AMR Research projects the 2005 supply-chain management software market growth rate to be only 2.5 percent, which is a tumultuous fall from the 36 percent growth rate reported as recently as 2000. Third-party logistics guru Richard Armstrong reports that worldwide logistics outsourcing revenue is growing only at the global GDP rate of about 6 percent, half what it was a decade ago.
Something seems very wrong.
The global economy is on the rebound. The availability of SCM solutions has never been greater. So why is software and service growth bumping along at a lackluster pace instead of skyrocketing?
AMR Research analyst Lora Cecere lays much of the blame on the vendor community.
"Demand is still strong for real solutions to today's problems," she says. "The problem is that vendors have been slow to address real user needs."
Gartner analyst Andrew White points to manufacturers and retailers that have failed to understand that their supply chains are a critical part of their competitive position in the market place. He says that companies have varying competitive personalities, from Type-A companies that are innovative, aggressive and customer-focused to Type-C companies that lack competitive drive and view the marketplace as price driven.
"Type-A companies see IT as one of their most important tools for competitive advantage," he says. "They look for applications that are highly verticalized to their business and capable of dealing with complex problems. Type-C companies are satisfied with solutions that help reduce costs and that require minimum investment."
The problem is that there are many more Type-C companies than Type As.
Regardless of the cause, both users and vendors have to change their ways if the promise of supply-chain management is ever going to be fulfilled. Right now, the most successful approach to such a turnaround for both vendors and their customers is a "verticalized solution." In the software world, this means building solutions that have a wide enough customer base to justify many millions of dollars in development and ongoing product support, yet capable of being highly customized to deliver the functionality users need for cutting-edge planning, execution, sourcing and other SCM activities. It's much the same in the 3PL world, according to Jeffery Barrie, vice president of global sales for BAX Global, which offers freight and outsourced supply-chain services in 133 countries to a broad variety of industries.
"We have worked to fully understand the requirements of our existing customers and the vertical markets in which they operate," says Barrie. "We have then built repeatable solutions, which can be customized or localized to meet a specific customer requirement. At the same time, we have a strong understanding of which verticals contribute to our companies' overall business."
Those SCM applications that were specifically written for certain vertical industries are in an excellent position to provide this advantage. While this focus limits the potential customer base, it provides tremendous advantages for its target customers.
Prescient, for example, provides planning software to consumer products that sell through retail and that have annual sales between $50m to $500m. According to Jane Hoffer, president and CEO of West Chester, Pa.-based Prescient, its target market requires applications with very specific functionality.
Just as important, Hoffer says, her target market expects its technology vendors to have deep domain expertise. According to Hoffer, any good technology company can code functionality into an application. The mid-market customers generally do not have big IT staffs, so it is crucial to provide the sales and implementation teams that can provide a turnkey service.
"We have become a trusted advisor to our customers," she says. "It is not just about the software."
According to White, this type of industry-specific experience is what it takes to create and deliver the applications Type-A companies need to gain the competitive advantage they seek.
"You garner that from implementing in an industry many times," says White. "There is an implicit transfer of knowledge from the user community to the vendor."
One of the benefits of serving a well-defined market is that many different companies share the same challenges-even if they don't realize it. For example, two of Prescient's major customers are sunglass manufacturer Foster-Grant and the fruit juice giant Tropicana. While they produce very different types of products both are highly seasonally based either on the product itself or the way that products are marketed.
Similarly, just about every one of Prescient's consumer products customers deals with some level of fashion change that results in short product life cycles. Proliferation of stock-keeping units (SKUs) has become a challenge for every consumer products manufacturer, not only because customers want more product variety but also because every major retailer has specific product packaging requirements. The more SKUs, the more complex the supply-chain planning task.
"Our planning application addresses all of these consumer product challenges, and we present them to the user in a way that is intuitive to the users based on their specific industry," says Hoffer.
The Execution Challenge
The challenge is slightly different for execution vendors serving hundreds of companies of all sizes in many industries. Take Manhattan Associates, which has about 1,300 implementations around the world with solutions for warehousing management, transportation management, reverse logistics and several other execution-oriented applications.
