Gilmore Says:

Supply chain, as most of us know it, is in the end really about planning, making and distributing physical things. When unit volumes grow in a strong economy, they create pressure and performance challenges that technology can help address. What do you say? Send us your comments here

In case you haven’t noticed, these are pretty good times for supply chain software providers - the best since right before the Internet bubble crashed. I think there are some insights arising out of this worth considering for most of us.

Let’s just start with some facts:

• In our supply chain and logistics stock index, supply chain software companies, including ERP providers SAP and Oracle, are up very strong over the past year. Logility is up 65%, for example; JDA, which bought Manugistics, up 37%; Manhattan Associates, up 30%; Ariba, up 19%.
• These stock price increases naturally reflect increases in overall profits, which for software companies is largely driven by sales of licenses, subscriptions and maintenance. Among the public companies, here are some more numbers: Manhattan’s ever growing license revenue is up 15% in 2007; Logility reported software sales in its most recent quarter up 48% over the prior year; in the second quarter, JDA signed 71 new software license deals, including four contracts that exceeded $1.0 million, and strongly expanded overall software revenue; Ariba signed more than 170 deals; i2 said it expects software bookings in 2007 to exceed its strong results in 2006.
• The supply chain results of the ERP companies (SAP, Oracle, Infor, Epicor) also seem to be strong.
• It isn’t of course just the public companies that are thriving – many of the privately held companies we track, such as RedPrairie, Softeon, LogicTools (now part of publicly traded ILOG), HighJump (part of 3M but without reporting separate results), GT Nexus, and many others are also very busy.

So what’s going on? Well, as with most things, in fact even more so for supply chain software providers, software sales tend to track the economy. In both the U.S. and globally, the economy has been strong.

Just as importantly, supply chain, as most of us know it, is in the end really about planning, making and distributing physical things. When unit volumes grow, they create pressure and performance challenges that technology can help address. Strong corporate profits provide the capital.

I also did some checking on this topic with a few people who I knew would have some good insight, including the always informative Andrew White of Gartner.

“Overall spending on SCM has expanded across several areas – both what we call process automation and process innovation,” he told me.

“The mass market has been adopting SCM best practices now for several years. A few years ago the focus was on Supply Chain Execution with warehouse management and transportation management being most critical to help manage the basics and keep costs down. Drivers such as complexity, competition, outsourcing, and innovation have led SCM leaders to once again evaluate broader SCM techniques such as better planning, optimization, collaboration, visibility, and multi-enterprise processes.”

White sees a lot of the technology investment as focusing on the basics: “We see the mass market adopting SCM for process automation. That is, standardized business processes that are repeatable, formalized and even described as best practices. These are the things a firm does to keep its supply chain on time,” he said.

Still, “Loss of control and lack of ability to change end-to-end processes lead to the other part of the SCM market – SCM process innovation,” White added. “In a post demand-driven world where chaos reigns, SCM leaders need to be more agile and nimble and less dictated to by one simple strategy,” he said.

This means companies need to embed decision making and resource allocation as close to the event that requires a change in the plan; new business rapidly processes form – and re-form.

“This is not SCM for the masses but more SCM for the innovators – firms that bleed SCM when you cut them. We are seeing investments across technologies including S&OP, inventory strategy optimization, global trade management, and sensory based planning and execution,” White concluded.

Karin Bursa, VP of marketing for Logility, told me that she sees "two issues are driving investments in supply chain solutions: the challenge of synchronizing a global supply chain network, and the need to streamline sales and operations planning in a demand-driven world."

She said demand seems to be strong in food & beverage, consumer goods and vertically integrated manufacturing-retail. "These are highly competitive sectors that rely on new product introductions, promotions and rapid inventory turns to expand profit margins," Bursa said. As a result, these companies have a big need for next generation SCM software to remain competitive.

I think both White and Bursa make good points. There are also a number of other key factors we can point to in addition to those thoughts and the impact of an overall strong economy, but given the space constraints I am going to save those for next week. Would love your thoughts in the meantime.

I'll end with some additional comments from Gartner's White: "Too many organizations perceive supply chain management as an application," he said." We hear all too frequently, 'Well, we implemented demand planning, so we have SCM all done.'”

"Yet the same organization might be facing customer service problems with ineffective fulfillment processes. Despite the “software on the shelf” syndrome, there has been a growing awareness by business leaders and innovators that SCM is not an application; it is a strategy supported by technology and process, that should be connected to and driven by the business strategy. When this connection is made, investment in SCM technology shifts from process automation to process innovation."

The upshot of that: are you investing to automate, or to innovate? Or a bit of both?

More next week.

What do you think is driving the current good times for supply chain software? Is your company making investments? Where and why? Is there an important difference between process automation and innovation? Let us know your thoughts at the Feedback button below.

Let us know your thoughts at the feedback link below.