Supply-chain software and service vendors long have leveraged their experience and capabilities in particular industry segments. But as customers become more cautious with their budgets and more demanding of rapid return on investment, vertical strength is increasingly crucial to market success.

"Customers now want less than 12 months' payback so there isn't time for a lot of customization," says Chris Jones, executive vice president of corporate development and marketing at SynQuest, a supply-chain software company based in Atlanta. "They want something that can quickly solve their business problems, and they want the people who walk in the door to actually know what their business is about."

Buyers today are jaded by their past experiences, adds Scott Zahn, vice president of business development at Optum, a supply-chain execution systems vendor based in White Plains, N.Y. They have probably been "woefully underwhelmed" by prior software implementations, he says, and are looking for the kind of credibility that comes from successful projects at like companies. "There is safety in numbers," adds Kelly Vizzini, vice president of corporate marketing at Optum. "In this climate, everyone is risk averse and they want to go with what they know will work."

This trend applies to third-party logistics providers (3PLs) and consultants as well. "If you are one of the world's largest computer manufacturers and you have 20 requests for quotes coming out over the next 36 months, you want to be dealing with a sales professional who really understands the exigencies of your business," says Chris Liberty, group vice president for consumer products at APL Logistics, Oakland. "This customer will say, 'Don't send me a guy who worked on shoes yesterday and Rice Krispies the day before and bed sheets the day before that. I want a guy who understands what goes on in the computer world.'"

	"Software today is highly configurable, but you have to have the vision to drive it like a Ferrari." - Stephen Banker of ARC Advisory Group

Deloitte Consulting also has seen "a huge emphasis" on the part of many clients to have their accounts served by people with specific and deep expertise in their industry segment, says Chicago-based Jim Harms, a partner in Deloitte's supply-chain practice. While Deloitte is responding to that demand, Harms questions its rationality. "I would profess that we have individuals who understand the concepts of the supply chain and logistics in depth and that these are highly leverageable in various industries," he says.

Rational or not, vertical specialization is fast becoming a market requirement. For customers the benefits are clear: Industry-specific solutions usually translate into faster implementation and quicker ROI with less risk. But providers also benefit from this trend. Vertical expertise enhances opportunities to cross-sell services and software and having a series of strong reference accounts within a vertical helps significantly in driving sales with new customers. Moreover, as a vendor gains additional experience in the same vertical, it increases its familiarity with an industry's business processes and functional requirements - knowledge that translates into better products and services.

There can be a downside to this approach, however. If a vendor tries to adapt the same basic software code to too many verticals, "then you are likely to run into software bloat," says Stephen Banker, director of supply-chain solutions at ARC Advisory Group, Boston. "When you are trying to serve too many verticals, the software development process becomes very, very expensive. You have all these features and functions, some of which apply to one industry and some of which apply to others, and you end up with this massive piece of software. It then becomes more costly and time-consuming to implement and that can work against you."

Banker thinks industry solutions work best when vendors specialize in a small group of related verticals. He cites Aspen Technologies' supply-chain focus on the process industries and Manhattan

Associates' concentration on execution software for consumer packaged goods manufacturers and retailers. Such vendors, he says, are likely to have developed the deepest domain expertise, which is as important as the product itself. "Software today is highly configurable and can do a lot of stuff, but you have to have the vision to drive it like a Ferrari," he says. "That is based on domain expertise and smart people that can talk intelligently about what is possible in this vertical."

Differentiating Factor
Domain expertise is the true differentiating factor, say experts, because solving supply-chain problems depends on thoroughly understanding an industry's specific business processes and practices. For that reason, there is a lot of cross-pollination of personnel between industry and vendors/providers. Richard Cardozo, director of industry solutions at Industri-Matematik International (IMI), for example, worked with grocery and discount department stores in IT functions for almost 15 years before moving to the Mt. Laurel, N.J.-based software company. IMI provides order management and replenishment solutions to high-velocity retailers like grocery chains. "My background is one of the things that makes me valuable both to my company and to our retail customers," Cardozo says. "I can talk to retailers in terms they understand because I have been in their shoes. I understand their business and their pain."

