SAP Acquires SmartOps, At Long Last

This could be the very first time as a market observer that my reaction to a merger announcement is not “Why?” but rather “Why now?” Namely, in late February 2013, SAP announced plans to acquire SmartOps, a leading provider of inventory and service-level optimization software solutions. Founded in 2000, SmartOps released its first multi-echelon inventory optimization (MEIO) product in 2001. The software company provides key operating parameters and targets for supply chain planning (SCP). Its solutions coordinate capacity, inventory, demand, lead time, and product availability variables with the idea to enable customers to optimize their inventory and service levels, and thus potentially free up their working capital for innovation and growth (or any other valid purpose).

Longstanding Partnership

SmartOps has had a formal business relationship with SAP since 2006, and for the last four years it has been a part of the program for solution extensions at SAP, i.e., offering the SAP Enterprise Inventory Optimization (EIO) by SmartOps solution. SmartOps' customers include about 60 major brands—Fortune 1000 and Global 2000 companies—in discrete manufacturing, consumer durables and packaged goods, technology, pharmaceutical manufacturing, distribution, chemicals, and retail industries. As part of the acquisition, SmartOps employees will join SAP. The transaction is expected to close during the first quarter of 2013, subject to customary closing conditions.

At the time of the acquisition, SmartOps had about 80 people, and I believe its revenue was at about $20 million “or just above” (which is by no means going to break SAP’s bank even if the price tag is a multiple of SmartOps’ revenue). A vast majority of SmartOps customers were SAP customers too (although the product integrates with all leading enterprise application platforms). The way that the joint selling and partnership has worked is really on an account-by-account basis. While SmartOps had an active direct sales force, the largest enterprise deals would often be led by SAP. Other factors that may have resulted in SAP taking the lead over are that

  • there were SAP add-on solutions in the deal,

  • there was a strong information technology (IT) lead with a “crush” on SAP, or

  • the account needed to have the entire deal on SAP paperwork (letterhead).

So Why Now, Indeed?

Again, this merger is no surprise by any stretch of imagination, and my only question is why now and not, say, three years ago (given that the two vendors have been selling together for ages). Sure, haggling over the price with SmartOps founders and investors could always be an issue, but the merger news announcement might be also telling us that SAP HANA and HANA-based sales and operations planning (S&OP) developments at SAP have had something to do with pulling the trigger. Thus SAP believes that the acquisition paves the way for SAP to develop a number of "real-time supply chain" software solutions by leveraging the SAP HANA platform, which empowers customers to run their businesses in real time—to analyze, predict, react, and adjust instantly.

Companies around the globe are facing the issues of volatile markets and growing logistics complexity. Winning in this environment requires an intimate understanding of the demand for a company’s products and a most efficient supply chain network. This requires continuous work on the sales and operation plans, which consider revenue and profitability right away. Core and center of the sales and operations plan is to ensure highest possible customer satisfaction and lowest inventory levels. Reducing the demand uncertainty, increasing predictability, and improving short-term forecast accuracy are needed, and only this capability will keep inventory as low as possible during day-to-day operations.

SmartOps has developed large-scale "stochastic" (nondeterministic) algorithms that take the uncertainty and risk out of supply chain management (SCM) processes. These algorithms use predictive analytics to help manage global distribution networks and vast multi-echelon supply chains. Such solutions could be significantly enhanced by SAP HANA, allowing for processing of high volumes of data in near real time. It also would complement and expand existing SCM and S&OP offerings from SAP, such as the SAP Sales and Operations Planning analytics application powered by SAP HANA, the SAP Demand Signal Management application powered by SAP HANA, and the SAP Advanced Planning & Optimization (SAP APO) SCM component, paving the way for a "real-time supply chain" solution.

The Time to Complement Is Now

SmartOps' flagship Inventory Optimization Suite is envisioned to complement and expand S&OP solutions based on SAP HANA, enabling a "real-time supply chain" solution to be built on SAP HANA. The suite also adds to the SAP portfolio of MEIO solutions, which global businesses need today. In addition, SmartOps has lately been quite busy developing new products and is just coming out of the early adoption phase with its cloud-based Enterprise Demand Sensing (EDS) and Analytics & Intelligence solutions. The next step was (prior to SAP’s acquisition) to integrate even more tightly the MEIO suite with the EDS solution. In any case, SmartOps' new EDS cloud-based analytics solution will now enhance SAP Demand Signal Management, enabling customers to predictively and more accurately manage their supply chain based on real-time demand and changing customer needs.

Demand sensing forays make sense for SmartOps and SAP, and that is the same message that I’ve recently gotten from ToolsGroup, the sole remaining independent MEIO vendor. ToolsGroup has also developed its own demand-sensing solution based on machine learning/predictive analytics to compete with the demand-sensing market and thought leader Terra Technology. ToolsGroup is even staying away from the “MEIO” word and rebranding itself as a SCP/demand planning provider. This move should speak volumes toward the value of MEIO solutions as a part and parcel of broader SCM offerings, and not really as a standalone software category.

Now What?

This move will make for a much more difficult life for ToolsGroup, IBM ILOG LogicTools, Manhattan Associates, JDA Software, Logility, and Kinaxis. But some of these competitors can still offer MEIO/S&OP options that may be a significantly better fit for some companies’ business in certain industries (and for a much smaller price tag). Take Logility for example—the vendor has long had its own in-memory solvers (that SAP HANA now promises to offer) and has long integrated its S&OP solution with former Optiant MEIO (Optiant had been SmartOps’ fierce competitor in the past). In addition, Logility already has a strategic network planning (SNP) piece from Optiant (so that now companies can even do what-if scenarios on inventories and strategic network nodes during strategic planning), which SAP offers via a Llamasoft partnership.

SmartOps and SAP SCM solutions have traditionally been major implementation projects with long durations and efforts in terms of money and human resources. Time will only tell whether SAP HANA and cloud deployments will mitigate this issue, perhaps via SAP’s future Rapid Deployment Solutions (RDS) offerings. In any case, SmartOps' patience and perseverance seem to have been worthwhile in light of some former close partners of SAP getting impatient, severing the relationship and going elsewhere (see blog post). Now that SAP has gotten its priorities right after digesting Sybase and developing HANA, will more similar smaller partner acquisitions follow suit, e.g., Vendavo, ICON-SCM, ClickSoftware, Netbase, Nakisa, Open Text, etc.?

The two merging companies intend to provide current customers the same, or increased, levels of support without disruption to their existing systems. This is certainly a no-brainer for joint SAP-SmartOps customers, but I would imagine non-SAP SmartOps customers to be taken care of as well (although some alertness and reaching out to SAP-SmartOps and inquiring about their support options cannot hurt).

Recommended Reading

Supply Chain Matters Initial Assessment of the SAP-SmartOps Acquisition. March 4, 2013.

How Much Supply Chain Optimization Do We Really Need? – Part 2. March 28, 2012.
Logility Connections 2012—Focus on Supply Chain X-Factors. February 10, 2012.
SAP HANA—Curing Cancer (for real), and More. December 4, 2012.
SAP SCM—Stepping Out of Obscurity. February 28, 2012.
SAP to Acquire Inventory Optimization Vendor SmartOps. February 25, 2013.
SmartOps Steps Out in to the Cloud SCM. July 30, 2012.
ToolsGroup—Going Back to Its SCP Roots. February 8, 2012.
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