6th Annual Supply Chain Software Survey: Purchase intentions slow

Our 6th Annual Software Survey reveals that while the majority of respondents are very active supply chain software users, there’s a subtle shift from our 2007 findings in that fewer companies expect to purchase or upgrade their applications in the next 12 months.

By Bridget McCrea, Contributing Editor -- Logistics Management, 4/1/2008

Logistics Management’s 6th Annual Software Survey paints a revealing picture when it comes to shipper intentions and their supply chain software. Despite a stagnant economy, many companies are still actively looking or are in the early stages of assessing/evaluating vendors in route to replacing their warehouse management systems (WMS), transportation management systems (TMS), yard management systems (YMS), supply chain planning (SCP), global trade management software (GTM), and enterprise resource planning (ERP) in order to compete more efficiently in today’s global environment.

However, while the majority of respondents report that they’re active users—and many are currently in the market—they’re not in a big hurry to make any moves. This year we saw a subtle shift from our 2007 findings in that fewer companies expect to purchase or upgrade their applications in the next 12 months—in particular, purchase intentions dropped for WMS, TMS, and SCP software applications.

Our software survey is conducted on an annual basis and serves an as industry benchmark for issues related to supply chain software usage and purchase intentions. This year we received 422 competed surveys—nearly double last year’s response—from logistics and supply chain executives who are personally involved with the evaluation, specification, recommendation, and/or purchase of supply chain software solutions for their companies. To help gain an overall picture of this year’s respondents, 29 percent had less than $49 million in sales, 19 percent reported $100 million to $499 million, while 28 percent report $1 billion or more in sales. Of those firms, 82 percent are currently using WMS, TMS, YMS, GTM, ERP, and SCP solutions, with the highest concentration focused in WMS and TMS solutions.

The bulk of respondents (28 percent) plan to purchase/upgrade their WMS systems, with 26 percent planning TMS changes, followed by GTM (14 percent) and YMS (11 percent). The prior year, 36 percent planned WMS changes while 41 percent expected TMS changes. Ian Hobkirk, senior analyst with Boston-based analyst firm The Aberdeen Group, says those numbers are not surprising. “The current adoption rates for supply chain software revealed in this survey are very close to what we’re seeing in the market,” says Hobkirk.

What stunned Adrian Gonzalez, director of Dedham, Mass.-based ARC Advisory Group, however, was the low level of interest in GTM software—especially now when more and more companies are “thinking globally.” According to the study, just 11 percent were using GTM software and 14 percent planned to purchase or upgrade such systems in the next 12 months. “I’m surprised that those percentages are so low,” says Gonzalez, who points out that the low interest could be due to the fact that respondents may not have had direct responsibility for global trade. “Our 2007 study turned up a higher percentage, which may also be affected by the economic uncertainty we’re seeing this year,” he adds.

Top reasons for buying

When it comes to ERP, 49 percent of responding companies looking to purchase such systems say they would include a WMS module, while 24 percent say they will include a TMS module. Of those buying WMS, the highest percentage of firms are doing so to achieve real-time control (59 percent), inventory deployment (56 percent), label printing (42 percent), and labor management (41 percent). On the TMS side, the most compelling reasons were routing and scheduling (65 percent), routing and rating (48 percent), carrier selection and load tendering (45 percent), and shipment consolidation (43 percent).

Top reasons for companies looking to buy supply chain management software over the next 12 months included inventory visibility (64 percent), collaboration with vendors/suppliers (60 percent), order management (55 percent), demand planning (54 percent), and procurement (49 percent).

When working with vendors, survey respondents say the most important factors they’re looking for in a vendor/solution are having the right features for their operations, service/support, configurability, ease of installation, and financial stability of the supplier. Respondents cited that their biggest challenges when dealing with software vendors are getting the right solutions/knowing our operational needs (24 percent), implementation/integration (18 percent), communication/service (15 percent), and accountability/product doing what it says it can do (15 percent).

