Who is controlling your supply chain?

Best-of-breed vendors pioneered the market for execution tools such as warehouse management software. Yet today those markets are in the sights of giant ERP players. When is it a mistake to go for one-size fits all?

There's an old saying about how to be successful as a software company that urges vendors to "get niche or get big".

The former is held to be a viable option because if a vendor picks the right niche market, they can develop expertise few will be bothered attempting to replicate. The deeper that expertise becomes, the harder it can be to enter the niche and the more valuable a vendor's software becomes to its market.

The alternative, "going big", is a reference to both size and horizontal applicability. By giving a vendor the biggest possible prospect pool, going big offers a greater likelihood of initial success and eventual scale. And by achieving scale, going big confers the advantages of creating a company whose deep pockets allow it to innovate, provide quality support, and package its offering into a proposition that equates to lower risk.

These two scenarios have long been observable in the market for execution technologies such as manufacturing management software or supply chain management tools. Around the world, myriad vendors provide specialised software that focuses on these tasks, performs specific variants with uncommon sophistication, or meets the particular needs of an industry.

"Vertical best-of-breed vendors tend to evolve in isolation, like Darwin's lizards," says Kristian Steenstrup, a managing VP for research firm Gartner. "They can become more adapted to their environment. Then, as you would expect, you get survival of the fittest."

While the best-of-breed ecosystem evolves in one island of the software archipelago, the bigger beasts of the IT jungle are also changing. Indeed, one of the most significant IT trends of the third millennium has been the spectacular consolidation of top-tier enterprise resource planning (ERP) vendors. First PeopleSoft acquired JD Edwards. Oracle then acquired PeopleSoft. Today, Oracle and SAP are the two remaining tier-one contenders in the market for integrated business software that offers almost anything any business could ever want.

One already-observable result of this consolidation has been the disappearance of one kind of supply chain vendor.

"There has been a lot of consolidation in the supply chain software vendor market of late," says Noha Tohamy, principal analyst with Forrester Research. "In the past we had ERP vendors and supply chain management suite vendors like JD Edwards. Then there was a third category comprised of best-of-breed vendors that looked at just one piece of supply chain.

"Two or three years ago it was obvious to end-users that the best-of-breed supply chain suite vendors were quite advanced. They had traction because their tools looked at complex problems like factory planning or scheduling. SAP and Oracle were not in the game."

But Tohamy says recent events have changed the niche landscape, not least because the likes of JD Edwards have been acquired, taking the tier of supply chain suite vendors out of the market.

"Smaller best-of-breed vendors like Manugistics have had financial problems too," which she believes has translated into less research and development. "The gap has closed a long way through R&D and acquisitions. The best-of-breed vendors used to differentiate by saying SAP could not solve complex problems. But over the last six to nine months users now believe SAP and Oracle have gone a long way towards closing the gap. So ends-users now have two reasons to go with an integrated solution: cost and functionality."

And cost is now a card being played aggressively by the ERP vendors.

"Suite vendors definitively force users' hands on price," says Gartner's Steenstrup. "There is an aura that this is an offer you cannot refuse," he says, adding that these vendors are willing to offer supply chain or manufacturing modules available at very little extra cost to companies that acquire their core financial or database systems.

"Suite vendors have a licensing structure that makes them more attractive," he says. "People say: 'We may as well switch it on and use it'."

But going to a suite vendor is no guarantee you will get the software you need.

"If they are giving it away, ask yourself if the vendor considers this a sustainable market," says Ganesh Kashyap, business solutions and supply chain consulting company Dowling Consulting's partner for its supply chain practice. "Will there be ongoing R&D?"

Kashyap also believes that businesses sometimes buy suites for the wrong reasons. "Chief information officers hate introducing new vendors to their environments," he says. "There is a perception at that level that ERP vendors do 80 percent of what a business wants or needs and with the cost advantages, that'll do."

But that missing 20 percent worries Kashyap. "Business people always have trouble articulating what that extra 20 percent is and why it is important."

To understand whether the 20 percent makes a difference, Kashyap recommends companies should ask if they are a business with a supply chain or the close cousin of this, a supply chain business. "If you are a business with a supply chain your core focus is manufacturing some service, and logistics is a small part of what you do. Customers might value the product or service more than your logistics capability," he says. "Supply chain businesses' core activity is moving stuff around. The whole value proposition is about reliability and delivery. Warehousing and inventory management are a central part of [this]."

Businesses with a supply chain, Kashyap says, can afford to use ERP. Others should turn to specialist vendors, a position supported by Gartner's Steenstrup. However, Steenstrup says he does worry about the maturity of ERP vendors' wares.

"Even if a suite does 80 or 90 percent of the things you need, if it does not do the thing you really need it will put you out of business," he says. "There are a lot of discrete materials manufacturing software that is great but if they're missing recipe management they cannot do process manufacturing."

And ERP vendors are missing several such components, according to Jeffrey Russell, Accenture's managing partner for supply chain in Australia/New Zealand and the Asia-Pacific.

"The areas where best-of-breed suppliers have the biggest advantage are warehouse management, logistics management, and transport management. They are important to a few but not to every organisation," Russel says.

"But the challenge for the best-of-breed players is that there are not many left," Russell adds. "They see IT spending is back on the radar after a five-year hiatus but during that time they have started to run out of horsepower."

Russel says that this means they may now have diminished their ability to innovate, making them less likely to produce truly best-of-breed products and therefore making their software a less attractive purchase.

"These are real issues as the small best-of-breed vendors get smaller," Russel says. "The local offices are tiny: there's just a sales manager and his right-hand man. You could be relying on this vendor very heavily."

Yet there is also some upside in their decline. As IT spending picks up, markets become more lucrative and therefore more attractive propositions for ERP vendors, whose swiftest route to market is acquisition of best-of-breed vendors who they feel represent a niche that is sufficiently mainstream for them to invest in and whose products are sufficiently advanced to enhance the quality of their suites. Oracle's recent acquisition of retail software specialist Retek is one example of this trend.

At the end of the day the decision about which way to go seems to be one where it makes sense to apply an even older saying: the Latin maxim caveat emptor (meaning buyer beware).