catch of the day

When the phone rang in Margaret Adat's suburban Toronto office on a recent afternoon, she was startled to find a sales rep from the world's largest software company on the line. Adat works for Gentec International, a Markham, Ontario, company that distributes photographic and electronic accessories. Her company's solidly on the growth track (its sales have quadrupled since its founding in 1990), but it's hardly a corporate heavyweight. Yet here was SAP, purveyor of supply chain software to the likes of Colgate-Palmolive and Kraft Foods, inquiring whether it could interest her in a new warehouse management system.

Until recently, warehouse management systems (WMS) were strictly for the big guys. If you didn't have a million bucks to spare (not to mention a battalion of eager IT people to program and maintain your system), you could only dream about a system of your own. Software makers designed their systems with big fish in mind; the little guys were on their own.

But years of fishing have depleted the stocks of big fish. Facing a future of revenues limited to maintenance and upgrades, WMS vendors have turned their attention to a market segment they had long overlooked—small and medium-sized manufacturers, wholesalers and retailers. Many began to market WMS systems scaled down for the smaller fry. And in the process, industry powerhouses like Manhattan Associates (which reported $196.8 million in 2003 revenues) and even billion-dollar SAP discovered what the smaller vendors like HighJump, Radio Beacon, Yantra and Red Prairie had known all along: There's good fishing to be had among small and medium sized companies.

Meanwhile, there's simply more demand from small and medium-sized customers. Business has changed for even the tiniest company if it ships products to very large customers, the Wal-Marts, Targets and Albertsons of the world. Big retailers now demand that suppliers—whatever their size—comply with detailed labeling, packing and shipping requirements or risk being hit with costly charge-backs or even losing the business. "The smaller companies are being forced to compete on the same field of play as the larger companies," says Bobby Collins, vice president of mid-market at Atlanta-based Manhattan Associates. "Even someone shipping 50 boxes a week has to have the right labels on them, or he gets a bill," agrees Dale Jeffries, president of Radio Beacon, a small WMS vendor based in Toronto. "Five years ago, he would have thrown people at the problem," Jeffries adds. "Now, he can get a WMS."

Life support
That's good news indeed, because throwing people at warehouse problems is no longer an option for many mid-sized players. Up until five years ago, Roger Wadsworth of Restaurant Equippers Inc. dealt with surging demand by adding people to get the orders out. But eventually he ran out of room. As staffers struggled to keep operations afloat in an overcrowded facility, accuracy and efficiency plummeted. "We had an order error rate of 7 percent, which was not tolerable," says Wadsworth, who is general manager of the 100-employee company, which distributes everything from salt shakers to freezer chests. "So we had to make [order pickers] work smarter and more efficiently." That meant venturing into scary waters to search for a WMS. And not just any WMS—Wadsworth needed one that could consolidate a shipment consisting of three forks and an eight-burner range but not cost an arm and a leg.

A few days at a trade show netted Wadsworth three prospects, all small vendors that specialized in small and medium-sized customers. But he held off making a decision until he and his team could personally interview each vendor's support people. Without the luxury of an internal IT staff, Restaurant Equippers must rely on the vendor to solve integration and other issues, he explains. "We live and die by that support."

As Wadsworth had foreseen, the interviews helped narrow the field. After one meeting, he recalls asking a colleague: "Was there anyone in that room who you'd want to pick up the phone if you called for support?" "No!" replied the colleague without hesitation. Wadsworth crossed that vendor off the list.

Wadsworth's interviews with the support people at HighJump Software, by contrast, went swimmingly. He ended up buying the Warehouse Advantage system from the Eden Prairie, Minn.-based vendor now owned by 3M (HighJump had $31 million in revenues in 2003, according to Hoovers Inc.). It was the company's support staff that sealed the deal, he admits. "The reason we bought HighJump," he explains, "was not the bells and whistles—although they had what we wanted without a lot of customization—but [that] we were more confident with the people we were talking with."

Beta fish?
Wadsworth is not alone in his insistence on high-quality tech support. When Margaret Adat of Gentec International began searching for a WMS 10 years ago, she confined her search to companies within reach of her Toronto-area office to ensure she could get help quickly if needed. At the time, the company had just added low-value cables and connectors to its line of photographic accessories, which meant it was on a drive to streamline its picking operations. "We had to be very efficient because it takes the same amount of effort to pick a $1.95 cable as it does to pick a $500 lens," she explains.

There was just one problem: At that time, nobody had figured out how to make a WMS work for a small outfit. But Adat, who is Gentec's chief financial officer and executive vice president, was not to be deterred in her quest. She found a local company, Radio Beacon, and agreed to become a beta tester of its new system. Adat figured she didn't have much to lose: Radio Beacon's system didn't require full integration with Gentec's enterprise resource planning (ERP) system, which meant she could drop them fairly easily if things didn't work out.

That Adat is still using Radio Beacon's system 10 years later is testimony to its success. Of course, things have changed a bit in a decade's time. Although in the early days the vendor's proximity to its customers was important, for example, today Radio Beacon performs upgrades and maintenance remotely, via the Internet, Adat says. "Now, just about the only time I see them come in is when they're demonstrating the software to someone else."

Though she may not see much of her vendor, Adat remains happy with her choice. "It was reasonably priced for what we were getting," she says. "And the payback came pretty quickly."

In the years following its pilot with Gentec, Radio Beacon steadily built up its market share among small and medium- sized companies by tying its services to widely used distribution and accounting software packages. Integrating its software with programs like Microsoft Business Solutions 'Great Plains, Solomon, Navision and Axapta systems has allowed it to provide high-end functionality scaled down to a reasonable price. But recently it went one better: rather than requiring small customers to buy its full WMS package, the company has broken the various functions into modules that clients can buy separately. "Before, if they wanted dessert, they had to buy the whole meal," says Jeffries. "Now they can skip the entrée." Not surprisingly, that's proved a big draw for the small and the budget conscious. Today, the average client for Radio Beacon manages a 100,000-square-foot warehouse operated by 10 people, Jeffries says. "That's our sweet spot."

The one that got away
That's not to imply that the smaller software vendors concentrate solely on the smaller customers, however. HighJump, for one, has landed some very big fish. Today it serves not just Restaurant Equippers, but customers like Circuit City and Verizon. Radio Beacon has contracts with the U.S. Social Security Administration and the U.S. Marines. Does Wadsworth worry that smaller companies like his will be forced to take a back seat to these larger customers? Not at all. Though he admits that he'll never need 1.75 million square feet of warehouse space like some of HighJump's clients ("We could sell every piece of restaurant equipment needed in the country and wouldn't need that [much] space"),Wadsworth says he likes having the assurance that his system can be scaled up as his business grows.

But just as the smaller vendors have been out casting for big fish, many big vendors have been out angling for smaller fry. Bobby Collins at Manhattan Associates says Manhattan always has an eye out for small customers, not least because they often become large customers—he cites long-time customer Patagonia Inc., the Ventura, Calif., outdoor clothing company whose 2002 revenues topped $220 million, as a case in point. "Some of our largest clients today started as small," Collins says.

But not all of the smaller fish can be lured away by the big guys.When SAP called Adat in hopes of interesting her in a new WMS, she didn't bite. "Frankly, it would take a lot for me to leave Radio Beacon," she says. Looks like SAP will have to write Gentec off as the little one that got away.