Companies that implemented supply chain planning and/or enterprise resource planning software around the year 2000 are entering an inevitable upgrade cycle and they are finding a very different market than existed eight to 10 years ago. Then, a host of best-of-breed vendors dominated the supply chain solutions landscape and supply chain offerings from enterprise resource planning vendors were typically dismissed as "light" versions, lacking the robust functionality needed to support sophisticated and complex supply chain operations.
That picture is dramatically different today. Not only have the ranks of best-of-breed vendors dwindled markedly-many having been acquired by ERP companies- but ERP vendors have, over time, developed additional and more robust functionality. The result is a much stronger competitive product for ERP players in many core supply chain areas.
"Those ERP vendors that have acquired best-of-breed functionality are right up there in terms of competitiveness, which is making it tougher for the remaining stand-alone best-of-breed vendors to gain mind share," says Cindy Jutras, vice president at Aberdeen Group, Boston.
ERP vendors also have gotten much better at selling their add-on applications, says Jim Shepherd, senior vice president-research at AMR Research, Boston "They used to be terrible at it," he says. "They didn't have people who could speak the language and many sales reps really weren't very interested in these solutions because they represented a relatively small sale compared with the big ERP sale. But they have really honed their message and now are much more formidable competitors."
"Five years ago, ERP vendors would have dropped out of the selection process pretty quickly with reasonably sophisticated customers, but today that's not the case," says Bill Frey, senior executive in the supply chain practice at Accenture, New York. "We see companies taking a much harder look at whether the new offerings from ERP vendors will meet their needs."
ERP financial results reflect this improvement, with license revenue for the group as a whole up 19 percent, according to research by AMR. Eight percent, or $924m of license revenue, came from supply chain management solutions. Product lifecycle management and supply management accounted for an additional 5 percent or $635m. As a comparison, license revenue for the overall supply chain solutions market was estimated by AMR to be around $2bn for 2007.
Stronger competition from ERP vendors certainly doesn't mean that the best-of-breed market is going away, says Shepherd. "ERP vs. best-of-breed is still a relevant question that comes up with our clients on a regular basis," he says. "We hardly ever see companies embracing a total best-of-breed strategy as might once have been the case, but they often look to best-of-breed vendors to solve specific and particularly complex problems."
Moreover, ripping out existing best-of-breed systems is not something companies will be willing to do without compelling reasons, notes Jutras. "Even if they were willing to do that, there are virtually no single enterprise applications today that can fill all of a user's needs. Some combination of best-of-breed and integrated suites will be with us for some time."
When making decisions on these technology investments, however, the choice between ERP and best-of-breed is not always clear-cut. And there often are competing pressures within an organization.
IT departments generally tend to favor the standardization and simplicity of a single-source ERP solution, while business managers often favor best-of-breed functionality. In the past two to three years, decision-making authority seems to be shifting more toward business managers, but the IT department often retains budget control. While conflicts inevitably occur, these two factions more often appear to be meeting somewhere in the middle, says Gordon Fleming, chief marketing officer at QAD, an ERP provider based in Santa Barbara, Calif., that targets mid-market manufacturing companies. "Line of business people are a lot more IT savvy these days and the CIO no longer is seen as someone sitting in a dark corner running an evil data center," he says. "Generally we see pretty good dialog going on there."
The question of best-of-breed vs. ERP in terms of supply chain solutions is important because of the impact the supply chain has on a business's success, says David Johnston, senior vice president at JDA Software, Scottsdale, Ariz. "The supply chain is the largest cost on a company's financial books when you consider that it includes materials, production and capacity management, asset utilization, labor, and all the costs associated with inventory, transportation and logistics. It also is a big influencer on the revenue side because it determines the speed at which a company can bring new products to market. So when it comes to delivering profits and customer satisfaction and competitive advantage, the supply chain is crucial," he says.
