Supply Chain and Logistics Innovation Accelerates, But Has Long Way to Go Descartes Research Report

The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

22The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Introduction

The recent past has highlighted that supply chain and logistics performance can make or break companies and that many supply chains are in dire need of innovation. A recent study by Descartes of 1,000 supply chain and logistics executives in North America and Europe identified that the challenges of the past several years caused more (57%) companies to accelerate their innovation initiatives with an even greater amount (65%) planning to invest more in supply chain and logistics innovation initiatives in the next two years. But does supply chain and logistics innovation translate to business success, and what role does management support play in both?

Top Level Findings Below are high-level at-a-glance takeaways from the research

59% accelerated the pace of their

innovation over the past 2 years

65% plan to increase innovation

investment next 2 years

37% listed “Lowering costs/improving

reliability” (tie) as top reasons for innovation

87% face obstacles to innovation

24% indicated that WMS was most in need of innovation

43% described their pace of innovation as “ahead of the competition” or

“industry leader”

41% listed order fulfillment as their

top digitization initiative

Over half of the respondents say they use a mix of internal and external resources to develop innovative supply chain technologies (55%) and strategies (52%).

33The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

What accelerates—or inhibits—innovation?

One of the goals of the study was to get some sense of the connection between innovation and business health. We wanted to understand how three key factors—management importance, financial performance and employee turnover—enable supply chain and logistics innovation and, conversely, how innovation enables financial success and reduces employee turnover. It was our hypothesis that management importance is a self-fulfilling prophecy; that is, if senior management believe supply chain and logistics innovation is important, it would be reflected in the strategies and actions taken. Similarly, companies with better financial performance would be able to direct more resources toward supply chain and logistics innovation than those with lower financial performance—and better performers would also reap the financial benefit of the innovations they deployed. Finally, we anticipated employee retention to be critical as supply chain and logistics innovation requires deep domain expertise and workforce stability helps build and maintain this level of expertise.

We compared responses from these three areas against each other to see if there was any correlation between business success and perspectives on innovation. The results indicated that innovation importance, financial performance and employee turnover do, in fact, have significant impact on each other. A higher level of senior management importance placed on supply chain and logistics innovation goes “hand-in-hand” with better financial performance and lower employee turnover. Management focus, better financial support and a more stable workforce are critical for accelerating supply chain and logistics innovation. Conversely, a lack of senior management support and financial wherewithal and higher employee turnover are significant inhibitors to fostering innovation.

61% 60%

40%

53% Better

performer

Poorer performer

47% Lower

turnover

Source: Descartes

39% Less

important

Higher turnover

Very important

What’s the relationship between business performance and innovation?

The study showed the following in terms of management importance, financial performance and employee turnover:

Innovation importance to Senior

Management

Financial performance

44The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Respondents who said that innovation was important to senior management were 20% more likely to be better financial performers and 13% more likely to experience lower employee turnover (see Figure 2).

Respondents who said they were better financial performers were 20% more likely to have senior management who believes innovation is important and 16% more likely to have lower employee turnover (see Figure 3).

Source: Descartes

Fig 2: Impact of innovation importance on financial performance and employee turnover

Innovation importance to Senior Management

49%

68%

55%

Better financial performer

Poorer financial performer

Lower employee turnover

Higher employee turnover

69%

Fig 3: Impact of financial performance on management importance and employee turnover

Better financial performers

Source: Descartes

49%

71%

55%

Higher innovation importance

Lower innovation importance

Lower employee turnover

Higher employee turnover

69%

A higher level of senior management importance placed on supply chain and logistics innovation goes “hand-in-hand” with better financial performance and lower employee turnover.

55The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Respondents who said they had lower employee turnover were 15% more likely to have management who believes innovation is important and 23% more likely to have better financial performance (see Figure 4).

Fig 4: Impact of financial performance on management importance and employee turnover

Lower employee turnover

Source: Descartes

44%

62%

39%

Higher innovation importance

Lower innovation importance

Better financial performer

Poorer financial performer

59%

Over half of the respondents (53%) describe their company’s employee turnover as “better than average”.

66The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

What’s driving innovation?

From dramatic shifts in demand to supply chain disruptions to labor shortages, the past two years have forced many companies to become more agile and rethink their supply chain and logistics strategies, tactics and technologies. The study showed that the majority of respondents (59%) said their company accelerated the pace of innovation as a result of the challenges in the past two years. This is the case for those companies who: had senior management support for innovation as very important (68%), were better financial performers (67%) and had lower employee turnover (66%). There was a significant gap in supply chain and logistics innovation acceleration for companies who: had senior management views on innovation as less important (45%), were poorer financial performers (48%) and experienced higher employee turnover (51%).

vs.

vs.

vs.

