Three key software trends
If you want to make sure you're investing your technology dollars wisely, then here's what you need to keep in mind.
By John Kerr -- Logistics Management, 3/1/2004
We won't name names, but not long ago, a very well-known sportswear maker took a financial hammering when its supply chain software failed to properly manage its inventory and deliveries. The multimillion-dollar debacle—splashed across headlines in the major business media—once again pointed out the challenge of properly selecting and deploying complex software.
If anything, the challenges are becoming more acute for logistics managers of every stripe. There are two reasons why this is true.
First: The stakes are getting higher. Logistics managers, like their counterparts in other departments, face increasing pressure to do much more with the same or fewer resources. They are expected to squeeze out inefficiencies in warehouses and distribution centers, get service providers to sit tight on prices, track the movement of goods more closely, and cut labor costs wherever they can.
Second: Technology choices are expanding. The Internet is rapidly opening up new ways of managing logistics activities, and at the same time is fueling an "always on" culture that demands instant responses. And coming to your neighborhood soon: radio frequency identification (RFID) technology that promises to raise logistics complexity to unheard-of levels.
Until recently, logistics professionals could justify the purchase of a warehouse management system (WMS) or a transportation planning tool without great difficulty. Today, when chief financial officers want to see some payback in as little as one financial quarter, each software purchase attracts intense scrutiny. "It's not so much about return on investment as it is about return on budget," says Dwight Klappich, senior supply chain analyst at META Group Inc., a technology research firm.
Logistics managers clearly understand that scaling back IT investments is not their best option. Research confirms it: Worldwide spending on logistics software, services, and recurring revenues will grow to nearly $3 billion in 2006, close to double the figure for 2001, according to market research firm ARC Advisory Group Inc.
The logistics leaders who successfully push for such investments know where technology can cost-effectively address business challenges. In turn, that knowledge calls for unprecedented familiarity with their companies' supply chain capabilities in the context of their business priorities, both present and future.
Knowing where IT offers the greatest benefit with the lowest risk also requires a good grasp of where logistics technology is headed. Here's a look at three of the most consequential trends in logistics software today—trends that will have an impact on what you buy and how you use it in the future.
1. Integration, Unbundling—or Both
At first glance, software vendors that offer integrated packages of logistics applications and unbundle their solutions in whatever way their customers like appear to be pursuing strategies that clash head-on. But both approaches offer value in the right circumstances. And both speak to a perennial issue for software customers: whether they should favor integrated suites from a few large vendors, or put together their own best-of-breed solutions.
For vendors, offering integrated suites is as much an opportunity to expand business with existing customers as it is a response to enterprise resource planning (ERP) suppliers' end-to-end offerings. Many of the transportation management system (TMS) vendors, for example, have extended their product lines beyond the core operational planning and execution functions to offer collaborative tactical planning, carrier communication, freight billing, and more. And there are some real advantages for buyers of such integrated applications. Jeff Woods, principal supply chain management analyst at Gartner Inc., notes that companies that outsource freight payment, for example, often can better manage that function if it is part of an integrated TMS suite.
At the same time, software vendors are more prepared to unbundle their applications and sell them separately than ever before, because more and more cost-conscious customers are demanding it. "There's much more flexibility in [software] licensing these days," Woods confirms.
The new branding strategy adopted by software vendor Manhattan Associates Inc. illustrates that trend. Last summer, Manhattan organized its supply chain solutions into three primary suites: Warehouse Management Systems, Transportation Management Systems, and Trading Partner Management. Each can be delivered as a stand-alone solution or as part of an integrated offering, explains Eric Peters, senior vice president of products and strategy.
In some cases, software vendors have gone so far as to break down a packaged logistics solution and sell just its underlying "engine." Says Noha Tohamy, senior supply chain analyst at Forrester Research Inc.: "Vendors are definitely willing to do anything that will allow them to win a sale."
Yet customers are growing weary of what one observer calls "the Chinese menu approach." With Internet applications layered on top of client/server solutions, ERP suites, and older legacy applications running on mainframes and minicomputers, businesses have more IT complexity than they can comfortably handle. That has led some analysts to predict that when economic conditions improve and capital expense budgets revive, integrated suites will regain popularity.
