SAP's Approach to the Retail Market

Introduction

There are some interesting dynamics within the retail market segment. On one hand, the market is much less penetrated by enterprise applications than most other economic sectors, in part since retailers have largely been remiss in leaving mainframes and other legacy technologies behind. Also, the sector has shown some resilience even during the recent and possibly still ongoing economic malaise, in part as the consumers have been stretching their credit card balances and limits. Generating more than $3 trillion (USD) annually in sales, retail is the second largest industry in the US, as reported by the US Census Bureau in April 2003.

However, on the other hand, the sector has been demanding on both the software vendors' and their prospective customers' capabilities, since retail organizations and their suppliers alike are constantly facing intensifying competition, fluctuating demand whether or not due to seasonality, picky and fickle customers, evolving retail channels, and increasing globalization, whereby sales are pressured, margins are compressed, and almost all participating companies have to try to achieve improved results with fewer people. As a result, retail organizations seek enterprise applications and other information technology (IT) solutions to better manage their increasingly complex businesses that have to cut across different enterprise business disciplines instead of focusing only on a particular one in an isolated manner (e.g., procurement, marketing, finance, customer service, etc.), and thereby improve their operating efficiencies and financial performance, and strengthen their relationships with customers and suppliers.

Therefore, companies in the retail market do have specific IT requirements to support and optimize their operations. To that end, general enterprise resource planning (ERP) solution providers have traditionally been unable to fully meet the demands of these organizations, but recently some major ERP players have been developing in-house, buying, or partnering with vendors that have retail point solutions to increase their appeal to retailers. Although the retail and wholesale customers have typically invested a low proportion of their total revenues in IT, as the leaders in this industry begin to demonstrate an ability to achieve market advantage through effective use of specialized enterprise applications, the requirement for all retailers to increase their investment in IT and adopt best practices has thus grown. For a detailed discussion of what software vendors face when addressing the retail market, see "Retail Market Dynamics for Software Vendors."

SAP Embraces RFID

There is also a threat of traditional ERP providers that have lately made serious strides in the retail sector. For example, SAP, which has since the mid-1990s corralled a broad retail enterprise suite, with traditional ERP as a core, has recently revamped and tightly integrated retail applications designed to address a gamut of requirements for store operations, workforce management, merchandising, and advanced planning for companies in the consumer packaged goods (CPG) and general merchandise and apparel (GMA) sectors.

What should help its retail segment cause is the fact that SAP has also been tacitly researching radio frequency identification (RFID) enabled processes since the late 1990s, within which time it has created an RFID customer council with over eighty customers, and was one of the first software suppliers to join the erstwhile Auto-ID Center (now EPCglobal, an organization which is designing the critical elements and creating global standards for the next generation barcodes as a mainstream method of business to business [B2B] product identification—called the electronic product codes [EPC]), and has created proof of concepts with retailers METRO Group and Procter & Gamble, whose live projects in early 2003 were far ahead of the still mainly experimenting and pondering rest of the SCM vendors' pack, bringing the technology and the related software to a further degree of stabilization (for more info, see RFID—A New Technology Set to Explode?).

Having been an overall enterprise applications leader, SAP has a more holistic view of where RFID should fit and is building capabilities that will enable it to have more flexibility in how RFID is applied for specific customer requirements across the entire value chain. To that end, the solution provides out-of-the-box support for packing and unpacking, goods issue, receiving, and track and trace business processes. SAP applications bundled to provide these capabilities include SAP's Web Application Server, SAP Auto-ID Infrastructure, supply chain event management (SCEM), and SAP Enterprise Portal. The Auto-ID Infrastructure, which links RFID data to disparate back-end systems, includes a Business Rule Configurator for creating new business processes, while SAP Event Management aims at monitoring exceptions to business processes triggered by data coming from RFID-tagged products or other sources.

The core data structure of the solution will be built on the Shipping and Receiving Module within SAP Warehouse Management (WM), to which SAP has added RFID adaptors to integrate the data with its core ERP, SAP APO (advanced planning and optimization), and other supply chain management (SCM) applications. In addition to the inbound and outbound delivery processes, SAP supports automated operations through its Handling Unit Management module which is integrating packaging data into end-to-end logistics processes, starting from production through warehouse and transportation operations. SAP's concept of a "handling unit" (i.e., a distinctively defined entity that can capture a nested setup of sub-elements, such as a mixed palette or multiple items in a case) is aimed at deploying RFID at various levels (e.g., palette, case, individual item), which will be important as RFID technology matures to support these intricate requirements. This RFID infrastructure with the handling unit concept appears a bit more ambitious and thus heavier and more expensive in terms of implementation services than that offered by supply chain execution (SCE) best-of-breed-vendors, but will eventually allow for the practical usage of RFID data across more and broader processes and applications within the value chain.

Further, the real benefits of RFID will be achieved when the integration of the EPC data will be a substantial part for the control of business processes. For example, the SAP solution could be applied in warehousing, manufacturing, transportation, and at touch points between these (e.g., production line replenishment of the warehouse, cross-dock from receiving to production line, shipment verification in warehouse, to manifesting, control of yard movements, and then in-transit visibility up to a final proof of delivery in transportation).

Strategy Analysis

For the above reasons, SAP has become a force to be reckoned with in the retail sector, especially in Europe and within certain retail sectors like fashion and apparel where it has gathered hundreds of customers (see SAP Learns The Ropes of Fashion and Outfitting). SAP and its ERP peers appear to understand that continuously improving the way enterprise information is presented and by marrying analytics, optimization, and retail operation systems on top of an ERP platform is starting to win over retailers. By building out its retail offering atop its enterprise platform and by tapping its maturing portfolio of SCM, e-commerce, portal, product lifecycle management (PLM), and customer relationship management (CRM) offerings, the likes of SAP can provide the building blocks for retailers.

