Already the world's twelfth largest economy, Brazil is a market in the midst of significant economic expansion, with anticipated growth of 5.8% for 2008. In recognition of Brazil's anticipated 5.8% economic growth and the need for supply chain processes to support it, AMR Research, in collaboration with the COPPEAD School of Business of the Federal University of Rio de Janeiro, recently completed the first joint survey of supply chain technology spending intentions for the Brazilian market. With revenue ranging from $100M (USD) to well over $1B (USD), 108 Brazilian companies participated in the study. The approach to the survey was very similar to the one used for AMR Research's annual worldwide spending study (see "The Supply Chain Management Spending Report, 2007-2008"). This enables comparison of the Brazilian responses to those from North America, Asia, and Europe as well as the identification of supply chain spending trends and motivations unique to emerging economies.
Survey results highlight common and unique characteristics of the Brazilian supply chain technology market:
1. Brazilian companies are as likely to buy supply chain technologies as U.S. and European counterparts.
2. Brazilian companies are also much more aggressive in using supply chain technologies to drive top-line growth.
3. IT cost savings are secondary to supporting business process innovation and service-level improvements.
4. Supply chain hardware and application infrastructure spending by Brazilian companies is 20% higher than in Europe and North America, signifying deeper overall growth.
5. Brazilian companies are entering into the collaborative phase of supply chain process evolution.
Brazilian spending intentions comparable to North American and European enterprises. Over two-thirds of Brazilian companies surveyed said spending on supply chain technologies will increase in 2008, which is similar to responses in other geographies. The picture changes slightly, however, from an industry view: half of Brazilian companies in discrete industries said they planned on increased spending for 2008, while two-thirds of process industries said spending would continue to rise during the same period. Service companies indicated the most aggressive growth: retailers, third-party logistics (3PL) providers, and wholesale distributors were almost unanimous that spending would increase at 91% in 2008. The differences in planned spending among industries directly correlate to the penetration level of supply chain technologies within them, with discrete having the highest and service industries the lowest.
We found that size was not an indicator of spending intentions for Brazilian companies. For the purposes of this Report, companies with more than $800M (USD) in revenue are considered large, and ones with less than $800M are small to midsize. Small and midsize Brazilian companies were very optimistic about increased spending for supply chain technology. Only 14% said spending would decrease for 2008, compared to 21% of companies with revenue over $800M. Two-thirds also said they will be increasing their spending for this year, differing slightly from the 63% of large companies reporting the same.
For smaller companies, spending will be targeted primarily at supporting logistics functions. Overall, they showed a lower propensity to adopt planning applications, reflecting the priorities of increasing output and reducing product cost.
Top-line growth big influence on supply chain technology investments. Cost containment ranks high on the priority lists of Brazilian supply chain managers. Increased productivity and reduction of material costs were rated as the top two contributions supply chain management (SCM) could make to help meet corporate profitability goals.
Responses to the survey, though, also reflected the unique growth opportunities found in an emerging market such as Brazil. When asked what the top two business priorities were for the next 12 months, increased profitability and market share were the overwhelming choices. When contrasted with U.S. and European responses to the same question, Brazilian supply chain managers see themselves as much more invested in top-line revenue growth than those in other parts of the world.
With this in mind, it's not surprising that applications built to help plan, optimize, and balance supply with demand were deemed the most strategically important technology investments for the coming year. Company size and industry do influence these choices, however. Large Brazilian companies are by far the most likely to acquire demand planning and forecasting applications. Only 9% of smaller companies rated this category as strategically important. Large companies also identify network design and optimization as well as supply chain visibility and performance as strategically important. Smaller companies, in the process of building their portfolios of supply chain applications from the bottom up, saw manufacturing and distribution planning, sales and operations planning (S&OP), and inventory optimization as the most critical.
A company's industry also plays a key role in determining which applications are strategically important. Companies in process industries rated sales and operations planning as the most critical application. Since the production schedule is set well in advance of manufacturing, the key is to make sure what is being sold aligns with what is being made. Discrete industries wrestle with almost the opposite problem: making sure what is sold can be delivered, so it is no surprise that manufacturing, distribution, and demand planning were identified as that industry sector's top choices. Despite the size of a company or the industry it's in, gearing up for growth is as critical as efficient operations for Brazilian supply chain managers.
