Investing in Supply Chain in a Downturn

Bear, Stearns survey shows few companies have changed plans to invest in solutions

Tempe, AZ  May 28, 2002  While the economy has wobbled during the past six months, few companies have changed their plans for spending on supply chain technology. Additionally, as many have increased spending on solutions as have put supply chain projects on hold, according to the results of a study released this month by an investment bank.

Based on its first quarter survey of shippers in a variety of industries, a Bear, Stearns & Co. team headed by Edward Wolfe concluded that, "Shippers may be more open to the idea of ramping up their supply-chain expenditures in an uncertain economy."

Bear, Stearns received 80 replies to its survey, out of a pool of 1,000 shippers to whom the bank sent out the first-quarter questionnaire. The respondents represented a total estimated transportation budget of about $60 billion, with the majority (51 percent) of the companies fielding budgets above $50 million. The shippers came from a variety of industries, ranging from manufacturing, technology and retail to automotive, food and chemicals, with manufacturing representing 43 percent of respondents.

Sixty-five percent of the respondents said that they use either home-grown supply chain software (22 percent), third-party solutions (28 percent) or both (15 percent). That was up from 57 percent the previous quarter. Another 20 percent in the first quarter said they would be using supply chain solutions within the next 12 months (up from 17 percent in the fourth quarter of 2001).

The bank found that 70 percent of responding companies foresaw no change in planned expenditures on supply chain software this year, despite the uncertain state of the economy during much of the first quarter. Moreover, that figure was little changed over the previous two quarters.

In addition, the number of respondents indicating that they would accelerate spending on supply chain technologies increased three-fold from the fourth quarter of 2001 to the first quarter of this year, from 3 percent to 9 percent, as more companies sought to reap cost savings, even in tough times.

Based on the first-quarter survey responses, Bear, Stearns estimated that companies investing in supply chain solutions spent an average of $545,000 on software licenses, implementation costs and maintenance over the previous 12 months, down from $650,000 in the previous survey. Spending during the first quarter decreased by about $110,000 against the fourth quarter, according to the survey, but the bank noted that the fourth quarter is traditionally the strongest period for software investments as supply chain managers push to expend their yearly budgets on a use-it-or-lose-it basis.

Bear Stearns estimated that companies plan to invest about $385,000 in supply chain technology over the next 12 months. Contrasting this lower figure to the spending over the past year, the bank's analysts wrote, "The difference between what shippers are spending now and what they plan to spend in the future seems to correlate with our thesis that [supply chain technology] customers increasingly favor solutions requiring smaller investments going forward."

Looking at the broader implications of the trends revealed in the survey, Bear Stearns concluded, "The fact that there has been a decrease in spending, combined with an increase in purchases to take advantage of cost savings (with no changes in planned expenditures), seems to indicate that shippers may be more open to the idea of ramping up their supply-chain expenditures in an uncertain economy."

Elsewhere, the survey showed that planning and optimization continue to be the primary focus of supply chain investments, accounting for 38 percent of the respondents' spending during the first quarter, up slightly from the 33 percent figure for the fourth quarter. For the first quarter, transportation management ranked second, at 31 percent (versus 29 percent in the fourth quarter), followed by warehouse management at 23 percent (versus 27 percent) and collaborative design at 8 percent (versus 11 percent).

Compared to the two previous quarters, a greater number of respondents in the first-quarter survey indicated they planned to accelerate their supply chain technology investments by up to six months: 9 percent of shippers were moving up their investment plans, against none the previous quarter. On the other hand, 27 percent of companies in the first quarter planned to slow down their investments by up to six months, versus 25 percent the previous quarter.

One finding from the survey that is likely to be of some comfort for many a supply chain solution provider is that supply chain managers are feeling less urgency to generate a rapid return on investment in technology. The number of respondents indicating that they would need to recover their investment in solutions in 18 to 24 months rose from fewer than 5 percent in the fourth quarter to greater than 20 percent in the first quarter. Other companies clearly had their eye on a fast ROI: 25 percent of companies in the first quarter were looking for a return in six to 12 months, and another 25 percent in less than six months. Just over 20 percent of respondents in the first quarter said they needed to see ROI in 12 to 18 months.

Finally, Bear, Stearns found that 8 percent of companies reported taking a write-down on their investment in supply chain technology over the past 12 months, indicating that they had abandoned an implementation at some point in the year. That compares with 16 percent in the fourth quarter. "This is in line with our assumption that there will be less of these types of write-downs as the economy begins to turn over the next few quarters," the bank's analysts wrote, while warning that some companies may be reluctant to reveal data on their write-downs.