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Keeping an Eye on Supply Chains

Although limited budgets constrain the IT spending of small- and medium-sized enterprises (SMEs) in the manufacturing vertical market, these companies have discovered that supply chain management is imperative for their survival.

Although limited budgets constrain the IT spending of small- and medium-sized enterprises (SMEs) in the manufacturing vertical market, these companies have discovered that supply chain management is imperative for their survival. As with their larger counterparts, manufacturers in the SME arena face increasing pressure to align their business processes and IT systems with those of their trading and business partners. This article reviews the key drivers and obstacles to the supply chain solutions spending of manufacturing SMEs and provides forecasts for this market opportunity from 1999 to 2004.

Key Business Issue
What are the opportunities for vendors in the industry subsegments?


Strategic Forecast Statement
Gartner Dataquest forecasts that the supply chain solutions spending of manufacturing SMEs will grow from $2.4 billion in 1999 to $8.1 billion in 2004.

Supply Chain Management: Key Initiative for Manufacturing SMEs
Faced with the pressures of market and shop floor globalization, diminishing margins, inventory optimization requirements, channel diversity, decreased time to market, and customer demands for cheaper custom products, manufacturing companies of all sizes have recognized that they must align and optimize their business processes not only across their internal units but also with their trading partners. Supply chain management has become a necessity for survival.

Until the advent of Web-enabled supply chain solutions, SMEs relied primarily on telephone, fax and e-mail to communicate with suppliers, customers, and partners. Electronic data interchange (EDI) is the traditional technology that automates business-to-business (B2B) transactions and information exchange between large manufacturers and suppliers. But EDI requires such large investments of time and money that small and technically unsophisticated companies were, in effect, excluded from participating in EDI-based supply chains transactions.

Internet technologies, including Web-native applications, promise to alter the supply chain environment by promoting more inclusiveness. Armed with only a computer and a browser, any company can exchange data and conduct transactions--albeit manually--with external companies. The business pressures faced by SMEs and the emergence of easier-to-implement technologies conspire to drive the supply chain solution spending of the manufacturing market segment.

Definitions
Small, Midsized Manufacturing Enterprises: Gartner Dataquest defines and segments the manufacturing vertical market into two subsegments: discrete and process manufacturing. Discrete manufacturing includes the aerospace/defense, automotive, high-tech/electronics and industrial machinery/equipment industries. Process manufacturing includes the chemicals/pharmaceuticals, petrochemicals, primary metals, printing/publishing and food/beverage industries. Gartner Dataquest defines small and midsize manufacturing enterprises as manufacturing companies that generate less than US$500 million in annual revenue. More than 99 percent of manufacturing companies generate US$500 million or less in annual revenue. Supply Chain Solution Spending
Gartner Dataquest defines supply chain solution spending as spending on hardware, software, and internal and external services to support an end user's process for planning, implementing, and controlling the flow and storage of goods from suppliers to customers--including inbound, outbound, internal and external movements--and the return of products for repair and recall purposes. The following definitions provide further detail concerning the various aspects of supply chain solution spending:

  • Hardware includes the computing unit, peripherals, and a variety of user input/output devices, such as keyboards, monitors, and printers.
  • Software includes systems/utilities software, network operation software, hardware operating systems, and application software. Software includes computer programs containing instruction codes that enable the computer and network hardware to perform certain sequences of operations.
  • External services comprise professional services (e.g., business and IT consulting, applications development, applications management and systems integration) and support services.
  • Internal services refer to salaries paid to the information services staff. This group includes all company employees who plan, develop, implement, and maintain information systems.
  • Supply chain solution spending includes capital expenditures, hidden IT spending, and business-unit IT spending associated with designing, implementing, deploying, and maintaining supply chain systems.
  • Capital budgets represent expenditures that recur infrequently and are depreciated over a number of years based on their life cycles as useful assets. For the purpose of this forecasting exercise, capital expenditures are allocated to the year that the expenses take place. Because of this, depreciation expenses are not included in the IT spending numbers.
  • Hidden spending includes operating expenses assumed by non-IT department entities within an enterprise that do not adhere to an IT chart of accounts. This expense is indistinguishable from other non-IT expenses.
  • Business unit spending includes IT operating expenses assumed by non-IT department entities within an enterprise.

Methodology
Gartner Dataquest obtained data for this analysis and forecast from a number of primary and secondary sources. Primary sources include interviews with selected IT vendors and data from Gartner's recent end-user primary research survey of SME companies. This survey involved structured interviews with 43 U.S. manufacturing companies. Survey questions probed the following topics:

  • IT user wants and needs
  • Subsector-specific IT requirements
  • Major business challenges and critical success factors
  • Relationships between business and IT strategy
  • IT investment plans and budgets
  • Buying intentions of supply chain-related solutions
Empirical Evidence: SMEs Explore the Possibilities
Gartner Dataquest's survey reveals that the majority of SMEs are actively evaluating potential solutions and vendors: 39.5 percent of the companies interviewed were evaluating supply chain solutions and vendors, 41.9 percent were in the consulting and design phase of deploying the solutions, and 41.9 percent were upgrading or enhancing the capabilities of their existing supply chain management systems. Clearly, supply chain solutions are poised for growth in this manufacturing subsector, with these three groups of respondents representing the primary opportunities for IT vendors.

