In-Depth

Supply Chain Software Vendors Forecast Recovery

ERP vendors, including Oracle and SAP, are transforming the supply chain software market

• By Stephen Swoyer
• 01/07/2003

According to Tom Pohlmann, a senior analyst with market research firm Forrester Research, there’s good reason for companies to consider SCM—even in the midst of an economic downturn. That’s because companies that implement supply chain management (SCM) solutions typically experience a corresponding increases in cash flow and growth, along with a greater return on their assets. “We’re not saying that buying supply chain [software] is going to dramatically increase your cash growth. We’re just pointing out that if you want to see what your top-performing companies and competitors are doing, they’re out there buying supply chain software.”

The problem, suggests Karen Peterson, a vice president and research director with market research firm Gartner Inc., is that most companies simply haven’t performed very well over the last two years. They’ve slashed funding for all but maintenance of their existing infrastructures, and they’ve deferred purchases of new software and equipment.

As a result, she points out, SCM revenues—like those of enterprise resource planning, customer relationship management and other packaged applications—plunged over the last couple of years, to $384 million in 2001, down from $631 million in 2000. Although Gartner’s 2002 numbers aren’t yet in, SCM revenues still aren’t anywhere near their levels of two years ago.

For his part, Forrester’s Pohlmann indicates that SCM revenues, along with those of ERP and CRM applications, will probably recover in 2003. “Early indications from our study (that is just about to come out of the field) is that we'll see a slight rebound in demand for SCM, ERP, and CRM. Most of that 'rebound' will come in the form of Q3-Q4 2002 upgrades that were deferred into this year.”

Jeff McKinney, executive vice president and president of Americas operations with supply chain software specialist Manugistics Inc., believes that after two tough years, the worst is over for SCM vendors. “I don’t think that there will be any [additional] downturn in the market. The market is feeling like it’s flattened.” Instead, McKinney expects that prospective customers will more carefully husband their budget dollars, choosing to spend them on modular SCM components—supply chain planning, supply chain warehouse, transportation --rather than full-blown SCM suites.

The result, he anticipates, could be an uptick in SCM deployments in the second half of the year. “If [prospective clients] have upside on their earnings, they’re going to hold that tight until they can work through the first-half of the fiscal year.”

According to Dwight Klappich, senior program director with consultancy MetaGroup, these days customers who implement SCM solutions are increasingly opting to do so in the form of modular applications, and not as full-blown SCM suites. “They’re buying two, three, four components—supply chain planning, supply chain execution, or supply chain warehouse. They’re focusing on those, getting them up and running. It’s a very pragmatic approach to buying software right now from SCM vendors.”

McKinney agrees, noting that Manugistics recently redesigned its supply chain applications and based them on an Internet-enabled modular architecture. “What we haven’t seen is clients making lesser decisions around that spending, choosing to modularize. So we took the opportunity to re-architect our application set on a pure Internet architecture, to modularize where it doesn’t require a lot of integration components.”

One company that has gone the modular route with respect to SCM is Unisys Corp., which is implementing a purchasing system based on software from Oracle Corp. Unisys’ new Oracle-based purchasing system must also integrate with its Xelus DRP system, as well as with other proprietary in-house systems. “This will eliminate low value transactions, and our purchasing processes will be more focused on strategic activities,” explains Mark Hutnyk, a Unisys systems analyst, who concedes that integrating the new Oracle purchasing system with Unisys’ other in-house systems is anything but a trivial matter.

Unisys’ experience highlights a number of factors that are transforming the SCM marketplace. First and foremost, Unisys is deploying a purchasing system developed by Oracle Corp., which has traditionally been a purveyor of database software and business financial applications. Increasingly, however, traditional ERP vendors such as Oracle and SAP have made inroads into the SCM space—at the expense of established vendors such as Ariba, i2 Technologies and Manugistics. According to Gartner, for example, Oracle and SAP both grew their share of the SCM space from 1997-2001, while the respective shares of Ariba, i2 and Manugistics contracted. The upshot is that although SAP launched its first SCM product (APO) six years ago, it’s now the number two purveyor of supply chain software after market leader i2 Technologies.

At the same time, Unisys’ deployment scenario—which involves integration with heterogeneous applications—has required the expertise of a bevy of third-party consultants. This isn’t unusual. According to MetaGroup’s Klappich, as SCM solutions mature and integration scenarios become more complex, the expertise of qualified consultants will become even more important. “We have found that a lot of organizations that have bought this software in the past have not effectively used it, so in the current climate, I believe that consultants are going to benefit from new investments in supply chain technologies. They’re going to have a heyday helping customers squeeze value out of supply chain issues.”

Christian Knoll, vice president of global SCM for software giant SAP America Inc., says that he’s unwilling to “make a general statement that companies can’t [implement SCM applications] on their own,” but acknowledges that consultants are involved in most implementations. “The typical approach is to have consultants involved, although the level of how much consulting is involved, it goes from one extreme, where you have them for a specific project launch, or you outsource the entire project.”

The incursion of ERP vendors into the SCM space has had the not-undesirable effect (for customers, anyway) of driving down prices. For example, in terms of acquisition cost, ERP vendors can simply afford to price their software cheaper than best-of-breed SCM purveyors.

Although neither Oracle nor SAP can compete on a feature-for-feature basis against Ariba, i2, or Manugistics, says Gartner’s Peterson, the idea of plugging into an existing Oracle or SAP application infrastructure and avoiding costly integration scenarios has proven attractive in some mid-market accounts as well. “We see a lot of people saying that they can lower their TCO because they can eliminate the need to do the integration.”

For his part, Knoll indicates that SAP’s SCM solutions are very attractive to existing users of its ERP applications. “We can compete against best of breed [vendors], but if you look at TCO, having everything with one vendor can help you reduce your cost of ownership.”

Peterson says that SCM went through its peak hype period in 2001. At the time, she acknowledges, its potential outstripped what it could actually deliver. In 2003 and beyond, she asserts, SCM is shaping up to be the real deal. As a result, she predicts, it will “become more of a mainstream purchase. People have been aware that it was important, however maybe they’ve had bigger things on their plates, so we are seeing more companies looking at SCM as a way to improve their margins.”