Enterprise resource planning (ERP) vendors are moving aggressively into the supply chain software market. As a result, forward-thinking software buyers are looking closely at extending their ERP assets. Much of their evaluation hinges on comparing ERP's promise to that of the latest offerings put forth by "best-of-breed" (BoB) vendors, which still hold the upper hand with respect to penetration of key vertical markets. ERP vendors are confronting the best-of-breeds on the following functional battlefields:

Supplier relationship management (SRM) encompasses analytics, transactional discipline, strategic sourcing, and supplier management. From paper clips to power turbines, SRM seeks to control and reduce a company's total expenditures.

During the past decade, several niche-solution providers have targeted supplier management, offering tools that help enforce enterprisewide compliance for the Web-enabled procurement of indirect materials, such as MRO (maintenance, repair, and operations) items and office supplies. Other vendors have introduced "e-auction" technologies that make it possible to execute Web-based sourcing events.

ERP vendors, however, are now closing this functionality gap with products that are designed to optimize the value of their clients' existing enterprise applications. For example, companies' ownership of enterprise data gives ERP vendors a leg up in aggregating enterprise spending and providing comprehensive analytics. Enterprise system providers also have made strides in auction technology. And the growth of enterprise portal solutions (single-access points across distributed networks) could make ERP vendors the preferred choice.

Of course, BoB vendors are not standing still. Some are seeking to combine e-procurement and sourcing technology with expertise in category-specific spending and the acquisition of professional services, thus expanding their reach and countering ERP vendors' expansion into SRM.

Product life-cycle management (PLM) seeks to create a single, enterprisewide repository for all product data, spanning research and development, sales and marketing, engineering, procurement, manufacturing, and aftermarket sales and support.

Best-of-breed vendors gained early market share in PLM applications with Web-based, collaborative capabilities for product data management. (PDM, the data-repository forerunner to PLM, focuses on engineering and product development.) Now they are moving into the enterprise application space by offering extended workflow capabilities, collaborative design environments, and Web-based vault (i.e., data-repository) architectures.

ERP vendors are approaching PLM from the opposite direction. Leveraging their ownership of financial and manufacturing data, they have invested in collaborative PDM development and have expanded their workflow offerings. ERP sales teams now target IT decision makers in engineering and product development, promising faster engineering change orders and increased access to enterprise financial data. As the PLM market matures, both ERP and BoB vendors are building solutions in portfolio management, new product introduction, collaborative product development, and direct material sourcing.

When the supply chain planning market exploded in the late 1990's, ERP vendors moved quickly to build relevant capabilities and introduce competitive offerings. Toward this end, ERP vendors introduced demand planning, supply chain planning, and detailed production planning applications. Meanwhile, the use of BoB-designed advance-planning solutions to forecast demand, manage inventory, optimize production, and improve customer service is steadily increasing.

Thus the battle has moved from planning-engine functionality to an industry-specific focus. Best-of-breed vendors have opted to stake claims in specific target markets, and now focus primarily on vertical expertise and prepackaged templates.

On average, manufacturers' after-sale parts and services contribute about 25 percent of all revenue, but they represent 40 percent to 50 percent of profits. In response to this trend, niche vendors have developed tools to help companies:

• Develop forecasts for parts that are slow-moving or have uneven demand profiles
• Optimize inventory levels, budgets, and customer-service level targets
• Procure and source parts
• Develop reverse logistics approaches, orchestrating the movement of repair items from the end user to a service center, and tracking items handled by service providers during the returns process
• Forecast returns and determine the disposition of returned assets using precise cost- and service-level targets to guide decisions.

Although BoB vendors pioneered niche solutions for many of the above capabilities, ERP companies now view service management as a ripe target. By leveraging ownership of enterprise data—including inventory management, purchasing, plant maintenance, and order management and fulfillment—ERP vendors have moved to produce specialized service management functionality. These include field dispatch and service; warranty management and repair; and demand forecasting for parts that have fluctuating demand or are slow movers.

Clearly, this will be a lengthy conflict that, on a company-by-company basis, will be defined by measurable value. That is, best-of-breed vendors will thrive if they continue developing unique, easy-to-differentiate solutions whose benefits can be clearly profiled in a business case. Nevertheless, as long as ERP vendors continue to release new functions and features that integrate smoothly into corporate enterprise applications, BoB vendors' competitive mettle will be seriously tested.