Still, SAP's challenge, as it expands its global reach as a dedicated solution provider for the retail sector, will be to penetrate the US retail market with the similar success it has achieved in Europe, but which is more fiercely defended by the likes of JDA and Retek. The success will also require more than simply repackaging existing applications with appealing retail sector wrapping paper, but rather to provide many of the above-depicted deep retail-specific nuggets of functionality. Therefore, the latest or upcoming components of the SAP for Retail suite already do or will contain what the deep retail-specific functionality retailers require, which will be the topic of a more detailed research note in the future. Further, much of this functionality is available on a modular basis, much like a point solution, meaning that retailers could get best-of-breed functionality with complete built-in integration capabilities from SAP.

Indeed, the decision to base the enterprise application backbone on an ERP system or piece together a best-of-breed strategy has never been an easy decision in any industry and in any functional area like business intelligence (BI), CRM, SCM, PLM, and so on, at least given that there are a number of possible package combinations alternatives in most of these. Also, the ERP vendors had long ignored the retail sector to only recently move more aggressively into the wide-open market, striving to thereby provide greater industry-specific functionality if they are to displace today's still popular approach of opting for integrating best-of-breed software. Yet, with SAP's modular approach and its near best-in-class functionality in many areas, it soon might no longer be a question of best-of-breed versus ERP, but rather it will be the best of both worlds with a phased approach, with SAP's strong retail functionality complete with integration to retailer's other enterprise systems (e.g., via the SAP NetWeaver platform) and the availability of SAP's core enterprise applications down the road. For instance, retailers can start with merchandise and assortment planning then obtain forecasting and replenishment and then when they're ready, move into financials and HR. This way, retailers could tackle their IT needs on a phased approach rather than a giant ERP-like implementation.

This brings us to the fact that the ERP vendors are making their way into the retail market by bundling, acquiring point solutions (as in the case of Lawson Software, see "Lawson's Approach to the Retail Market"), or partnering strategically to embed retail-specific functions within their suites. Like in all other enterprise applications markets, eventually albeit not any time soon, the retail market too will come down to a showdown between the pure retail vendors and the enterprise application vendors (e.g., Oracle, SAP, Lawson, PeopleSoft, SSA Global, Geac, Intentia, etc.), which have been striving to natively embed more retail-specific capability into their products. As usual, the enterprise vendors will bet on leveraging existing customers who will have deeply invested in them, and have even reorganized operations around their ERP systems.

The promise of retail products from ERP vendors is the link to financial and manufacturing systems (albeit mostly the vendors' own, which is logical at this stage) and include collaborative supplier relationship management (SRM) and PLM capabilities, and links to customer data in CRM systems. A single-vendor approach by ERP providers could produce other benefits too, like integrated and consistent processes throughout the supply chain, consistent data-model for the entire enterprise, and easier estimation of overall project cost and implementation management through primary relationship (i.e., "one throat to choke"). The business opportunity is to move from supply- to demand-driven retailing, via merchandizing, replenishment, pricing, promotions, consumer loyalty schemes, and multichannel management systems, all working off the single ERP platform.

However, the retail vendors' Holy Grail has become working with information from heterogeneous sources, an order du jour' within many large organizations, which often have more than one ERP system or various retail point solutions and legacy systems, albeit SAP will claim that much of this issue might be addressed and solved with SAP NetWeaver. This is analogous to the enterprise applications integration (EAI) market, since in larger corporations, customers still may prefer integration vendors with renowned product strength, vertical expertise, financial viability, and savvy in extensible markup language (XML)-based business-to-business (B2B) integration, multi-platform integration, and workflow management. The best-of-breed approach could still often provide the selection of a functionally richer system for each business area from a more specialized vendor, elasticity and exit strategy against a particular vendor's failure or demise, and greater flexibility in terms of substitution of individual elements as to accommodate any adaptation needs.

The current retail leaders' superiority, like in the case of the SCM and CRM markets, will eventually diminish as the ERP vendors continue to improve their retail-specific functionality, collaborative capabilities and accessibility, and add universal interfaces, including the new web service standards to facilitate access and integration of data outside their own environment. Thus, the retail vendors need to establish as strong a hold on the market as possible before the enterprise and platform vendors catch up. Especially the remaining Tier 2 and 3 retail point solution vendors, if they cannot gain significant traction and distinctive differentiation, could find themselves in a position of needing to either be acquired or join forces with a complementary functional or platform technology vendor via alliance or acquisition.

On a more general note, retailers will have to find a fine balance between investments in emerging technologies and their ability to tactically stake out effective competitive differentiation in what seems to be challenging times for all. The winners will be those who can align their investments with the ever-changing preferences of their customers, who may prefer in-store or off-store channels, or both. On one hand, technology investments that facilitate speed of checkout, self-service, multiple sales channels, inventory availability, and personalized content are what will engage customers and make them feel close to being the only customer. On the other hand, strategic technology investments in historical data analysis, demand-based forecasting and replenishment (store- and distribution center [DC]-level), seasonal profiling, allocation, and space planning, measuring shelf space performance, will be the pedestals on which growing revenue and improving margins will be built.

Whether considering new enterprise applications based on a single-vendor offering or constructing a best-of-breed portfolio of retail applications, prospective users should espouse a consistent technology infrastructure to avoid the pitfalls of too many supported platforms, while ensuring open and broad integration functionality that focuses on common product and pricing data sources and the necessary, ubiquitous connections to trading partners. In retail companies where employees have more autonomy and initiative, best-of-breed approach will typically let employees work with the best tools for their peculiar needs and talents. On the other hand, the sweeping changes imposed by usually more rigid single-vendor solutions (particularly from unified ERP offerings) may work better in more autocratic companies.