Innovation highly important to Senior Management

Innovation less important to Senior Management

Better financial performer

Poorer financial performer

Low employee turnover

High employee turnover

68%

59% 67%

66%

45%

48%

51% Accelerated the pace of their innovation as a result of challenges over the past 2 years

How has the past two years of supply chain and logistics challenges driven innovation in your organization?

Source: Descartes

The past two years have forced many companies to become more agile and rethink their supply chain and logistics strategies, tactics and technologies.

77The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Innovation and the environment

Company environmental programs, government mandates and consumers are challenging supply chain and logistics professionals to rethink product flows and transportation modes and were noted as factors accelerating supply chain and logistics innovation for just over half (52%) of respondents. Environmental programs were a greater accelerator for companies that believe supply chain and logistics innovation is very important (60%), are better financial performers (60%) and experienced lower employee turnover (60%). Environmental programs were less of an accelerator for companies that regard innovation as less important (39%), had poorer financial performance (39%) and experienced higher employee turnover (42%).

vs.

vs.

vs.

Innovation highly important to Senior Management

Innovation less important to Senior Management

Better financial performer

Poorer financial performer

Low employee turnover

High employee turnover

60%

52% 60%

60%

39%

39%

42% Just over half have

also seen an acceleration driven by

their company’s environmental

programs.

What is the impact of your company’s sustainability/environmental impact programs on your supply chain and logistics innovation?

Source: Descartes

55% have a defined ESG strategy, but only 30% also have an action plan and funding in place.

88The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Increasing importance of cyber security

Cyber-attacks have been increasing dramatically, shutting down supply chain and logistics operations, exposing legacy bespoke technology and forcing the need to rethink business processes. Information and cyber security were an innovation accelerator for just over one-third of the respondents (36%). Again, there was heightened attention for information and cyber security as a supply chain and logistics innovation catalyst for companies where management believes innovation is very important (43%), companies who are better financial performers (41%) and those with lower employee turnover (44%). Information and cyber security programs were less of an accelerator for companies where management believes innovation is less important (24%), who are poorer financial performers (27%) and who experience higher employee turnover (26%).

vs.

vs.

vs.

Innovation highly important to Senior Management

Innovation less important to Senior Management

Better financial performer

Poorer financial performer

Low employee turnover

High employee turnover

43%

36% 41%

44%

24%

27%

26% Information and cyber

security have accelerated the

innovation plans of over third of respondents.

Has information or cyber security impacted your supply chain and logistics innovation plans?

Source: Descartes

Information and cyber security have accelerated the innovation plans of over one in three companies.

99The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Two-thirds of French (67%) and U.S. companies (66%) have accelerated their supply chain and logistics innovation, compared to only 50% in Canada.

French companies are leading in terms of acceleration due to environmental programs (59%) while Canadian companies rank the lowest at (34%).

France noted the highest level of acceleration on supply chain and logistics innovation from information and cyber security (50%) while Canada noted it had the least impact on innovation (20%).

In the U.S. (48%) and Canada (48%), inflation was noted as the top negative impact on innovation.

67%FR

66%US

50%CA

59%FR

50%FR

34%CA

20%CA

48%US

48%CA

How have organizations in specific countries accelerated their supply chain and logistics innovation?

Some external factors are negatively impacting supply chain and logistics innovation: COVID (36%) and inflation (34%) were noted as having the most adverse impact.*

* Senior management importance, financial performance and employee turnover did not influence the negative impact of COVID and inflation on supply chain and logistics innovation.

Supply chain innovation by region

1010The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

How important is technology to innovation?

Technology solutions have become closely associated with supply chain and logistics innovation. For many companies, technology is a differentiator, but others have not gained any significant benefits from their deployments. According to the study, 61% of respondents said their current supply chain and logistic technology solutions are helping the company, not hindering it. This leaves 39% that have experienced either no negative impact at all from their supply chain and logistics technology solutions, or no negative impact. Specifically, 19% have not seen any impact from technology on business performance and 20% believe technology solutions are actually hurting business performance. Unfortunately, a lot of factors can dictate success for supply chain and logistics technologies that have nothing to do with the technology solution itself. The study did reveal, however, that the positive impact of logistics and supply chain technology solutions rises (70%) when senior management considers innovation very important and the company has better financial performance (69%). Conversely, the positive impact decreases when senior managers consider innovation less important (46%) and the company has poorer financial performance (49%). The results are almost self-prophecy. Experience says that management that places importance on innovation or doing well financially is most likely getting the most out of their supply chain and logistics technology solutions.

