Procurement and Distribution
The future of B2B marketplaces
There’s a wide group of companies you can roughly categorize as B2B marketplaces. Today, I want to dive into the next generation of B2B marketplaces and the complex web of logistics, procurement, and distribution workflows they will occupy.
If you want more precise background on the landscape and managed marketplaces, opportunities in these businesses, and more, both Bessemer and Dan Hock have some great content.
Today, I want to focus on a different aspect in the marketplace landscape, namely the workflow penetration that industry platforms are accomplishing in their quest to build marketplace-esque businesses. Some are more formally marketplaces, others are still pure software. In any case, they all have the opportunity to become the exchange of record for their industry.
First, a couple observations around B2B marketplaces:
Broadly all B2B supply and demand issues result from fragmentation in either the supply or demand function. Sometimes, you get both. But usually you have a supply function is more concentrated than the demand side.
B2B marketplaces orient around GMV - GMV is itself dependent upon habituating marketplace participants to use your platform as their primary procurement and distribution layer.
Lastly, the majority of opportunities in the B2B marketplaces will be competing against procurement or distribution process that may be hard to disrupt.
There are some notable exceptions of course. Faire has built a juggernaut by operating in a context where both the supply and demand side were so fragmented that the two sides never really had interactions with each other.
Faire finally allowed independent retail to shop a incredibly broad selection of wholesale products. Previously, there was no solution to enable this in the frictionless way both sides of the marketplace needed. Independent retailers don’t have a procurement department. Small product boutiques don’t have a distribution strategy. By successfully aggregating the demand and taking on the some of the risk (fulfillment and more) associated with the transactions, Faire benefitted greatly.
Yet in most industries, there are established practices that are often incongruent with more pure marketplace strategies.
The Dilemma
Posit that there are two sorts of marketplaces: those whom accrue value from supply and demand matching and those whom accrue value from supply and demand optimization.
Supply and demand matching is usually the realm of industry white space. Restaurants had no meaningful delivery function prior to Doordash. Independent retailers had limited wholesale product access prior to Faire.
In other words, they create distribution and procurement workflows around the marketplace itself.
For many other industries, we have existing supply chain dynamics. There’s a set way of performing RFQ, obtaining new inventory, or selling into new locations. The path here to build substantial GMV is through optimizing these procurement and distribution functions that encompass sales generation, logistics coordination, and analytics necessary to disrupt the legacy way of doing business.
Hence the rise of procurement and distribution platforms.
The upshot: While they may not always look like B2B marketplaces from day 1, the next generation of these marketplaces will develop substantial GMV on platform through these optimizations.
Procurement and Distribution
While industries all have fragmented supply and demand, most have a supply or demand function that holds more of the bargaining power in transactions.
Vertical marketplaces can choose to either a) disrupt the existing center of power, or b) enhance it via far more seamless workflows.
Most choose the latter.
Distribution and Provi
The beverage industry is comprised of an extremely fragmented demand base - there are myriad bars, restaurants, and more whom need their Michelob.
The supply side has two groups: producers and distributors. And while there are plenty of independent producers crafting IPAs, a Prohibition compliance regime means the distributors end up with a lot of market power.
The beverage industry is subject to three-tier system: Brands can only sell to distributors, distributors can only sell to retail locations, and retail locations are only able to sell to consumers.1
Distributors thus hold the keys to stocking restaurants and bars. That means they often operate regionally, hire reps to sell into restaurants, and generally spend a lot of energy cultivating the relationship.
Nonetheless, brands and restaurants suffer from the paradigm. Restaurants have trouble purchasing new products without a distributor relationship and brands are subject to the savviness of their distributor in stocking new restaurants.
What Provi saw was a new way to connect the demand and supply while still adhering to the three-tier construct.
On the restaurant side, staff can browse all sorts of beverage stock without needing a prior distributor relationship to purchase. And brands can get their product in front of new restaurants without needing the distributor themselves to reach out.
Both sides really want this! Bars want premium selection, brands want to get their beverages directly in front of on-premise locations.
But to make it work, Provi has had to build distribution flows, analytics tools, and more to ensure that distributors achieve more through the platform instead of feeling disintermediated.
Yes, it’s a marketplace. But more accurately, it’s a new acquisition portal for distributors. And they’ve tailored it accordingly. Distributors get inventory plugins, sales reps get new lead gen tooling, and seamless ordering mechanisms.
In short, they’ve built a platform that aims to change distributor workflows entirely. Yes, it’s a marketplace. But mostly it’s becoming the distributor’s CRM for restaurant interactions.
And since brands too benefit here, producers are starting to funnel ad dollars to capture bar attention on platform. That means that increased GMV will also lead to more ad spend on platform. And that too, means that distributors will adopt Provi as more important to their day-to-day.2
Procurement and Kojo
At the other end of the spectrum, we have Kojo. Nothing about Kojo looks like a B2B marketplace yet. That’s intentional.
In construction, materials management is the classic vSaaS problem. It’s all in spreadsheets, orders aren’t tracked in granular detail, and occasionally that ends up with the wrong materials showing up to the job site.
There’s various facets of this issue. Material prices often shift which can mean a project is suddenly far less lucrative. Spend itself isn’t often tracked well. And teams can’t collaborate on requirements in the same platform.
Fixing those workflows inherently taps you as the source of truth for materials management and procurement. That’s what Kojo has done.
Once you build that source of truth, you get to do some really interesting marketplace adjacent things. First, you can develop a vendor portal to allow them to bid and receive orders far more efficiently. Second, you can build logistics layers that add tracking functionality, and tap you as a supply chain management platform as well.
At some point your repository of materials pricing, logistics support, and supplier management acts as an information layer that lands you squarely as the discovery engine - the marketplace - for what materials can get to a warehouse in the least amount of time at the best price point. Whether Kojo ends up monetizing this discovery function directly as a portion of materials spend (GMV) or as a software module remains to be seen, but these features are part and parcel of marketplaces.
What happens next?
The incremental productivity gains from better marketplace and procurement approaches will stack up dramatically.
I view the next generation of procurement platforms as enablers of vertically-tailored Toyota Production Systems.
TPS of course systematized just-in-time manufacturing and is predicated on one really important idea: in order to increase inventory utilization, you should keep inventory levels low and order inventory as you need it.
That too was itself reliant on computer systems capable of automatically ingesting orders from the Kanban system on the factory floor.
If you take TPS as a stand-in for the sort of systematization efforts that every industry could engage in, the lack of digital coordination and ordering has dramatically impacted our ability to achieve the productivity gains you might expect.
Now not every industry needs to adopt JIT for inventory. But they do need smarter procurement, analytics, and quick supplier connections. Suppliers too need platforms that allow them to optimize sales cycles and their own inventory levels. And while that might not necessitate TPS in every industry, it will mean we get a whole lot closer.
Washington is the only state without a 3-tier regime and yet the practice persists.
Provi also shored up the distribution product and market share with the acquisition of SevenFifty, the other major competitor in the space. The market consolidation means that the network effects are only going to grow more powerful.