"We have learned a lot about how clients are doing things in the eight verticals we market to, so we can build their best practices into our applications," says Prashant Bhatia, Manhattan's director of product management. "Verticals are a critical factor in our go-to-market strategy, but we have to work with our customers from a base application."
Manhattan rarely changes the base code in its applications for its customers, and it definitely does not let customers make changes. Not only would such changes make regular version upgrades more difficult and expensive, they would inhibit the customer's ability to gain new functionality that Manhattan is constantly adding.
"When we introduce new functionality in the base WMS application, we make it configurable so it does not cater just to one industry," says Bhatia. "We may add functionality designed primarily for high-tech, but it usually can be used in other industries such as retail or life sciences."
For example, to meet Food and Drug Administration regulations, the food and beverage industry must have lot tracking that includes such variables as country of origin. Life science companies need similar functionality called batch tracking that traces pharmaceutical supply chains down to the bottle level. High-tech customers may require serial tracking of components.
"We do not have to write the same code three different times," says Bhatia.
There is one table for managing batches and lots that can capture data according to any variable and then use that data to perform industry-specific processes such as product recalls, hold, release and so on.
"We build the functionality once in the base software, and then provide highly adaptable configuration capabilities, so each customer can manage the data down to the nth degree of detail. It is a matter of flipping switches within the system as opposed to writing a lot of redundant code."
To speed the implementation process, Manhattan offers pre-configured versions of the software for each of the eight vertical industries it serves, but more specific configuration is done on site with the client. The collaborative process during implementation is vital because each customer defines processes differently. One company may want the pickers directed to the location so they do not have to think about where to go. Another company may want their pickers to have discretion on which item gets picked next. This level of configuration is done on site.
Manhattan constantly develops, or acquires, new applications that may have a specific vertical focus, but they have been able to adapt these products to a much broader base of customers. For example, Manhattan's slotting optimization product was built for food, beverage and grocery customers so they could maximize warehouse utilization and optimize the put-away and picking processes.
"Slotting has become an important process for many other industries," says Bhatia, "so we have built functionality into the application that works specifically for high-tech, life sciences, government and logistics providers. Again, it is configurable for each user."
Bigger Vendors, Bigger Challenges
The verticalization challenge is greatest for the very large technology vendors that provide full suites of business applications across nearly every industry.
"The only way the big enterprise resource planning vendors can make money is to write one general product and sell it a thousand times," says Gartner's White. "It becomes very difficult to build in much industry-specific enhancement. The ERP footprint continues to extend to many enterprise functions, including supply-chain management, so the lack of vertical specialization extends with it."
SAP, which is the world's largest business software company serving thousands of customers, illustrates how a large technology vendor addresses this challenge. Its supply-chain management applications are similar at the code level for every customer, although it has versions of its ERP with enhancements for broad industry groups such as process manufacturing, discrete manufacturing and distribution.
For example, SAP's supply-chain planning product, APO, has no industry-specific versions. "We do not want to offer many different variants of APO, because that would create problems for our customers that have cross-industry needs," says Bob Ferrari, a supply chain specialist for SAP. "They have a product division that is process oriented and one that is discrete. That customer does not want to have to buy two different versions of APO. There is one APO."
So instead of creating industry-vertical versions of its software, it includes all industry requirements in the base code. Specific industry functionality can be turned on or off, as the customer wants through a combination of steps. The functionality is turned on and off with industry-based configuration settings. A series of business process templates help customers implement the software to take advantage of best practices that SAP has gleaned from its experience with the world's leading manufacturers and retailers.
White agrees that templates for best-practice business processes and industry-specific configuration are valuable for getting the most out of off-the-shelf software. These tools provide significant levels of customization that can improve supply-chain performance. Of course, these templates have limits.
"They do not allow any new processes or capabilities to be added," says White. "You can just select processes that are also available to your competitors."
Besides providing vertical templates and configuration capabilities, SAP markets and supports its products on a highly vertical basis.
"We go to market by 22 different industries, each of which is supported by a separate industry business unit group (IBU)," says Ferrari. "Those are the groups that walk and talk the industry they cover. They develop their own partnerships and execute their own go-to-market strategies."
