Supply chain software shakeout

As a plethora of players consolidate and the market reaches critical mass, the supply chain management software industry faces a shakeout.

"We see supply chain reengineering over the next five years being as important or more important than business process reengineering was over the last five years," said Dennis Byron, analyst at International Data Corporation in Framingham, Massachusetts. "Users want to stretch the integration they put in internally in their companies over the last few years into their whole line of partnerships and customers. The technology is there. Now they've got to crank out the work."

But the current crop of supply chain software vendors won't be players in the game, the analyst added.

The main reason is that there are too many vendors crowding the niche market, a problem made worse by corporate computing giants in the enterprise resource planning (ERP) market like German software titan SAP encroaching on the territory with its own supply chain management products.

"Generally speaking, this is mergers and acquisitions territory, and it is going to have to happen soon," said Joshua Greenbaum, analyst at the Hurwitz Group, also based in Framingham. "These companies are just not big enough and there are too many of them to hold SAP or others at bay in the market."

ERP vendors like SAP, PeopleSoft, and Baan are all developing or delivering software that allows companies to manages the flow of materials, cut inventory levels, and better plan use of their supplies.

For companies like Manugistics in Rockville, Maryland, ERP vendors eyeing this territory is a tough pill to swallow. Manugistics, which has built its $175.7 million business selling products in the supply chain management niche, announced recently it is going to take a loss its first quarter ended May 31. The news sent Manugistics' stock plummeting the past few weeks from a high of nearly $60 a share just before the announcement to around $26 a share this week.

"What's happened to Manugistics is really setting the stage for the first of many problems," Greenbaum said. "It's a pretty scattered market. It has to consolidate."

For now, analysts say the niche vendors like Manugistics and I2 Technologies in Irving, Texas, are staying one step ahead of the ERP vendors by offering a deeper breadth of products than SAP or PeopleSoft can offer. They also have a track record of expertise in critical supply chain management operations that the ERP vendors cannot offer.

"Supply chain software for a lot of managers is their window into the ERP realm, not other way around," Greenbaum said. "It is nothing short of the next paradigm shift but it will be two years before the market settles down."

In addition, the ERP vendors during that period could likely catch up in the technology department, forcing the niche players to pump up research and development efforts to advance their products and find new markets.

For its part, Manugistics is expanding into vertical markets like the semiconductor industry and hooking up with Oracle to feed the needs of the consumer packaged goods industry. Manugistics is also making it easier to connect its product to the ERP packages so users can use a product outside of their ERP package without worrying about integration issues.

"All of the supply chain vendors are going to have to go this route to compete with the traditional ERP folks who are all coming their way from the other direction to get a piece of this action," Byron said.