Supply Chain Planning in 2000: The Brains Behind Internet Fulfillment

Supply Chain Planning in 2000: The Brains Behind Internet Fulfillment
S. McVey- April 4th, 2000

Market Overview

Supply 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.

Visualization 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.

In 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.

Before 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.

SCP 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 Resource Planning).

The SCP market is usually divided into the following segments:

Demand 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 operations.

Production 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.

Production 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 scheduling.

Transportation 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 delivery route.

Who 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.

The 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.

Corporate 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.

Since 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.

Consolidation 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.

ERP 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.

Supply 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 networks.

Electronic 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% over 1998.

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

We 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.

A 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.

Market Leaders

Apart 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.

i2

i2 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.

Strengths: 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

Challenges: 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%).

Manugistics

Manugistics 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.

Strengths: 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

Challenges: Corporate viability, delayed entry into Internet B2B software market, restructuring sales organization around new Internet offerings, rebuilding market confidence.

Market Challengers

The 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 best-of-breed category.

Aspen Technology

Aspen 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.

Strengths: Highly flexible product with feature-rich modeling language, toolset, and heuristics.

Challenges: Reconciling its product set around core supply chain management offerings, bringing industry-specific templates to market, building well-focused Internet-leveraged applications.

Logility

Logility 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.

Strengths: Comprehensive product suite, early lead in collaborative planning forecasting and replenishment (CPFR), pre-packaged. capabilities benefit many users

Challenges: Developing itself as an application services provider, selling its products to highest level of management, competing on even ground with much larger vendors.

Adexa, Inc.

Adexa, 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.

Strengths: Outstanding advanced planning and scheduling (APS) capabilities for the semiconductor industry, flexible programming language allows extensive customization.

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.

SynQuest, Inc.

SynQuest, 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.

Strengths: 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 network.

Market Predictions

Following 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.

Consolidations 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.

Though 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.

New markets will emerge to occupy the interstices between SCP and other existing markets, driven by the need for new technologies.

In general, products will grow more flexible and modularized to enable companies to personalize them for their particular needs.

Vendor Recommendations

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.

Although 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.

User Recommendations

Though 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.

Users 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.

Companies 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.

Dot-com 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 company growth.