The importance of supply chain initiatives to manufacturing SMEs can be largely attributed to the executive-level support that these projects have garnered. According to the 43 companies interviewed, CIOs and IT managers exert much influence in initiating these projects. However, the individuals most influential in initiating the decision to deploy supply chain solutions are executives, such as CEOs, COOs, and division or business line executives. Because the executive management team--not just the IT management team--backs these projects, they are business initiatives, not merely technology initiatives. As initiatives that drive corporate business objectives, these projects will likely be endowed with a larger budget than if they were technology initiatives.

As expected, the primary objectives driving the implementation of supply chain solutions center on the need to link with external companies and the desire to reduce costs.


Business and Technology Drivers and Inhibitors
The adoption rate of supply chain solutions by SMEs varies across the different manufacturing subsectors. High growth, high-tech/electronics SMEs are adopting supply chain solutions more readily than mature consumer-products manufacturers. Yet, manufacturing SMEs from all sectors must contend with common issues that affect their receptivity to supply chain solutions.

Dominant Market Accelerators
As with large manufacturing enterprises, SMEs face the following business pressures, which accelerate their need for solutions that enable them to integrate their business processes and IT systems with those of their trading partners, suppliers, and customers:

  • Cost containment: As the cost of research and development and marketing increases, manufacturers struggle to drive down costs across all business processes. They have targeted supply chain and logistics processes, which are rife with inefficiencies in many organizations, as primary candidates for productivity improvement projects.
  • Customer demands: To compete effectively in an environment characterized by eroding price margins and intense regional and global competition, manufacturers must differentiate themselves from their competitors. Manufacturers are transforming from a product-centric to a customer-centric environment and are aspiring to deliver high-quality, increasingly custom products. To satisfy customers and quickly fulfill their complex demands, manufacturers must optimize both the inflow of increasingly customized sets of raw materials into their manufacturing processes and the outflow of customer-tailored finished goods.
  • Time-to-market: Many manufacturing companies, such as those in high-tech/electronics and consumer products, face extreme competition to be first to market. At the same time, they suffer from shrinking margins as a result of product commoditization. To combat these issues, manufacturers have become aggressive in shrinking the cycle time from product conception to market delivery. As a result, they are optimizing their supply chains to achieve this objective.
  • Globalization: Many manufacturers want to enter new international markets and leverage larger economies of scale abroad. As manufacturers expand their operations globally, they will need the infrastructure to be able to plan, source, implement, and control the flow of raw materials, works in progress, and finished goods on a global level--all while complying with country-specific documentation and regulatory mandates.
The following accelerators for the selection, implementation, and deployment of supply chain solutions are specific to manufacturing SMEs:
  • Availability of EDI alternatives: With the development and availability of Web technologies, SMEs can connect with critical suppliers, customers, and business partners without investing as much as they would for EDI. At the most primitive level, a manufacturer needs only a computer and Web browser to communicate with external companies via Web forms.
  • Emergence of rentable applications: New pricing models, such as subscription models, will attract SMEs, particularly those with limited capital budgets. Solutions from application service providers, though not customized to an enterprise's business process, will be the first step for many small enterprises that want supply chain functionality and industry-specific templates without incurring huge capital investments. SMEs will be more willing than large companies to forego advanced functionality.
Dominant Market Inhibitors
Although manufacturing SMEs recognize the need to purchase solutions that enable them to optimize their supply chain processes, the following factors will limit or delay their investments:
  • Constrained resources: Although supply chain management is a business initiative and will, thus, be endowed with more resources than other technology initiatives, the absolute size of the budget that SMEs can allocate toward projects will be much smaller than that for larger companies. As a result, SMEs will be attracted to simpler solutions. Indeed, smaller organizations may not need sophisticated functionality.
  • Past experience with problematic enterprise resource planning (ERP) implementations: Manufacturers that have endured painful, lengthy, and costly ERP implementations will be wary of deploying supply chain solutions, especially if the solutions are associated with ERP packages. Manufacturers will not want to purchase systems that threaten already shrinking margins with high capital and implementation costs and that may compromise operational and supply chain efficiencies. Moreover, manufacturers will resist solutions that, like ERP systems, lack the agility to be changed quickly in response to dynamic business conditions.
Supply Chain Solution Spending
Gartner Dataquest projects that supply chain solution spending by small, midsized manufacturing companies will grow from US$2.4 billion in 1999 to US$8.1 billion in 2004. The progression of this growth, at a compound annual growth rate (CAGR) of 27 percent, far exceeds the 12 percent CAGR for external IT spending by the entire manufacturing vertical market. The most aggressive growth in supply chain solutions spending will occur in the US$250 million to US$500 million annual revenue sector.

