike gaming, which often attracts enthusiasts from childhood.
Despite the innovation and improvements seen in supply chain software over the past few decades, Joannes asserts that it still falls short of being considered “great.” He compares it to popular products like Instagram, Facebook, and Gmail, which have garnered widespread admiration and love from their users. Although Lokad has happy clients, Joannes admits that they have not yet achieved the level of devotion and indispensability seen with these popular products.
Kieran inquires about the root causes behind the worrying trends in the supply chain software industry. Joannes explains that supply chains are complex, and in some ways, fragile systems in terms of software. A single bad ERP (Enterprise Resource Planning) system can significantly disrupt a supply chain, and there have been instances where failed ERP deployments led to massive financial losses or even caused companies to cease operations.
The complexity and interconnected nature of supply chains make it difficult to isolate and optimize individual aspects, as seen in the case of Target Canada. This poses a challenge for software developers working in the supply chain industry, as they have to navigate and manage a vast network of interconnected stores and processes.
Vermorel begins by explaining the market’s preference for large supply chain networks and the influence of technology on centralization. He notes that networking and distributed software implementations for supply chains were difficult to achieve a couple of decades ago, leading to the adoption of more monolithic ERP systems.
The conversation shifts to the makeup of the market, which Vermorel describes as being dominated by large players such as SAP and IBM. These companies often acquire smaller players, leading to a lack of growth for small companies in the enterprise supply chain software field. Vermorel contrasts this with the business-to-consumer segment, where companies have grown from small to large in relatively short timeframes.
When discussing the challenges large companies face in embracing innovation, Vermorel uses Microsoft’s two-decade-long shift to embracing open source as an example. He notes that large companies struggle with changing their business models and adapting to new technologies, particularly when these changes go against their core business practices.
The interview explores the role of relational databases in shaping supply chain software, highlighting both their benefits and limitations. Vermorel argues that when large companies acquire smaller ones that do not rely on relational databases, they often fail to pivot the culture of the larger company, which remains dominant.
He attributes the difficulty in changing the culture of larger companies to their aggressive merger and acquisition strategies. Vermorel asserts that it is hard for companies that grow through acquisition to create great products, as these products require sharp focus and vision. He uses Apple’s iPhone as an example of a product that went against conventional wisdom but ultimately succeeded in retrospect.
The discussion touches on the pitfalls of creating innovative products, particularly in the enterprise software sector. Vermorel points out that although listening to customers is important, it can be limiting in terms of anticipating future developments. He refers to Henry Ford’s famous quote about customers wanting faster horses when what they really needed was the automobile.
The conversation focuses on the complex nature of supply chain software, the difficulties in reinventing such companies, and the importance of negative knowledge.
Vermorel explains that the complexity of supply chain software often leads to too many cooks in the kitchen, which can negatively impact the final product. He cites the example of Google’s search algorithm, which is maintained by a small, close-knit team, despite the company’s size.
When asked about how companies can reinvent themselves, Vermorel expresses skepticism. He suggests that it is more likely for a company in need of change to simply choose a different software vendor, rather than expecting the vendor to reinvent itself. He believes that market Darwinism will naturally sort out the best solutions.
For smaller companies seeking to break the mold and achieve success, Vermorel advises against acquisition, though he acknowledges that it is hard to blame a founding team for selling their company after 15 years of successful growth. He thinks the solution lies more on the client side, where supply chain managers should focus on finding the best solutions for specific problems, rather than looking for a one-size-fits-all approach.
Vermorel also emphasizes the importance of having a tightly defined scope for software solutions, which allows for a landscape composed of many different apps, as long as they each have clearly defined boundaries.
Regarding the future of the supply chain industry, Vermorel discusses the concept of negative knowledge, or the understanding of what does not work. He highlights the value of this knowledge, as it remains stable and can provide useful insights into failures. Vermorel argues that companies should develop a culture that respects and documents failure, even if it is a painful exercise. He suggests that this approach may lead to more effective solutions and improvements in the industry.
