The Analyst Corner: Fulfillment & Logistics

With globalization, RFID mandates and a host of other concerns looming large for corporations of all sizes, this market is starting to hit its stride.

[From Supply & Demand Chain Executive, October/November 2004] A New Englander, refurbishing the entryway in his quaint, 100-year-old residence, orders a commonly stocked runner for his stairway. His local retailer, discovering no inventory, orders the runner from an overseas supplier. Originating in the Netherlands, the shipment should arrive and be delivered to the New England distribution center within two to three weeks a realistic promise date given the average 12- to 14-day ocean transit times for transatlantic shipments.

Eight weeks later our frustrated homeowner is still without his carpet. After investigating the logistics breakdown, he learns that the shipping container that holds his runner is part of a larger cargo bottleneck being held up because of security reasons.

This New Englander's logistics woe underscores the bigger challenges being faced by the world as a whole as globalization continues and runs parallel to increased logistics security concerns. And it's not just about globalization and supply chain security issues logistics professionals also want ever-increasing insights into the topic of radio frequency identification (RFID).

In the world of fulfillment and logistics, then, no shortage of critical matters exists.

Mike Dominy, director of enterprise services for Boston-based The Yankee Group, clearly lays out what most concerns professionals when discussing the fulfillment and logistics landscape: "With continuing merger and acquisition activity in the applications market, logistics is no exception. But the single largest development in fulfillment and logistics has been RFID and electronic product codes (EPC). RFID will shift the best practices curve in logistics, making it essential that enterprises improve their logistics processes and technologies or outsource to third-party providers."

Dominy adds that cross-border logistics, also known as global trade management, increases the level of security concerns. "The continued march to source supply and manufacturing from the Asia-Pacific area, especially China, has led manufacturers, distributors and wholesalers into a global logistics battle that includes such new challenges as longer transit times, multiple transportation modes and evolving customs requirements," he explains. "Once again, enterprises will need to evaluate their logistics performance against new best practices and different benchmarks. The likely result will be a realization that improved processes and technologies are necessary, or the outsourcing of specific supply chain activities must be carried out."

This edict for improved processes and technologies leads the charge for change in the fulfillment and logistics market. "For example, companies now look at fulfillment as a process, rather than just a function," says Noha Tohamy, principal analyst in supply chain for Forrester Research. "To enable the fulfillment process, then, organizations need a solution that spans order management, customer service, financials, inventory management, transportation and more. A lot of companies have already invested in some or most of these functions. The challenge for them this year is to use these pieces to define a process solution. Vendors in the space have helped with this effort, since vendors, like SAP for instance, offer xApps that are intended to use multiple applications to offer visibility and decision support for a process such as order fulfillment."

As a result, a lot of consolidation among the providers exists for exactly the same reason. Says Tohamy: "If I am a vendor that offers warehouse management systems (WMS), I need a transportation management system (TMS) and/or a visibility solution to create the order fulfillment process solution. We see this consolidation effort in examples like Red Prairie acquiring LIS, Arzoon acquiring Vigilance (a visibility vendor), and then both EXE (WMS) and Arzoon (TMS) being acquired by SSA Global in an effort by that company to offer a complete listing of solutions for its clients."

Dwight Klappich, vice president of SCM research for META Group, who extends his predictions out to 2008, voices similar points. "For this year and next, external pressures to leverage new technologies (like RFID and UCCnet), provide customized services and improve visibility will drive companies to upgrade supply chain execution applications, for example warehousing, transportation and manufacturing," he explains. "Concurrently, international trade, security and compliance pressures will motivate companies to upgrade global trade, health and safety, and contingency planning solutions. Through 2008, companies will merge information processes among [customer relationship management (CRM), supply chain management (SCM), and product lifecycle management (PLM)] applications to holistically scrutinize demand and revenue flows across customer and product lifecycles."

According to The Yankee Group, organizations have shifted information technology (IT) dollars away from internally oriented technologies to outward-oriented technologies in such areas as lean SCM, distributed order management, collaborative planning and forecasting, and collaborative logistics, or what they call extended supply chain management technologies. In the firm's "IT Budget Shift Drives Extended Supply Chain Management" report, 71 percent of those companies surveyed increased IT investment in the areas just described. What's truly telling is that the portion of the budget allocated to extended SCM, distributed order management, collaborative planning and forecasting, and collaborative logistics grew 75 percent on average, while the overall IT budget grew only 3.7 percent.

According to the report, "Few enterprises were technically or organizationally prepared to embrace extended SCM during the height of dot-com mania. Similarly, no supply chain vendor had the ability to deliver edge-of-the-enterprise solutions, such as extended SCM, without substantial integration and customization costs. Client/server enterprise resource planning (ERP) and SCM applications made it technically challenging to extend processes and functions beyond the four walls of the enterprise."

The report goes on to explain that much has since changed. "The costs of integrating with the extended supply chain are falling. Various protocols and standards reduce the technical cost of supply chain integration. Supply chain application and integration vendors have responded to customer demands that vendors make it easier for customers, suppliers and other parties to access information such as forecasts, inventory levels, order status and capacity."

