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.
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.
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
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.
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.
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
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.
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
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 ProcessCity.com, 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.
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.
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.
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.
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.
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.
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.
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.).
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.