The interview highlights the challenges faced by supply chain software companies in navigating the complexities of their industry, the importance of focusing on specific problems rather than general solutions, and the value of negative knowledge in driving innovation and improvement.
Full Transcript
Kieran Chandler: Today on Lokad TV, we’re going to discuss the root causes behind these worrying trends and understand what it is companies can do in order to react to them. So, Joannes, why is it that we’re sort of falling out of love with some of the products that we’re using in a supply chain context?
Joannes Vermorel: I believe the software industry has been driven a lot by passion, and it’s very interesting because the amount of investment in terms of tech, intelligence, and sheer innovation has been highly dependent on how many people are passionate about those topics. For example, at one end of the spectrum, you’ve got gaming where literally you had people who decided to dedicate their life to make great video games. In terms of tech, I would say video games are incredibly state-of-the-art. I mean, there are marvels, and there were people who were absolute geniuses, like John Carmack, who were actually part of the team who built Doom, the first probably one of the first super successful 3D first-person shooters.
Does it happen with supply chain software? A bit of it. I mean, I believe that I’m very interested in those topics, but let’s face reality, there are very few people that would say at the age of 8 years old, “Well, when I grow up, I want to be an enterprise software developer.” But you can have people like me who wanted just to do video games because that’s very cool. So, you have that. You can have people that have this early age passion. It happens in certain fields, but much less in other fields. And so, down the road, we end up after a couple of decades of improvement and innovation, which is real, I would say it’s still quite lagging behind. I would probably qualify that there is hardly any product among supply chain software that could qualify as great. I mean, the sort of things that people are literally in love with, like Instagram, Facebook, and Gmail. Even if we have very happy clients at Lokad, I’m still not there yet, you know, to have people say, “I would not live without that.” I mean, we are not there yet. We are trying, but there is still a long road until we have this degree of polish that is achieved in other areas.
Kieran Chandler: Yeah, I think when I was growing up, I was definitely in that category of wanting to be a professional sportsman and probably didn’t think I’d end up in a supply chain industry. So, what are the root causes behind some of these worrying trends? What are we really seeing?
Joannes Vermorel: What we are seeing specifically in supply chain software is that supply chains are very complex systems and, to some extent, fragile ones. I mean, not fragile against everything, but in terms of software, they are relatively fragile. What do I mean by that? I mean that one bad ERP can literally completely mess up a supply chain, and it regularly happens. Last year, Lidl had to write off half a billion euros on a failed ERP deployment, where the intent was to deliver a higher degree of optimization for the supply chain. So, it does happen. Target Canada actually ceased to exist altogether. These problems are very real, and the consequences can be literally very dramatic when supply chain software fails.
Kieran Chandler: You have to deal with a very complex system and you cannot really decide to do it locally. If we look at Target Canada, which is now different, they couldn’t say, “Oh, we are going to do very well at one given store,” because the problem is that it’s one network of stores to manage altogether. You cannot say we are going to be very good locally because then you create problems for the other stores. As a consequence, I believe that the market has privileged relatively large players, and that kind of makes sense.
Joannes Vermorel: If we go back a couple decades in the past, it was very hard to have a networked system, so it was very hard to have a distributed software implementation for your supply chain. The rule, which is kind of still in place, is to have a monolithic ERP or fairly monolithic systems where everything is brought to one place, as opposed to having a more cloud-like vision, highly distributed, highly redundant, but highly dependent on high-speed internet connections that did not exist a couple of decades ago. So, bottom line, we end up with market factors that were driven first because of technology influence, high centralization because network computing was complicated, but also favored by the fact that, because you want to deal with large supply chain networks, it kind of gives an incentive to companies to be large.
Kieran Chandler: So, what does the market actually look like then? Is it made up of mostly larger players, and there are a few small players kicking around? What does that do to innovation and things like that?
