A growing yet complex market is set to benefit from emerging standards

After a decade of lackluster—if not downright depressing—performance, the market for manufacturing operations application software is showing signs of a healthy recovery. In fact, manufacturing is decidedly hot, and getting hotter.

Early results from Boston-based AMR Research's 2006 application spending survey show that manufacturing operations investments captured the No. 1 spot—ahead of ERP—both in terms of strategic importance and intended dollar investment for the upcoming year.

Of the 900-plus companies AMR surveyed, respondents said they were investing in manufacturing execution systems (MES); statistical process control; CAPA and closed-loop quality management; enterprise asset management; recipe management; laboratory information management systems; and even advanced process simulation and control.

Myriad factors converge to ignite this sudden resurgence in manufacturing operations investments. In domestic and global markets, regulatory and industry bodies are broadening their reach, enacting far more stringent traceability requirements for food, drug, and beverage; safety-related products such as airbags and tires; and hazardous materials used in the manufacture of electronic components.

While compliance issues vary by industry vertical and subvertical, they comprise a tremendous impetus for brand owners to protect their legal and financial interests. But regulatory compliance isn't the only driver.

Costs associated with poor product quality—as it pertains to product performance against safety or label claims measures—are astonishing. In 2005, GM spent 2.5 percent of its auto sales revenue fixing vehicles under warranty. Ford spent 2.8 percent, according to Warranty Week 2006 SEC data. Numbers from IBM, Dell, and Whirlpool are even more impressive. So while punitive measures from regulatory bodies are one risk, brand owners run a much larger risk in damage to brand equity and market perception—all of which impact shareholder value.

Mature manufacturers recognize that operations excellence—as opposed to penalty avoidance—is critical to superior market performance. And while many are making tactical investments in software today, they also are developing global manufacturing strategies and architectures to achieve what AMR refers to as "perfect order performance"—the right product at the right time for the right price. This trend is further impetus for the stepped-up prioritization and spending on manufacturing operations software applications.

It's a challenge for independent software vendors to deliver enterprise-class applications for manufacturing. In fact, the market for commercial MES software only just broke through the$1-billion mark, and the commercial software market for manufacturing operations software is, optimistically, about $5 billion to $6 billion—a far cry from today's $18-billion core ERP market.

The gap closes slightly when considering AMR's latest IT spending research, which suggests that almost two-thirds of manufacturing investment will go toward in-house custom applications development, or extensive customization of various manufacturing applications. This market is ripe for efficient development of composite applications and service providers—but why?

In technical terms, no one has achieved the holy grail of a Universal Manufacturing Model that addresses a significant cross section of the manufacturing styles encountered across the process and discrete industries. Eighteen years after AMR Research coined the term MES, there isn't a standard set of manufacturing processes, nor integrated software functionality that allows manufacturing ISVs to achieve the economies of scale ERP vendors take for granted.

Building composite applications was a necessity in manufacturing before the term service-oriented architecture (SOA) was invented, and manufacturing is positioned to be the first demonstrable beneficiary of broad SOA adoption. In fact, a host of specialists address each of the aforementioned software application categories—and many others (see graphic)—and the landscape is fragmented along industry vertical lines, largely based on manufacturing styles.

For example, MES for batch-style manufacturing bears little resemblance to the MES that targets low-volume, engineer-to-order, discrete production scenarios. Similarly, it is hard to find deployments of advanced process simulation and control applications in manufacturing environments with little or no automation and process control. Legacy systems add to this complexity.

Historically, manufacturing plants have operated autonomously, and with tight cost constraints. Software applications have been purchased at the plant level with a focus on cost containment, enforced by shortsighted compensation plans—in other words, purchases are tactical rather than strategic.

As a result, a large manufacturing company may operate a fleet of 40 or more plants—many of which were acquired through mergers—and the software application landscape within each plant is likely to be dramatically different. This complexity drives SOA adoption in the manufacturing operations arena, and, for the sake of survival, vendors serving this space embrace Web services to create standard interfaces to legacy assets, preserving the value of investments and leveraging them in new ways.

A critical next step for the vendor community is to define the process for maintaining these "new" services, including how they should be used, who can use them, and the performance and versioning requirements needed to maintain usefulness. Again, manufacturing is a ripe market, ready for a more efficient SOA development model to apply to the backlog of composite applications.

Expect demand for manufacturing operations software applications to grow throughout the decade, but remember there are big question marks surrounding who the direct beneficiaries of this spend will be. AMR's recent annual spending study indicates two-thirds of manufacturing investment will go toward in-house custom applications development or extensive customization of various manufacturing applications.

This affirms the perception that today's commercial off-the-shelf applications still aren't offering the flexibility or extensibility to address a broad range of manufacturing scenarios and legacy-system environments.

Buyers also should be mindful of these trends:

1. Market consolidation will continue. Over the years, significant consolidation has occurred in the manufacturing operations software market, and it's not over yet. This time, though, consolidators are just as likely to hail from the ERP camp they are from the automation arena.
2. Global system integrators (SI) will enter the fray. Historically, SIs serving the manufacturing space constituted small, regional shops with deep domain expertise in supervisory control and control systems integration, and perhaps one or two higher-level applications, such as MES or quality management. As composite applications take off, expect to see names like IBM Global Business Solutions, Deloitte, and Accenture join the covey of capable service providers from India.
3. Standard "standards" will eventually emerge. The long-term investments that standards groups like ISA have made in the S-88 and S-95 models will realize their latent potential as the foundation for this new generation of manufacturing services.
4. Composite application frameworks will end the "best-of-breed versus ERP" debate. To reiterate previous points, the entire manufacturing operations arena is ripe for composite applications. Prospective buyers should evaluate the frameworks provided by ERP vendors—or by global services providers—as a means of "leaving and leveraging" existing investments in manufacturing software applications.

Seek support for real-time event management, highly distributed workflows like manufacturing process management, and operations intelligence—the emerging real-time equivalent of corporate-level BI. By all means, continue to invest in local manufacturing excellence capabilities, but verify that your chosen applications can play in aservice-oriented world.