June 2006 | Commentary | Supply Chain Technology

Paying by the Drink at D/C Expo

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If you missed this year's Distribution/ Computer Expo, May 23-25 in Chicago—and judging from the poor attendance level, it's likely you did—you missed seeing the supply chain technology industry line up to pay by the drink.

No, I'm not talking about vendors' after-show bar habits, but rather the industry's embrace of pay-by-the-drink software solutions.

More commonly referred to as on-demand or software-as-a-service (SaaS), or even the "timeshare method," these applications are hosted by third-party vendors, accessed by users via the Internet, and paid for based on usage.

Walking the floor at D/C Expo, on-demand was hard to escape. Press literature from numerous companies including RedPrairie, Navis, Transplace, Fortigo, Transportation Management Technologies (VisiShip), and TransWorks (a Norfolk-Southern Company), were filled with on-demand references. On the educational side, seminars such as How On-Demand Transportation Cuts Up-Front Costs, presented by Erv Bluemner of RedPrairie, proved popular.

Indeed, cutting up-front costs is exactly what draws shippers to the on-demand model. Because the software is hosted by a third party and boasts a pay-as-you-go billing structure, companies using SaaS applications can often minimize in-house IT requirements, which reduces implementation costs. It also means faster implementation because hardware purchases or major training sessions are not necessary.

A Level Playing Field

But most importantly, on-demand software levels the playing field and allows small and medium-sized businesses (SMBs) access to sophisticated tools they normally could not afford.

"Mid-tier companies were shut out in the past because they couldn't afford big technology systems," says James LeTart, RedPrairie's corporate marketing manager. "But SMBs have to compete against big companies, so they need the same technology. Allowing smaller companies this pay-by-the-drink option gives them the cost-effective solutions they need."

This trend isn't breaking news—many retailers, manufacturers, and distributors already utilize on-demand solutions. In fact, more than 50 percent of respondents to a recent Aberdeen Group study use or are considering using an on-demand application as part of their supply chain technology arsenal.

The significance, however, is that this delivery method—which larger technology providers once scoffed at—is now a viable threat to traditional "license and install" solutions.

How so?

Compare logistics IT managers' technology wish lists against on-demand's characteristics and you get a clear match: Do they reduce software expenses? Yes. Shorten implementation time? Check. Pass maintenance and upgrade responsibility back to vendors?

Absolutely. Avoid additional hardware purchases and make sharing data with partners easier? Yes, and yes.

"In the next 5 to 10 years, the majority of core software sold—that is, software that is not highly customized—will be delivered on-demand," predicts Jim Burleigh, vice president, products, for Navis, which was on hand at D/C Expo to debut SmartTurn, its new on-demand WMS.

"There is no rational reason why companies shouldn't consume software that way. It makes economical sense, it's flexible, and it's good for the end user," he adds.

A Model System

"For areas such as transportation management, on-demand is clearly a better model than installed software," agrees Tom Sanderson, CEO of Transplace, a third-party logistics provider that offers a proprietary on-demand TMS.

"Take upgrades, for example. If you install a software product, at most you will update it once a year. With on-demand, vendors can add functionality with each new release—every part of that functionality is available to every user immediately."

Don't expect to get all the specific functionalities you desire from an SaaS offering, however—the solutions are developed with mass appeal in mind. "The limitation of the on-demand model is that it standardizes offerings," notes LeTart.

Many SMBs, though, have similar system needs and can optimize supply chain operations just fine without the more advanced customization that large installed systems offer.

"With SaaS, vendors build core functionality that suits 80 percent of users; we have to say no to customized requests from the other 20 percent in order to keep system prices down," explains Burleigh, a self-proclaimed "on-demand zealot" who was employee No. 6 at Salesforce.com, the company that pioneered the on-demand model.

And configuration—not to be confused with customization—is available in most cases. Transplace, for example, can alter the way its applications' screens look to suit customer preferences, and will configure workflow to support the way a specific shipper wants to work, explains Sanderson.

TMS, WMS and Beyond

Currently, on-demand supply chain solutions are most prevalent in the TMS segment, although applications are also popping up in other areas. Vendors now offer on-demand solutions for global trade management, product lifecycle management, supply chain execution, freight bill payment, and even ocean transportation sourcing and management.

On-demand WMS solutions, however, may hold the most untapped potential. Though Fortune 500 companies with complex warehouses will largely continue using customized installed solutions from industry heavyweights such as Manhattan Associates, i2, and RedPrairie, SMBs are ripe for on-demand WMS solutions, according to Burleigh.

"An estimated 600,000 warehouses exist in the United States, and SAP currently has the largest number of installations—about 4,000 warehouses use its product," he explains. "So how many of those 600,000 warehouses aren't using any system all at?

"There is a great mass of forgotten warehouses out there—the 50,000-, 20,000-, or even 10,000-square-foot warehouses that can't afford the larger systems," he adds. What will these warehouses do to remain competitive? Naturally, Burleigh expects they'll turn to on-demand players such as Navis.

While the user need is clearly there, it's unclear how many technology providers will be willing to forgo the large up-front licensing and installation fees associated with WMS systems for on-demand's smaller, monthly-fee structure.

Navis, for example, expects to charge just $500 per month per warehouse for its on-demand WMS. (The company is well-positioned to offer low prices thanks to the deep pockets of its core marine terminal operating solutions. Not all vendors are so lucky.)

It is too early to tell whether on-demand applications will spell the end of the installed software model in logistics technology. But either way, these applications are worth looking into.

So grab a drink, pull up a seat at your computer, and get familiar with on-demand. If the D/C Expo buzz is any indication, you might like what you see.

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