The market for warehouse management systems (WMS) software could well double in five years. The ARC Advisory Group, a market research firm in Dedham, Mass., forecasts that worldwide shipments of WMS packages will rise from $840 million in value in 2000 to $1.6 billion by 2005. WMS applications oversee warehouse and distribution center operations, including such tasks as receiving, put-away, inventory control, order picking and fulfillment, shipping, and labor management.

ARC notes that the WMS market has surged recently. Between 1998 and 1999, the market grew a mere 4.0 percent—primarily because corporations were investing in software to ensure a smooth transition to the year 2000. But last year, WMS sales jumped by almost a third. "This surge in growth was due to pent-up demand, new demand caused by companies seeking to open up Internet selling channels, and the growing realization among third-party logistics providers that competitive differentiation required sound fulfillment technology," says Steve Banker, ARC's director of supply chain research.

Over the next five years, ARC projects, the WMS market will start to mature and its compound annual growth rate will reach 14.6 percent. As part of that maturation, the revenue stream for WMS providers will shift, the analysts expect. Instead of purchasing a license for a WMS package, more companies will choose to rent the software online, opting for so-called Web-hosted solutions. "Revenue streams from Web-application hosting (WAH) … accounted for less than 1.0 percent of total revenues in 2000," Banker says, "but these streams will become the fastest-growing component of total revenues over the next five years. While the total market is growing at about 15.0 percent, WAH revenues will grow at about 57.0 percent."

In part, the shift to greater use of Web-hosted WMS will be driven by the corporate strategy of make-to-order manufacturing. This approach requires a host of smaller facilities to work in unison to make a product. For instance, a computer manufacturer might have a third-party logistics company assemble a monitor, CPU, and keyboard from different manufacturers before shipping the final product to a consumer. Smaller companies that collaborate on product manufacture will be less inclined to bear the huge up-front licensing and installation costs for the WMS software that will be essential to supply chain management.

Although the market remains fragmented among dozens of WMS suppliers, Banker expects more consolidation. In the future, he says, "we'll start to see the top 10 suppliers gain share at the expense of the other suppliers."