Joannes Vermorel: There was a very interesting post a couple of weeks ago that showed the incredible numbers, I believe it was above 2000 acquisitions in the field of enterprise supply chain software over the last three or four decades. Indeed, it’s a field that is completely dominated by large players like SAP or Oracle, IBM, and it’s not that there are no small players, but they are very routinely acquired by major players. There is a relative scarcity of small players who just happen through success to become big. For example, 10 years ago, Facebook was still a fairly small company and they have grown from tiny to supergiant. In the B2C segment, there are a lot of companies who went from very small to very large, and if we look at many of the best apps on the internet nowadays, many of those apps did not exist 10 years ago.
However, this process is happening in enterprise software much less so. Companies tend to grow a little bit and when they reach something like 100-200 employees, they just get acquired by very large companies and then innovation stalls.
Kieran Chandler: What’s different about the approach a larger company would take compared to a much smaller company that’s growing quite rapidly?
Joannes Vermorel: It’s very difficult to be both very large and very innovative, especially when the innovation fundamentally is at odds with your core business model. Even the most incredibly profitable, super well-managed companies like Microsoft, which has been one of the most profitable companies of all time, took them literally two decades to wrap their head around open source, which they are now embracing fully. They went from “open source is a cancer of our industry” to “we completely embrace open source.” It took them two decades, and it was because they were a fantastic company with tons of exceedingly smart people, incredible managers, and with tons of cash and literally decades to execute that, and they managed. But you see, that gives you an idea of the challenges involved.
Kieran Chandler: So, what is the magnitude of the challenge when you want to wrap your head around a new concept that represents a paradigm shift for your business? For example, what are some of the problems for enterprise supply chain software?
Joannes Vermorel: Most of the leading enterprise supply chain software emerged in the late 70s or early 80s, with one key innovation at the time: the relational database. This was crucial for companies like Oracle, SAP, and JDA. It gave tremendous results in terms of inventory management and data integrity. However, these companies ended up locked in a specific way of thinking about supply chain and the software needed to operate it. When these companies acquire others that weren’t built around the idea that the relational database is the alpha and omega of supply chain software, they struggle to pivot the culture of the parent company, which is often much larger.
Kieran Chandler: You mentioned the word “culture.” What is it about the culture in some of these larger companies that’s so bad, and why is it so difficult to change?
Joannes Vermorel: The market has always demanded large players, and these players have pursued aggressive strategies of mergers and acquisitions. This is different from companies like Google or Apple, which mainly develop products organically. It’s challenging to have a growth-through-acquisition strategy that results in great products because creating truly great products requires sharp focus and vision. Great products often appear to be in conflict with existing habits and dominant patterns, only becoming recognized as great in retrospect.
Kieran Chandler: So the iPhone is an example of a truly great product. What are some of the pitfalls that you can encounter when trying to create such a product? What are the problems that you come across?
Joannes Vermorel: You have to go counter to the intuition of always listening to your customers. In enterprise software, most of the time, customers are correct. But when you’re trying to create a truly great product, you might need to challenge the status quo and go against established habits and patterns.
Kieran Chandler: Because of demanding requirements, clients can sometimes be difficult for enterprise software vendors. How do you navigate this issue?
Joannes Vermorel: The problem is that if you stick too closely to those requirements, it’s hard to see what will come next. As the report was saying, quoting Henry Ford, “If I had listened to my early customers, I would have tried to figure out how to make faster horses.” Turned out that faster horses were not the way to go; it was automobiles. You had to wrap your head around the problem and stop listening to your clients at some point, which is very difficult for enterprise software. If you don’t listen, you lose your client, which is very painful. But if you do listen, even if it doesn’t work, the worst part is that you still get paid. So there’s a perverse incentive. If you listen to the client, you get paid even if it doesn’t work. If you don’t listen, you might ultimately get paid by another client who shows interest and recognizes the value in your innovation, but that’s a much riskier move.
Kieran Chandler: How does the complexity of supply chain software impact the industry?
Joannes Vermorel: Supply chain software is very complex, and frequently vendors put too many cooks in the kitchen. When it comes to great software products, it’s hard to have a great product if you have hundreds of software engineers. It might come as a surprise, but if you look at what Google is doing for search, it’s actually a very close team of just a few dozen people tweaking the core search algorithms. It makes sense because when you type keywords in Google, you can only have one set of results.
