If the Solution Is 'Just Right,' Mid-sized Companies Will Buy It

Supply-chain technology vendors have come knocking at the doors of smaller businesses and found a market segment that knows how to make the most of its limited IT dollars.

A-1 Logistics, a third-party logistics (3PL) provider based in Boulder, Co., was looking for a warehouse management system that didn't break its pocketbook or strain its IT resources. And, most importantly, the company needed to meet customer expectations regarding inventory visibility. Its clients - manufacturers in the telecommunications and computer equipment industries - wanted to be able to see into their A-1 managed sites to access order information and identify excess and unidentified material.

"The implementation was a matter of survival for us," remarks Kirby Henderson, president and CEO of A-1. "We have less money to spend internally and customer requirements continue to grow. We needed a flexible, affordable solution that is easy to maintain." The company, which posts $40m in annual revenue, had an IT budget of $1m to work with for the entire project.

While shopping for a system, company managers became disillusioned by the steep prices for solutions and unsubstantiated claims from vendors. "We talked to some of the larger software providers, but they were asking for half a million dollars for a four-walls installation, plus we would need to purchase licenses and do a full-scale implementation in each facility," he recalls. "We quickly learned that we couldn't get inventory visibility out of the box."

The 3PL spent six months evaluating intense demos from most major Tier 1 players, but company executives ultimately chose High Jump Software, a supply-chain execution (SCE) provider based in Eden Prairie, Minn., which traditionally sells predominantly in the mid-market space. The implementation, deployed in an application service provider (ASP) model, took only six to eight weeks to complete.

According to Chris Heim, president and CEO of High Jump, mid-market companies such as A-1 Logistics are experiencing the same pressures once relegated to large corporations. "They need to cut costs and squeeze more efficiencies out of production. Customers are more demanding and specifications can change overnight. Many companies are in a paradox because they have to cut costs, but also improve customer service."

Economic impact

A number of vendors always have targeted the mid-market, but application developers that traditionally went after the Fortune 1000 also are looking for ways to make this market a sweet spot. The mid-market, generally defined as companies that post revenue in the $250m to $1bn range, by definition offers smaller individual sales but the potential for a lot more of them. Over the past few years, many large solution providers have introduced initiatives designed to answer the needs of these companies, usually inthe form of scaled-down versions of their core applications designed for simpler and faster implementation. Such initiatives have slowed dramatically this year, however, most likely due to the downturn in the economy.

Some observers say major supply-chain vendors jumped into the mid-market for the wrong reasons. Larry R. Smeltzer, professor of supply-chain management at Arizona State University, says that vendors' claims for their software got way ahead of the technology. "The strategy of larger suppliers was if they had enough people investing in the technology, they would build the system. But that backfired because the user community became increasingly skeptical. So vendors turned to the mid-market." Then, trying to be all things to all people, vendors ended up spreading themselves too thin, he says.

While the availability of web-enabled software and the declining cost of hardware has made sophisticated technology more accessible to mid-sized companies, questions remain as to how much these companies are willing to invest. Increasingly, vendors are reevaluating their mid-market programs and trying to get a better grasp of the needs and concerns of this elusive sector.

In many ways, IT purchasers in mid-sized companies are little different from their larger brethren. As the economy has slowed, both have become particularly concerned about the ability to cost-justify purchases. "A year or two ago, it was common to hear companies say they needed to implement due to competitive pressures, but now solutions require concrete results, like improving cycle time or reducing head count," Smeltzer notes. He says the best systems are simple and unglamorous in nature, and seek to improve the basics, such as automating purchase orders or advanced shipping notices.

"Software still is expensive," acknowledges Mary McKenney, chief of operations for Prescient Systems, West Chester, Pa. "It's not like the PC market where buyers get more for their money when prices go up." In addition, she says, mid-market companies today are more aware of the full cost of their implementations - "not only up-front spending, but also the resource drain going forward."

Nonetheless, McKenney discounts the notion that a slow economy necessarily results in businesses being more cautious about new ventures. "Mid-market firms still are willing to try leading edge processes, as long as they offer quick payback," she says, adding that companies in this category often are progressive organizations interested in fairly sophisticated applications.

