Transition for Manhattan Associates Necessary for Long Term Growth

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Transition for Manhattan Associates Necessary for Long Term Growth
S. McVey - February 2nd, 2000

Vendor Genesis

Based in Atlanta, Georgia, $78 million Manhattan Associates, Inc. develops, markets, and supports supply chain execution systems for distribution center management. Founded in 1990 by former KSA consultant Alan Dabbiere with Ponnambalam Muthiah, Deepak Raghavan, and Deepak Rao. Manhattan installed its first Pickticket Management System (PkMS) license at Jockey International in 1991. In February 1998, Manhattan purchased Performance Analysis Corporation and incorporated its slotting product, SLOT-IT, with its PkMS applications. Later that year, Manhattan completed an initial public offering worth $53 million, although falling revenues and economic factors have eroded its market capitalization since then. Root causes of Manhattan's decline centered on the company's rapid growth from a staff of 25 in 1995 to over 500 today. In mid 1999, Manhattan reorganized its staff and operations, bringing in CEO Richard Hadrill to complement the vision of founding members with experience in managing a large organization.

Manhattan Associates reported total revenues of $62 million for fiscal 1998, an increase of 93% over the previous year (see Figure 1). Manhattan has achieved an impressive 70% growth in annual revenues since 1995, but high sales overhead and restructuring expenses have kept earnings low. In addition, Manhattan's revenue mix has shifted drastically toward services over the past two years (see Figure 2), a trend that threatens to further erode operating margins. In 1998, services accounted for 52% of its total revenues. The remainder was divided among new licenses and hardware in the form of supporting computer platforms and radio frequency devices used in conjunction with PkMS.

Vendor Strategy and Trajectory

Manhattan occupies the fourth position among supply chain execution vendors behind Industri-Matematik, privately held McHugh Software, and International Business Systems. In contrast to some other players, Manhattan touts a relatively narrow product offering, concentrating primarily on warehouse management systems (WMS) and transportation management software for its six target markets: e-commerce, retail, apparel/footwear, consumer products manufacturing, food/grocery and third-party logistics. The PkMS suite has grown to encompass applications for inventory management, freight management, parcel shipping, work order management, and outbound distribution. The inventory management and outbound distribution systems are supplemented by RF extensions for remote data entry. SLOT-IT is a dynamic slotting system that optimizes the placement of items in a pickline. ASN Enabler is an Internet extension to PkMS for sending advanced ship notifications. Manhattan's applications have been used to support fulfillment operations by many on-line companies, such as J. Jill Group, Patagonia, and Cornerstone International, but only by integration to other products that create the web storefronts and handle the transaction activities. Manhattan lags behind many of its competitors in development of Internet-enabled applications such as intranet/extranet and hosted applications, areas that could be vital for the company's long term growth.

Vendor Strengths

  • Well-defined warehouse management system: Manhattan offers as part of its warehousing capabilities RF-enabled inventory management (IMS) and outbound distribution (ODS), task management for IMS, cycle counting and work order management, wave management, verification, freight management, and parcel shipping. In addition, Manhattan can provide one-stop shopping by offering server platforms, radio frequency equipment, and other peripherals.

  • Service provider partnerships: Manhattan has one of the most comprehensive service provider partner networks of its peers. Its 20+ systems integrator partners include Andersen Consulting, Deloitte & Touche, PricewaterhouseCoopers, EDS, plus a host of smaller, specialty firms like AnswerThink, Clarkson-Potomac, and Sedlak Management Consultants.

Vendor Challenges

  • Dropping license revenues: Although license revenues nearly doubled from $7.2 million in FY97 to $13.8 million in FY98, they have declined by an average of 6% over the past four quarters. More alarming is the 9% rise in services revenues over the same periods (see Figure 2). Though the company can subsist on services revenues in the short term, its long term success depends on its ability to resurrect market demand for its products in the form of new licenses.

  • Unclear market perception: In the broader enterprise applications marketplace, Manhattan is regarded as a WMS vendor with little or no transportation management capabilities. Its marketing strategy lacks the intelligence to resolve PkMS's highly interrelated warehousing and transportation features. The nuances of this interoperability are lost when Manhattan's message reaches the IT community.

  • Undefined Internet product strategy: Apart from its success in providing fulfillment back-ends for Internet retailers (See TEC News Analysis article: "Manhattan Associates' New Partnership with CommercialWare"), Manhattan lacks web-enabled products, in spite of the fact that many parts of its suite are well-suited to deployment over an intranet or extranet. Warehouse management alone provides huge potential for collaborative applications such as VMI (Vendor Managed Inventory) and CPFR (Collaborative Planning Forecasting and Replenishment)..

  • Heavy reliance on direct sales: Essentially all of Manhattan's products are sold via direct sales. The high overhead is evident in the company's sales and marketing expenses, which account for over 36% of total expenses. Certain third party integrators receive finder's fees from Manhattan and represent the company's only quantifiable indirect channel.

Vendor Predictions

  • Manhattan will unveil a definitive Internet strategy that will focus its product development efforts and alliance structure. Short term, this announcement will renew investor confidence and help generate a 5% increase in license sales (70% probability).

  • As part of a broader alliance strategy, Manhattan will form a significant partnership in the next six months with an Internet technology provider. The candidate will likely be drawn from vendors who support Internet retailers that see PkMS as a common denominator among their suppliers (70% probability).

  • Provided that Manhattan can stake a claim in the e-Business marketplace within the next 12 months, it can expect to see a return to a healthier 50/50 mix of licenses/services by the second quarter of fiscal 2001 (60% probability).

Vendor Recommendations

  • To jump-start its Internet presence, Manhattan should consider a strong alliance or merger with a company that can seal Internet fulfillment contracts with e-tailers and other web commerce companies, such as InterWorld or Edify. Its newly announced partnership with CommercialWare has the potential to deliver its WMS and TMS capabilities to a much wider audience of Internet companies.

  • Manhattan should look ahead for future Internet opportunities such as application hosting and supplier network collaborative planning. Movement in these directions, however, requires considerable investment in R&D, not to mention a change in services support strategy.

  • Seek strategic marketing partnerships with complementary software vendors and systems integrators. In addition to streamlining the sales cycle, it can help expand business to overseas markets, a segment that accounts for less than 5% of Manhattan's revenues. The recent alliance with Intentia represents a positive step in this direction (See TEC News Analysis article: "Manhattan Associates Partners with Intentia").

User Recommendations

For companies operating in retail, apparel, or consumer goods manufacturing who need solid warehousing or transportation management capabilities only, Manhattan is a logical short list candidate. Companies who are looking for support for e-Commerce initiatives, such as e-Procurement and Internet fulfillment will want to consider Manhattan, but only in conjunction with vendors that offer web front-ends and transaction processing engines (such as CommericalWare). On-line companies with special transportation and storage requirements, such as those in perishable goods delivery should pass over Manhattan in lieu of alternatives with competencies for these requirements such as Descartes Systems Group.



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