Chain Planning in 2000: The Brains Behind Internet Fulfillment
S. McVey- April 4th, 2000
chain planning (SCP) software applications reason through the difficult
trade-offs that manufacturers face in producing goods and delivering them
to customers. They do this either by giving users tools for visualizing
their supply chains in ways that facilitate decision-making, or by automating
the entire decision-making process.
Automation is useful where the decisions are guided by straightforward
goals and assumptions, but involve large numbers of repetitive or calculation-intensive
tasks. This is the case in factory planning, where an algorithm can instantaneously
sequence a set of assembly operations across multiple production lines
and facilities while balancing material and capacity limitations with
order due date compliance.
is important where decisions are based on incomplete or uncertain information.
A good example occurs in forecasting, where SCP may predict demand for
a product based on seasonal trends and customer-supplied estimates but
gives the planner final responsibility for the consensus forecast.
both cases, SCP systems are the brains behind customer fulfillment. The
potential benefits of SCP systems have been well documented and include
reduced inventory levels, lower production costs, shorter order cycle
times, and improved customer fulfillment.
continuing, it is important to define terms. The supply chain is a group
of enterprises that share materials, resources, and information with one
another in order to produce goods and distribute them to customers. This
group typically includes one or more of one of the following: suppliers,
production facilities, warehouses, distribution centers, and resellers.
applications provide tools for facilitating and, in many cases, automating
these decisions but stop short of executing on them. Again, using factory
planning as an example, constraints such as raw material availability,
resource capacity, and shift schedules are reviewed and applied to generate
a production schedule that indicates what products will be made and where
they will be stored. Generation of the transactions involved, such as
purchase orders, work orders, parts lists and picklists, is left to other
systems, such as MES (Manufacturing Execution Systems) or ERP (Enterprise
SCP market is usually divided into the following segments:
Planning: Demand planning involves creating forecasts to anticipate
customer demand. Forecasting usually involves some level of agreement
between a supplier and its customers (resellers, retailers, wholesalers,
manufacturers, etc.) regarding projected demand. By superimposing the
effects of seasonal factors, promotions, new product introductions, economic
cycles, competitive actions, and other events, planners build a demand
profile that can be acted on by procurement, manufacturing, and distribution
Planning: Production planning determines the blueprint for meeting
forecasted customer demands under assumptions regarding material and resource
availability. Production plans usually specify what products are to be
ordered or manufactured, required quantities, any raw material sourcing
or procurement activities, and other information. Usually, companies decide
to allocate available materials and resources to those customers' orders
that will maximize their profitability, fulfill previous inventory agreements,
or aid the development of preferred business partners. Production plans
usually take into account these allocations, or material and capacity
set aside for particular forecasted demand. Industry frequently determines
the scope of production planning. In discrete manufacturing, production
plans typically consider material availability only. For process manufacturing,
resource capacity plays a larger role.
Scheduling: Where production planning seeks to fulfill projected demand
under idealized conditions of material availability and capacity, production
scheduling concentrates on meeting firm customer orders given actual material
and capacity constraints. Algorithmically, production scheduling differs
from production planning primarily in regard to time horizon and granularity.
Production plans map out expected material flows by week, month, or even
year, while production schedules focus on smaller intervals of time: days,
hours, and even minutes. Production scheduling frequently involves horizons
of less than two weeks, although industry is the determining factor. Generally,
volatile businesses tend to have shorter scheduling horizons, as longer
ones are usually wasted effort because of order cancellations. Alternatively,
production scheduling is referred to as factory scheduling or manufacturing
Planning: Transportation planning involves managing the flow and storage
of finished goods from warehouses to distribution centers and end customers.
Transportation time, modes, and costs are the primary trade-offs that
SCP seeks to balance in order to arrive at a reasonably cost-effective
distribution plan. Route optimization is a particularly profitable component
of transportation planning that uses constraint-based algorithms to strike
a balance among these trade-offs to determine the most cost-effective
Buys SCP and Why
The majority of SCP software acquisitions are made by top tier manufacturing
companies (those with annual revenues in excess of $2 billion). This results
from two factors: 1) large companies tend to have diffuse, complicated
supply chains that are difficult to manage with traditional processes
and 2) SCP product license fees run, on average, $550,000 per installation
with an additional $1 million to $5 million in services and consulting
fees. As SCP vendors penetrate the top tier, we expect that competition
and application hosting will bring the price of SCP into a range where
mid market companies (those between $200 million and $2 billion) can participate.
