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QAD Pulling Through, Patiently But Passionately Part Five: Challenges

Written By: Predrag Jakovljevic
Published On: September 24 2003

Market Impact

On August 20, QAD Inc. (NASDAQ: QADI), a global provider of collaborative enterprise applications for manufacturing and distributing organizations, reported upbeat financial results for the fiscal 2004 second quarter and six-month period ended July 31, 2003. The improved financial performance has not come without astute moves with regard to product functionality enhancements. These moves include:

  • A partnership with Johnson Controls (NYSE:JCI) to develop a next-generation Just-In-Time (JIT) Sequencing software module for MFG/PRO

  • Announcement of Kanban Visualization, which enhances QAD's existing Supply Visualization (SV) solution

  • More than two dozen important new functions and enhancements to MFG/PRO eB2, specifically designed in collaboration with QAD's manufacturing customers to help address their specific needs

  • Announcement of healthy sales momentum in Asia, with the MFG/PRO suite becoming a platform of choice for automotive manufacturers in China to automate business operations and collaborate with partners worldwide

The "fortune favors the bold" and "patience is a virtue" adages would be applicable to QAD's endeavor of finally getting far beyond its most trying days. "Patience" would stand for the reason of QAD staying true (and being finally vindicated) even during its most difficult times in the last few years (see Figure 2), to what had made it successful in the first place—solving manufacturers' real-world problems.

Figure 2


This is Part Five of a six-part note.

Part One detailed the above moves.

Part Two presented the company background.

Parts Three and Four discussed the market impact.

Part Six will make user recommendations.

Challenges

One should by no means assume that QAD is without challenges. While the acceptance of its new collaborative e-Business modules proves to be well received by its existing MFG/PRO customer base, QAD still has to create greater market recognition and additional revenue from beyond it. Although the vendor has apparently drifted away from those years of particularly relying upon its existing customer base, if one is to judge by the extent of new accounts and its penetration of emerging markets, look for QAD to more aggressively pursue winning new business—the company is still well below its near $250 million in revenues in fiscal 2000 (or calendar 1999).

There might still be some worrying clouds on the horizon for QAD, which might suggest that its growth beyond its existing customer base will be limited. QAD might suffer from some sort of identity crisis. On one hand, QAD would want to be considered more than a mid-market alternative to tier one vendors, particularly as it has customers that have several billion dollars in revenues. However, QAD is mostly deployed at their individual divisions whereby none of them is larger than $500 million in revenues, which is an unofficial mid-market cutoff point. With eQ, however, the prospective buyers could indeed be true global gigantic corporations, but it then means different sales force approaches and training to address possibly different audiences for MFG/PRO and eQ.

The combination of MFG/PRO, eQ, SV, and embedded point solutions from its premier partners (IBM, Adexa, Robocom, Demantra, Access Commerce, etc.) might indeed provide QAD with a product set also suitable for larger, multinational corporations. Still, QAD's reliance on a number of partnerships to deliver extended-ERP functionality may not be the preferable option for its target market—medium sized manufacturing organizations that still prefer a single source provider and single data model and solution architecture.

The conundrum, for penetrating the higher-end of the market could also lie in the fact that MFG/PRO is still not at the forefront of natively provided ERP functionality, particularly in terms of multi-national financials/consolidation, budgeting, project accounting/management, HR/payroll, marketing campaigns, etc. While many enterprises will adopt decentralized operations, there is also the growing fashion for so-called one-stop-shop' integrated software—where one vendor supplies tightly integrated financials, HR/payroll, manufacturing and other key functions.

QAD admits it has still been struggling to offer complete "across the board" functionality for larger companies, although the system supports multiple currencies and global tax management, and it is tailored to financial practices and requirements in major geographic markets, while the eB2 release features improved financial reporting and inter-company accounting. Without much more of these in hand, it is a tall order for any vendor to penetrate the corporate management level competing against likes of Oracle, SAP and PeopleSoft.

Production management remains MFG/PRO's strongest module, and, therefore, QAD has often been implemented only in manufacturing divisions of large global organizations that use a tier one ERP product for corporate financials or HR applications. On the other hand, QAD might be in-between anvil and hammer while it might be tempted to bolster its product's administrative functionality, it, on the other hand, risks the loss of focus and product code simplicity, which would conflict with its above-mentioned assertion of differentiation and uniqueness. Therefore, a tightrope walk on the obscure line of balance between functionality and complexity will remain QAD's challenge.

Room for Functional Enhancements Remains

Still, room for functional enhancements both within and beyond ERP and product delivery work-in-progress remains, since QAD's strategy will take several years to develop, and its success is never guaranteed. Many of the earlier mentioned products are yet to be delivered, such as JIT sequencing and payment and invoicing automation via e.g., Citibank, within the manufacturing community portal environment. The vendor is also contemplating a deeper involvement in the radio frequency identification (RFID) supply chain initiative.

QAD has also been somewhat quiet about its product lifecycle management (PLM) strategy. The announcement of the alliance with Arena Solutions (formerly bom.com) of several months ago has all but stopped short at only that. There are indications of customers' lukewarm interest in PLM, as opposed to EDI Commerce, VMI or self-service modules, which has relegated its delivery to the back seat. However, one could hardly imagine successful supply chain management without PLM collaboration, particularly within QAD's industries of focus, and one should expect a much more energized involvement from QAD in that regard, such as its forthcoming Product Visualization module to catch up with the competition.

Incidentally, the competition now comes from a slew of SCE point solution providers in the areas of supplier connectivity, business process management, collaborative replenishment, distributed order management, performance monitoring, and analytics. Yantra, Provia, HighJump, Optum, and an army of their upbeat likes will certainly always have something more functional to offer.

Moreover, although eQ and SV's principles of operating look quite straightforward, automating manual processes requires the mindset change and readiness to do the things in a different way. Trust between companies still remains a large opponent to opening up the supply chain to every player in the chain, since sharing information poses the threat of companies divulging their customer and inventory metrics with possible competitors. Thus, some prospects may be reticent to deployment, despite the potential benefits of near real-time information exchange and visibility.

Although QAD covers multiple manufacturing styles such as make-to-stock (MTS), make-to-order (MTO), configure-to-order (CTO), engineer-to-order (ETO), mixed mode/hybrid and repetitive, it has not traditionally been particularly strong in the "to-order" aspects. The company hints at product enhancements in that regard in the foreseeable future. There is thus even a greater challenge of fending off the bigger vendors' attempts to sway the corporate executives to implement QAD's system corporate-wide (or, at least, in as many divisions as possible) given that these vendors might emulate QAD's deep manufacturing functionality over a period of time, and particularly at divisions with very old and heavily customized MFG/PRO instances (due to lack of native functionality at the time), where migrating to eB2 would entail as much effort as any other non-QAD product.

Also, the leaner company with a large customer base and a palatable market capitalization of slightly over $260 million remains an attractive acquisition target in this seismically consolidating market. Although QAD has never been a proponent of mergers and is not seeking any help in this fast-consolidating market, one can never ignore the possibility of predatory moves by larger competitors, particularly after being slighted by QAD's recent competitive assertion. Being publicly-held, there is not much the vendor can do to prevent it, other than to continue to repurchase its stock in order to secure a major voting power, like it has recently done with over 8 percent of its stock. In any case, the road the vendor has taken should help to further liberate it from its ERP manufacturing "also-ran" status, and enable it to recover the technical leadership that it was in danger of losing.

This concludes Part Five of a six-part note.

Part One detailed the events.

Part Two presented the company background.

Parts Three and Four discussed the market impact.

Part Six will make user recommendations.

 
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