The ERP midmarket heats up

The midmarket is where the action is when it comes to ERP. In a spending report released last fall, Boston-based AMR Research found that more than one-third of companies under $500 million in annual revenue are installing new ERP systems, compared with one-fifth of companies $500 million or above.

No wonder enterprise software vendors are aggressively touting their midmarket offerings. The problem, particularly for vendors accustomed to serving the Fortune 1000, is accurately defining the midmarket, and then determining its technology needs.

Liberally defined, the midmarket ranges from companies with $50 million in annual revenue to $1 billion in yearly sales. Within those parameters, the primary business issues tend to revolve around a company's specific vertical industry or its role in a supply chain, rather than its size. Diversity means that what matters most to a midsize manufacturer when it comes to ERP systems and software vendors also varies.

But these midmarket nuances rarely matter to managers like Michael E. Rodgers. He is information systems manager for Rev-A-Shelf, a midsize manufacturer of storage products. Rodgers says that for the Jeffersontown, Ky.-based company, ERP combined with a warehouse management module and wireless data collection boils down to real-time visibility over operations.

Rev-A-Shelf uses the Epicor Enterprise suite from Epicor Software, a vendor focused on small and midsize manufacturers and distributors. The warehouse management module also is from Epicor, and the integration between the two means that activity tracked via scans on the floor is immediately reflected in the ERP system. With light manufacturing going on at two warehouses, having this grasp over operations is a big deal to Rev-A-Shelf.

"Every piece of information we get on inventory moves is in real time," says Rodgers. "That makes a big difference. If something is moved, it's shown and accounted for as moved."

For companies toward the lower end of the midmarket, factors such as functionality, low cost of ownership, and vertical industry features loom large in ERP decisions. However, middleware and partner connectivity are becoming more important to larger medium-size enterprises that need to integrate multiple systems, or quickly connect with partners. Ultimately, this means ERP needs in the midmarket vary widely, says Simon Jacobson, an analyst with Boston-based AMR Research.

"If I'm running a 400-person enterprise, I'm most concerned about integrated functionality that is going to help me run my business," he says. "But when you get to the higher-level midmarket companies that need to manage a fleet of plants or multiple partners in a supply network, they tend to be more concerned about how to integrate everything."

High demand for ERP solutions in the midmarket has the world's biggest ERP vendors, such as Oracle and SAP, butting heads with more traditional midmarket players such as Epicor, Infor, SSA Global, and Microsoft Business Solutions. While SAP and Oracle dominate the upper end of the ERP market, the midmarket is more competitive.

SAP and Oracle are coming after the midmarket like "juggernauts" and will be hard to fend off, says Bob Ferrari, program director for supply chain strategies at Framingham, Mass.-based analyst firm Manufacturing Insights, but don't count out the traditional vendors. "They've been in this market for a long time, and understand that it has different needs," Ferrari says. "They know midmarket companies need to serve large customers, so they require visibility into their own processes and operations. They also understand the solution has to be tailored to industry needs, and simple to maintain."

Traditional midmarket vendors say they shine when it comes to factors such as vertical-industry functionality and low cost of ownership. They also say they have the supply chain management extensions needed for the market. But the clout and size of the major vendors is hard to overlook. SAP, for instance, says that 65 percent of its 32,000 customer-strong installed base—or roughly 20,800 organizations—has fewer than 2,500 employees, or less than $1 billion in annual revenue. Finally, large vendors can point to midmarket customers who say their solutions are affordable and functional.

Ferrari notes that the days of a midmarket served by dozens of small ERP vendors are gone. In fact, the largest traditional midmarket players owe much of their size to acquisitions, such as SSA's purchase of Baan, and Infor's acquisitions of MAPICS and Lilly.

For ERP users, the financial strength of vendors has become more important. As Rev-A-Shelf's Rodgers puts it, "You like to know your vendor is growing, and that it has strength, but what is most important to me is that the product is reliable and that it has a strong support team."

In the late 1990s, Rev-A-Shelf was running an accounting package from Platinum, which was bought by Epicor, as well as a distribution management solution from FocusSoft, also bought by Epicor. When Epicor offered the products as an integrated suite, Rev-A-Shelf migrated to that solution in 2001, says Rodgers.

At the time of the migration, says Rodgers, Rev-A-Shelf considered other ERP solutions, but stuck with Epicor because it liked the accounting functionality and an integrated suite from one vendor. Rodgers says packages from some bigger vendors were looked at, but were much more expensive.

Says Rodgers, "We already had an established relationship with Epicor. The way we were looking at it, we wanted one vendor we could trust to be the full solution provider, so that if we had any problems, we'd have one phone call to make."