Dataquest Perspective
Aligning business processes with strategic business and trading partners is a critical success factor for manufacturing companies of all sizes. Effective management of a company's supply chain is paramount to its prospects for survival and prosperity. A streamlined supply chain process is a competitive advantage because it enables an enterprise to react quickly to opportunities and challenges imposed by its trading and business partners. SMEs that demonstrate this ability can catapult into prominent positions as preferred suppliers, beating out even their larger competitors. As a result, SMEs will increasingly demand IT that enables them to manage their supply chains more efficiently and effectively.

At present, the market for supply chain solutions targeted at manufacturing SMEs is small and nascent, but it is poised for tremendous growth in the next five years. Data from Gartner Dataquest's survey suggests that, at the present time, SMEs will allocate the bulk of their supply chain solution spending to internal and external services. Over time, SMEs will increasingly direct expenditure toward external service providers because SMEs simply do not have the internal staff to implement, deploy, and maintain these systems.

The chronic IT skills shortage and lack of supply chain management experience in small and midsize manufacturing enterprises hinder their ability to contend with one of their most pressing technical issues--the integration of supply chain solutions to legacy systems, overlays on legacy systems and future systems. Compared to their larger counterparts, SMEs are less able to shift internal staff from daily maintenance and support activities to serve on project teams for implementing new systems.

To overcome these problems, SMEs will supplement internal staff with external talent. Although SMEs typically have limited budgets for consulting and systems integrators, they will gradually rely on these services to design, implement, and deploy supply chain and other systems. Gartner Dataquest predicts that the IT function within SMEs will change from one that builds to one that brokers technological solutions. Consequently, the growth in spending for external professional services to support supply chain solutions will far outpace expenditures for hardware, software, and internal services.

Dataquest Recommendations
IT vendors that offer supply chain solutions to manufacturing SMEs stand to benefit in two ways. They will enjoy phenomenal market growth in the next few years. And to the extent that their clients garner a competitive advantage from streamlined supply chain processes and grow successfully into larger organizations, IT vendors could capture increased business as a result of the larger coffers that those clients will have for IT expenditure.

However, IT vendors should also heed the risks associated with the small, midsized market segment. Although SMEs can be more agile than larger organizations in addressing dynamic market conditions, they may face brutal competition from companies with established suppliers, partners, customers, and channels. Moreover, SMEs are frequently the targets of consolidation. Gartner Dataquest predicts that through the year 2003, 70 percent of U.S. SMEs will be directly involved in a merger, acquisition, or divestiture, which could entail big revenue losses for the IT vendors that serve them or potential revenue growth as the clients expand the account into the acquiring or merging company.

To IT vendors that offer, or are thinking about offering, supply chain solutions targeted at manufacturing SMEs, Gartner Dataquest offers the following recommendations:

  • Formulate your strategy and develop your solutions now. The vast majority of SMEs are currently in the process of selecting or designing supply chain systems. It is imperative that you communicate your capabilities to them before they commit to a particular solution.
  • Tailor your value proposition to address the biggest challenges that manufacturing SMEs face in deploying supply chain solutions: understaffing, lack of supply chain management expertise, and affordability.
  • Customize your marketing message to the various decision makers and buyers ranging from CEOs to IT managers of supply chain solutions. CEOs, COOs, and business line managers will be most receptive to messages that demonstrate how your solutions will improve their top-line and bottom-line growth and address the fundamental objectives of their businesses. CIOs and IT managers will be most interested in messages that demonstrate how your solutions will affect, integrate with, and optimize the company's IT systems, and how your solutions will supplement the IT staff.
  • Develop repeatable, industry-specific templates that can be leveraged across several installations and endeavor to pass the cost savings to your SME clients. SMEs will be more willing than large enterprises to tolerate solutions templates if they can enjoy cost savings while still managing their supply chains more effectively.
  • Design Web-native supply chain solutions. SMEs will be less likely than large manufacturers to use a virtual private network to access internal applications.
  • Develop, acquire, or partner with an external services provider to offer business and IT consulting, systems integration, and applications development expertise. These service areas represent the highest IT growth opportunities for vendors that target the SME supply chain space.
  • Build scalable solutions that accommodate changes in the IT needs of SMEs. In addition, develop migration paths for SMEs that outgrow solutions optimized for small, midsized business processes.
  • Analyze the business models, competitive positioning, and financial health of your potential SME clients with a critical eye. Although SMEs can be a fruitful source of future revenue growth for your company, they impose large risks which you should quantify and integrate into your business plans and forecasts.
Supply Chain Management Solutions for Small and Midsized Manufacturing Enterprises:
Aggressive Growth in a Niche Market
By Geraldine Cruz
First published in August, 2000