A Supply-Chain Whiz Comes Back Wiser

Says returning i2 CEO Sidhu: Smaller projects are smarter

Sanjiv S. Sidhu is one of high-tech's more modest billionaires. The 44-year-old founder of i2 Technologies Inc. (ITWO ) speaks softly, lives in an unimposing house in Dallas, and parks in the sun-baked company lot, door-to-door with his workers. But his latest move--returning to i2 in April as CEO after withdrawing to the chairman's spot more than a year ago--will be a whole new lesson in humility. For the first time, Sidhu must struggle to stay ahead of his competitors.

After building i2 into the world's top maker of software for managing corporate supply chains, Sidhu presided over a painful industrywide crisis of confidence in early 2001. Now, to overcome eroding market share, shrinking revenue, and persistent losses, he'll have to adopt a new set of business strategies. "i2 can't afford another embarrassment," says Salomon Smith Barney analyst Heather A. Bellini.

Founded in 1988, i2 beat the drum earliest and loudest for supply-chain software. When wired into a customer's factories and warehouses, such programs help slash inventories by figuring out the optimal amount of parts or raw materials the company should have on hand and signaling suppliers when to deliver just that much. Manufacturers--along with competitors, investors, and the media--were quick to grasp the huge savings potential. They rewarded i2 and its fast-multiplying competitors with multimillion-dollar purchase contracts and skyrocketing share prices. By 2000, the sector was crowded with players and had mushroomed into a $4.5 billion market, with i2 leading the charge.

Within a year, however, two things went painfully wrong: America's love affair with cutting-edge Internet software collapsed with the dot-com crash. Worse, some i2 products became mired in complex customizations. Companies "got so caught up in the idea that technology could work miracles" that they forgot about the human element, says Karenann Terrell, director of DaimlerChrysler Corp.'s eConnect Platform. Even Sidhu concedes: "The technology could be better. It could be simpler."

The first big blow for i2 came in February, 2001, when Nike Inc. (NKE ) publicly blamed a troubled i2 software implementation for inventory snafus that caused the shoemaker to miss its quarterly targets. i2 wasn't alone. Programs from several supply-chain companies were installed by Cisco Systems Inc. (CSCO ). Its operations were hobbled when grossly inflated demand forecasts left it holding $2.25 billion in unsellable gear that it later wrote off. It was just the sort of inventory crisis supply-chain systems were supposed to prevent.

These setbacks, aggravated by the broader tech slump, took a toll on i2. After nearly doubling its revenues in 2000, to $1.13 billion, i2's sales fell by 12% in 2001, to $986 million. That year, the company lost $149 million (excluding a $7.75 billion write-down for goodwill and in-process research and development). Following Nike's announcement, i2's shares tumbled 22%, down from a high of more than $100 a share in 2000. Today, they trade below $3.

The company's financial woes will continue, predicts Morgan Stanley Dean Witter & Co. managing director Charles E. Phillips. The costs of an oversized salesforce and the drain from gratis support work for existing customers could push i2's sales down 35% more this year, to $646 million, says Phillips. Losses could hit $173 million.

Maybe wisdom will come with suffering. As Sidhu and others struggled to understand what went wrong with the first wave of supply-chain installations, the following lessons emerged: First, employees are smarter than software code. Some of the most successful supply-chain implementations rely heavily on human intelligence, notes Hau L. Lee, a Stanford University operations professor. Delta Air Lines Inc. (DAL ), for example, has saved millions by posting its procurement requests on a central Web site--but humans pour over the replies. "We don't have artificial-intelligence systems that can sort through all those responses. That's only in Hollywood," says Rick Plasket, Delta's supply-chain maven.

Lesson Two: Poor network connectivity can thwart even the best-laid supply plans. As a common communications infrastructure, the Net helps. However, "the actual number of applications that have managed to integrate the Internet in the supply chain is still low," concludes a recent report by AMR Research Inc. So companies must move faster to upgrade their supply-chain systems.

Lesson Three: Problems with poor data quality, along with compatibility issues, are even more technically vexing than connectivity. Errant weather forecasts, for example, can send too much suntan lotion to seaside drugstores. And even with good information, one machine's code for suntan lotion may mean lipstick to another. While Internet-based standards are being hashed out by industry groups, a digital lingua franca for the supply chain is still "years, maybe a decade" away, says Scott Stephens, chief technology officer at the nonprofit Supply Chain Institute.

For all of the technical hurdles, and for all i2's floundering, the supply-chain software industry continues to grow. Overall revenues for companies in the sector increased by 4% in 2001, according to ARC Advisory Group, and will expand by about the same amount this year. That's because even though only about a third of manufacturers have installed supply-chain systems, the software clearly helps boost efficiency. The inventory-to-sales ratio--a measure of how much stock U.S. businesses keep on hand--was high, and volatile, through the 1980s (chart). But in the mid-1990s, amid a sustained IT investment binge, it declined steadily.

The ability of businesses to do more with less is confirmed by the growth of so-called multifactor productivity in the 1990s. Last year, Federal Reserve Chairman Alan Greenspan identified this sustained growth of output per unit of labor and capital as key to the U.S.'s longest-ever growth spurt. Testifying before Congress, he credited the new software tools by name: "New technologies for supply-chain management...imply that businesses can perceive imbalances virtually in real time and cut production promptly," he said.

That's a welcome endorsement for the technology. But what will it take for i2 to get back in the groove? For a start, Sidhu will have to lower his sights and steer customers to less ambitious software-adoption schedules. At the height of supply-chain fever, companies were binging on "soup to nuts" multiyear supply-chain rollouts costing tens of millions, says Salomon's Bellini. These days, "they're spending just $2 million per quarter to eat just when they're hungry," she adds. Sidhu has absorbed this lesson. "Now, we tell customers to start fast, but start small," he says.

Consolidation may help i2. As market share concentrates among the top three software suppliers--i2, followed by SAP (SAP ) and Manugistics Group (MANU )--smaller outfits simply don't have the cash to stay afloat for very long, says Morgan's Phillips. i2, on the other hand, has $617 million in cash reserves, which should give Sidhu the time to right things with existing customers while his salesforce finds new accounts. The industry could certainly use Sidhu's help over the next decade as it irons out problems in Net architecture, data quality, and standards. With humility and discipline, Sidhu will be back in the thick of things.

By Adam Aston in New York

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