John Fontanella, vice president of research for AMR Research in Boston, says his firm’s research also indicates an increase in WMS purchases and upgrades, driven mainly by the replacement market. “About half of the companies were buying WMS to replace what they had in-house,” says Fontanella, who adds that the Logistics Management survey revealed some positive trends when it comes to supply chain software vendors’ willingness to create applications that interface with other systems. “The number of supply chain applications that companies are purchasing goes up year after year,” Fontanella adds. “That’s pretty remarkable.”

The on-demand solution slant

According to our findings, 31 percent of companies are currently using an on-demand solution (up from 20 percent in 2007), while 35 percent planned to add one within the next 12 months (down from 43 percent in 2007). Key reasons for opting for on-demand included price/cost/startup costs, quicker deployment and turnaround, automatic upgrades, management/production flow efficiency, and ease of implementation and integration.

Gonzalez estimates that about one-third of the TMS market comprises on-demand right now, and says the survey correlates with that number. “TMS is where on-demand has the highest adoption, with most companies considering this model,” says Gonzalez. Quick deployment and fast turnaround time are pushing companies to consider on-demand, he adds, while many internal IT departments are “booked over the next two years with some other type of technology rollout.”

Hobkirk says some confusion exists among companies when it comes to putting on-demand to better use. “They don’t always know what it means,” he says. “A lot of people confuse it with service-oriented architecture [SOA], but the two are completely different. Because companies don’t understand this, they don’t always ‘get’ the primary benefits of on-demand.”

Hobkirk references the ability of on-demand to achieve instant connectivity with existing trading partners as an example. “When you’re working with a finite group of carriers, once one of the TMS vendors gets connected to them [or a high number of them] it becomes much easier for the next company to connect to those carriers through the system.”

Downward pressure on spending

For 2008, the highest percentage of survey respondents plan to spend less than $100,000 on their WMS, TMS, YMS, GTM, ERP, and SCP applications in 2008, followed by a large group that expects to shell out $100,000 to $500,000. Gonzalez says his firm has been tracking a downward pressure on spending for several years now, and adds that the survey results prove that point, particularly when it comes to TMS.

“The on-demand piece [which costs less than a purchase-and-install rollout] could be contributing to that,” says Gonzalez. “Overall, we’re seeing fewer and fewer million-dollar software deals these days. They have become the exception compared to nine years ago, when many of the large supply chain vendors would report numerous million-dollar projects per quarter.”

Those deals that are off the charts, so to speak, tend to span multiple divisions (within the companies) and geographies, and require a year or two to fully rollout and deploy. “For the most part, we’re seeing IT becoming much more affordable and within reach of a broader audience,” says Gonzalez. “The growth opportunity for vendors exists in the small to midsize markets, and some of the costing trends reflect that.”

When it comes to return on investment (ROI) expectations, the median timeframe for supply chain software was about 13 months, with the bulk of respondents (36 percent) expecting returns within 12 to 18 months. The expectations were similar in 2007. “There are no big surprises there, as most companies expect a payback within 18 months or less,” says Gonzalez. With more CFOs and management teams getting involved with IT projects and decisions, he says all such investments must be justified before they are approved. “If you can’t show payback within 18 months,” says Gonzalez, “getting the projects moved forward is difficult.”

Software vendors may see growth in the future

However, there are blue skies ahead for supply chain software vendors, according to the Logistics Management survey and the analysts interviewed for this article. Hobkirk expects to see more companies converting their aging, legacy systems to more modern SOA-based systems and, in the process, building out functionality. “The biggest area where you are going to see companies purchasing additional modules is in the TMS sector,” says Hobkirk. “There, companies are getting into it one module at a time, and working with the same vendors to purchase and supplement their systems with new modules.”

The WMS market works a little differently, according to Hobkirk. “There we’re seeing a lot more rip-and-replace, with many companies saying that they don’t like the platform they purchased 10 or 15 years ago,” he says. “They’re going out and getting entirely new systems.”

Fontanella says AMR is forecasting a 7 percent overall growth rate for the sector in 2008, with the typical company expecting to increase its supply chain budget by 12 percent overall. “This shows that companies are very willing to add to their portfolios,” says Fontanella. “Between that, and the 7 percent overall growth rate, we’re still looking at pretty healthy spending.”