Justify Your Spend

Since more is at stake in a weakened economy, companies are taking the time to intensely scrutinize systems and suppliers. "They are concerned about the viability of vendors and want to ensure players are in for the long term," says McKenney. "Therefore, sales cycles tend to be longer, particularly when analyzing total cost of ownership figures."

Dan Gilmore, vice president of marketing for McHugh Software International, a Waukesha, Wis.-based provider of SCE systems, agrees that longer sales cycles are the norm for the upper end of the market, but not necessarily for the lower end, where there is typically a shorter command hierarchy. "Decisions at smaller companies happen more quickly, especially if firms are privately held," he says. "But these companies also have less access to outside capital, so they may tend to hoard cash."

Less bureaucracy in the mid-market space definitely leads to quicker decisions, says Ken Lewis, president and CEO of Provia Software, Grand Rapids, Mich. "Since the approval process is faster, projects get going at a faster rate. Plus, with smaller firms, we work directly with those higher up the chain of command, such as company presidents or a vice president of logistics. We have contact with key decision makers, whereas with larger companies, we may start out talking to project managers."

More mid-sized companies are interested in modular applications and fewer are looking for full-scale solution suites. McKenney says, "Firms that want to get results quickly in an incremental way can implement the first phase of an installation to achieve fast ROI benefits, and use the savings from the first phase to help fund the second phase." Solutions that provide measurable, tangible results in a reasonable time frame are a key consideration for most mid-sized companies. Some typical ROI examples are to improve production scheduling, lower inventories, automate order management, cut transportation costs, and improve customer service. "Savings are most obvious with systems such as forecasting and inventory management," says McKenney. "It is easy to see an increase in turn rates, or if you're lucky, better forecast accuracy."

The amount of time before tangible ROI results can be seen varies by vendor, and ranges from as soon as six months to 18 months. Most suppliers agree that companies will see some positive effects on their business within six months of implementation, but measurable results most likely will not come until the solution is up and running for about one year. "Everyone uses a different payback model, but it is unrealistic to expect much until 12 to 24 months," says Gilmore from McHugh. "Usually an internal rate of return of 20 percent is enough to pass financial institutions' qualifications, so if you get more than that, you are doing well."

For the Household and Body Care Division of Sara Lee, Exton, Pa., a standard ROI measurement is perfect order-fill rate, or the percentage of orders that are 100 percent accurate and on time. "It is considered perfect only if we supply all the lines on an order by the requested ship date," says Gary Kahler, director, sales and operations planning. The company also wants to keep inventory levels as low as possible without running out of safety stock.

With Prescient's demand planning system, the $200m manufacturer of shoe care, household, and personal care products hopes to achieve these goals by better automating the forecasting process and improving communications with field sales personnel. Sara Lee researched numerous Tier 1 enterprise resource planning (ERP) systems, but found them to be too costly and complex for their needs. "We looked at two major players, both of which had forecasting modules as part of their full scale APS [advance planning and scheduling] systems," says Kahler. "It was extremely robust, but expensive and complicated. Cost was a major consideration, and the ERP systems included functionality that we didn't think we would use. The added complexity definitely was a negative."

According to Kahler, the economy has not affected the company's IT strategy, and in fact, the Sara Lee division hopes to more than double its size over the next few years through acquisition and internal product development. "We need to modernize our systems to be ahead of the power curve before we hit our growth spurt. One of the problems is our size. We have difficulty being heard in our industry because we're not as big as Johnson and Johnson or Dow."

Key Drivers

The impetus behind supply-chain implementations for mid-market companies typically falls into one of three categories, says Gilmore from McHugh. The first category is those driven by customer requirements. "Companies don't have much option, for example, when they are required to provide more value-added services to retailers," he says. The second type of implementation has a goal of continuous improvement, where companies are looking to take cost out of their business in some way.

The third category is for those firms planning a fundamental change in business strategy. "They are embarking on a new initiative, such as moving from make-to-stock to make-to-order processes," says Gilmore. "An example might be a make-to-order window manufacturer with long lead times that wants to reduce its cycles from a few weeks to two days. This involves a major shift in operations."

