Infrastructure Is Integral To Supply Chain Success

Dec. 11, 2006
A company's highest supply chain priorities are demand forecasting, supply planning, inventory management, and sales and operations planning.

Global outsourcing, leaner supply chains and the frequency of new-product introductions require substantially tighter collaboration and coordination among complex networks of trading partners. In response, corporations are building business processes, organizations and technology portfolios that allow them to manage this complexity and the ever-present uncertainty of supply and demand.

As supply chain managers build their technology portfolio to manage complex supply chains, the first issue they face is whether to buy application software from their enterprise resource planning (ERP) vendors (such as SAP and Oracle) or from independent companies commonly known as best-of-breed vendors.

ERP and best-of-breed vendors provide applications for demand planning, transportation and logistics optimization, warehouse management, multi-echelon inventory optimization, supply chain visibility and event management, global trade, and overall supply chain network design and optimization. The trend has been to use whenever possible the supply chain applications provided by the ERP vendor to reduce integration complexity and overall cost of ownership. In many cases, however, companies find that the functionality they require is either insufficient or nonexistent within their ERP systems. For this reason, best-of-breed supply chain software applications are still chosen to address the business requirements of their company or industry.

See Also

The Perfect Order

Setting Your IT Priorities
ERP vendors are expanding the breadth of their supply chain offerings and continue to gain favor in terms of increased market share. However, rather than coming at the expense of best-of-breed application providers, the data show that users are beginning to shift away from internally developed applications to packaged supply chain applications provided by ERP and best-of-breed providers.

In a recent AMR Research supply chain spending report, manufacturers report that their highest priorities for supply chain technology and process investment are demand forecasting, supply planning, inventory management, and sales and operations planning.

Companies are increasing their investments to either upgrade or buy new software. Budgets were expected to grow by 4% in 2006.

Top Priority For Improvement

Shift Functionality

Supply chain applications are becoming more standardized, packaged and widely deployed. For instance, demand management applications, which are implemented to leverage downstream channel data, provide higher levels of demand insight and demand-shaping capability. Warehouse management systems and transportation management systems continue to grow in functionality and deliver very tangible benefits. Interest in transportation management, for example, is surging due to constrained capacity and rising fuel costs.

SOA Reduces Costs, Complexity

Service-oriented architecture (SOA) is an important technology development within the supply-chain market. SOA is a standards-based technology platform that facilitates customization of process workflows and greatly reduces the cost and complexity of integrating software applications.

Many supply chain technology vendors have already adopted SOA to reduce the complexity of their software installations and to facilitate integration with other applications. SOA will also allow for today's tightly bundled applications to be broken down into more granular services. For example, companies are already using transportation rates from a single source to provide fully landed cost to customers at the point of order entry as well as reconciliation of freight bills after shipment.
Some of the most advanced science is being applied in the areas of multi-echelon inventory optimization and service parts planning. The key value driver is the ability to model and solve multi-tier, time-phased problems and recommend inventory levels and replenishment policies at each node of a multi-tier network. This increases the probability of achieving desired service levels or fill rates with lower total inventory investment.

Similarly, software solutions are emerging to support the more strategic problems of asset allocation and network design. Supply chain planning software vendors are focusing on the development of both optimization techniques as well as collaboration and integration frameworks to help enable multi-enterprise planning and collaboration.

The need for multicompany, multi-tier visibility has driven investment in connectivity enablers. These are Internet commerce hubs that move beyond just providing connectivity and visibility by supplying tools to enable collaboration.

To facilitate more effective multiparty scenario planning, vendors are building tactical order and inventory management solutions that leverage forecast, inventory, order, capacity and logistics data from heterogeneous ERP and supply chain management (SCM) applications. This new set of applications represents a fundamental evolution of SCM applications -- away from a focus on transactional interaction and toward buy- and sell-side, service-level-based commerce.

Finally, integrating analytics with optimization is delivering additional value to the companies that are merging these capabilities. This practice enables closed-loop decision making for critical processes such as demand management, inventory optimization, and sales and operations planning.

Consolidation Needn't Be A Worry

As the supply chain market matures, vendors will inevitably consolidate. Currently, ERP vendors are driving this trend. Best-of-breed vendors, such as i2 Technologies, Manhattan Associates, RedPrairie, Sterling Commerce and JDA Software, will most likely also remain active in the acquisition market. However, rather than seeking a public stock offering as an exit strategy, acquisition by a larger vendor is the more likely outcome. In general, this should not be a concern to current customers or prospective buyers of supply chain software.
Current And Emerging Business Models

As in most other enterprise applications markets, supply chain application customers typically buy the rights to use software through a perpetual license. They generally contract for implementation services, typically two times or more the cost of the software license itself, and pay the software vendor ongoing maintenance fees of 18% to 20% to secure support and fund application enhancements. There are, however, important transformations occurring in the way companies are buying software today and in the future:

  • Users are contracting for their SCM applications on a subscription basis rather than on a perpetual license basis.
  • Software-as-a-Service (SaaS) has become reality in the supply chain market. While the adoption of SaaS in supply chain applications has trailed the uptake in the customer relationship management (CRM) market, SaaS has taken hold in supply management, transportation and global trade management. It will continue to grow in popularity as a deployment and delivery option.
Planned Supply Chain Application Usage

Greg Aimi, research director at AMR Research Inc., provides vendor research and best practice analysis in supply chain management, global trade, and visibility and event management.

Mark Hillman, research director at AMR Research Inc., is a key member of the supply chain team and works on detailed research projects in contract management, supply chain risk management, and procurement and sourcing.

Steve Hochman, research director at AMR Research Inc., has over 15 years of supply chain and technology implementation expertise. Prior to joining AMR, Steve directed sales operations for New Balance Athletic Shoe Inc. All are based in Boston.

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