Understanding the business means having a solid grasp of processes and workflows particular to that industry. "You have to start off with a very solid foundation of domain expertise about the supply-chain processes that are represented in an industry and that you are trying to solve," says Dan Gilmore, senior vice president of marketing at McHugh Software, Waukesha, Wis. McHugh, which provides warehouse, transportation and labor management solutions, has modeled the logistics flows for verticals that include food and beverage, packaged goods, consumer hard goods, high-tech and 3PL. McHugh pays close attention to the different data requirements for each of these verticals. For example, says Gilmore, "businesses in the high-tech arena often have substantial requirements for multi-level bill-of-materials tracking, where there are serial numbers on top of serial numbers on top of serial numbers. This is very different from the retail sector, which is different from the process industries, where you might allocate inventory as a function of catch-weight rather than as a function of pieces. So a substantial part of the work for any supply-chain vendor is the underlying data model that represents the data constructs of a specific vertical."

Dallas-based i2 Technologies uses its domain knowledge to "map the key pain points in an industry," says Andy De, director of marketing for supply-chain management. All of these requirements are then worked into the solution road map for that vertical, which ultimately is delivered as a template for that industry. This is a very well defined process that i2 has developed over the past 14 years for the 22 verticals it serves, he says.

Templates are a key component of software verticalization. "The idea is to embed industry best practices into the solution as basically a series of work- flows," says De. Templates also must be flexible enough to allow for customization to the customer's individual business practices, he says, "so the client does not have to change his business model to fit with i2."

Cyrus Hadavi, CEO of Adexa, Los Angeles, estimates that 70 percent to 80 percent of a company's business rules typically are representational of all businesses operating within a vertical, and it is these that are incorporated into templates. "What it amounts to is that with templates you can get 80 percent of the functionality you need with a 20 percent effort," he says. "Then you can see what else you want to add in the way of additional functionality or customization that would give you a competitive edge."

Defining Verticals
Precisely defining verticals can be tricky because companies even within the same industry can be very different. Many vendors have a retail vertical, for example, but within retail there are a wide variety of supply-chain practices and processes. A solution that works for one type of business will not necessarily work for another.

In its retail vertical, IMI focuses on grocery and "grocery-like" businesses - those that require high volume replenishment of fairly standard products. "Anything that has style, size and color attributes to it, we stay away from," says Cardozo. "That's a market we don't want to go near because the way you forecast and replenish is entirely different."

Similar differences are evident in a sector like soft goods, one of the verticals that Adexa targets. Adexa defines soft goods as encompassing textile manufacturers, apparel companies, certain footwear manufacturers, segments of the home furnishings industry, and floor coverings, according to Gary Narin, vice president of the soft goods vertical. A major factor uniting these companies is a common supply base, an important consideration for Adexa, whose software enables supplier collaboration. But "apparel retailers have specific attributes that home furnishing manufacturers would never understand," says Narin. To manage this problem Adexa developed sub-verticals within the broader industry category.

This is a tactic adopted by many providers. At APL Logistics, for example, consumer goods is treated as one very large vertical, but Liberty breaks it down into three major sub-verticals: electronics, consumer durables and consumer packaged goods. Retail and apparel constitute a separate vertical, along with government accounts and automotive.

Similarly, SPS Commerce of St. Paul, Minn., which specializes in retail solutions for mid-sized companies, has developed a specific sub-vertical for sporting goods retailers. SPS has landed several clients in this category, including REI, Golf Galaxy, Galyans, Gander Mountain and Sport Chalet. "The thing with sporting goods is that there are a lot of small, mid-sized suppliers that make up a large component of the supply chain," says Jim Frome, executive vice president and chief strategist. Moreover the retailers in this sector "are not huge and they like the fact that we are a hosted service."

SPS sells to a problem that smaller retailers have in terms of exchanging information with their suppliers, many of which are still using the fax machine. "We help small and mid-sized suppliers get hooked into our service and, through it, to retailers," says Frome.

SPS further leveraged this vertical by forming a partnership with the National Sporting Goods Association. "There is always a key set of influencers" in an industry that can be helpful, Frome says. After a few customers are landed, a vertical gains its own momentum. "Once you are in a niche within retail it sort of develops on its own," says Frome. "For example, in sporting goods we have 3,000 suppliers that have been run through our program. When the next sporting goods retailer comes along, it says, 'well, gee, you already have my suppliers on your service, why wouldn't I pick you?'"

The "snowball effect" is how most verticals grow. One key customer partners with a vendor or provider to solve a specific problem and helps develop the solution. The vendor then uses that experience to help sell other similarly situated companies.