As an example, Ferrari says, SAP's CPG business unit was working on the retail industry's radio frequency identification long before most vendors were even aware of the issue.
"We were the first to include a fully configurable compliance solution into our execution applications," says Ferrari. "This IBU saw where the challenges were going to be and they worked with our solutions group to provide the functionality to meet that business case. That is how we go to market."
Developing this industry knowledge is especially hard for large technology vendors, according to White, because they tend to rely extensively on outside consultants for the actual software implementation. These consultants and systems integrators can create a barrier between themselves and their end users.
"During the setup phase, there is knowledge between the end user and the implementer," says White. "Vendors that go to market with their own implementation team gain direct feedback from industry into their development shop. If the vendor depends on outside implementers, they miss out on much of this knowledge. That may explain why big ERP vendors are slower to react to industry-specific needs than their smaller competitors that do their own implementation."
To further enhance their customer knowledge base, virtually every technology vendor has a user group that is supposed to constantly provide the vendor with suggestions, comments and ideas for product improvement.
"User groups have not been as valuable as they should be," says White. "Many vendors short-circuit the feedback process with too much of their own marketing hype."
There are two types of user groups, according to White. One type is truly an independent user group, and the other is dominated by the vendor. The annual user group meeting is an immediate indicator of which type it is.
If there are lots of entertainment and flashing lights, and if the vendor does most of the presentations, it is a poor excuse for a user group, according to White.
"The customers just happen to be the invitees to a vendor marketing event," he says.
True user groups independently set the meeting agenda. They invite the vendor, but the group has its own officers that are elected by the users. The meetings address issues of real concern.
"Vendors may be very uncomfortable at these meetings, but they can learn an enormous amount about what their customers need, and what they are willing to pay for," says White. "Vendors that just hold marketing events are really fooling themselves and missing a great opportunity."
The vendors like the first type because it gives them a chance to tell customers how great they are, but they really don't gain much value from users because they short-circuit the natural feedback loop with their own marketing hype.
While vertically configurable applications and industry-specific business process templates are the current state of the art for supply-chain technology, White says the challenges going forward are going to be different, both for the vendors and the users that aspire to be Type-A competitors.
The vast majority of software today was built for companies that performed most of their business processes within the enterprise. Real-time information just had to be shared between functional silos. Communication with suppliers and customers only required batch messages via electronic data interchange.
The emerging business model is built on a highly distributed supply chain with most processes performed by outside companies. While supply-chain applications for planning, sourcing, fulfillment, transportation and so on will still be relevant, the overriding requirement will be on real-time collaboration and the underlying data.
White says that truly leading edge companies will all have so-called services oriented architectures (SOA) that allow companies-and entire supply chains made up of many companies-to assemble totally customized business processes from configurable pieces of code. The information in the form of web services is seamlessly shared by these composite applications that all members of the supply chain use simultaneously.
"Type-A companies are those that leverage collaboration to develop business plans, promotions, product designs and other processes across the supply chain using SOAs," says White. "This is sophisticated stuff that goes beyond vertical configuration, and you don't get that from your average technology vendor."
Gartner calls this trend business fusion, and it has tremendous implications for technology vendors. Customers may no longer buy entire stacks of supply-chain applications. Instead, users will have an SOA platform that supports processes, also known as objects, such as invoicing, supplier collaboration, customer orders, etc. The platform maps to these objects and allows users to assemble exactly what they need and to deploy these objects and the needed vertical functionality with their partners.
"What becomes important is not the application but the domain expertise to assemble the processes most efficiently across the supply chain," says White. "Vendors in demand will be those that have the process knowledge and domain expertise."
There are no true examples today of a complete supply-chain build on an SOA, but such common practices as distributed order fulfillment show how it can operate. When a company receives a customer order for a variety of items, it is often fulfilled by a number of suppliers that automatically receive the order information from the original company. The customer is totally unaware that the company with whom he placed the order never touched the goods, but merely passed the order information onto its suppliers.
Tomorrow's Type A companies will have their entire supply chains and all of their industry-specific processes and functionality built on an SOA. When this shift will happen is open to speculation.
"Technology advances quickly, but business process change moves very slowly," says White.
