Startups are associated with innovation, emerging technologies, digitalization and disruptive business models. But the scholarly supply chain, logistics and operations management literature has up to now paid little attention to startups’ role in the supply chain ecosystem.
Stephan Wagner, professor and chair of logistics management at the Swiss Federal Institute of Technology Zurich (ETH Zurich), aims to change that. In his April 20 Distinguished Lecture, he set out to motivate researchers, both in Africa and other parts of the world, to take up projects at the interface of operations management and entrepreneurship.
Wagner began doing research in this area in 2015 and has published 11 papers on the topic to date. He and his students also have put their research into practice. They have founded two successful startups—GenLots, a supply planning tool, and Archlet, a supply analytics platform.
When other students were developing hardware startups, Wagner said they would come to him and ask, “How should I build up our operation? We need to sell a product. We don’t know how to do this.” Those inquiries spurred his interest in research at the intersection of entrepreneurship and operations management.
In his lecture, Wagner outlined a number of reasons why it makes sense for operations and supply chain management scholars — as well as corporate entities — to engage with startup firms. Those reasons are:
- Startups develop innovative products and services.
- Startups offer products and solutions that existing firms do not.
- Startups are oftentimes a driver for digitalization and automation.
- Startups are an important source of external innovation.
“So much of what we now call tracking and tracing, supply chain visibility, analytics, digital supply chains, platforms, 3D printing, augmented reality technology, IoT — a large portion of this came from startups,” Wagner said. “So yes, companies need to engage with startups.”
On the downside, startups have a low survival rate. Wagner cited statistics from Europe, Ghana, the U.S. and South Korea showing that 70% or more of new businesses fail in the first five years.
“As a corporate, I need to be careful whether I work with a startup,” Wagner said. “I need them because of the reasons that I mentioned. However, many of them will not be successful.”
Startup Supplier Model
A variety of vehicles exist for corporations to engage with startups, Wagner pointed out. These include incubators, accelerators, venture capital investments, mergers and acquisitions, all of which require a financial investment.
Wagner studies a different kind of corporate–startup relationship that he calls a startup supplier model. It involves a corporation integrating a startup into its supplier base. The corporate entity gains access to the startup’s technology or product, but the startup remains independent.
“This is what we are interested in,” said Wagner. “The interactions with startups that require the buildup of supplier relationships can be that the startup delivers a product or service to the company. Or, in the supply chain ecosystem, the startup can be a service provider that helps a company with sourcing processes, supply chain processes, maintenance processes, and all these.”
In both cases, a buyer-supplier relationship needs to be established, Wagner said. Corporate firms working with startup suppliers are primarily looking for flexibility and innovation, he noted. Managing these suppliers does come with unique challenges.
In one research study, Wagner looked at challenges corporations might encounter at the pre-formation stage, before a buyer-supplier relationship is established. One such challenge is the need to adapt their standard supplier evaluation tools.
“Some of the traditional information that the buying firm normally wants to have from suppliers, startups simply do not have,” Wagner said. “The buyer has established questions that would include, ‘please give us your sales numbers from the last three years.’ ‘Can you prove what the quality performance was over the last year?’ ‘Can you show us your financials?’
“‘No, we cannot,’” Wagner said startups would reply. “A startup cannot do this.”
Another potential pre-formation challenge is differing expectations about timelines, Wagner said.
“The startups, they want to move fast. They know if they do not move forward with the project, if they don’t win the business with this customer, they will not get financing. They will not be able to scale their business.
“As a corporate buying firm, I have more time. I have my processes to go through. I don’t have time pressure. So there’s a disconnect.”
Post-formation challenges
Wagner also has studied post-formation challenges, those that occur after a buyer-supplier relationship has been established. Among these are slow and complex decision making and what he terms “missing reliability.”
“So a startup that wants to sell a service or product to an established corporate, well now there is a business person, IT comes into play, legal comes into play, corporate communication, and many, many other units that might be involved, which simply slows down the process,” says Wagner. “That is something that startups really have to struggle with.”
Missing reliability refers to a buyer’s expectation that a product is 100% developed and proven, while a startup’s product may be only 80% reliable. It could still be in the pilot phase and need further development.
“A startup might offer a product to a buying firm when it’s 80% okay,” said Wagner. “For the startup, speed is more important. If I’m an established buying firm, I want to source a product that’s 100% developed and not still in the pilot phase.”
Through a qualitative study Wagner conducted, he developed a model of buying firm archetypes. The archetypes describe how different firms work with, identify and select startups as suppliers.
Skeptical buyers do not adapt their supplier selection process to the needs of startups and thus do not successfully integrate startups into their supplier network. Opportunistic adapters partially adjust their processes for startups.
The third archetype, systematic selectors, use best practices for working with startups. They have different startup-specific evaluation criteria and may even have dedicated people within the organization for startups to work with.
Wagner concluded his talk with recommendations for corporate managers who wish to work with startups and questions for scholars interested in studying startups to consider.
For managers who want to work with startups:
Step 1: Clarify what you aim for
- Develop a holistic strategy for engaging with startups.
- Specify the types of collaboration that best fit your company (e.g., accelerator, merger or acquisition, startup supplier).
Step 2: Draw on best practices
- Identify the technology areas to integrate into your company through a startup.
- Improve your knowledge about startups.
- Tap into experts such as venture capitalists and accelerators.
- Adapt, simplify and speed up processes, contracts and tools.
- Create new-venture partnering capabilities by adapting your evaluation and selection, development, communication and governance processes.
Questions for academics who want to research startups:
- Should I focus on a problem or a method? Wagner has used experiments, large scale surveys, secondary data and case studies.
- What are the risks and benefits of engaging in novel research streams?
- Should I engage with practice, and if so, how?
- Can I get access to data or will I need to create the data?
- Will I be able to find a journal to publish my interdisciplinary research?
“I think interdisciplinary research is very promising, and you can have a lot of impact,” concluded Wagner, “but publishing it is not that easy.”