According to 61% of the respondents, their current supply chain and logistic technology solutions are helping the company, not hindering it.

1111The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

How would you describe the impact of your current supply chain and logistics technology solutions on your company?

Source: Descartes

46%

69%

49%

Higher innovation importance

Lower innovation importance

Better financial performer

Poorer financial performer

70%

61% 39% Impact of

your current technology solutionsHelping the

company Hindering the

company

No impact on business performance

Hurting business performance

19%

20%

16% of American and Nordic respondents indicate that supply chain and logistics technology solutions have helped their company become an industry leader.

How important is technology to innovation? (cont’d)

1212The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

In the U.S. specifically, 71% of senior managers believe supply chain and logistics innovation is very important, compared to only 48% in the Benelux region.

The expectations for supply chain and logistics innovation change over time and are highly influenced by recent and current experiences. The results of the study reflect this, in that lowering costs (37%) and improving reliability (37%) were cited as the main reasons today why companies are innovating their supply chain and logistics operations. The impact of management importance, financial performance and employee turnover on these findings was negligible. Better customer experience was the third highest response (27%) although, in this case, there was some difference based on financial performance: 30% for better financial performers and 22% for poorer financial performers. While the environment is an important accelerator for many respondents, it wasn’t cited as a primary reason; the highest it ranked was as the third priority from respondents in France (27%) and the Nordics (26%).

What are the primary reasons you are innovating supply chain and logistics?

Source: Descartes

56%

43%

40%

Improve reliability

Lower costs

Lower costs

Improve reliability

41%

32%

45%

Lower costs

Lower costs/Improve reliability Better customer experience

Improve reliability

41%

USA

Canada

UK

Germany

France

Nordics

Benelux

Source: Descartes

Why innovation is important

1313The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

What innovations are companies deploying and how far along are they?

Digitization efforts are closely aligned with supply chain and logistics innovation because they’re about transforming company performance in ways that allow customers to see the positive difference. Supply chain and logistics operations are very extensive, so it’s highly unlikely that companies would have digitization programs that address the entirety of their operations. The study identified the top digitization initiatives companies have focused on as order fulfillment (47%), customer experience (45%) and transportation processes (44%). There was little difference in the results when evaluating management importance, financial performance and employee turnover.

Supply chain visibility was the fourth most important digitization effort (43%); however, there was a significant difference in results for senior management who thought supply chain and logistics innovation was very important (51%) compared to those who believe supply chain and logistics innovation was less important (30%).

Top digitization initiatives

47% Order fulfillment

45% Customer experience

44% Transportation processes

43% Supply chain visibility

vs. Innovation highly important to Senior Management

Innovation less important to Senior Management

51% 30% Source: Descartes

1414The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

For management who believe innovation is very important, given the significant disruptions of the last several years, supply chain visibility has become extremely important to manage supply chain and logistics performance. Advanced tracking of truckload transportation (47%) was the top fully deployed innovation followed by fleet (33%) and courier (32%). Supply chain visibility is, however, rapidly maturing as between 35% and 43% of the respondents across all modes (i.e., truckload, fleet, courier, air, rail, ocean, LTL and barge) cited technologies in pilot or partial deployment.

Which of the following transportation modes makes use of advanced tracking in your operations?

Air

Rail

Ocean

LTL

Barge46%

46%

42%

33% 47%

Partially Deployed

47% Truckloads

Fully Deployed 45%

Fleet 44%

Courier

Source: Descartes

The application of supply chain visibility

1515The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Almost half (49%) have already fully integrated real-time shipment tracking into their customer service solution, followed by integration with customer portals (36%), transportation management systems (TMS, 27%), supply chain control towers (23%) and dock appointment scheduling systems (23%). For fully deployed TMS integration with real-time shipment tracking, there was a significant difference between those who said senior management believes supply chain and logistics innovation is very important (34%) and those who think it’s less important (16%). The same was true for real-time shipment tracking integrated with a customer portal, with senior management who regard innovation as very important at 44% compared to 23% for those who regard it as less important.

Competition is also shaping supply chain and logistics innovation. The top competitive innovation respondents cited was real-time shipment location (27%) followed by electric or alternative vehicles for more sustainable delivery (23%), digital customer experience (22%) and robotics to improve fulfillment capacity (21%). The impact of management importance, financial performance and employee turnover on these findings was negligible.

Has your organization integrated real-time shipment tracking into your enterprise solutions?

