Executive Briefings

Global Recession to Have a Dramatic Impact on the Supply Chain Planning Market

The impact of the recession on the Supply Chain Planning (SCP) market will be dramatic. Between 2005 and 2008, the Compound Annual Growth Rate (CAGR) was 11.3% and the SCP market grew to 1.4 billion dollars. We are forecasting that the market will shrink in 2009, will grow only modestly in 2010, and won't resume the historical growth trend line until 2011. We are consequently projecting a five year CAGR through 2013 of only 3.4%.

"During the last recession, software suppliers argued that supply chain solutions helped companies to cut costs, which was of paramount importance during a recession, and thus while their growth might slow, they still expected to continue to grow. Those arguments proved flawed and the market shrank substantially. We expect the same thing in this recession," according to Steve Banker, Service Director of Supply Chain Management, the principal author of ARC's "Supply Chain Planning Worldwide Outlook".

The Lessons of History: ARC is projecting that the SCP market will shrink by about 4% in the coming year. However, in some ways only shrinking 4% can be considered a success. The market shrank more substantially, approximately 10%, during the last recession. Further, the historical record tells us that during a recession, the shorter the payback period, the better. Only one type of SCP solution--spare parts optimization based on multi-echelon optimization--routinely has a payback period of less than a year.

Most SCP solutions have a payback period of about two years. Further, the two most commonly bought forms of SCP--manufacturing planning and demand management--have their payback period lengthen during a recession.

Demand planning tools have a very difficult time making accurate forecasts when large exogenous events, like a deep recession, occur. It is only after several quarters of history during a recession that the forecast performance will start to improve. Manufacturing planning's payback period tends to lengthen as well. One key form of payback from manufacturing planning is higher throughput, which expands production capacity. However, during a recession, production capacity is often not constrained. Manufacturing planning can be installed for other reasons, to cope with frequent schedule changes, to facilitate order pegging, and to reduce raw material and work in process inventories. But nevertheless, a key impetus for implementing manufacturing planning is diminished.

In many recessions, not all industries continue to shrink. However, in this recession as one examines all the key verticals for SCP--electronics & electrical, machinery manufacturing, food & beverage, chemicals, household & personal care, and retail--none look immune from the impact of the recession. Food & beverage and household & personal care look better poised to resist the impact than the other verticals, as consumers will continue to buy food and diapers. However, even in these verticals consumers will look for lower cost products.

Based on these considerations, why is ARC only forecasting the market will shrink by a bit more than 4% in 2009? We see maintenance revenues as an important firebreak to dramatic shrinkage in the market. Maintenance revenues are far more predictable and stable than software and implementation service revenues. In modeling maintenance revenues we assumed a 95% maintenance retention rate. Further, the proportion of maintenance revenues to total revenues is much higher today than during the last recession.
ARC Advisory Group

The impact of the recession on the Supply Chain Planning (SCP) market will be dramatic. Between 2005 and 2008, the Compound Annual Growth Rate (CAGR) was 11.3% and the SCP market grew to 1.4 billion dollars. We are forecasting that the market will shrink in 2009, will grow only modestly in 2010, and won't resume the historical growth trend line until 2011. We are consequently projecting a five year CAGR through 2013 of only 3.4%.

"During the last recession, software suppliers argued that supply chain solutions helped companies to cut costs, which was of paramount importance during a recession, and thus while their growth might slow, they still expected to continue to grow. Those arguments proved flawed and the market shrank substantially. We expect the same thing in this recession," according to Steve Banker, Service Director of Supply Chain Management, the principal author of ARC's "Supply Chain Planning Worldwide Outlook".

The Lessons of History: ARC is projecting that the SCP market will shrink by about 4% in the coming year. However, in some ways only shrinking 4% can be considered a success. The market shrank more substantially, approximately 10%, during the last recession. Further, the historical record tells us that during a recession, the shorter the payback period, the better. Only one type of SCP solution--spare parts optimization based on multi-echelon optimization--routinely has a payback period of less than a year.

Most SCP solutions have a payback period of about two years. Further, the two most commonly bought forms of SCP--manufacturing planning and demand management--have their payback period lengthen during a recession.

Demand planning tools have a very difficult time making accurate forecasts when large exogenous events, like a deep recession, occur. It is only after several quarters of history during a recession that the forecast performance will start to improve. Manufacturing planning's payback period tends to lengthen as well. One key form of payback from manufacturing planning is higher throughput, which expands production capacity. However, during a recession, production capacity is often not constrained. Manufacturing planning can be installed for other reasons, to cope with frequent schedule changes, to facilitate order pegging, and to reduce raw material and work in process inventories. But nevertheless, a key impetus for implementing manufacturing planning is diminished.

In many recessions, not all industries continue to shrink. However, in this recession as one examines all the key verticals for SCP--electronics & electrical, machinery manufacturing, food & beverage, chemicals, household & personal care, and retail--none look immune from the impact of the recession. Food & beverage and household & personal care look better poised to resist the impact than the other verticals, as consumers will continue to buy food and diapers. However, even in these verticals consumers will look for lower cost products.

Based on these considerations, why is ARC only forecasting the market will shrink by a bit more than 4% in 2009? We see maintenance revenues as an important firebreak to dramatic shrinkage in the market. Maintenance revenues are far more predictable and stable than software and implementation service revenues. In modeling maintenance revenues we assumed a 95% maintenance retention rate. Further, the proportion of maintenance revenues to total revenues is much higher today than during the last recession.
ARC Advisory Group