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Solutions for the Masses [Global Business magazine]

by Hope Katz Gibbs
Contributing Editor
Global Business magazine
July 2000

INDUSTRY EXPERTS PREDICT THAT U.S. companies will spend $4.5 billion this year on supply chain management solutions, but the universe of firms that actually do so will likely remain quite small. One consultancy reports that some 7.4 million small to mid-size suppliers around the world—some with yearly sales well above the $1 billion mark—can still be characterized as “electronically challenged.”

“Companies are either fully exploiting supply chain improvement opportunities or have not even begun to initiate a program,” says Robin Palmer, partner-in-charge of KPMG’s Supply Chain Management Practice.

For the many companies that are lagging behind, the growing gulf between their technological capabilities and those of their more advanced competitors—and often with their customers—is ever more disturbing. Increasingly, there is a sense that power is shifting to the firms that can better manage the basic information that moves through the average supply chain and manufacturing process.

Indeed, the ability to automate supply chain management is quickly coming to be seen as a master of basic survival. “The companies that will lead the way into the 21st century will be able to harmonize the global networks of customers, suppliers, and internal operations,” Palmer says. “They will be rewarded with cost reductions, revenue enhancements, and improved customer service. For companies that can react quickly, shareholder value could increase dramatically.”

Yet even for the companies that have moved slowest so far, there is good news. The prices for advanced supply chain management solutions have dropped dramatically in recent months. And in some cases, these technologies will even allow firms that have fallen far behind in the tech competition to leapfrog rivals tied down by investments made in expensive solutions purchased only a couple of years ago.

THE ASP MODEL

Installing and integrating a supply chain management system has long been a rich company’s game. The more sophisticated applications date back only a decade or so, to when electronic data exchange (EDI) first became widespread.

About five or six years ago, the next wave of innovation kicked into higher gear, especially as more firms began to realize how much less expensive and more flexible the internet was compared to most EDI systems. Suddenly, it seemed, dozens of software companies were selling supply chain solutions that could be implemented on the internet.

But the most advanced systems still cost more in terms of both money and management than most firms were willing to spend.

Now a third wave of change is gaining strength, one that in only a few months has already radically increased the number of options for companies looking for ways to integrate their supply chain management with their global operations.

The new model, often referred to as the Application Service Provider (ASP) model, has put some of the most sophisticated of supply chain management solutions within reach of even the smallest of dot coms by allowing the software provider to deliver its product from its own servers on a per-transaction basis.

“The good news for small and mid-sized firms is that there are a lot of options available that allow them to invest in supply chain management technology without having to bet the family farm,” says Bob Ferrari, a senior analyst at AMR Research. “All the old barriers to business growth have changed due to the web. Today’s high-tech offerings give the little guys the opportunity to become big players.”

The process won’t be glitch free. Barely out of the box, the ASP model has already come under attack for not guaranteeing that any particular client is guaranteed enough server capacity to handle its needs. But such objections will likely prove of only minor importance compared to the arrival of the model itself.

NO MORE INSTALLS

The market for supply chain solutions has long been dominated by a few large companies, led by i2 Technologies, which earned $571 million last year and is expected to pull in some $885 million in 2000. Other big names include Manugisties, expected to earn $175 million this year, up from $148 million in 1999, and International Business Systems, which earned $220 million last year and is on track to take in $308 million this year.

These companies obviously continue to do very well, in part by continuing to sell their services and solutions to their existing client base and by creating new products that work for smaller firms.

But the real face of change these days in supply chain management, is more likely to be found in the offices of upstart service providers in San Francisco or Boston or Chicago.

The solutions offered by these ASP-based companies are designed to do away with the need for their clients to go out and buy the software necessary to manage their businesses, then load it onto their computers and servers and manage the systems themselves. The ASP-based provider essentially rents both hardware and software to the user.

Nor are ASP-based services available only through such third-party providers. Users can also turn to ASP providers to host the software solution of their choice, be it from Microsoft, Oracle or PeopleSoft, as well as from supply chain providers such as i2 or Capstan.