In 2003, Rev-A-Shelf decided to add Epicor's warehouse management module to its installation of Epicor Enterprise. The module uses wireless bar-code scanners to record material movements in near-real time. Data is collected at receiving, shipping, and at about 25 work centers. Previously, Rev-A-Shelf operated with a paper-based receiving, picking, and shipping process that offered no real-time visibility.

"We would do everything in the warehouse by paper, followed by inputting data into our systems," says Rodgers. "As a result, we'd have errors and inventory problems. We also used to spend a lot of time on cycle counts, and sending people out to try to find product. But now, as a result of what we've put in place, we have very good control over where product is."

Rodgers says real-time tracking has increased inventory accuracy in the warehouse from about 85 percent to nearly 99 percent. Because less time is wasted searching for materials, and picking is more efficient, productivity is up by 25 percent. The real-time data sets a foundation for regulating material flow for lean assembly and kitting operations that take place in Rev-A-Shelf's two warehouses, says Rodgers.

Kaizen teams have set up work-in-process inventory bins for various work centers in the two facilities, and these bin levels are managed using reports and alerts generated from data in the ERP system, which runs on a Microsoft SQL Server data base. Reports are written in Crystal Reports, and email alerts are initiated via SQL Mail, a component of SQL Server using stored procedures to automatically send email alerts. While this took some configuration by Rev-A-Shelf's database administrator, it's been an effective means of leveraging ERP data to automate kanban replenishment. SQL Mail technology also sends kanban alerts to a handful of suppliers.

"With lean, we often have to adjust and make changes to production and material flow," says Rodgers. "If we didn't have this system in place, we wouldn't have the information we need to make those changes."

While it's true that smaller midsize companies tend to want strong shop-floor execution and factory scheduling within ERP, the system needs of a company aren't always driven by revenue size. Mike Frichol, a VP with Infor's Discrete Group, says other drivers—such as whether or not a company outsources production, the complexity of its supplier network as well as product complexity and volume, or special industry requirements—often are key ERP drivers.

For example, says Frichol, manufacturers that are suppliers to others are going to want an ERP solution with strong production management. Others also require industry functions such as EDI for the automotive sector. Vertical functionality is a special focus for Infor, adds Frichol. "First, midsize manufacturers are saying they need a very specific manufacturing system that covers production and supply chain management, and second, they want a solution that supports the business processes of their vertical industry," he says.

A third general driver, says Frichol, is that the midmarket demands low cost of ownership. "The reality for midmarket companies is that the system needs to be affordable," Frichol says. "That includes being able to implement an ERP solution in a short time frame."

Graeme Cooksley, an executive VP with SSA Global, agrees the midmarket is highly sensitive to IT costs. "They are looking for an end-to-end solution, and for one vendor to supply that solution," he says. "They don't want to be worried about the integration of three or four disparate products."

SSA Global, says Cooksley, uses IBM's WebSphere middleware to link its ERP systems with supply chain management extensions or other ERP systems. Larger midmarket companies, he adds, often are looking for extended applications from their ERP vendor, but want them pre-integrated.

SSA Global, says Cooksley, sells a supply chain execution suite from its acquisition of EXE a few years ago, and more recently, from its acquisition of Provia. Such packages, he contends, increasingly are the most pressing need among larger midsize companies challenged by global order fulfillment. "Many larger midsize manufacturers are sourcing products offshore, but they still have to transport and distribute those products," he says.

For its second fiscal quarter ended Jan. 31, 2006, non-ERP extensions accounted for 25 percent of SSA Global's license revenue. As for the notion that SSA Global is a "rollup" vendor living off of maintenance revenues, Cooksley points out that 30 percent of total revenue for its second quarter was from license revenue. "Not many other vendors in the industry are doing that," he says.

The traditional midmarket players are larger than they once were, and can offer useful extended applications, says Jacobson, but ultimately, they must attract a healthy stream of new users. "They've done a good job buying up the common technology," he says. "Now they have a tremendous cross-selling opportunity within their bases. But the real battleground for any of these vendors is, 'Who can add the new accounts?'"

Both Cooksley and Frichol say their companies are attracting new customers. Cooksley, for example, points to 56 new customers gained during its second quarter, while Frichol says Infor is on pace to add 1,000 new customers this year. Jacobson, however, says that because the midmarket is so potentially large, the traditional vendors need to attract large numbers of new accounts to thrive long-term.

Vendors such as SSA Global need little convincing on this score. Cooksley says SSA is transitioning from being an acquirer to accelerating organic growth, and is hiring 65 salespeople to meet its goals. Finally, with better than $730 million in annual revenue last year, SSA Global is hardly a small software concern anymore, which tends to play well with ERP buyers assessing vendor viability. In fact, Cooksley sounds far from the underdog when he concludes, "There is flight to size, and a flight to safety in the market. I think consolidation will continue, and the small will become very specialized, or simply not survive."