2. The Ins and Outs of ASPs
In the thick of the dot-com frenzy, an interesting sub-trend emerged: software application hosting. Third-party providers adopted the application service provider (ASP) model, using the Internet to relieve businesses of having to license, implement, and maintain software packages in-house. The more of a headache software became, the more compelling was the argument in favor of delivering technology online.
Although the ASP model hasn't swept away older ways of doing things, it has proved useful in certain areas. Industry observers say it is well suited to logistics, which is by nature geographically dispersed and highly collaborative.
If, for example, a shipper and its leading carriers can use an ASP to maintain their electronic data interchange (EDI) connections, they could substantially reduce technology infrastructure costs. ASP LeanLogistics Inc., for example, claims that Web hosting can save up to 17 percent on transportation procurement costs, and as much as 25 percent on day-to-day transportation costs.
That ability to acquire sophisticated technology at a reduced cost is particularly attractive to smaller companies. Many large corporations, though, have developed a hybrid approach and are bringing hosted logistics applications in-house. Chemical giant DuPont, for example, uses G-Log's Web-based software to replace its own mainframe-based logistics applications. That software gives much better order visibility and far more track-and-trace data than DuPont's previous system—and it saves substantially on software operating and maintenance costs. At the same time, large companies often find the outsourcing model useful for the 90 days or so it may take to integrate a new application into their internal operations.
3. Flexibility on the Fly
Software suppliers are increasingly talking about the need to gain "real-time control" of supply chain activities to match demands for flexibility and more agile supply chains. It's still a year or two away, but industry experts say some logistics software systems will soon be able to meet those demands by reconfiguring themselves on the fly to more closely match the needs of specific customers.
The technology appears to have much in common with well-established practices in computer-systems monitoring. Today sophisticated software is able to continuously monitor the utilization rates of a company's network. Such software will automatically reconfigure the network if, say, an e-mail server or a storage subsystem becomes overloaded.
Woods points out that such a capability is likely to evolve out of technologies such as software that manages inventory visibility and distributed order fulfillment—technologies that use newer business-process management tools and real-time communication, and can manage extended logistics networks. Because of its complexity and newness, though, this type of product won't be an "off-the-shelf" buy, at least not in the early days.
4. Be Able to Act
It's not enough to simply know about software trends; logistics professionals must also be able to act on them. Their first order of business will be to develop a clear understanding of broad supply chain goals in the context of a business's overall strategy.
The next priorities include aligning managers' goals with strategic objectives, and ensuring that their incentives promote the right behaviors. There's no benefit to the company if rewards for one functional area—say, transportation—come at the expense of the performance of another, such as warehousing. The right metrics will help identify and eliminate the mismatches and improve performance.
After that, the emphasis must be on having all the facts. "I can't tell you how many [supply chain managers] I hear about who don't know how many line items they have," says one industry analyst. At the same time, candid assessments of existing logistics systems are needed before moving ahead with any changes or upgrades. For example, META Group advises warehouse professionals to categorize their operations in one of five levels of WMS sophistication before investigating whether best-of-breed or integrated suites will be the right choice.
"Companies must realistically align their needs appropriately, avoiding the temptation to over- or under-buy," says META analyst Klappich. META's lowest level is essentially a bin-tracking system, and "Level 2" includes multi-location inventory tracking. The highest level emphasizes automation, perhaps with whole facilities engineered to support automated conveyors and storage/retrieval systems.
Only then does it make sense for logistics professionals to begin mapping IT requirements in collaboration with their companies' technical staffs. At this point, they can deal constructively with the decisions required to take advantage of the three trends described above. As always, though, logistics professionals must balance an awareness of emerging IT solutions with a focus on what fits with their companies' strategic objectives. Still, logistics leaders must not pass up the opportunity for a short-term win if, for example, that means buying specific best-of-breed software.
In putting together a shortlist of potential software products, it's as important for logistics professionals to review the viability of software vendors, especially the best-of-breed types, as it is to consider product specs. Why so? An improving economy is likely to help the big get bigger, accelerate merger momentum, and expose the marginal players.
John Kerr is a veteran journalist with more than 20 years of experience covering business and industry practices and trends.
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