Internet Makes SCP All That It Can Be

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Internet Makes SCP All That It Can Be
S. McVey - April 26th, 2000


The Internet is reshaping the enterprise applications market by making possible unprecedented visibility and information sharing between enterprises. Nowhere is this transformation more evident than in the supply chain planning (SCP) software market. The fact is, prior to the Internet, much of what SCP promised was never realized beyond a conceptual level. Supply chains that seamlessly joined customers and suppliers were easy to draw on paper, but building the link without Internet technology was practically impossible. Several clear trends have emerged in recent years that capitalize on the possibilities for collaboration, information sharing, and instantaneous communication that the Internet provides.

These trends are:

Internet Procurement
New Pricing Models.


Continuous Planning, Forecasting and Replenishment (CPFR) is a set of processes for trading partners, manufacturers and retailers, to share forecast and replenishment information. CPFR succeeds earlier initiatives such as ECR (Efficient Consumer Response), Quick Response, and VMI (Vendor Managed Inventory) and benefits from strong support from standards organizations like VICS (Voluntary Interindustry Commerce Standards), which published guidelines for CPFR in June 1998.

CPFR is emerging from its pilot phase with the help of proponents like retailers Kmart, Wal-Mart, and Sports Authority as well as consulting firms like Andersen Consulting. Some SCP and ERP vendors have recognized CPFR's potential and are building standard CPFR protocols into their collaboration products. Logility was an early champion of CPFR and its Voyager XPS product, hosted via i-Community, is the culmination of several years of CPFR-compliant architecture development. ERP giant SAP also offers CPFR support as part of

According to a 1999 study by Consumer Goods Magazine, more than half of the 224 executives surveyed from consumer goods manufacturers representing apparel/accessories, food and beverage, packaged goods, and home furnishing/appliance companies said they expected to implement "Internet Order Handling" in the next three years. Forty-four percent said they would implement CPFR specifically. Although it demands a high level of organizational commitment to succeed, CPFR can bring bottom line benefits for companies that sign onto the challenge.

User Impact: For all its potential and the extensive blueprints developed by VICS and others, CPFR is relatively new to the vendor world. Apart from Logility and SAP, few supply enterprise application vendors offer products that directly support CPFR processes according to VICS standards. We expect CPFR to gain broader acceptance as the novelty of online trading exchanges wears off and users seek more structured methods to control relationships between customers and suppliers. Though CPFR can be applied in any industry segment, the retail consumer goods market has been the primary adopter to date. Retail users should find out more about CPFR if accurate forecasts are a priority with external and internal customers.

Internet Procurement

Online communities where companies can buy and sell products have become very popular in the past year. Companies look to these communities to reduce administrative costs, improve turnaround, and to help control inventory and spending. In response, SCP vendors are developing tools and applications targeted at this rising segment of the Internet procurement market. Some industry observers have expressed concern over the impact that such exchanges have on profit margins by driving prices down and predict that "e-markets" will be used exclusively for "spot purchasing" of commodity-level goods and services.

E-markets fall into different categories depending on where the software resides, who controls or sponsors the market, and whether direct or indirect goods procurement is available. Though current exchanges predominantly involve only spot purchases, there is a move towards making e-markets responsible for the full trading lifecycle spanning procurement, supply chain management, and customer relationship management.

Because so many vendors offer e-procurement capabilities, it is becoming increasingly important for them to distinguish their portals from competitors. We believe that SCP vendors are uniquely capable of doing this by providing value-added services that relate to procurement in fundamental ways. i2 Technologies is an excellent example of a SCP that is successfully bringing its considerable domain expertise in supply chain planning to enhance procurement over the Internet.

User Impact: Users who want to cut their indirect material costs should not delay in selecting an appropriate vendor that offers online procurement, either a package vendor or Internet-based portal. For direct material purchases, where on-time deliveries are an imperative, users should partner with an SCP package vendor or a portal backed by supply chain planning that can bring the intelligent backend planning capabilities to fulfill online material purchases. A good choice to consider is i2, which has begun to offer advanced planning services such as logistics and transportation planning along with its growing cadre of vertical marketplace portals.