We get a little bit of a clue, if not clarity, as to why enterprises are shifting their IT budgets from a recent survey conducted by Supply & Demand Chain Executive. When readers were asked what are the primary drivers behind spending on solutions to improve processes and operations for their organizations, 63 percent said it is to reduce costs, 19 percent said to increase efficiency, 12 percent said to use logistics solutions to gain competitive advantage, and 6 percent said they invested in additional IT to scale upward because their business is growing.

RFID, Outsourcing Lead Hot Topics

According to Forrester Research's Tohamy, "I think RFID would take first prize when it comes to hot topics this year. The craze started around Wal-Mart's suppliers meeting in November of 2003. For a few months there was a lot of confusion, partly caused by vendors who were looking to capture as much of the market share as they can and to differentiate themselves in a very young market. User companies worked hard to figure out what their long-term strategy should be besides retail compliance and ensure that there are no throw-away efforts."

Tohamy and the analyst community expect more clean up in this area, as well as a better definition of such solution components as reader integration, middleware, business process management and functional application.

Additionally, RFID will drive increased interest in wireless solutions. "Companies will evaluate the radio frequency technology, including other wireless or mobile technologies with RFID initiatives," says Dominy.
Since outsourcing is a hot topic for everyone, including the mainstream media during this election year, the analysts are also tackling it, but in relation to how it's impacting fulfillment and logistics. Many believe the outsourcing trend is forcing companies to re-evaluate their supply chain management portfolios. "Enterprises must redesign their portfolios around a virtual network model where they focus more attention on the externalization of processes and information flows," says META's Klappich, "not around internal processes."
Klappich goes on to explain that business cases should be developed around end-to-end process improvement (e.g., order-to-cash cycle time, total pipeline inventory reduction, improved delivery on promise date), which
in a virtual network would span multiple enterprises and systems.

"For example, improving order-to-cash and deliver-on-promise dates touches multiple organizations (e.g., manufacturer, third-party logistics, carriers, customers) with pieces of the process controlled by different organizations at different points in the process," Klappich says. "Information flows between systems and pieces of the process will be owned and executed by different systems at different points. For example, an order transaction might be taken in a company's ERP system, handed off to a third-party logistics provider's warehouse management system for fulfillment, and handed off again to a carrier for delivery and then payment authorization comes from the customer's receiving and accounting systems. As evidenced by this example, focusing inside the enterprise (i.e., ERP) would address only a small fraction of the process, and the greater value would come by looking across the extended supply chain."

Finally, Tohamy discusses a more sophisticated attempt at multi-channel fulfillment in the retail sector and its logistics needs. A solid and recognizable player in the multi-channel environment is Escalate. "In 1998 to 1999, when people talked about multi-channel fulfillment they usually meant offering an e-commerce channel alone or in addition to their store channels," she explains. "This year there are more and more firms looking at the different business units that manage stores and direct (catalog) and e-commerce, and, in doing so, they are trying to build one view of customers' needs as well as one view of inventory across all channels. This will result in a better customer experience as well as better inventory visibility and management. The best examples here are Best Buy and Home Depot."

Players in the Market Today

Tohamy of Forrester Research, The Yankee Group's Dominy and META Group's Klappich give clear insights into the current group of fulfillment and logistics enablers. The pervasive commentary from all of them was that there is continued consolidation; it's safe to say that what you see today in the market may not be what you see in just six months.

But let's begin with the big guys. According to the analysts, while SAP shows somewhat of a market lead in RFID, other data is beginning to reveal that IBM, Microsoft and Oracle are becoming preferred RFID providers.

Some caution must be identified, however, regarding the major players' efforts in the fulfillment and logistics arena. As it relates to The Yankee Group's "extended SCM," the ERP enablers are behind in the areas of planning and execution. The continued struggle ERP providers often have with delivering scalable solutions beyond the edges of the enterprise only serves to help best-of-breed enablers steal new license revenue from the ERP customer base.

According to The Yankee Group, among the ERP providers, SAP with its NetWeaver and xApps strategy, is best positioned to deliver extended SCM solutions. Oracle's extended SCM capabilities have been limited to a handful of industries with specific requirements.

News abounds, though, for the two most traditional players in this space, i2 and Manugistics. With cash infusions earlier this year and a solution linking planning and execution for a closed-loop supply chain offering, i2 deepened its strategic alliance with IBM through a partnership to deliver supply chain solutions built on IBM's on-demand operating environment. This effort, in part, aims to fortify i2's customer base with new clients and launch a competitive offense against the major ERP players.

Manugistics' big story is the appointment of Joe Cowan as its new CEO this last July, replacing Greg Owens, who remains chairman of Maniugistic's board. Given Cowan's most recent success in selling the ailing EXE to consolidator SSA Global, Forrester's Tohamy suggests "his appointment has left investors wondering about Manugistics' prospects to grow organically as an independent software vendor."