Dock appointment scheduling systems

Customer service

Supply chain control towers

23%49% 23%

Customer Portals

36% 27%

TMS

vs. Innovation highly important to Senior Management

Innovation less important to Senior Management 34

% 16%

vs. Innovation highly important to Senior Management

Innovation less important to Senior Management 44

% 23%

Source: Descartes

What supply chain and logistics innovation is the competition doing that you most wish your company was doing?

21% Robotics to improvefulfillment capacity22% Digital customer experience23% Electric or other alternative vehicles for more sustainable delivery

Real-time shipment location27%

Source: Descartes

Real-time shipment tracking

1616The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

The answers to three questions paint a picture of where companies believe they are most innovative in their supply chain and logistics operations, where they had the greatest need for innovation and where they will focus innovation for the next two years. In general, no one area dominated the results for the state of innovation today and future focus. In some cases, such as warehouse management systems (WMS), the same area simultaneously topped the list of the most innovative parts of the business and the list of those having the greatest need for innovation.

y Over a quarter of respondents feel their companies are most innovative with their WMS (28%) and transportation tracking (26%). TTMS was third (25%); however, this figure rose to 28% for those who said senior management believe supply chain and logistics innovation is very important and declined to 18% for those who said senior management believe it less important.

y WMS (24%) was also cited as the top area with the greatest need for innovation followed closely by inventory management (22%). There was little difference by management importance, financial performance or employee turnover.

y For the next two years, the top focus areas for innovation were customer experience (25%), TMS (24%) and WMS (23%). Customer experience was the highest priority for manufacturers, retailers and distributors, but the fourth highest priority for carriers and logistics services providers. TMS was the highest priority for carriers and logistics services providers, but the fourth highest priority for manufacturers, retailers and distributors.

26%

28%

18%

28%

TTMS

WMS

Transportation tracking

Innovation highly important to Senior Management

Innovation less important to Senior Management

What areas in your organization are the

most innovative today?

25% 24 %

What areas of supply chain and logistics technology in your

organization are in the greatest need for

innovation?

22%

24% 25%

WMS

WMS

Inventory management

TMS

Customer experience

Where is the greatest innovation focus for

your organization in the next 2 years?

23%

Source: Descartes

Over one in five companies feel the need to innovate their WMS (24%) and inventory management (22%).

Where companies are applying innovation

1717The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Advanced computing technology has been touted as the next wave of supply chain and logistics innovation. When looking at full deployments, with the exception of data analytics (40%), most advanced computing technologies such as machine learning (20%), artificial intelligence – non machine learning (17%) and robotic process automation (16%) are still in the early stages of full production use. When looking at pilots or partial deployments, however, there is a lot of advanced computing technology activity in supply chain and logistics operations: robotic process automation (52%), machine learning (52%), data analytics (50%) and artificial intelligence – non machine learning (47%).

Which advanced technology innovations are currently being employed by your company?

Partially Deployed

Fully Deployed

52%

16%

Robotic process automation

47%

17%

Artificial intelligence

50%

40%

Data analytics

52%

20%

Machine learning

Source: Descartes

Innovation and advanced computing technology

1818The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

What inhibits the pace of innovation?

Innovation of any kind requires change. Because they are under constant pressure to adapt to changing market conditions, the pace of innovation is extremely important for supply chain and logistics organizations to stay ahead of competitive pressures. More than two-in-five respondents (43%) described their company’s innovation pace as “ahead of the competition” or even as “industry leader.” Only 12% believe their company is not keeping up with the pace of supply chain and logistics innovation in their respective markets.

Senior management importance and financial performance weigh heavily on the pace of innovation in supply chain and logistics. Of the 43% who described their pace as ahead of the competition or industry leading, 54% indicated senior management believe supply chain and logistics innovation is very important compared to 26% for those who believe it’s less important. For the same group (43%) of respondents, 60% indicated they were better financial performers compared to only 18% who had worse financial performance.

How would you describe the pace of supply chain and logistics innovation at your company?

Source: Descartes

vs.

vs.

Innovation highly important to Senior Management

Innovation less important to Senior Management

Better financial performer

Poorer financial performer

54% 43%

60% 18%

26%

described their company’s innovation pace as “ahead of the competition” or even as “industry leader.”

Respondents in the Nordics (50%) and U.S. (48%) were more likely to regard their company’s pace as “ahead of the competition” compared to only 28% of U.K. respondents.