One of the fastest growing of such neutral ASP hosting companies is USinternetworking Inc. of Annapolis. The first ASP to go public, USinternetworking keeps track of software in its data centers located in Tokyo, Amsterdam, Milpitas, Calif. and Annapolis.

Such solutions are not only for mid-size and smaller companies, either. The costs vary according to what needs to be hosted, and how much capacity a company will demand. USinternetworking officials say that some of its customers have paid as much as $1 million for a 40-month contract.

It remains questionable whether big numbers of mid-size manufacturers will jump on the ASP concept. While many call it groundbreaking, others wonder about its long-term potential. A recent executive survey by the internet research company International Data Corp., for instance, indicated that only 5% of information technology managers and 8% of business managers were familiar with the concept.

Steve Zoechi, chief marketing officer at Capstan Systems in San Francisco, says he believes ASPs are only the precursor to another business model, the Business Service Provider (BSP).

This “smart” ASP not only enables companies to access the latest software solutions, but also gives them access to a suite of network services. For example, Capstan’s BSP software will organize global logistics, such as by booking shipments and tracing them through points of delivery as well as by interacting with all vendors and providers along the way. The software will also integrate the documents required, calculate duties, taxes, and drawbacks, and assure compliance screening.

“Businesses today must have the ability to track and control the global supply chain from purchase order to proof of delivery,” Zocchi says.

“Sophisticated planning is not enough. Companies must be able to adapt to constant change. They must be able to leverage technology breakthroughs to be able to participate in a global marketplace,” he says. “Mastering global supply chain execution is critical for the next generation of companies.”

SMALLER LINKS

Supply chain management solutions are changing not only in how they are delivered to users, but in what they deliver.

While some companies scramble to provide total solutions—Capstan’s wide-ranging suite of products is an example—more and more companies are taking aim at automating ever-smaller links in the supply chain. The idea is that a systems integrator working directly for the user, or for an outside consultant, will then tie all the supply chain products together.

Take for instance the EC Company of Palo Alto, Calif. Its products and services, EC Exchange and EC Exchange.net, are internet-based electronic transaction systems that translate invoices and purchase orders into a language accounting applications can understand.

Documents can then be sent via the internet into the computer systems of a company’s trading partners to alert them of sales.

Andrew Duncan, CEO and president of EC Company, says that by replacing phone calls and faxes with a web-enabled ordering system, suppliers and their buyers can trim the cost of order fulfillment from $50 per order to just $ 1.

The EC Company’s software gets high marks from Carl Lehmann, vice president of electronic business strategies at the Meta Group consultancy in Stamford, Conn. “EC Exchange is changing the way mid-market suppliers process electronic transactions with their buyers.”

EC Company is but a small example of the companies offering solutions for single links within the supply chain. If anything, the problem now is sorting though the alternatives, as so many companies seem to pop up every month offering solutions designed for supply chain management.

“This is a highly fragmented market and vendors are actively merging, acquiring, and partnering to defend market share,” says ARM Research’s Ferrari. “The top ten supply chain vendors account for only 51% of the market, and a vendor with the right product strategy could move up quickly.”

In fact, the market is moving so fast that what was new six months ago is often already antiquated, says Steve Gold, managing director of the KPMG supply chain team.
“The big players are shifting, and they are driving all the B2B solutions,” Gold says.

“It’s tough for vendors to keep up. But that is good for small and mid-sized companies, because it’s just a matter of time before supply chain management applications become even more affordable and accessible.”

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"I get by with a little help from my friends," says Hope, who gives special thanks to:

• MICHAEL GIBBS, website illustration and design: www.michaelgibbs.com
• MAX KUKOY, website development: www.maxwebworks.com
• STEVE BARRETT, portrait of Hope on Bio page: www.stevebarrettphotography.com

Contact HOPE KATZ GIBBS by phone [703-346-6975] or email.

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