Technology: Good news, bad news

Companies that sell logistics-related software or operate Internet exchanges have high hopes for the future, but vendors of automatic identification equipment are watching their margins shrink.

By -- Logistics Management, 7/1/2000

A number of entrepreneurs this past year thought shippers and carriers were ready to "exchange" their traditional business practices for Internet-based operations. More than two dozen logistics and transportation exchanges popped up on the Internet, offering logistics managers a Web-based marketplace for locating and hiring carriers and other related service providers.

It wasn't always like this. Last year, the National Transportation Exchange (NTE) pretty much had the market to itself. Based in Downers Grove, Ill., NTE provides an Internet-based matching service for freight movements within the United States. By the start of the year 2000, however, NTE found itself fending off a number of competitors, all of which were seeking to match up shippers with carriers of all modes and across national borders. As this market expands, the activity is beginning to spread into other areas as well. "Most of the action is happening in the transportation market space," says John Fontanella, an analyst with AMR Research in Boston, "but we're seeing it spread into warehousing and inventory."

Fontanella says AMR expects logistics exchanges, which charge either a transaction fee or a periodic contract fee (or both) for their services, to earn between $3 billion and $4 billion in revenue by 2004. Indeed, the analyst foresees exchanges evolving from their original purpose of matching up carriers and shippers into forums for supply chain collaboration. "The exchange concept is way beyond electronic auctions," he says. "[Exchanges] will become the collaborative tool of the future."

Software: Good Times

Although exchanges captured the headlines, the supply chain software industry also marked a banner year in 1999. Software makers recorded strong sales as companies continued to buy and install applications to improve their transportation, warehousing, and distribution operations.

U.S. companies spent about $3.8 billion on software for supply chain planning and supply chain execution in 1999, according to AMR Research. This year, the company expects software sales to reach $5.3 billion, an increase of about 39 percent. Those numbers include revenues from software licenses, implementation, maintenance, and hardware purchases. Ranked strictly by revenues, the vendor i2 Technologies led the pack of supply chain management software vendors (see Figure 1).

Software mergers continued to sweep the industry last year. As a result of those mergers, many vendors now offer "suites"-bundles of applications that cover the spectrum of supply chain functions. Still, when it comes to purchasing applications for warehousing or transportation, most companies bypass those suites in favor of a single-application package, such as a warehouse management or transportation management system, from a best-of-breed vendor. "Buyers are still purchasing point solutions, although vendors are offering fuller suites," says AMR analyst Chris Newton. "The trend will shift toward buying suites once the vendors prove themselves."

Although warehouse management and transportation management systems remain popular, one of the hottest new applications deals with collaborative planning and forecasting, a strategy in which trading partners work together to optimize inventory in a specific channel. Software packages that provide visibility of products in the supply chain are also hot, notes Steve Banker, an analyst with the ARC Advisory Group in Dedham, Mass. He adds that the emphasis today has shifted from optimizing the internal organization to enhancing collaboration among trading partners.

At the same time, many software vendors are starting to rent their applications over the Internet. Transportation management software providers, in particular, are adopting this marketing approach for their applications. "For transportation, the application service provider (ASP) model makes sense," says Adrian Gonzalez, senior analyst with the ARC Advisory Group. "In fact, ASP makes sense whenever collaboration is involved."

Auto ID Growth Slows

Though software makers registered a big jump in sales last year, automatic identification equipment makers didn't fare nearly as well. Auto ID equipment-whether in the form of bar codes or radio-frequency tags-tracks products, parts, and components through a distribution channel and thus plays a critical role in tracking the flow of products throughout the supply chain.

The North American market for auto ID equipment is expected to total $31.3 billion in 2000 compared with $25.2 billion in 1998, according to Venture Development Corp. (VDC), a technology research firm in Natick, Mass. (see Figure 2). Yet despite that projected rise, 1999 was not a stellar year for the industry, says David Krebs, an analyst with VDC. Krebs says price erosion for scanners and related auto ID equipment has started to turn these high-technology products into commodities. "There's a lot of underselling in the market, sacrificing the margin on the product," he notes.

Digital Future

Although the automatic identification equipment market may be maturing, the software and exchange sides of logistics technology appear to be just warming up. In the upcoming months, more companies are expected to employ software and exchanges to collaborate with their trading partners in an effort to optimize the flow of inventory in their distribution channels.

In fact, many analysts believe that the deployment of technology that facilitates collaboration represents the way of the future. "We're talking about collaborative commerce," says Larry Clopp, a research director for transportation management and international trade systems at the Stamford, Conn.-based Gartner Group, "and the next step is to offer more services and the capability to communicate back and forth to support ongoing relationships."