Under pressure

For Richard Smith, managing director of Oxford Chemicals, a manufacturer of chemicals for the flavours and fragrances industry, growing his business is not simply a matter of expanding into new markets and new geographies. In fact, he says, it is also about keeping its largest existing customers happy and meeting their needs better than competitors can.

To that end, Oxford Chemicals has recently implemented SAP's All-in-One suite of products, a fixed-price, fixed-scope suite of business applications for mid-market customers. The suite contains production planning, materials management and sales and distribution modules (as well as core accounting software) that enable Oxford Chemicals to get the right products to the right customer at the right time. In short, All-in-One has streamlined many of Oxford Chemicals' complex supply chain processes and increased its appeal as a supplier.

Smith's focus on achieving – and retaining – the status of 'preferred supplier' among Oxford Chemicals' major clients is common to many mid-market customers. These companies know that preferred suppliers enjoy many advantages over their competitors: exclusive contracts; right of first refusal to new contracts; shorter sales cycles; more predictable demand; and importantly, faster payment for products and services.

Earning that status, however, is a challenge. Mid-market companies must be able to respond to new orders rapidly, accurately and according to agreed delivery dates and prices. In addition, they must increasingly be able to integrate with the systems and processes in place at large customers. "Compatibility with our main partners is key to our future e-business and collaborative plans," says Smith.

Supply chain management (SCM) software has done much to enable larger companies to meet these kinds of expectations. These products typically fall into two categories: supply chain planning applications, which govern the flow of components and goods through the supply chain and help companies to reduce inventory; and supply chain execution applications, which are concerned with logistics and typically comprise software for managing the warehousing and transportation of goods.

Among mid-market companies, the uptake of advanced SCM applications remains low – but that is starting to change, says Richard Nicholas UK sales and consulting manager at supply chain software maker TXT e-Solutions. "SCM applications are no longer new and they're no longer a luxury. In fact, for many European companies, they're a necessity. If you don't have SCM software then you're probably beginning to miss a trick or two and maybe even a deal or two," he says.

That message has struck a chord not only with TXT customers such as ceramics manufacturer Wedgwood and fashion company Dolce & Gabbana, but also with Microsoft. In October 2004, the software giant announced a partnership with TXT, under which it will embed TXT's demand planning modules into its Great Plains, Navision and Axapta product lines for mid-market companies.

Pressure points

But even those mid-size companies that do not currently use SCM software – and are not inclined to do so – may eventually find themselves forced into implementing it by the demands of their larger customers and the need to retain preferred supplier status.

That pattern is being keenly monitored by many of the SCM suppliers. "There is a lot of pressure being placed on mid-tier companies by their larger partners right now and the spending power of a high-end company such as Wal-Mart is typically large enough to command a good deal of respect among its suppliers," says Steve Smith, vice president of performance services at supply chain execution specialist Manhattan Associates. When faced with economic pressures, he explains, large companies have a tendency to expect smaller partners to bear at least some of the brunt of tight product margins.

That means that smaller companies find themselves searching for many of the same efficiencies that high-end companies have already achieved by implementing SCM software. Additionally they are likely to find that large customers also expect them to integrate tightly with their supply chain systems. "As a result, they are expected not only to physically deliver goods but also ensure that data flows to and from their major clients seamlessly," says Manhattan's Steve Smith.

Manhattan's answer to these challenges has been to organise its software into 'core kernels', surrounded by add-on functional components. While a large company may choose, for example, to deploy a full suite of products, a mid-market supplier that regularly does business with it may choose simply to deploy the warehouse management kernel. By componentising its suite and providing application programming interfaces (many based on web services) for each component, Manhattan Associates enables its customers to integrate them with their own legacy systems and with the supply chain systems of trading partners. That need for integration was another major driver of Oxford Chemicals' SAP implementation.

"It was apparent that SAP was considered the industry standard in the chemical sector. This [implementation] would offer compatibility with our main partners," says Oxford Chemicals' Smith.

According to analysts at research firm Gartner, mid-sized organisations face tough choices on whether to opt for such industry standard software or more traditional SCM software designed for the mid-market.

Buyers should concentrate on whether "the vertical or horizontal depth of the solutions and ease of integration will outweigh going with 'good enough' solutions delivered by enterprise resource planning vendors," says Robert Anderson, research director at Gartner.

The good news for SCM companies like Manhattan Associates and TXT (as well as ERP companies such as SAP) is that the pressures placed on mid-market companies by their larger trading partners are only likely to increase in the coming years, according to Carl Lehmann, an analyst with IT market research company the Meta Group. "To help ensure compliance with these business objectives, large and Global 2000 organizations are improving their methods and increasing their investments in tools to evaluate and rate suppliers," he says.

These supplier relationship management (SRM) tools – which comprise supplier analytics, procurement operations management, contract management, reverse-auction services and software and supplier-rating systems – enable companies to place pressure on supply partners for the best price, timely response, and improved product and service quality.

That will certainly keep mid-market companies on their toes – and investing in SCM applications in order to keep their larger trading partners happy.

"The best suppliers to small and mid-sized businesses readily adjust to change, and they respond quickly to anomalies to protect and enhance their customer relationships. Rapid sense-and-respond techniques will play a growing role in determining preferred-supplier status, and vendors that succeed will demonstrate a keen ability to understand and support the SRM initiatives of their large and Global 2000 customers," says Lehmann.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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