Karin Bursa, vice president of marketing at Logility, a supply chain best-of-breed vendor located in Atlanta, agrees. "We are in a horrible economic market right now, but if a company is going to make IT investments, the supply chain is one of the best places to do that," she says. "In fact, operating your supply chain efficiently in a bad market is even more important than operating it efficiently in a great market."
Best-of-breed providers excel at providing that competitive edge, she says, "because of the depth and agility of their solutions."
Johnston argues that the best-of-breed advantage begins with architecture. "ERP architecture is a highly scalable but rigid transaction execution system that is not built for optimization, whereas our whole focus is around optimizing the supply chain across all its disciplines," he says. With its 2007 acquisition of Manugistics and proposed acquisition of i2 Technologies - two companies that had long vied for leadership in the supply chain space - JDA is looking to build a comprehensive supply chain solutions suite that takes a page from both best-of-breed and ERP playbooks. "Our goal is to offer both superior functionality as well as seamless integration of components," he says. "Basically, we will provide a best-of-breed solution that is both modular and integrated." Functional modules will be deployable based on the priorities of a client's business and, because the modules are integrated, the benefits of optimization will be available across the supply chain, he says. "This means that when demand changes, that information can flow back to inform decisions around production, allocation, inventory and distribution - all the way to decisions on materials procurement."
Bursar also stresses that supply chain solutions are "architected very differently than ERP applications. They are planning systems, they are scenario based, and they are intended to provide users with multiple views of what the future might look like. ERP systems are built to handle transactions," she says.
ERP Vendors Note Changes
ERP vendors say that this argument may have been true a few years ago, but no longer holds water. The two biggest ERP leaders, SAP and Oracle, have invested millions in ongoing efforts to move to a flexible, open architecture and are employing services-oriented architecture (SOA) to integrate their best-of-breed acquisitions as well as solutions developed in house.
Oracle, after having acquired best-of-breed providers in demand planning (Demantra), logistics (G-Log) and product lifecycle management (Agile), claims to have best-in-class optimization capabilities in these areas, which it describes as "the three high growth areas in the supply chain." Chris Farinacci, vice president of applications marketing at the Redwood Shores, Calif.-based company, notes that Oracle also continues to invest heavily in its supply chain portfolio, having announced the launch of five new supply chain products at its recent OpenWorld conference.
Oracle also is changing its delivery model to decouple supply chain solutions from its core ERP applications. "We clearly see that companies across the board do not want to deploy using a 'big bang' model," says Farinacci. "They want to deploy best-in-class capabilities to solve whatever their critical business problems are, get some return on investment, and use that return to fund phases two and three. We are responding to that by delivering modular solutions."
SAP also gets this message. It now is offering solutions like Extended Warehouse Management that are built using service-oriented architecture and can be deployed separately from its core ERP suite. SAP's use of SOA also enables users to "put smaller things on top of the software, to add process steps, to modify process steps or even to bring in new technology or new smaller solutions without violating the existing environment," says Stefan Theis, vice president of supply chain solutions management at SAP, Blue Bell, Pa. "That is how we deliver flexibility and adaptability to our clients."
"We are seeing quite a bid of unbundling of products among ERP providers," says Gopikrishnan Ramachandran, a portfolio head with the supply chain management practice at Infosys, a global consulting, integration and software company based in India. "SAP and other vendors are offering modules in areas like demand planning and supplier relationship management that are built to integrate with their core products but that also stand alone and can be implemented separately."
There clearly are areas, however, where ERP vendors either don't choose to offer a product or have a product that does not meet the needs of many buyers. One of these is in managing complex warehouses, an area with such thriving best-of-breed vendors as Manhattan Associates, RedPrairie and HighJump.
"I'd be the first to say that if a company's ERP warehouse management can handle its operations, then there is no reason for them to be talking to us," says Patrick Maley, vice president of marketing at RedPrairie, a supply chain execution vendor based in Waukesha, Wis. "But there are a lot of companies that do need more complex solutions."
