The Software Links in the Chain

When network Goliath Cisco Systems Inc. (CSCO ) unveiled the shocking news that it would have to write off $2.25 billion in inventory in the third quarter, fingers began to wag. Some blamed Cisco's reliance on complex supply-chain systems to coordinate outside suppliers.

That drew outraged denials from the suppliers of such systems. "It's not the software," insists Greg Owens, chief executive of Manugistics Group Inc. (MANU ), a leading maker of supply-chain-management (SCM) software based in Rockville, Md. "Companies didn't respond quickly enough to a downturn in demand."

Who's right? The market seems to agree with the programmers. While the Nasdaq is down 55% from last March's peak, SCM leader Manugistics is down about 26%. And despite the slowing economy, many analysts believe that manufacturing companies, such as Boeing Co. (BA ), will continue to invest steadily in SCM systems. Indeed, in the midst of the tech wreck, AMR Research predicts that corporations will spend $6.7 billion on SCM software this year and that through 2005, the market will expand by a 35% annual clip. The crux, says AMR senior analyst Bob Ferrari: SCM systems help companies cut costs by reducing inventory. "Companies understand that they can be more competitive," he says.

Supply-chain software can be broken down into two general types: planning and execution. Planning systems help line up the materials necessary to meet long-range-demand forecasts; execution systems focus on how, in the near term, companies will buy and use those materials to meet demand. The big players on the planning side include Manugistics, i2 Technologies (ITWO ), and SAP (SAP ). The execution side of the market is more fragmented, with dozens of players.

Long before these myriad SCM specialists appeared on the scene, back in the late 1980s, Boeing already recognized the need to digitize its supply-chain operations. Through the '90s, the planemaker spent in excess of $1 billion to computerize its engineering, procurement, and manufacturing operations. Today, that system works hand-in-hand with Web-based SCM software, such as Oracle Corp.'s (ORCL ) iProcurement suite.

At most large corporations, including mighty manufacturers such as Flextronics International Ltd. (FLEX ) of San Jose, Calif., off-the-shelf SCM applications are the rule. Armed with a system from Datasweep Inc., the $10.1 billion contract electronics maker lets Lucent Technologies Inc. (LU ) and other customers keep track of production over the Net. Flextronics even set up a Web site where its clients can view a host of real-time data related to their orders--the number of units completed in a given batch, the production-error rate, and the like. "We can identify and solve problems more quickly," says Michael M. McNamara, Flextronics' president of American operations.

CONSOLIDATION. Flextronics and other fast-moving technology companies helped to put SCM software on the map. But these days the growth is coming from a larger, quieter market made up of established companies hunting for cost savings. TaylorMade-Adidas Golf, for example, is using i2 software to let retailers buy products, check inventories, process invoices, view order status, and jointly develop sales forecasts and merchandising plans. Rob McClellan, senior e-business project manager at the Carlsbad (Calif.)-based company, predicts that the software will save "millions of dollars a year in reduced inventory," and help its retailers sell more golf clubs.

But just as its customer base is broadening, the SCM market is consolidating. The major players are adding functionality by snapping up smaller specialists. Last June, SAP invested in e-marketplace and procurement-software maker Commerce One (CMRC ). And in March, i2 bought RightWorks, a provider of procurement programs. Analysts expect the consolidation to continue for the next several years, until a handful of players controls the entire market.

By Spencer E. Ante in New York

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