Aptly named, portals open a window of communication between supply chain planning vendors and communities of customers, partners, content providers, advertisers, and, in most cases, the general public. A good example of a basic portal (detached from hosted services and procurement) is Aspen Technology's, a collaborative web site for the process industries. The portal offers process industry-specific news and event information, discussion forums, career guidance and employment information, and access to consultant expertise among other information.

Portals are a natural result of competition, the need for better customer support, and the Internet. In addition to benefits for participating users, the forums allow vendors to foster more dynamic relationships with customers and prospects than would be possible through corporate websites, annual user conferences, or helpdesks.

Apart from advertising revenues and content sales, the future dollar impact of portals on SCP market growth is difficult to quantify. Portals will drive partnerships and even consolidations among SCP vendors and Internet enablers such as, in Aspen's case, Extricity and Syntra Technologies. If nothing else, portals also afford more backward vendors a low cost, low risk entry into the Internet marketplace.

User Impact: Users should view portals in the same way as vendors: a place to share and receive information. Portals also represent perhaps the only free product/service available from software vendors. Privacy issues exist, of course, and users should be careful to avoid sharing potentially sensitive information such as implementation success/failure stories unless the portal provider agrees to keep it confidential.

New Pricing Models

Unfortunately for vendors, customer expectations tend to grow faster than their ability to furnish competent, easy-to-use products to satisfy them. High client hopes usually fall to the ground sometime during implementation and leave a lasting, often-bitter impression.

Since fewer than one in four projects deliver workable solutions that last six years or more, clients are increasingly wary of committing huge sums of money before they have obtained measurable return on their investment. In response, the licensing of supply chain planning software products is undergoing a fundamental shift from traditional up-front fees to incremental or success-based pricing. Success-based pricing is a popular alternative especially for small businesses and startups that lack the IT budgets of larger, established companies. It allows these companies to acquire software for a lower entry cost and pay more only as their business expands.

The Wall Street community has responded favorably to the recurring transaction revenue that results from success-based pricing and is reformulating models for many SCP and e-business application vendors.

Vendors who embark on the transition to the new model are sure to experience growing pains, however. As traditional license revenues decline, recurring revenue generates comparable figures only after time. This can produce unsightly red marks to appear on income statements and eventual success is by no means assured. Organizationally, vendors must make fundamental changes to sales and support processes for transaction-based pricing.

User Impact: For users, success-based pricing models offer a "pay-as-you-grow" alternative to up-front license fees. Though often touted as cheap and convenient, these models can bring unexpected IT costs down the road. As with any long-term contract, prospective clients should carefully review the fine print to understand the implications that transactional revenues will have on future expenses. A transaction may appear cheap at $10, but detailed growth projections that factor in per-transaction increases, milestone increases, as well as other contract attributes are a must for companies to understand the magnitude of future payments.


With the Internet making access to supply chain planning tools both cheaper and easier, it is becoming increasingly difficult to imagine why a manufacturing company would remain without them. Success-based pricing is probably the most compelling financial incentive for small to midsize companies to consider an acquisition. Actual charges vary widely depending on the type of application, but typically range from $5 to 15 per transaction (where transactions may be purchases, orders, shipments, truck lanes, etc.).

Large and small companies can benefit immediately from e-market portals. By signing on to an e-market, whether a public exchange or a private network hosted by the vendor or a large "anchor tenant" supplier, a corporation can effectively outsource its entire tactical procurement operation, at least for commodity items. CPFR will be the collaborative paradigm of choice for direct goods procurement and non-commodities over the next five years as it allows large companies with several key suppliers and/or resellers to individualize their relationships while at the same time exploiting the speed and efficiency of the Internet. For the longer term, CPFR will provide the framework for end-to-end collaboration across the entire supply chain.

The Internet will not eliminate traditional application licensing, but these trends will cause a significant percentage of application license revenues, at least 15%, to shift to transaction-based models by the end of calendar 2001. Absolute market growth will also occur as the Internet streamlines the ability to roll out applications to users, though it will be tempered somewhat by reduction of support and maintenance fees that result from web-based deployment of these services.

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