January 1, 2009
technology review | Supply Chain Execution Software

Software for hard times

software for hard times

The economy may be slumping, but analysts say demand for supply chain execution software will stay strong this year.

By James A. Cooke

The economy may be down and businesses may be cutting back, but supply chain execution (SCE) software packages are expected to sell briskly throughout 2009. That's the consensus view of leading analysts who follow the supply chain software market for a living.

As for why these applications would be bucking sales trends, it's all about managing costs. In an economic downturn, companies are looking to pare warehousing and transportation expenses wherever they can. And that's precisely what tools like warehouse management systems (WMS), transportation management systems (TMS), and global trade management systems (GTM) are designed to do.

Why TMS is hot
The top-selling application in the supply chain execution sector this year will likely be TMS, software that oversees freight planning and movements. TMS revenues totaled $650 million in 2008, according to the Stamford, Conn.-based information technology and research firm Gartner Inc. Despite the recession, Gartner expects TMS revenue to grow 12.3 percent to $730 million in 2009.

Gartner analyst Dwight Klappich says there are a couple of reasons for his firm's bullish forecast. For starters, he says, the number of TMS users is still fairly small, even in North America and Europe. "Market penetration remains relatively low," he explains, "so there is a lot of new business potential."

On top of that, Klappich says, transportation management software offers a quick payback on the initial investment. "It's not uncommon to see cost reductions of 10 percent or more on the annual freight spend," he says.

In fact, nowadays, even small shippers can benefit from using a TMS, the Gartner analyst reports. That wasn't the case a year or two ago when the software's primary selling point was its ability to consolidate shipments. "A small shipper could not justify the cost of a TMS on optimizing 20 LTL shipments," Klappich explains.

In the last year, however, software developers have been loading up their TMS packages with new functions: carrier rate comparison features, governance mechanisms that force users throughout the corporation to select the low-cost carrier, and freight bill auditing capabilities that ensure that shipping charges reflect contracted rates. "Small shippers can now justify a TMS on the freight payment and audit feature alone," Klappich says. "Anyone spending $25 million or more on freight can now justify the cost of a TMS."

Analyst Adrian Gonzales agrees that TMS sales will remain strong in 2009. "Companies will want to prioritize transportation initiatives to cut costs and improve profitability, considering business sales are going down or remaining flat," says Gonzales, who is executive director of the logistics council at ARC Advisory Group in Dedham, Mass.

Gonzales says some of that demand is coming from a previously untapped source: companies that once outsourced their transportation management to a third-party logistics company but have since decided to do it themselves. "Companies need a TMS in order to bring that function back in house," he explains.

WMS: Still the revenue leader
TMS may be the fastest-growing segment of the SCE software market. But in terms of dollars spent, the hands-down winner remains the WMS, software designed to oversee distribution center operations. Gartner pegged worldwide revenues for WMS in 2008 at $1.03 billion; it expects revenues to climb 11.7 percent to $1.15 billion in 2009.

In the past year, much of that revenue came from sales to companies in Western Europe and the United States that were replacing their old systems. Sales of replacement systems will likely slow this year, but Klappich believes that weakness will be offset by growing demand for WMS from companies in Eastern Europe, the Asia Pacific region, and Latin America. And while North American companies may put major systems upgrades on hold, he predicts that they'll still buy add-on modules like labor and performance management.

Customs regs spur GTM sales
Another growth area for supply chain software will be global trade management systems, which have a smaller user base than either TMS or WMS. Gartner expects that vendors will see worldwide revenues from global trade software jump 16.7 percent to $238 million in 2009 from $204 million in 2008.

Although many companies still rely on their customs brokers, freight forwarders, or third-party logistics service providers to handle trade compliance, enterprises running global supply chains are likely to find it necessary to obtain software to deal with fast-changing customs regulations. "Even if they don't want to, companies may have to invest in this software due to customs," says Klappich.

Five more good years?
Despite all the turmoil on the world economic front, at least one prominent analyst remained bullish on this category of software at the end of last year. In an e-mail sent a couple of weeks before his death on Nov. 30 (see related article on p. 16), John Fontanella of AMR Research in Boston predicted that sales for all types of SCE software would remain strong for the next five years. According to his company's projections, the overall market for supply chain-related software will grow 7 percent annually through 2012.

As for why companies would continue to buy supply chain software in a period of corporate belt-tightening, Fontanella said it was a matter of cost control. The bailout of the financial industry expanded the money supply of major nations, he explained, leading to devalued currency and an environment favorable to inflation. "Supply chain managers will be expected to play an important role to protect product and company margins through cost control and increased efficiencies in their operations," he said.

On top of that, he added, in times of financial turmoil, companies hoard cash. "For the first time, cash preservation will become a major imperative outside the corporate treasurer's office," Fontanella said. "Capital spending will come under great scrutiny in this environment, so technologies that increase the velocity of cash collection will become a critical component of initiatives going forward."

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

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