1919The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Culture, preparedness and a number of other factors can inhibit supply chain and logistics innovation. According to the study, inhibitors were pervasive as 87% of respondents said they faced obstacles. The greatest inhibitor to supply chain and logistics innovation was cited as attitude to risk and reward at 26%. Interestingly, not a priority (14%) was the fifth answer behind lack organizational readiness (17%), don’t have the right resources (16%) and payback not clear (14%). This means that almost half (47%) had not done their homework prior to getting approval to move innovation programs forward. Financial performance did have some impact on the number of respondents who indicated there were no obstacles to innovation with better financial performers seeing an increase from 13% to 15% while poorer financial performance dropped from 13% to 10%.

What is your company’s greatest inhibitor to supply chain innovation?

Source: Descartes

1%

26%

16%

13%

14%

14%

Attitude to risk and reward

Lack organizational readiness

Don’t have the right resources

Payback not clear

Not a priority to executive team

Other

No obstacle

vs.Better financialperformer Poorer financial performer15% 10%

17%

Inhibitors to innovation

The greatest inhibitor to supply chain and logistics innovation was cited as attitude to risk and reward at 26%.

2020The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Are companies investing in innovation?

Supply chain and logistics innovation requires investment in people, technology and time. Almost two thirds (65%) of respondents said their supply chain and logistics innovation IT spend will go up in the next two years. This number increased to 72% for those whose senior management believe supply chain and logistics innovation is very important and decreased to 55% whose management believe it less important. There was a similar difference when looking at financial performers with an increase to 71% for those who are better financial performers and a decrease to 57% for poorer financial performers. These numbers are fairly consistent with the view of the increasing importance and pace of supply chain and logistics innovation in general, and with heightened senior management recognition and better financial performance to be able to invest more.

How will your supply chain and logistics innovation IT spend change over the next 2 years?

Source: Descartes

vs.

vs.

Innovation highly important to Senior Management

Innovation less important to Senior Management

Better financial performer

Poorer financial performer

72% 65%

71% 57%

55%

Almost two thirds (65%) of respondents said

their supply chain and logistics innovation IT spend will go up in the

next two years.

Most companies develop and implement innovative technologies (55%) and strategies (52%) through a mix of internal and external resources.

2121The Descartes Systems Group, Inc. | www.descartes.com | Supply Chain and Logistics Innovation

Conclusion: Innovation builds a foundation for future success.

The light shone on supply chains in the recent past has highlighted that supply chain performance can make or break companies. The need to innovate supply chain and logistics operations has moved to the forefront of many C-level agendas out of competitive necessity or the recognition that top performing supply chains provide competitive differentiation. The results of this study point to the accelerated pace of innovation that’s underway in supply chain and logistics operations, and how management importance, financial performance and employee turnover can impact innovation. There’s clearly a lot of supply chain and logistics innovation underway but, for many companies, they’re early in their journeys, especially with the use of advanced computing technologies.

What has also been in the spotlight is that supply chains are “aging” more rapidly than ever. Given highly evolving market dynamics and the demands put upon supply chain and logistics organizations, standing still is not a viable option. Companies need to think about supply chain and logistics innovation as an evergreen program to remain competitive or industry leading, not only as a project to fix a supply chain performance problem.

The results of this study point to the accelerated pace of innovation that’s underway in supply chain and logistics operations, and how management importance, financial performance and employee turnover can impact innovation.

Supply chain and logistics innovation at Descartes

Because supply chain and logistics are constantly evolving disciplines, a history of innovation is central to the long- term success of leading logistics technology solutions such as Descartes’ offerings. We believe that true innovation should deliver fundamental performance improvement for our customers. Our formula for innovation is simple: we treat it as a never-ending journey that only happens through hard work every day and fostering a culture that seeks to go beyond incremental change. We are able to go beyond because we combine our deep domain expertise with close work with our most visionary customers and advances in computing technology. This is why we are able to lead the digital reinvention of freight forwarding and customs and freight brokerage, turn home/last mile delivery into a competitive weapon for our retail and distribution customers and enable small-to-midsize ecommerce companies to rapidly scale their fulfillment operations to meet growing demand.

To learn more about how Descartes’ innovative supply chain and logistics solutions can make a difference to your business go to https://www.descartes.com/who-we-are/contact-us.

About Descartes Systems Group

Descartes (Nasdaq:DSGX) (TSX:DSG) is the global leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance and security of logistics-intensive businesses. Customers use our modular, software-as-a-service solutions to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in the world’s largest, collaborative multimodal logistics community. Our headquarters are in Waterloo, Ontario, Canada and we have offices and partners around the world.

Learn more at www.descartes.com and connect with us on LinkedIn and Twitter.

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