Needless to say, the leading technology vendors are well aware of this trend toward supply-chain networks and the need for technology that can support it. SAP, for example, has developed its NetWeaver platform that allows easy integration of its applications with those of other vendors. Information, both internal and external, moves seamlessly among the connected partners.
"NetWeaver is the way we will support networked supply chains, industry-specific processes and the information sharing that these require," says Ferrari. "In the next year or two, you will be hearing more about how we support industry processes across the supply chain, and less about application such as mySAP SCM. We are well on the way to doing that within our marketing and development plans, and so are the rest of the big technology players."
The 3PL Vertical Strategy
Large 3PLs have a challenge similar to that of technology vendors when it comes to serving a variety of industry verticals. To be profitable, they must be able to serve a broad base of customers, but they can only be successful if they can prove their service value to their customers.
"We must deliver a consistent offering within a vertical market and then translate that success to other industries with similar supply-chain requirements," says BAX Global's Barrie. "The exciting part is that different industries have adjusted their supply-chain models at different times. We often see examples where a process such as vendor-managed inventories became a common way for technology supply chains to improve performance. We can then help spread the VMI process to another industry such as retail."
Of the thousands of 3PLs that exist around the world, relatively few are successful in serving a broad spectrum of customers. Most are satisfied to remain in the functional or vertical niche where they are strongest.
"When I first came to TNT in the early 1990s, nearly 90 percent of our business was concentrated in the automotive industry," says Mark Morrison, senior vice president of business development for TNT Logistics. "Today, we still are a dominant 3PL in the automotive world, but less than half of our business comes from this sector."
Besides supporting inbound transportation for the automotive industry, TNT focuses on five other verticals including fast moving consumer goods, industrial manufacturing, utilities, rail logistics, and high-tech service parts distribution. According to Morrison, the 3PL has achieved this diversification to new verticals by leveraging its experience in dealing with the data-intensive automotive industry.
"We have been able to transfer disciplined processes we helped create in automotive for managing suppliers, just-in-time manufacturing and inventory visibility to global supply chains for such companies as Thompson Electronics, Rolls Royce's jet engine division, Eaton's heavy truck group, and many others."
According to Morrison, entire industries, such as windows and fenestration, have come to TNT because of the process improvement that they can impart to their customers.
"We have learned that disciplined processes, with enabling technologies, add tremendous value throughout the supply chain," he says.
Combining the vertical needs of the 3PL customers with the technology needs of the 3PLs themselves is one way how supply-chain solutions can be customized to meet any need.
"We must understand the technology and the needs of each customer, and then find the solutions that have enough breadth and configurability to support these needs," says Keith Goldsmith, the chief information officer for TNT Logistics in North America and Europe. "The 3PL model is based on finding synergies across customers."
Goldsmith explains that the verticals TNT serves share many so-called "process bundles," which include such activities as inbound support to manufacturing, spare parts distribution, VMI, etc. The vertical itself does not matter; it is the process. Remarkably, TNT has been able to find relatively few applications and adapt them to meet the requirements of these processes.
"Our philosophy is to buy the best and build the rest," says Goldsmith, adding that Manhattan Associates' PkMS warehouse management system is one of TNT's key applications. One instance of PkMS at TNT's headquarters supports inbound manufacturing support at a Ford Motor plant, a retail supply chain, a large network of tire DCs and a spare parts distribution operation with a heavy emphasis on kitting. Goldsmith says his company is able to support this wide range of needs with one piece of software because of the configurability of the application.
"There are attribute fields in the software based on SKU, which is common in the retail industry to cover color, size and style," he says. "We can use those same fields in automotive to cover engineering revision levels. Of course, the 3PL industry cannot have a completely generic solution. Part of the value we bring to a customer is to be able to design an application to a customer's business processes."
Manhattan will do customer-specific modifications if the base application cannot be configured to meet the customer need. In many cases, these modifications eventually find their way into later revisions of the products.
"We understand the power of good supply-chain processes and the need for enabling technology," says Goldsmith. "This is our business, and we are happy to share our philosophy with our customers. Pick technology partners that are forward thinking and are always evolving their products."
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