Internet represents the greatest force behind SCP market growth today.
E-commerce has opened new revenue opportunities for companies of all sizes
but presents significant challenges to customer fulfillment. Many of these
result from the Internet's ability to communicate vast amounts of information
instantaneously throughout the world. Electronic storefronts that can
place products in front of consumers around the globe avail a company
little without efficient back-end order fulfillment. In addition, a consumer
who becomes frustrated with poor service from one company can find a competitor
by merely pressing a key or clicking a mouse button. The importance for
companies to effectively manage internal fulfillment operations, from
procurement through manufacturing to delivery, will continue to grow as
more products are bought and sold over the Internet.
users also face new imperatives created by the Internet. Online marketplaces
for buying and selling commodities require well-run order management and
distribution capabilities to keep fulfillment costs low. Many companies
are forging more directed alliances that require trading partners to share
visibility into their inventories and production capacities via the Internet.
Collaboration among companies involves processes that are central to supply
chain planning, such as forecasting, replenishment, and fulfillment planning.
1996, ERP vendors have been the dominant force in SCP market consolidation.
The inadequacies of traditional planning algorithms for managing the increasingly
competitive global environments of customers are well known. In response,
ERP vendors have sought to augment their core manufacturing and distribution
transactional systems with best-of-breed supply chain management capabilities.
Because the complex nature of advanced planning systems presents a formidable
challenge to internal development, ERP vendors usually find acquisition
a more cost effective means for obtaining these capabilities. SCP vendors
bring proven software products and deep expertise developed over many
years that would otherwise need to be generated from scratch.
also occurs between SCP vendors when one company needs capabilities in
a particular industry vertical or discipline. Contrary to popular opinion,
such combinations can present as many challenges as those involving ERP
vendors, since SCP software products can have widely different underlying
architectures. Table 1 lists some of the more notable SCP acquisitions
in the last four years.
1 -SCP Acquisitions by Leading Enterprise Application Vendors Since
Edwards & Co.
Logistic Information Systems
Distribution Architects International
is by no means the only software market that recognizes the competitive
advantage afforded by SCP. Customer Relationship Management (CRM) vendors
such as Siebel routinely collaborate with SCP vendors to more tightly
integrate their customer facing and call center management applications
with back-end order fulfillment engines.
Chain Execution (SCE) is a natural fit for SCP as it takes plans and schedules
generated by SCP and handles creation and flow of transaction-level data
to support the plans on the shop floor, in the warehouse, and over transportation
Procurement (e-procurement) is quickly dominating the procurement of commodity
goods and vendors announce new online trading marketplaces geared toward
a particular industry segment almost weekly. These marketplaces are popular
among SCP vendors due to their ease of implementation, quick return on
investment, and broad appeal within the buying community.
SCP Market Size
As little as four years ago, observers were debating whether supply chain
planning was merely a fad or the next revolution in business applications.
Since then, SCP has changed the way companies operate their businesses
and established its importance among manufacturing companies, distributors,
retailers, and dot-coms. TEC conservatively estimates the SCP market size
for 1999 at $1.7 billion, which represents an average increase of 41%
Market growth slowed in 1999 due to several factors including:
- Diversion of corporate information technology budgets for Y2K remediation
and resulting delay of SCP projects
- Spending paralysis brought on by some ERP vendors that announced
SCP applications in advance of availability and/or viability
- Large enterprise market saturation of SCP installations and lack
of penetration into the Small-to-Medium Enterprise (SME) market
- Market confusion created by SCP companies reformulating offerings
for Internet fulfillment and e-business
base SCP market size on total revenues from software sales, services,
and maintenance derived from SCP products. A breakdown showing revenues
of the larger best-of-breed vendors, ERP vendors, and others is given
in Table 1. SCP market size estimation is not a straightforward procedure.
Less than four years ago, twenty vendors shared roughly 90% of the SCP
market. Most of these were small, private companies that offered solutions
within a particular specialty. Since that time, acquisitions and mergers
have reduced the fragmentation of the SCP market, though at the expense
of its precision.
large portion of the SCP market is embedded within broader application
suites and most vendors are loath to divulge segmented revenue data for
SCP. For the many niche vendors that are still privately held, estimates
are given where public results are unavailable.
