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Among supply chain software vendors, the battle for the customer's pocketbook continues to rage. But there's another, less public fight going on-within buyers' own organizations.
There's little doubt that businesses are seeking to consolidate a myriad of information technology systems, especially as their operations take on a more global scope. Outsourcing, acquisitions and organic growth have combined to ratchet up the complexity of most supply chains. Companies are looking to simplify their IT infrastructures to the greatest extent possible, whether by reducing the number of instances of a particular piece of software, or building more functionality into fewer applications.
How they choose to accomplish this depends on who's in control of software procurement decisions. In one corner stands the IT organization. In the other, those who oversee the various business functions, such as marketing, manufacturing and logistics.
The priorities of those two areas can diverge sharply. "If you're a chief information officer, you're looking at the cost of ownership," says John Fontanella, vice president of research with AMR Research Inc. "The natural tendency is to consolidate. If you're on the line of business, you just want functionality delivered to you with flexibility and responsiveness."
Hence, the ongoing debate between two distinct kinds of software sellers: the "enterprise" vendor, who offers a menu of supply chain products tied to its larger enterprise resource planning system, and the "best-of-breed" player, who specializes in applications for discrete tasks such as transportation, warehousing and supply chain planning. In general, the ERP side provides fewer bells and whistles on the supply chain side, but promises a greater ease of doing business, since the buyer has to deal with fewer vendors and integration headaches. Best-of-breed means deeper functionality, yet more checks to write and the possibility that some applications won't mesh easily with the ERP backbone.
Over the past decade, ERP vendors have appeared to dominate their best-of-breed rivals, with giants such as SAP AG, Oracle Corp. and Infor Global Solutions either developing supply chain applications in-house, or gobbling up providers of those tools. SAP, the most conservative in terms of acquisitions, acquired Lighthammer Software Development Corp., a vendor of collaborative manufacturing applications; Frictionless Commerce, for supplier relationship management; and Khimetrics Inc., for retailer forecasting and pricing. Oracle went shopping and bagged PeopleSoft, a rival ERP and supply chain vendor which had itself absorbed mid-market specialist JD Edwards; Siebel Systems, the leader in customer relationship management; and Hyperion Solutions, for business analytics, among other deals. Infor picked up SSA Global Technologies, which had previously acquired ERP developer Baan and supply chain execution seller Provia Software.
One factor driving IT consolidation is the growing importance of supply chain management applications, says Krish Mantripragada, head of solutions management for SCM and radio frequency identification with Walldorf, Germany-based SAP. "SCM started out as a separate function a decade or so ago," he says. "Now it has emerged to become the core business function of the enterprise." Companies are responding with efforts to create core platforms that harmonize data and applications. Such a philosophy tends to favor the ERP vendor.
Recent developments, however, have altered the competitive landscape. A handful of best-of-breed providers are winning new business and holding their own against the ERP giants. And line-of-business managers are gaining traction in their struggle to retain specialist vendors.
Business Is Booming
ERP and leading best-of-breed vendors have one thing in common: they're on a roll. After years of sluggish sales, with the bursting of the dotcom bubble and the torpor that followed the Y2K hysteria, the business software sector has been posting strong results. Oracle, IBM and Microsoft have all reported higher revenues in 2007, as have best-of-breed players such as Manhattan Associates, Logility and RedPrairie. For the most part, corporate spending on supply chain IT is on the upswing.
The reason for the surge is twofold. In addition to the effects of a stronger economy, companies that stopped buying software after 2000 are seeing a fresh cycle of innovation by vendors, says Jim Hoefflin, chief marketing officer and executive vice president of Waukesha, Wis.-based RedPrairie Corp. Buyers are in the market for systems that can manage more complex supply chains, even as they work to consolidate the number of vendors with whom they deal.
The reduction of choices in the software marketplace has been accompanied by a desire of buyers to reduce their global IT infrastructure. But it isn't all about cost, says Fontanella. The real driving force is complexity. "Having five integrated systems versus 50 islands of information made much more sense," he says. Companies can cut down on their data centers, integrate systems and get access to critical information much more quickly.
That doesn't mean a dozen instances of SAP within a given organization can be whittled down to one. But five or six versions, delineated by geography or market segment, are achievable. "In areas such as sales and operations planning, the ability to bring together a global view, but still have local selling or geographic granularity, is very important," says Karin Bursa, vice president of marketing with best-of-breed vendor Logility Inc.
In any event, the IT function isn't winning every argument about software procurement. "In a very decentralized company," says Fontanella, "the CIO can ask everyone to update. But if that line of business doesn't see a payback, it's just plain not going to do it."
Sometimes it's a matter of who holds the purse strings. "If a distribution vice president has the money to spend on transportation or warehouse management, then he's going to drive toward a best-of-breed decision," says Joe Dunlap, senior manager in the supply chain practice of Accenture. "If IT has it, they will have other priorities, around centralization and support." In such cases, vendor consolidation "is mostly a game of procurement and how much I can save."