With a limited budget, companies may be forced to put more elaborate supply-chain projects on hold and concentrate on the areas of functionality that are most critical to their success. "We've seen a dramatic drop-off in users' aggressiveness in new-age internet solutions, such as customer-direct models, trading communities and exchanges, because their benefits have yet to be proven," says Gilmore.

Labor management and transportation applications offer easy, fast results, while warehouse management system (WMS) savings might not be as quick or obvious. "The value of WMS depends more on a company's level of sophistication," explains Gilmore. "If the facility is moving from a manual operation, it is fairly easy to get quick results. However, the potential savings from more sophisticated processes, such as task interleaving, is more difficult to grasp."

Most of Provia's mid-market customers want to take advantage of the latest solutions, although their spending is limited. The most popular solutions for mid-sized firms are fulfillment collaboration tools and event management applications, which can send bills of lading directly to customers and use workflow techniques to alert appropriate personnel if problems occur.

Provia conducted a recent supply-chain market analysis study and found nearly 3,000 opportunities among large Tier 1 companies, and from 7,000 to 10,000 opportunities in the mid-market arena. "Clearly the mid-market space is growing for us now, and it represents about one-third of our total market," says Lewis. He says the affects of the weakened economy have hit some vertical markets harder than others. The most vulnerable are industrial manufacturers and those in the PC or high-tech industries.

Since mid-sized companies are concerned with getting up and running quickly, Provia has developed an accelerated implementation methodology where projects take from three to five months. The methodology is particularly suitable for 3PL providers because they can reuse standards if the physical flow of materials is the same from site to site. "The configuration is straightforward and templates are available, so it's more like a cookie cutter implementation," says Lewis. "Once 3PLs close a deal with a new customers, they have to get up and running quickly, and now they can replicate sites in 6 weeks or less."

PeopleSoft, a Pleasanton, Calif.-based ERP provider, recently announced two new accelerated solutions - distribution and procurement - to add to an existing accelerated manufacturing application. The accelerated solutions include a reconfigured bundle of systems, implementation services, workflow, customization and training. According to Jeffrey Read, vice president and general manager of mid-market solutions, the systems offer mid-sized users the necessary components to get up and running in 70 days or less. "Some of our competitors have tried to compete in this space by reducing functionality and creating a light, more stripped down product, but this is not what users want."

Mid-sized companies want systems that are just as robust as those used by large corporations, but they may prefer a phased or modular implementation, says Read. Over 1,000 PeopleSoft customers are mid-market companies, and nearly one in every three new implementations is a medium-sized company. Since many companies don't have large IT departments, PeopleSoft's ASP model is very popular among mid-market users. "These firms do not have time to integrate disparate systems," says Read. "If they are running on older technology, and lack server-based hardware, they don't need to upgrade their PCs or worry about network bandwidth."

O-Cedar Brands, Springfield, Ohio, currently is undergoing implementation of PeopleSoft's accelerated manufacturing solution using the ASP model. The supplier of cleaning tools, which posts annual sales of $110m, is hoping to streamline its order-to-ship cycle and reduce inventory. "We started off considering hundreds of vendors, but with a limited IT budget, we took a hard look at total cost of ownership figures. Our previous system was heavily modified and was very cumbersome to maintain and upgrade," says Bob French, O-Cedar CIO.

In June, High Jump Software introduced the High Jump Challenge, a program that guarantees fixed prices on specific changes to its system over a two-year period. It determines total cost of ownership by considering possible changes that could occur in a business and quantifying the changes from a system perspective. "Costs of a system include much more than just software charges, which actually are fairly inexpensive in comparison," says Heim from High Jump. "Surprises always happen, so it's important to have a flexible system to accommodate all the functionality changes."

The mid-market continues to be an alluring opportunity for many software suppliers. Although the weakened economy has affected enterprises across the board, many mid-sized companies are continuing to invest, albeit on a limited scale, in technology, focusing on ROI justification and cost of ownership.