Brazilian IT executives prioritize service and innovation. When compared to their counterparts in North America and Europe, Brazilian IT professionals differ significantly in their priorities and strategic goals. While IT executives in other regions cited cost savings as the top priority for the next 12 months, Brazilian IT managers called out improving service levels followed closely by enabling business process innovation as the most important priorities. This was true regardless of industry or company size. The desire to enable business process innovation through technology was most pronounced in large companies, a tendency that is likely driven by the scope of operations, expanding markets, and complexity of business models.
Both discrete and process industries rank the importance of cost savings the same, with the latter more aggressive on IT consolidation. Fewer major supply chain technology projects were planned for companies with $800M or less in revenue, reflecting a preference for an incremental approach to implementing technology.
High percentage of Brazilian software spending is for net-new supply chain applications. Unlike the United States and Europe, where markets are seeing a significant replacement cycle of legacy technologies, the growth of supply chain technology sales in Brazil is powered by companies acquiring applications new to their organizations. In the past 24 months, a third of Brazilian companies made supply chain technology investments to fill functional gaps that were not yet automated. Another 39% said investments were made to support current service requirements. Only 11% of Brazilian companies bought software to replace older applications that have become obsolete or too expensive to support, with the majority of those companies having over $800M in revenue.
Companies in process industries showed a higher inclination to buy technology to fill functional gaps. Those in discrete industries were marginally more willing to buy technology to support current service requirements.
Contrast these results to the mature markets of the United States and Europe where the replacement rate of existing applications is much higher. Brazilian survey respondents were roughly equal to their European and U.S. counterparts as far as the implemented supply chain application types go. However, these findings tell us their functional footprints are not as wide and that new opportunities, such as rapid expansion of Brazil's middle class, are forcing them to extend their capabilities. In another indication of market growth, Brazilian IT managers also say they will spend an average of 31% of their budgets on hardware and application infrastructure, a full 20% more than those in the United States or Europe.
Brazilian supply chain models moving from anticipation to collaboration. Survey responses show the evolution of the approach to supply chain management in Brazil. When compared to the Demand-Driven Supply Network (DDSN) capability model (see "Transforming Organizations With DDSN: A Capability Roadmap"), Brazilian companies have moved from the reactive to the anticipatory stage, where companies, mostly focused internally, use planning and forecasting techniques to determine demand for their products. There are indications companies are moving to the next stage, collaboration, which requires a rethinking of supply chain processes and, of course, the technologies to support them.
When asked about future investments in supply chain applications, respondents listed the following as leading initiatives:
1. Improved analytics
2. More strategic approach to network design
3. Creating visibility to supply chain events and building better tools to manage performance
4. Vendor-managed inventory
5. Collaborative forecasting
All these supply chain applications build dependencies in some way within a company's trading community and reduce the insularity that comes from focusing internally. Planned spending in these areas promises to be aggressive, particularly among large companies and those in discrete industries.
Where will Brazilian companies turn for support of their transition to a more collaborative business model? While ERP vendors, particularly SAP, appear to dominate the supply chain application landscape in Brazil, survey respondents did tell us they would consider alternatives. As we found in the spending survey of the United States and Europe, Brazilian companies would consider best-of-breed vendors or in-house development to deliver capabilities such as collaborative forecasting, network design and optimization, transportation management, and vendor-managed inventory. The majority of survey respondents saw their ERP vendors providing software to support service parts planning, supply chain visibility and analytics, demand and manufacturing planning, and order management. Roughly 50% of respondents said they would look to ERP vendors for S&OP functionality.
Want to win in the Brazilian market? Demonstrate commitment? For technology vendors wishing to enter or realize a greater share of the Brazilian supply chain technology market, country presence is valued by prospective customers much more highly than delivering services through a reseller network. In our research, we found several examples of U.S.-based software companies that launched direct sales campaigns in Brazil, only to leave after several years, frustrated by the challenges of market development in the country. Their customers felt abandoned, and prospects quickly examined other alternatives after experiencing the apparent lack of commitment to establish a Brazilian market. Technology companies that have been long established in Brazil, like SAP, have benefited from the goodwill and confidence their presence generates. Not unlike other geographical regions, Brazilian companies expect a level of commitment from their technology vendors, demonstrated by establishing a local presence that is as serious as the commitment the vendors want them to make to their technology. The survey tells us Brazilian companies are ready and willing to buy supply chain technologies, but anecdotal evidence tells us not with an arm's length relationship. Success in the Brazilian market comes by conforming to cultural norms and business practices of the country, and there are no shortcuts to circumvent the effort required to do so.
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