IT has a stronger voice in cases where companies have already built their software platforms around an ERP vendor. When they haven't, "the line of business is probably winning," says Dunlap.
A recent survey by the Aberdeen Group shows how complicated the issue has become. A healthy 38 percent of respondents said their philosophy was to focus on "upgrading current packaged supply chain applications from our ERP or SCM [supply chain management] vendors." At the same time, nearly a quarter said they were "looking to use new packaged applications from a best-of-breed vendor to extend our current capabilities."
With survey respondents permitted to check more than one category, there is likely some overlap between those two statements. And the responses aren't mutually exclusive. But they do suggest that companies revamping their supply chain IT programs are pulling in different directions. "There is always friction between line-of-business and IT teams," says Nari Viswanathan, research director of Aberdeen's supply chain and logistics practice.
He believes IT departments still have more of a say than the line of business in what kind of software is purchased. Companies continue to be attracted to package deals from ERP vendors. But that doesn't mean they're willing to settle for less functionality. They want the best of both worlds: the simplicity of dealing with fewer vendors, and the depth of best-of-breed products.
In response, even the largest software vendors are trying to reposition themselves as best-of-breed providers, says Viswanathan. They tout their expertise in both vertical and functional areas. Infor, for example, focuses in part on the food and beverage sector, while SAP claims its demand-management application for the chemicals industry is on a par with best-of-breed applications.
Proof that true best-of-breed vendors are losing ground can be seen in their diminishing numbers, Viswanathan says. Manugistics, one of the strongest providers of stand-alone software for supply chain planning, was snapped up by JDA Software Group Inc., while rival i2 Technologies has struggled to reverse several years of adversity. "Across the board," he says, "I see challenges being faced by best-of-breed providers who really cater to the higher end of the spectrum, the tier-one companies."
Others disagree. Jeff Cashman, senior vice president of business development with Atlanta-based Manhattan Associates, says companies are taking a fresh look at discrete SCM applications, having withstood a multi-year "digestion process" of ERP systems. "Business is now clamoring for the CIO and his team to help solve problems that are focused around the supply chain," he says. New challenges include the risks associated with outsourced manufacturing, homeland security, tainted or unsafe products, and a general lengthening of supply lines.
CIOs want to drive down the total cost of IT ownership, and trimming the number of vendors is an obvious way to do it. But some software providers are more interested in stabilizing their customer base and generating maintenance revenue than in solving fresh problems, Cashman suggests. Buyers, meanwhile, can't wait for ERP vendors to release viable execution software for warehousing and transportation, so they go with a best-of-breed vendor such as Manhattan.
"If a customer views its supply chain as strategic, it's going to need that deep domain [expertise] and the applications to solve that business problem," Cashman says. Top executives are mandating a rapid return on investment for systems that address such critical processes as labor, fuel usage and inventory optimization. As a result, he claims, "nine out of 10 times, the line-of-business people are winning."
The experience of Atlanta-based Logility belies any notion that best-of-breed vendors are on the ropes, says Bursa. Her company signed up a record 111 new customers last year. They were not content with the "good enough" attitude that buyers have exhibited toward ERP offerings in the past.
"For companies whose supply chain networks are differentiators, [and who want] the ability to have the lowest total cost of goods, accelerate new-product introductions, and have better visibility, it would appear that ERP systems are not good enough," Bursa says.
Michael Levi, director of solution strategy with Dallas-based i2, questions whether enterprise vendors have the expertise to delve deeply into SCM. They must master such elements as planning and forecasting, procurement collaboration, order fulfillment, visibility across a multi-partner supply chain, and execution tools. "Supply chain is its own unique category," Levi argues. "It's a completely different structure."
Even when a company is buying multiple products from the same vendor, those components might not be integrated, Bursa claims. An ERP vendor's menu of extended applications might be an amalgam of disparate systems that were picked up through a series of acquisitions. It could take months or even years of redesigning before the pieces work well together.
Enterprise vendors aren't the only ones out to consolidate multiple applications. Best-of-breed providers have been picking up additional functionality as well, notes RedPrairie vice president Tom Kozensky. Stand-alone warehouse management system sellers, for example, are growing increasingly rare. At the very least, they have incorporated transportation management into their service menus, for a more well-rounded approach to supply chain execution. Order fulfillment, inventory optimization and demand planning are among other capabilities to be rolled into "best-of-breed" suites. Some of those providers are becoming so multi-faceted that the line between enterprise and best-of-breed has begun to blur.
Such moves aren't merely a way to compete with the ERP giants; they're a direct response to market demand. "Our customers now have supply chain corporate executives," says Kozensky. "They expect integration between these applications. It just forces all the niche applications out."