2 - SCP Market Financial Data
Revenue ($ billion)
revenue growth of the market
from revenues, the SCP market leaders are characterized by their broad
product offerings, large client bases that comprise a wide range of industries,
and strong alliances.
was the dominant SCP vendor in 1999 and maintains an enormous lead over
its competitors. Its annual revenue growth averaged a staggering 105%
per year from 1995 to 1999, giving its 31% share of the total SCP market.
License revenues comprised a healthy 62% of its total revenues in 1999,
evidence that i2 is still a company on the rise. Though i2's total revenue
growth has begun to slow in recent years, its 55% increase between 1998
and 1999 is enviable by market standards. i2 is an emerging force in the
B2B trading marketplace market and recently acquired Aspect Development
Corporation, a provider of industrial parts catalogs, for a record $8.6
billion in stock.
Clear market lead, well ahead of its competition and high brand recognition;
superior financial position; diverse product suite offers SCP and many
adjacent features such as CRM and e-procurement; vast alliance network
comprising e-commerce, CRM, ERP, and service providers
Maintaining its SCP market lead over ERP competitors whose ability to
combine manufacturing, financials, and human resources functionality with
SCP (acquired or developed in-house) allows them to offer complete enterprise
solutions without interfaces, partnering effectively with system integrators
to better manage implementations, transitioning to a more mature rate
of growth (25-35%).
found 1999 a very challenging year. Its license revenues dropped by 47%
and services revenues dipped slightly, 4% below 1998 levels. Manugistics'
market position foundered as the company focused inward, making wholesale
changes to its executive management team, streamlining its operations,
and reassessing its corporate strategy. Despite its poor showing in 1999,
it still managed to retain 8% of the total SCP market, placing it a distant
second after i2.
Full SCP product suite, solid transportation and distribution planning
functionality, largest customer base of supply chain management vendors,
reputation for experienced implementation services and support
Corporate viability, delayed entry into Internet B2B software market,
restructuring sales organization around new Internet offerings, rebuilding
SCP market challengers have potential to grow substantially over the next
few years to rival the market leaders, but not without making big investments
in sales, marketing, and third party alliances with e-commerce vendors
and systems integrators. This excludes many small, private vendors devoted
to a particular industry or functionality niche that are nonetheless successful.
We present four market challengers, one that bundles supply chain management
into a larger suite (Aspen Technology) and the rest that fall into the
Technology made its mark selling software applications for process simulation
and control, though its fastest area of growth is SCP since acquiring
Chesapeake Decision Sciences in May 1998. Following an impressive period
of 51% average annual growth since 1994, Aspen staggered in 1999 under
the effects of a market downturn in two of its target industries, chemicals
and petroleum refining. Aspen appears as an SCP challenger for making
its MIMI-based applications the cornerstone of its product offerings and
its leadership in the process manufacturing industries.
Highly flexible product with feature-rich modeling language, toolset,
Reconciling its product set around core supply chain management offerings,
bringing industry-specific templates to market, building well-focused
has made significant strides since coalescing from separate divisions
of parent American Software in 1997. Though the company grew by a respectable
average annual rate of 38% from 1994 to 1998, it slid 22% in fiscal 1999.
Logility attributes the decline to the Y2K market malaise, weakness in
the global economy, and increased competition from ERP vendors.
Comprehensive product suite, early lead in collaborative planning forecasting
and replenishment (CPFR), pre-packaged. capabilities benefit many users
Developing itself as an application services provider, selling its products
to highest level of management, competing on even ground with much larger
Inc., formerly Paragon Management Systems, is one of the early advanced
planning and scheduling vendors to enter the market. Though a small player
($30-35 million estimated revenues), privately held Adexa possesses a
broad product suite that contains most of the features one could wish
from an SCP application. Adexa has perennially spent more effort on product
development that it has on sales and marketing, a fact that helps explain
its low profile in the marketplace. A new corporate identity and plans
for an IPO suggest that Adexa has grown weary of operation as an also-ran
and is ready to engage the larger SCP players.
Outstanding advanced planning and scheduling (APS) capabilities for the
semiconductor industry, flexible programming language allows extensive
Challenges: Putting sales and marketing muscle behind its product,
developing strong alliances with third-party channels, expanding its industry
vertical coverage beyond semiconductor and high tech.
Inc., another small, private company ($25-35 million estimated revenues),
was founded in 1994 as a manufacturing execution system vendor. Though
its product suite contains execution-level elements in its manufacturing
system, SynQuest also offers core supply chain planning products that
trace their origins to acquired French APS vendor Log'In. SynQuest possesses
a strong vision for combining SCP and SCE, a trend that is becoming popular
as vendors recognize the benefits of the union. Similarly to Adexa, SynQuest
is mulling over plans for an IPO later this year.