After solving an inbound-planning problem for Ford Motor, for example, SynQuest signed a deal with Honda for the same solution. But no two companies ever do things precisely the same way. Ford uses cross-dock, for instance, while Honda doesn't. The software is flexible enough to adjust for these changes while still solving the overall problem, says Jones.

On rare occasions customers and providers partner to develop a vertical solution with the specific intent of marketing it to a larger audience. This was the case when General Motors and transportation giant CNF created the new joint-venture company known as Vector SCM. Vector will use the expertise of CNF's operating units - Con-Way Transportation, Emery Worldwide and Menlo Logistics - to take over management of GM's entire automotive supply chain, a $6bn operation. Solutions developed during the two to three year phase-in period will then be marketed to other companies. "Our vision and strategy is definitely to commercialize Vector," says COO Greg Humes. "The whole purpose of the joint venture is to first take care of GM, to get savings and value for GM," but then to leverage what is learned in that process, he says. "Vector will definitely commercialize its product sets and services for other customers, not only in automotive, but outside the industry."

Most providers eventually look outside their core vertical for continued growth. "Our marketing group spends a good amount of their time understanding what we can do with our product because there is a direct correlation to revenue and market share with verticalization," says Optum's Zahn. "If you specialize in one market, you get x amount of revenue; if you go to two markets you theoretically have revenue of 2x. And the company wants to grow, so we always think about that."

Crossing to another vertical requires thinking in terms of the basic problems that a solution is designed to solve. In Optum's case, says Zahn, that consists of bringing efficiency and optimization to a piece-pick environment, which is labor intensive, requires complicated picking schemes, is prone to error and generally more difficult to execute than traditional pallet-picks. Telecom and aerospace are two industries that share these properties with Optum's core verticals of high-tech and electronics, Zahn says, and are sectors that Optum "is thinking about right now."

"What we look for are similar pain points among industries," says i2's De, noting that i2's core vertical also is high-tech. "The high-tech industry is marked by very compressed product life cycles and rapid product obsolescence," he says. "So we look for other verticals where we see similar pain points and customers holding large amounts of inventory that are rapidly going obsolete." It's also important, he says, to determine whether a newly targeted industry is manufacturing intensive or distribution intensive. "Then we see which of our solutions we can bring together within a template that is integrated and can be deployed very rapidly and that conforms to this industry and embeds best practices."

"To make the leap from one vertical to another you have to look at both the vertical industry nuances and specifics,"' says McHugh's Gilmore. "Then you look at the process model itself, which sometimes cuts horizontally across different verticals. For example, there certainly is a level of similarity between food and beverage and chemicals in terms of their need for complex lot control and their logistics flows in and out of distribution centers."

The leap to a new vertical sometimes requires a leap of imagination. After SynQuest developed an outbound scheduling solution for Hahn Furniture, an office furniture maker, it began to wonder if the solution would also work for automakers. "This is not a situation where you have a general product that you warehouse and then move around," says Jones. "This is where the customer orders a specific product, that could already be built or could have to be built, and that is going to be highly configured, where there might be some value-added processes that go on before it gets to the customer, like at the dealer or distributor. Both of these industries have complex coordination issues and complex capacity constraint issues through their supply chain." SynQuest since has sold the solution to Ford and Honda.

Manhattan Associates recently targeted the 3PL industry as a new vertical, though the new Manhattan business unit will focus on 3PLs that primarily serve retail and CPG companies, Manhattan's core vertical. "In our research we determined it wasn't just the functionality of the software, it was the operational processes that make you business friendly to 3PL clients," says Susan Rider, vice president of sales and leader of Manhattan's 3PL business. "It made a lot of sense to us to develop a separate business unit that would meet the needs of 3PL companies for a much more customer-service centric approach."

It is rarer, particularly in these times, for manufacturers or retailers to look beyond proven vertical solutions when outsourcing or purchasing IT, but consultants say this riskier strategy can provide the best results. Harms of Deloitte Consulting says he frequently encourages clients to transplant a technique or approach from a completely different industry. "There are always naysayers who only feel safe with what has been shown to work," he says, "but when these individuals win out, their companies end up being second- or third-level performers. Successful industry leadership is typically very, very adaptive of best practices and capabilities, no matter where it comes from."

Banker agrees. "If you are lagging in your industry and know you are not as sound operationally as your competitors, there is a great advantage to buying from a company that understands your industry, understands the best practices and can help pull you there," he says. "But when you want to set the benchmark, it may be that you need to do something in a new way. You may need to borrow ideas from a different vertical."