Kieran Chandler: How can these companies reinvent themselves? You’re suggesting they should not listen to their customers and should get rid of half their engineers. It all sounds very counterintuitive.
Joannes Vermorel: First, you don’t have to reinvent the company. For example, Yahoo failed to reinvent themselves, and Google took over. So, I’m not overly optimistic that companies stuck in a pattern for decades will evolve. But the good news is that if you’re a company running a supply chain, you don’t need to reinvent yourself; you just have to pick a different vendor, which is a much easier task. You can either take one vendor and expect them to reinvent themselves, or you have an easier solution which is to go and take another vendor. The market Darwinism will sort it out.
Kieran Chandler: What can a smaller company do to break the mold as it grows and becomes successful?
Joannes Vermorel: The question might be more suited for a company like Lokad. One answer is not being acquired, which is difficult. If you face some degree of success, like Lokad, we’ve been around for more than a decade and have been growing very successfully, but we are nowhere near as large as, let’s say, Oracle. And it will probably take decades if we ever manage to do that, which would be fantastic. So the bottom line is that for small companies, the message would be not to get acquired. But it’s hard to blame a founding team who spent 15 years growing a company successfully.
Kieran Chandler: Let’s say there are 200 employees, which is quite an achievement in this sort of field, and to blame them for selling their company to GG Oracle ICP, right? They earned it, so it’s difficult. I believe that the solution is not exactly in this area. It will be more on the client side, which is, I believe, one of the key solutions is to have an approach that is more like staying clear from requirements where you want a solution that does everything.
Joannes Vermorel: If you come to a supply chain manager or supply chain executive and say, as a first requirement, “I want a solution that does everything,” then you end up with SAP, IBM, or Oracle and the tiny few. There are half a dozen companies worldwide that can claim to be able to do all of that. So then, you start with those folks because you’ve implicitly made the decision to use one of those companies. The starting point is to say, “Okay, how can I think about a problem where I will figure out one problem and find an app for that or something that has a much tighter scope?” I want to be the best of breed for this specific problem, and the good news is that, thanks to the internet, it’s now orders of magnitude easier to have an applicative landscape made of many apps. Having many apps is not a problem as long as apps have tightly defined boundaries.
Kieran Chandler: So, concluding and bringing everything together today, can you see a day when these toxic patterns are leaving the supply chain industry? Or is it very much an industry that’s set in its ways, and there’s no way we’ll ever get to the stage of the gaming industry or something a little more glamorous?
Joannes Vermorel: I think it’s an interesting question. I believe that the answer exceeds the scope of supply chain. There is an under-appreciated value to negative knowledge. It’s very funny because it’s something that is not specific to supply chain; it’s in science in general, biology, medicine, even physics. We are still struggling to come to terms with this idea. Negative knowledge is about knowing what doesn’t work. Success is never guaranteed, but failure can be, and we have failure modes that are exceedingly predictable and literally guaranteed. It’s very interesting because in this age of innovation, it’s hard to pay attention to the fact that even if technology is always changing and there are always new ways to improve, you have an ever-growing potential knowledge of negative knowledge, which is all the things that have been tried, tested, and deemed as recipes for failure.
This knowledge is very valuable because it’s stable and can be incredibly productive. It’s not just in supply chain; it’s about coping with negative failure and valuing rewards, things that are about positive knowledge. We may need to find a new way to do that and document it as a tremendous achievement. But we don’t have the opposite of the Nobel Prize, which would be people who spend their lives collecting and consolidating all the ways you can tackle problems and that will lead to failure. I believe the path forward for many companies tackling complex supply chain problems is to start having a culture where failure is not celebrated, but respected, documented, and analyzed, even if it represents a fairly painful exercise.
Kieran Chandler: Maybe we’ll start seeing a negative Nobel Prize sometimes soon?
Joannes Vermorel: Maybe.
Kieran Chandler: Okay, that’s everything for this week. Thanks very much for tuning in, and we’ll see you again next time. Thanks for watching.
