Risk and reward are found in logistics, transportation, and global trade

In today's environment, businesses are global, complex, and interdependent. Supply chain organizations at these companies vary widely in maturity, and in the technology investments they make. Companies at more basic levels of maturity are working to master supply chain management basics by deploying fundamental manufacturing scheduling or demand-planning processes. Meanwhile, companies with more mature supply chain organizations are opting for demand-driven supply network (DDSN) capabilities, and driving cross-functional and multi-enterprise processes like sales & operations planning (S&OP) and supplier collaboration.

In a recent AMR Research study, supply chain organizations identified the following goals related to supply chain management (SCM):

• Manage and reduce materials costs
• Optimize overall internal supply chain costs
• Reduce supply chain risk
• Improve manufacturing efficiency
• Enhance customer service; and
• Understand customer/end-user demand.

For SCM vendors, this translates into a rebounding market, posting a 3-percent gain in 2005, with forecasted spending increases of 7 percent in 2006 and 5 percent in 2007. Based on data from a recent AMR Research supply chain spending report, this year is expected to be the second in five consecutive years of market growth.

Natural disasters and the threat of terrorism likely contributed to companies' investments in reducing supply chain risk and optimizing supply networks. The threat of business interruption highlights the need for multi-echelon inventory optimization and an inventory policy to buffer against supply risk, maximize in-stock positions at the shelf, and ensure continuity of supply.

In fact, increased corporate awareness of supply risk contributed to 35-percent sales growth in the inventory configuration and policy solutions market, while inventory optimization was the top supply chain technology growth area in 2005. These issues also helped supply chain security software skyrocket in importance.

There's also renewed interest in supply chain network design, with license growth of 21 percent in 2005. Manufacturers need tools for managing the complexity of global supply chains. To do this, AMR finds 27 percent of companies with greater than$1 billion in revenue are reviewing their supply network at least semiannually, and the trend is for more frequent network design for resiliency, new product introductions, and customer service.

As warehouses become more labor-intensive—with a larger percentage of mixed pallets, picked cases, customized orders, and late-stage postponement modalities—warehouse systems have changed as well, leading to an increase in requirements for order visibility, task automation and pick productivity, labor benchmarking through technologies like RFID, and voice recognition.

Inquiry volume for transportation management systems reportedly doubled in the first half of 2006 over last year, indicative of the pressures logistics professionals are under due to rising fuel costs, capacity shortages, and trade flow imbalances.

Inflation and commodity are prompting a more cost-focused agenda. This pain is being felt by manufacturers as opposed to retailers, and is more acute for larger companies than smaller ones. In addition, network complexity is driving the need to focus on reducing—or at least managing—complexity.

Consolidation continues to occur across enterprise application segments. As the smaller software companies are acquired, users are more reluctant to purchase from the smaller vendors that remain. The water line for required capability is rising, and vendor differentiation is more difficult to demonstrate. Additionally, vendors' historic inability to sell to business-user pains, rather than against technology categories, could impede growth in some segments.

The way that customers buy software also is changing. Revenue from application hosting/subscription grew strongly at 16 percent, far outpacing growth of other sources of revenue. In SCM sectors such as collaborative infrastructure, buyers purchase software on a subscription basis to avoid the capital budgeting process, achieve time-to-value more quickly, and avoid large upfront license commitments. We expect subscription licensing to grow as a share of SCM software revenue.

Supply chain vendors can feel good about the current state of the market, but they must be mindful of the risk factors. Specialty vendors will need to act strategically to remain competitive and relevant in the market. That said, AMR data suggests that the SCM market as a whole will continue to ride a wave of prosperity in the coming years.