While other industries struggled during the recent recession and sluggish recovery, supply chain management (SCM) software companies for the most part were able to maintain sales. As the economy revives and companies look to increase productivity, the SCM software market will be well positioned for even greater growth.
At Gartner Research, we are optimistic about sales growth in that market for the next several years because of the results of recent user studies. For the past four years, Gartner has conducted an annual survey of the wants and needs of supply chain management organizations. That study provides a picture of the current and projected business climate facing those organizations.
This year's study found the business climate ripe for investment in supply chain technologies. Figure 1 shows that some users plan to invest in upgrades and new implementations in a variety of applications.
While demand continues to be strong, it is driven by different needs than those that have influenced sales in the past. In the two most recent Gartner studies, supply chain management organizations reported that they are now making more strategic decisions about what applications to invest in. In the past, they exhibited a myopic obsession with having the latest software features. Now, they are more interested in choosing applications that target their priorities while addressing the barriers to achieving those goals.
According to the survey results, the priorities for supply chain organizations have changed during the last few years while the barriers to success have not. Improving productivity and efficiency has surpassed reducing costs as the number-one priority for respondents. Meanwhile, demand variability, complexity, and lack of visibility were again identified as the most significant barriers to achieving an organization's goals and objectives.
Why the change in priorities? When the recession first hit, many SCM organizations initially used brute force to drive down costs. Now they hope to maintain those low costs while also growing their businesses. The only way they can achieve this, however, is by improving efficiency and productivity. For this reason, companies are expressing interest in supply chain execution technologies like warehouse management systems (WMS) and transportation management systems (TMS) that target process efficiency.
Demand for WMS increases
Even through the recent recession, demand for warehouse management systems remained surprisingly strong. Demand will increase even further, at least until 2012.
The majority of new WMS engagements in North America and Western Europe are replacements of aging or technologically obsolete systems. Although an added cost, these replacements are needed to improve companies' overall efficiency as well as the agility and adaptability of their systems and processes. Additionally, many WMS users need to replace their old systems because the older systems' technical architecture cannot compete in today's fast-paced marketplace. Consequently, while they could add a standalone capability like labor management to their legacy WMS, the desire for greater agility justifies a complete overhaul.
Our clients also state that they are looking to new systems to drive additional productivity improvements. Along these lines, there is increased interest in productivity-improving capabilities like labor management, task interleaving, slotting, yard management, dock scheduling, performance management, and others.
This need for system replacements and enhanced productivity is driving significant WMS sales in mature markets such as North America and Europe. Emerging markets in other parts of the world, however, will see sales increase but at a somewhat slower pace. This is largely because the lower cost of labor in those countries creates less motivation to use technology to cut costs. Additionally, the types of applications that these companies are interested in are much different than those that are currently popular in more mature markets. In emerging markets, process control and things like order and document accuracy and on-time shipment are higher priorities than productivity.
Gartner also anticipates accelerating demand worldwide for WMS delivered through a software-as-a-service (SaaS) model, in which the buyer "rents" online use of the application. We believe that demand will increase now that the core functionality of SaaS warehouse management systems is approaching parity with onpremise WMS. In addition, since enterprise resource planning (ERP) vendors now offer credible WMS, they will benefit from global market growth, particularly in warehouse environments that are not very complex or sophisticated.
Changes in TMS market
Transportation management systems will also continue to witness growth beyond 2013. Historically the prime justification for purchasing a TMS has been cost reduction. As the freight market shifts from favoring the shipper to favoring the carrier, however, the justification for a TMS will rest on how it can help shippers to secure capacity, handle capacity constraints, collaborate with carriers, and manage rate volatility. The paradigm must evolve from simply reducing costs to managing cost volatility in an era of scarce capacity.
Changing conditions in the marketplace will also alter what features users will be looking for in a TMS. For example, costs will be harder to handle in the near future as fuel costs remain volatile, carriers raise rates, and hours of service rule changes increase detention penalties. These factors will put more emphasis on rating engines, performance management, more sophisticated route-planning tools, and the ability to manage complex models like rail or intermodal freight.
TMS is also one of the strongest supply chain management markets for SaaS. Demand is already robust, and it shows signs of increasing. The need to support a carrier network and the model's total cost of ownership make SaaS an attractive option, although demand for on-premise versions remains strong as well. To date, demand has been largely concentrated in North America, but we are now seeing increased interest and growth potential across the globe.
The business challenges facing supply chain organizations require innovative solutions, and that's creating a fertile environment for investment in SCM software. Accordingly, we expect the adoption of supply chain technology to accelerate over the next few years, resulting in a projected return to double-digit growth.