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Supersizing the Supply Chain - And Reducing Costs

As companies rode the e-commerce wave in 1999, they began to purchase technology that promised to solve problems created by the Internet and e-commerce. One such problem was that competitive pressures had compelled businesses to begin exchanging data and collaborating with their trading partners on the Internet.

However, existing supply chain management applications were not well suited to help companies manage their new e-commerce fulfillment requirements, so they turned to best-of-breed upstarts.

Eventually, however, the incumbents figured out how to leverage the Internet and resolve issues related to it. The pendulum is now swinging back toward these large vendors, such as SAP, Oracle (Nasdaq: ORCL) and PeopleSoft, which currently control the biggest piece of the supply chain management pie.

Perhaps as a result, supply chain management software itself has changed. In recent years, applications dedicated to this purpose have morphed from small, individual programs designed to fix specific problems into huge suites installed over time like so many Legos.

Buying Piecemeal

Yankee Group senior analyst Michael Dominy told the E-Commerce Times that historically, when companies invested in large supply chain management suites, they would buy all of the modules at once, then figure out how to implement them over the course of a year or 18 months. Such large projects suffered from slow adoption rates, and, for various reasons, sometimes only a few of the applications were ultimately installed and applied to isolated planning problems.

Today, in contrast, the trend is to start by buying only one small module of a large suite, Dominy noted. Companies implement that module slowly, making sure they get it up and running successfully before buying another module. A company eventually may end up with an entire suite, but only after multiple sales cycles involving purchases from a single software vendor over a relatively long period of time.

Not Just the Big Guys

SAP's Greg Mekjian, vice president of extended supply chain, noted that large corporations are not the only ones investing in their supply chains. He told the E-Commerce Times that SAP offers small products that are viable a la carte and that use Web application servers to give smaller companies a wealth of visibility that "doesn't cost them an arm and a leg."

On the other hand, industry giants like Procter & Gamble, Colgate-Palmolive and Hewlett-Packard (NYSE: HPQ) are looking for the Ferraris, according to Mekjian. "They're looking for legs up on their competition, and they have the wherewithal, the money and the core competency to do something big and complex," he explained. "But if I'm a grommet manufacturer that supplies Toro for one of their lawnmowers, I don't have the wherewithal, nor do I need it. That company may just be looking to maintain visibility to their inventory, their suppliers and ... their customer's inventory."

He added that in this economy, SAP also has customers that have fallen on hard times but still want to improve their supply chain. Those customers are seeking a tool that addresses perhaps one part of their supply chain, that can be installed quickly and that achieves quick return on investment (ROI). "The savings they then realize from that project will in turn pay for another project," Mekjian said. "Right now, I have more customers like that than customers making the big deal . The big dealers are still out there, they're just fewer and farther between."

Time for a Web Shift?

Dominy said he believes the current buying trend will continue for the next 6 to 18 months, then begin to shift toward Web-based models. He noted that rather than buying their own supply chain management suites and installing them behind company firewalls, companies may consider purchasing a monthly subscription to such a networked model. Doing so will allow them to pull in only the functionality they need as their business grows or shrinks.

He added that cost likely will be one of the drivers toward this networked model. After all, traditional supply chain management applications can come with a huge up-front fee, which can range from hundreds of thousands to millions of dollars. Additionally, such applications must be integrated and maintained.

In contrast, in a networked scenario, the viability of a vendor and service provider probably will be a prime concern, according to Dominy. However, he added, it is probably an even bigger risk for a company to purchase its own software and integrate it into its infrastructure. If the software vendor fails in that situation, the company will be stuck using an application that is no longer supported.

The Space Between

However, the idea of cutting costs through the supply chain is not a new one. As Seungjin Whang of the Stanford Global Supply Chain Management Forum told the E-Commerce Times, this concept first caught fire about four or five years ago, and much progress has been made since then.

Therefore, rather than trying to squeeze every cent out of solely internal operations -- something that probably has already been done -- companies now see more potential in streamlining across their entire supply chain, both internally and externally, according to Whang.

Dominy agreed, saying enterprises are starting to focus on running their inter-enterprise supply chains more effectively. He said the next battlefield for supply chain management applications will be at what he calls the edges of the enterprise, where the outbound (or distribution) side of one business meets the inbound (or receiving) side of another.

Biggest Waste Area

"The biggest potential benefit lies in attacking the waste that occurs in between the different business partners in your supply chain," Dominy noted, adding that this area can account for 50 percent or more of the total waste in a supply chain. Likely culprits include delays, missing information, limited visibility and partners that do not perform tasks optimally.

Companies must work together with their business partners to gain visibility in those in-between spaces, he said. The right level of security, confidentiality, accessibility and control is essential to make significant improvements.

Some up-and-coming players in this space include Elogex, Nistevo and Evant, according to Dominy. All of these companies focus on inter-enterprise business processes and on ways to connect, collaborate and manage the flow of materials between partner companies. He noted that these vendors have posted triple-digit growth figures over the course of the last few years -- an amazing rate in this down economy.

Vendor Shakeout

For now, however, Dominy said he expects the vendor shakeout in the supply chain software marketplace to continue, with several companies merging or dropping out. Large back-office application vendors, such as SAP, PeopleSoft and J.D. Edwards, will continue to offer more functionality to their existing installed base, encroaching on turf currently owned by best-of-breed supply chain management purveyors.

SAP's Mekjian agreed, saying that he thinks his company is strong and seeing growth. "The world economy really stinks right now," he said. "People are not spending money. But supply chain is still the number one product we sell here at SAP, and we're seeing growth -- especially [among] the manufacturers, who are still looking inward for operational efficiency to cut costs and try to better their gross profit margin."