RedPrairie Corp.'s recent acquisition of SmartTurn signals the growing importance of on-demand software applications in the warehouse management systems (WMS) market. In case you missed the news, RedPrairie, a developer of traditional supply chain execution solutions, in May bought SmartTurn, a provider of on-demand warehouse management applications. SmartTurn is one of a handful of players in this niche market. Others include Vigna (which markets an application called HWY905 WMS), Four Soft Ltd. (4S eLog WMS), 7Hills Business Solutions (eBizNet WMS), and Synergy Logistics (Snapfulfil WMS). By adding the SmartTurn app to its portfolio, RedPrairie can now offer a WMS solution to DC operations of all sizes and levels of complexity.
The Web-based approach to software delivery provides a sharp contrast to the traditional way of doing business. Historically, WMS vendors sold licenses to customers for the use of their software, which the customers then had to install on their own servers. In addition to the licensing fees, customers had to pay for maintenance and software upgrades whenever the vendor issued a new release. And in many cases, they had the added expense of systems integration work needed to get the WMS to "talk" to any other applications they were using. Given all the costs, it's no surprise that only large companies have been able to afford these solutions.
Under the on-demand model, by contrast, vendors "rent" their software to customers for a modest monthly fee. The advantages to companies with limited budgets are obvious. For one thing, they avoid a huge upfront capital outlay for software licenses. For another, deployment is quick and easy. The vendor hosts the application on its own servers; all a user needs to gain access to an on-demand application is a Web browser—there's no need for a lengthy software installation or for systems integration work. On top of that, the software vendor usually maintains the application and provides updates as part of the service, which is a big selling point for small or medium-sized customers that lack in-house IT resources.
Despite those attractions, the on-demand WMS vendors have yet to capture more than a fraction of the overall WMS market. Chad Eschinger, an analyst at Stamford, Conn.-based Gartner Inc., estimates that sales of hosted WMS solutions accounted for a mere 5 to 6 percent of the $800 million global WMS market last year. Part of the problem, says Dwight Klappich, another Gartner analyst, is that on-demand WMS solutions are simply not competitive with the more elaborate licensed packages.
Klappich has a point. On-demand WMS solutions tend to be basic applications; they keep tabs on the receipt and disbursement of stock, interface with RFID and bar-code scanning equipment, and not much else. The licensed WMS packages, on the other hand, offer features that go well beyond inventory management to include functions like slotting optimization and labor management.
But many distribution centers don't need a high level of sophistication. They simply want an accurate count of inventory and the ability to provide inventory visibility to their supply chain partners.
That's why I believe that the WMS market is about to split into two groups, one that specializes in high-end solutions I'll call the Lexus models, the other offering low-end packages I'll dub the Corollas. The Lexus vendors will serve larger companies that demand more sophisticated solutions, while the Corollas will cater to smaller companies with relatively simple needs.
Although there are more than 200 vendors of WMS solutions today, that's far more than the market can support. I believe the industry is headed for a period of significant consolidation that will thin the vendor ranks to just a handful of players—two or three Lexus vendors and a small number of on-demand players.
What will be interesting to watch is how the market dynamics shift in the next few years. Because they charge less for their wares, I don't foresee the Corolla vendors making significant inroads into the Lexus players' market share in terms of revenue dollars. But I'll bet it will be a very different story when you look at each group's share of total WMS installations. By that measure, at least, it's likely that within a few years, the on-demand players will have pulled way out ahead of the competition.