The Era of On-Demand
Also changing is the relationship between a company's size and its choice of software provider. It used to be that small to mid-sized businesses would rely mostly on enterprise vendors for multiple applications, while Fortune 500 companies would seek deeper functionality among the best-of-breed community. Not anymore, says Levi. The arrival of "on-demand" software, hosted by vendors, lowers the up-front cost of applications for smaller companies. "It becomes more of a 'pay-by-the-drink' proposition, so that organizations can look at this as an operating expense rather than capital expense," he says.
At the very least, the change gives smaller companies more choices. "Some organizations are saying, 'We don't necessarily need the Ferrari,'" says Levi. "It makes sense for them to have a simple solution." But others prefer the specialized nature of best-of-breed software. The on-demand option could alleviate the cost and management concerns of IT departments.
Even Viswanathan isn't writing off best-of-breed sellers yet. The maturing of service-oriented architecture (SOA)-a way of designing software so that unrelated applications can be more easily integrated into a company's IT infrastructure-has breathed new life into the best-of-breed option.
Just about every major software vendor is incorporating SOA into its applications today. Some team up with particular ERP vendors so as to effect an even tighter symbiosis with the "enterprise" backbone. For example, Philadelphia-based MCA Solutions is the exclusive partner of SAP in the area of spare parts planning and optimization. The companies market the capability jointly and share the revenues, says Bob Salvucci, MCA president and chief executive officer. SOA makes the relationship possible.
Levi says SOA brings a "plug-and-play" capability to complex supply chains, with their array of separate systems. By combining a single platform with applications that meet a variety of specific needs, companies can do a better job of adjusting to constant changes in suppliers, products and customer demand.
SOA is still too new for its impact fully to be felt, says Dunlap. The potential remains for SOA services to be deployed throughout an organization, so that data flows and processes can serve more than one purpose. For example, an airline with its own warehouse might use a related slotting application to locate other assets on the tarmac. Or labor-management software might oversee multiple departments, from distribution functions to call centers.
SAP agrees that SOA can be a boon for the best-of-breed provider. It allows a company to support applications from different vendors without juggling multiple software platforms, says Stefan Theis, product manager for supply chain planning. In any case, SAP views best-of-breed vendors as potential partners, where their capabilities don't conflict with those of the ERP provider. It sees no problem with combining disparate applications to serve a larger purpose.
"That's a win-win situation for end customers, who can consolidate their IT infrastructures with a single set of master data and core applications, and at the same time address a variety of specific problems to meet the needs of specific industries or locations," Theis says.
SAP develops customer "road maps" which embrace both its own applications as well as partner offerings that fill "white spaces" in its product line, adds Mantripragada.
Which Way to Go?
For an enterprise vendor, the decision comes down to assessing the cost of acquiring in-house capability versus the potential market for it. The business of spare parts planning is currently valued at around $1bn worldwide, notes Salvucci-not enough to justify an investment by SAP in that sector. What's more, the nature of the parts business is highly complex and demanding, with big customers such as Boeing and Cisco. "If it could solve those problems," asks Salvucci, "how much would an ERP vendor have to invest to be competitive?"
In one respect, SOA benefits enterprise and best-of-breed provider alike, says Bursa. The architecture eases the upgrade process, so that companies don't have to wait for a major upgrade of their ERP systems before obtaining better functionality from related supply chain applications.
Redwood Shores, Calif.-based Oracle is well-known for insisting that it can meet most of a customer's needs through in-house applications. But the company has softened that stance in recent years. Maha Muzumdar, vice president of supply chain marketing, says Oracle "very strongly believes" in the SOA approach. The technology leads to better integration between software, more flexibility in business processes and a higher quality of architecture, he says.
Muzumdar outlines three broad approaches to the question of supply chain IT infrastructure. One is the reliance on a single system which supports most, if not all, of a company's needs. A second is the wide-scale deployment of best-of-breed applications to address business needs. The third is the hybrid approach, involving a single, standardized platform which can support best-of-breed systems when needed. In such instances, Muzumdar says, 80 percent of an organization's infrastructure might be standardized, with the remainder filled in by discrete applications such as logistics and demand management.
And which model is prevailing in the business world today? "It's a company-to-company scenario," says Muzumdar. "Where IT leadership is more influential, you're going to find a move toward a single infrastructure. When it comes to business leadership, it's more about making sure you have the best functionality, information and processes to address specific needs."
The changing nature of global supply chains virtually ensures that no single vendor will ever service all of a company's needs. "There will be peaks and valleys in terms of innovative companies entering the market," says AMR's Fontanella, "but that's largely dependent on the economic climate."
AMR Research, www.amrresearch.com
i2 Technologies, www.i2.com
Manhattan Associates, www.manh.com
MCA Solutions, www.mcasolutions.com
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