the race isn't over …

In the race for buyers' software dollars, there's never been any question about who's out in front. Year after year, warehouse management systems (WMS) have easily outdistanced the rest of the field, generating at least half the revenue in the supply chain execution (SCE) market. And that's unlikely to change anytime soon. Most analysts see no big changes in the software horse race in 2008.

Nonetheless, close observers report that they're seeing some subtle shifts in the mar- ket for supply chain execution applications, systems that manage storage, order fulfillment, and delivery functions. For one thing, it appears that transportation management syst (TMS) have put on a burst of speed and are gaining on WMS. For another, ther ple of contenders from the back of the pack are about to make their move.

Trade-up time
Supply chain execution (SCE) software has become big business. According to the Stamford, Conn. based research firm Gartner Inc., sales of these applications totaled $1.55 billion in 2006 and are expected to reach $1.7 billion in 2007—an increase of 9.7 percent. Gartner says growth will continue this year, though the pace will slacken a bit. Its forecast calls for revenues to grow another 8.5 percent to $1.845 billion.

Right now, warehouse management systems account for approximately 56 percent of that revenue. License sales and maintenance fees for WMS—software that keeps tabs on inventory and oversees DC tasks like receiving, putaway, and order picking—reached $950 million in 2007, according to Gartner. The analyst's forecast calls for sales to climb 6 or 7 percent this year, which would put revenues over the $1 billion mark.

Although other analysts may differ with Gartner's market-size estimates, they all agree that WMS sales will continue to expand. In most cases, however, it's not new users that are driving the growth; it's existing users that are trading up. "In large part, it's a replacement cycle for older WMS packages that were bought and implemented in the mid '90s," says John Fontanella, an analyst with Boston-based AMR Research. The newer packages, he says, offer enhanced reporting capabilities and realtime information processing. And many include features designed to help users comply with their own customers' mounting demands—enabling them to, say, load pallets or package shipments in specific ways.

Today's upgraded packages typically include a labor management component, which enables users to measure worker productivity and optimize the use of labor in picking, packing, and sorting. That's fast becoming a must, says Fontanella. "Companies are finding it harder to recruit warehouse workers," he explains. "Because the costs are going up for labor, they have to make sure they get the most out of their labor."

Adrian Gonzales, executive director of the logistics council at ARC Advisory Group in Dedham, Mass., says enhanced data-exchange capabilities are another factor in the newer versions' appeal. The older WMS applications lacked the ability to support data exchange with external trading partners, he says. The latest packages, however, contain features designed to give a company's supply chain partners visibility into a warehouse's inventory holdings.

The new WMS applications are also more flexible than their predecessors. Among other things, they're designed for easy reconfiguration if a company needs to make changes to its warehouse operations. "In the past, you would have to write custom code for a new business requirement," explains Gonzales. "The new software architecture [used in the latest WMS packages] allows you to make changes more easily and cost effectively. Because a lot of companies are looking to be nimble, they are looking to upgrade the WMS from the standpoint of information technology so they can more cost effectively respond to business changes."

TMS put on the speed
When it comes to revenues, warehousing software may have left the rest of the field in the dust. But it's a different story when it comes to growth. While WMS sales are cantering along at a 6- to 7-percent clip, for example, sales of TMS are hurtling forward at double-digit rates. Gartner expects sales of TMS applications (systems that oversee freight planning and movements) to reach $493 million in 2007—an 11.9 percent increase over 2006 revenues of $441 million. This year, the research firm expects TMS revenue to surge another 12.4 percent to $554 million.

What's driving the growth? An obvious factor is skyrocketing fuel prices, says Gonzales of ARC. "Companies are realizing that unless they implement this technology, their costs are going to go up and their service will degrade."

But it's not just about fuel, he says. The newer versions are fast becoming more global in scope and, therefore, appeal to a broader base of users than their predecessors did. Unlike the earlier versions, which could only manage truck and rail movements, the newer versions can handle air and ocean shipments as well. Gonzales also thinks TMS vendors will soon start adding features normally associated with global trade management solutions, such as regulatory compliance. "In 2008, you'll see more activity in terms of TMS and global trade management becoming more integrated," he predicts.

The growing pressure to go green could also boost demand for transportation software, according to Gonzales. "Although I haven't seen any company justify a TMS purchase solely for green purposes, I'm beginning to see and hear companies talk about it," he says. "The driving force for a TMS is still to reduce costs and improve service levels, but when you consolidate loads and optimize routes, you have fewer trucks on the road, using less fuel."

Falling TMS prices may provide another incentive for buyers to finally take the plunge. The availability of TMS on demand—that is, delivered over the Internet for a relatively low monthly or per-transaction fee—has placed "downward pressure" on the price of software sold under the traditional licensing model, says Gonzales. "Prices are staying the same or decreasing slightly for TMS," he says.

As things now stand, the only thing that could spoil the TMS vendors' party is an emerging competitive threat from a couple of outside sources. In recent years, freight carriers have begun offering shippers access to their own in-house TMS solutions on an on-demand basis. At the same time, third-party logistics service providers (3PLs) have started offering load consolidation and routing optimization as part of their service. Indeed, Gartner analyst Chad Eschinger notes that the primary question facing shippers these days is which provider offers a better value proposition for freight spend optimization—a 3PL or a software vendor.

Dark horse candidates
Although WMS and TMS tend to get all the attention, Fontanella of AMR notes that there are a couple of other SCE applications that bear watching. These applications— network design and inventory optimization systems—are relatively new to the market, but they're already attracting a lot of interest. "Network design and optimization and inventory optimization are the fastest-growing categories, though they are working off a small base," he says.

Network design software lets users evaluate different options for reconfiguring their supply chain operations— giving them an idea of how, say, closing a DC in Miami and opening one in Atlanta would affect transportation costs and customer service levels. Though sales of network design applications only amounted to $54 million in 2006, Fontanella expects strong growth in 2008 as users scramble to cope with a turbulent market. "Network design was something you used to do periodically," he says. "But that's changed now. Companies are constantly re-evaluating their supply chain. That's because they are changing who they are buying from, and they are regularly looking at where they locate plants and warehouses or where a 3PL might set up a postponement center."

Like network design systems, inventory optimization applications help users figure out how best to respond to changing market conditions. As its name suggests, inventory optimization software helps users decide where to locate stock and analyze the cost/service implications of various scenarios. "It helps companies with postponement and where to locate inventory to keep it close to the customer," says Fontanella. Inventory optimization software racked up $91 million in sales in 2006.

A smaller field in the future?
With all these applications jockeying for market position, the obvious question is which ones will be in the lead 10 years from now. But at least one analyst thinks the question will be moot. Dwight Klappich of Gartner foresees a day in the not-too-distant future when individual SCE packages are replaced by integrated solutions built on a single platform for easy information exchange. "Increasingly, as core functionality approaches commoditization," he says, "that [WMS and TMS] functionality will move to the platform vendors—the SAPs, Oracles, and Microsofts."

If Klappich's predictions are on target, companies will someday be buying not a WMS or a TMS, but a broad supply chain application with those capabilities built in. The big ERP vendors would undoubtedly welcome such a turn of events, but what about the smaller vendors that specialize in "best-ofbreed" warehousing and transportation management systems? That type of market shift would throw their whole future into question. As Klappich puts it, they will be "forced to reinvent themselves" if they want to stay in the race.