Maley says a good way to judge is by looking at picking operations. "If a company is mostly doing pallets in and pallets out, they have a low-complexity facility that ERP can generally handle. But when you get into operations with a high number of piece picks, overall high volume, lots of material-handling equipment and lots of value-added work before a product goes out the door, you have added a ton of complexity. These are operations that ERP solutions do not address." Moreover, integrating to a complicated material-handling system requires very specialized expertise, he says.
Some ERP vendors agree. "If you have a warehouse with lots of people driving lift trucks around with RF devices on each truck to tell them what to pick and workers at the pick faces using handheld devices, you are going to need a more specialized system," says QAD's Fleming.
The same is true on the transportation side, says Frey. "If a company is using a variety of modes and doing sophisticated things like creating continuous moves and identifying backhaul opportunities, it will tend to tip over to best-of-breed TMS pretty quickly."
Other best-of-breed vendors operate in specialized areas or where the size of the market is too small to ever attract ERP competition. "We see our solutions as complementary to ERP," says Robert Pease, vice president of marketing at Hubspan, Trenton, N.J., which provides technology to connect supply chain partners. "We see a continued need for our services regardless of what ERP system a company is using," he says.
Kinaxis is a best-of breed vendor that has found a niche providing specialized supply and demand chain planning solutions for multi-tier supply chains that are centered on outsourced manufacturing. "I think smaller companies like Kinaxis will always exist because they find the white space that ERP vendors and larger best-of-breed vendors haven't filled," says Trevor Miles, director, product marketing at the Ottawa-based company. "Smaller guys like Kinaxis are able to find these spaces, get traction with a good solution and deliver real value to the market."
Interestingly, Miles also sees value in the standardized, one-vendor approach of ERP. "I liken the growing dominance of ERP players to what happened when Microsoft Windows emerged as more or less the standard operating system for PCs," he says. "I was working for a software company at the time and we had been really struggling to support a bunch of different versions of Unix that were out there. The productivity gain that we got with the standardization on Microsoft was just phenomenal and that was true across industries. And just look at what the wide adoption of Microsoft Office has done in terms of people's ability to move from one organization to another without having to be retrained on the technology.
"I think we are at that sort of cusp around these business applications. There will be a large number of people who will have been trained on the core capabilities within ERP systems, but then other providers can create all sorts of applications around and on top of those core capabilities, the same way that people are always writing stuff on top of Windows and on top of Office."
Shepherd believes there also will be space in the middle for private equity-backed vendors like JDA, which is following a consolidation strategy within the supply chain area. "There are a whole bunch of smaller vendors in the supply chain space, so I think that is a sensible business model," he says. "What I think will evolve is a top tier of broad-sweep, large vendors and a middle-tier of consolidated vendors, perhaps consolidated around a vertical industry or around a business process area. And there always will be new start-up companies coming along- nowhere near at the rate we used to see because it is so much more difficult today to get funding, but there will be people with new ideas and others who are willing to bootstrap them."
Whichever scenario you favor, there is no question that productivity and corporate resources will continue to be key issues when it comes to choosing between ERP or best-of-breed solutions, especially for mid-sized companies.
"Most mid-market companies don't have the resources to manage a lot of different vendor relationships," says Melissa Paulik, marketing director of manufacturing and distribution, for Lawson Software, a mid-market ERP provider based in St. Paul, Minn. "They don't have the resources and skills internally to develop and maintain all the interfaces or to train and maintain people with the skills needed for a lot of different systems. It is much better for these companies to work with one ERP vendor."
A lot of resource issues center around the demands of integration. "A lot of companies have incurred huge integration expenses in the past and are now recognizing that integration in not a core competence in their IT organizations," says Fleming. "This is driving them to look at the trade-offs between the costs of integrating applications from several sources vs. having a complete, single-source solution that perhaps has less functionality, but is better for the business in terms of relative costs and benefits."
ERP vendors as a whole have long touted the integrated nature of their suites as key selling points. SAP has perhaps one of the strongest claims in this area since it has developed most of its add-on applications in-house rather than by acquisition.