Products enable precise synchronization between ERP and SCP, good track
record for discrete manufacturing, early in offering genetic algorithms
and neural network approaches for optimization.
Challenges: Resuming once rapid growth (~80% revenue increase in
1997), generating broader market enthusiasm, and building its alliance
its slowdown in 1999, the supply chain planning market should advance
with a compound annual growth rate (CAGR) of 50-55% over the next 3-5
years. The SCP market will continue to be driven by the rapid advance
of e-commerce and its imperatives for efficient B2B (business-to-business)
and B2C (business-to-consumer) fulfillment.
will continue to occur among the SCP market leaders and challengers, ERP,
CRM, and e-commerce vendors that will change the competitive landscape
dramatically by 2005.
many SCP vendors will be subsumed by larger enterprise application providers,
others will remain independent or complement their capabilities by using
ASPs to join their applications to those of other vendors.
markets will emerge to occupy the interstices between SCP and other existing
markets, driven by the need for new technologies.
general, products will grow more flexible and modularized to enable companies
to personalize them for their particular needs.
Terms like trading networks and e-fulfillment are scattered throughout
corporate press announcements. This belies the fact that SCP vendors have
just begun exploring the possibilities afforded by the Internet. While
investments in Internet-related products should not be made carelessly,
vendors should not hesitate to embrace the opportunities that the Internet
provides and be proactive in establishing internal development agendas
focused on web products and/or partnering with Internet-enabling companies
to avoid falling behind.
In competing with the best-of-breed vendors, ERP system providers are
hampered by lack of expertise in this still evolving field. To win favor
among corporate buyers, ERP vendors need to solve the intractable problems
of global enterprise planning, such as raw material and capacity sharing
across multiple supply chains, problems that have yet to be adequately
resolved by even the best-of-breeds. While ERP vendors work to achieve
the vision laid out by the SCM vendors, these same companies have the
opportunity to move on and maintain their lead. Acquisition of or merger
with SCP vendors remains the most expedient method for ERP and other vendors
to add these capabilities to their suites.
i2 and Manugistics could arguably be placed outside the best-of-breed
category due to expansions of their product suites, such as e-procurement
and CRM, their core expertise remains centered in SCP. Additions to their
suites should be encouraged as they enable them to cover more of their
clients' business needs. For small vendors to remain competitive, they
need to continue making enhancements to functionality within their particular
domain and form alliances with complementary vendors that can increase
the relevance of their applications in areas beyond their niches.
SCP has grown considerably since it appeared on corporate radar screens
in the 1990s, the central tenets and benefits of the discipline remain
the same. SCP offers companies the means to automate decisions to more
efficiently and easily manage their businesses. The biggest savings result
from lower inventories, shorter order cycle times, and reduced operating
costs, though these are only achieved when implementations follow a period
of careful preparation and package selection. Many SCP implementations
go astray because SCP, as a "higher level" planning tool, is often considered
to have less impact on day to day operations than ERP, and hence receives
less attention by top management of larger organizations. Historically,
smaller companies have fared better with SCP since it requires a greater
percentage of their money and personnel resources to implement.
who have only recently embarked on information technology purchases and
have little or no legacy infrastructure can achieve immense benefits from
standalone SCP packages, such as those offered by best-of-breeds on an
NT or Unix platform. Most SCP products can accept data input via standard
text files and can produce similar files for manipulation by spreadsheets
and other reporting tools. Web hosted applications may be an even more
attractive option in terms of pricing, but is a less mature model than
traditional licenses and a smaller selection of SCP applications are available
through application service providers.
that use advanced planning capabilities offered within ERP systems should
make periodic surveys of best-of-breed offerings, all of whom have reasonably
mature interfaces to most larger ERP products, or at least have joint
implementation experience. Though SCP vendors generally have less money
to invest in product development than their ERP counterparts, they compensate
through a dedicated corporate focus on SCP. Among SCP vendors themselves,
innovation is often found within private companies that are not bothered
by Wall Street concerns that would prevent them from taking chances.
retailers and other companies that sell products over the Internet, both
established, brick-and-mortar companies with web outlets and true Internet
startups, should make SCP a priority in corporate IT budgets. SCP applications
are generally more scaleable than ERP systems and will keep pace with