But Cowan's recent visit with Tohamy gives the market a picture of his strategy for Manugistics. He said he plans to leverage the software provider's three key strengths: customer service, employee satisfaction, and research and development capabilities.

Says The Yankee Group's Dominy: "i2 and Manugistics are both definitely moving further into execution, with Manugistics better positioned from a brand and channel perspective."

All the analysts agree that the planning and execution aspects of fulfillment and logistics will become more tightly integrated as enterprises push to accelerate information, financial and inventory flows across the global, extended and networked supply chain.

According to The Yankee Group, best-of-breed planning enablers that have moved their applications to J2EE architectures benefit from the advanced planning and execution trend. Enterprises that are serious about collaborative planning must select and implement applications from enablers such as Manugistics, Adexa, Syncra Systems and Logility.

With supply chain execution priorities in mind, enablers in this market that have added event management and portal capabilities also benefit as enterprises move to extended SCM, according to The Yankee Group. Synchronizing fulfillment across multiple entities requires newer releases of supply chain execution software. Enablers such as Manugistics, Manhattan Associates, RedPrairie, Optum, WebPlan and Provia Software should enjoy higher upgrade rates within their customer base than execution enablers that cannot support extended supply chain execution.

The analysts also continue to highlight the efforts in supply chain communication and B2B integration. As critical organizational partners in a competitive supply chain form tighter and broader electronic relationships, the volume and frequency of data and transactions only increase. This brings integration enablers into the mix with effective enterprise net connector solutions. Sterling Commerce, Cyclone Commerce and Transentric are the enablers positioned to satisfy an enterprise's supply chain communication and B2B integration.

According to the analysts, warehouse management system (WMS) enablers continue to be dominated by a shrinking list of best-of-breed solutions. Players most often cited with the strongest positions are Manhattan Associates, Red Prairie, HighJump and Provia. But SSA Global (mainly because of its recent acquisition of EXE), Irista, Redpoint Systems, KNAPP Software, Lilly Software and Logility have certainly carved a niche in this area of fulfillment and logistics. With WMS market contraction really starting in 2002, such consolidation will continue "with the strong becoming stronger and the weak being either acquired (e.g., SSA acquisition of EXE, Epicor acquisition of TDC Solutions) or forced to downsize for survival on maintenance revenues (e.g., Optum, Ann Arbor)," explains Klappich.

By 2007, he predicts the ERP players will dominate the WMS market for companies that have crafted strategies to more tightly manage process flows that span the entire fulfillment and production lifecycle. "And though market dominance will shift from best-of-breed to ERP WMS, the heterogeneous nature of many companies and the continued trend toward logistics outsourcing will continue to demand standalone WMS, which will become a lifesaver for the few best-of-breed WMS vendors that survive."

Pure fulfillment plays, such as Optum, Yantra and Demand Management (recently acquired by Logility), continue to stand out, and visibility players like Escalate and Viewlocity continue to command attention.
Pure transportation management services (TMS) continue to be the domain of the best-of-breed, but the analysts expect ERP players to eventually take more of a foothold here, too. In the meantime, G-Log, i2, Manugistics, Schneider Logistics, Americas Systems, Avnet Supply Chain Services and Tramco get the most mention in the market in this area, with global trade management (GTM) still dominated by Vastera.
And don't forget inventory optimization. Best-of-breed players in this arena include Optian, SmartOps, Prescient and Elogex.

Though our New England homeowner might be at a standstill while he awaits the arrival of his runner for his stairway, fulfillment and logistics are not. Events in this space keep moving forward. Fulfillment and logistics enablers will continue to reinvent themselves in a way that allows them to more effectively respond to customer demand like process-oriented transportation solutions and global logistics support. Recent acquisitions indicate that the shakeout in the logistics market is poised to further accelerate. And with continuing interest in RFID, globalization and transportation security issues, analysts will have plenty to talk about for some time to come.

About the author: Murphree has 14+ years experience as a journalist reporting about Fortune 500 companies' supply and demand chain management endeavors. As former editor-in-chief for Supply & Demand Chain Executive, she was responsible for developing and managing editorial content that helped the magazine gain national recognition as the "go to" source for key business issues relating to sourcing, procurement, operations and demand management.

As President and Founder of Speak Easy, Murphree travels all over the country advocating and promoting the value of supply and demand chain management for today's enterprises.

Murphree is currently engaged in significant initiatives for a number of client's including market reviews on strategic sourcing and procurement, diplomacy coaching and management reviews for improved process flow. She is in the process of developing a training series focused on diplomacy to help corporate teams collaborate more effectively in cross-functional teaming environments.

A featured speaker, Murphree has presented on a variety of topics related to supply and demand chain management to organizations such as Banta Corp., the Conference Board, Peoplesoft, and Corporate United. She currently serves on the Advisory Board as Founding Editor for Supply & Demand Chain Executive. Her Web site is www.juliemurphree.com .

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