"If you build a solution, it is much easier to make it work with the foundation product," says Joginder Lamba, head of the global consulting practice at Tata Consultancy, New York. "I think SAP has a head start on that count."
SAP's Theis underscores this point. "Our strength is that we guarantee a tight integration between the solutions," he says. "And now we also have several system landscapes that allow a customer to plug and play."
Customers are realizing that there are very big costs involved with running a multi-vendor environment, Theis adds. "They are saying that the best thing is to have a single point of contact and a single vendor to help solve any problems."
Best-of breed vendors also tout their experience and expertise integrating their solutions to many different systems. "If you look at our heritage and history, we had to build cheap, quick integrations that worked with many different systems," says Johnston. "So we have a lot of experience providing integration that scales, and mapping the data and providing the right integration points."
"Integration was a problem 10 years ago but with all the integration tools we have available today, it has become almost a non-issue in our discussions," says Maley. "If you think about it, every single time we go into a company we are integrating to an ERP system. We have done hundreds and hundreds of SAP integrations and hundreds of Oracle integrations and maybe thousands of legacy system integrations. Integrating to ERP is really pretty straightforward. It's all the other things around it that we need to integrate to like third-party systems, conveyor systems and sortation systems that pose a much greater challenge. That is where the bigger guys really struggle and where our kind of expertise is essential."
The technology for doing integration has gotten a lot better, especially with SOA, agrees Shepherd. "But, at the same time, expectations about integration have gotten much greater," he says. "People used to think integration meant passing a data file once a week, but now it means seamless, real-time connectivity and a common look and feel. In addition, customers have expectations around being able to implement these end-to-end, seamless, cross-departmental business processes. Well, that stuff is hard to do, SOA or not."
It is particularly hard for vendors that have made a lot of acquisitions, like Oracle and JDA, which promise this type of integration but still have much work to do to make it a reality. "When you buy a product, it is not an easy task to integrate it because you are dealing with divergent technologies with divergent database structures and divergent functionalities," says Lamba. "Technologies like SOA make it a little less difficult. They do not make it easy."
Shepherd offers a number of guidelines for potential buyers to consider when evaluating supply chain solutions from either ERP or best-of-breed vendors:
Be realistic about your needs. "Companies need to be honest with themselves about how much functionality they actually need. It is easy to get dazzled by specialized products, but they need to ask if they really need it and if they have people with the skills to use it. We see people over-buy all the time.
Understand the integration requirements. "It is important to understand the commitment you are taking on from an integration perspective. Don't consider only the upfront integration demands, but also what it will take to maintain that integration as the best-of-breed product and the ERP product continue to change and evolve. A big commitment has to be worth it.
Consider your time frame. "What often happens is that a relatively new application area will emerge and initially the best-of-breed vendors have a real lead on the ERP vendors. But if this is something that gains traction, the ERP vendors either acquire the functionality or use their tremendous development resources to close the gap. So, if there is a gap today between the functionality of a best-of-breed solution and an ERP solution, companies need to ask whether that gap will still exist in a year or two and whether having that solution in the meantime would really provide a competitive advantage. Often we find that by the time the company is far enough along to be able to use that advanced functionality, the ERP vendor has it.
Check the vendor's viability. "One perennial issue around best-of-breed vs. big, integrated suites is the question of viability. It is important to recognize that a lot of best-of-breed vendors are small and subject to being acquired or going out of business. Plus, they may not be able to support all of your global operations. This doesn't mean you should not buy from a small vendor, but you should look at all of the implications."
A final suggestion mentioned by many of the experts interviewed for this article is this: Keep an open mind. Regardless of what your preference has been in the past, come to the decision with fresh eyes and evaluate both ERP and best-of-breed solutions before deciding which best meets your company's supply chain needs.
Aberdeen Group, www.aberdeen.com
AMR Research, www.amrresearch.com
Lawson Software, www.lawsonsoftware.com
Tata Consultancy, www.TCS.com
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