THERE ARE AS MANY as 500 startups in the supply chain space and I don’t see all of them getting funded in the next round. A lot of these companies will do insider rounds or massive down rounds or they won’t get funded at all. I think it is going to be a very difficult year,” says Raymond Lane, General Partner at Kleiner Perkins Caufield & Byers.

Lane may sound skeptical about the supply chain space; but he is equally excited about the fact that the IT investment in enterprise is directed either to supply chain or demand side. “Enterprises are investing in ‘composite applications’ that tie the supply side and the demand side. Supply chain probably represents 30-40 % of the expenditure of IT in the enterprise. In fact, no other category is as large as supply chain, that has recourse to large IT budgets from the enterprise,” notes Lane.

According to a new Forrester Research report, U.S. firms will spend a total of $35 billion over the next five years to improve business processes that monitor, manage, and optimize their extended supply chains—or supply networks.

Despite the optimism on spending by the enterprise, venture funding into the supply chain space is decreasing. “ The venture community has backed down from investing in the supply chain space because we saw enterprises invest heavily on packages from large vendors like SAP, Peoplesoft, i2 and Manugistics. Most of them failed to deliver on the promises made. Unless startups have innovative products we see no new investments flowing in,” says Lane.

Nancy Schoendorf, General Partner at Mohr, Davidow Ventures, who is one of the premier venture capitalists for enterprise applications including supply chain, concurs with Lane’s views. “The size of the supply chain market is amazingly large. Be it warehousing systems, logistics, traffic planning or event management, each of these is very large market by themselves. When you aggregate all of these the supply chain market is a multi-billion dollar market,” says Schoendorf.

She points out that—while crowded—there is still room for new startups to succeed in the supply chain space. “If a startup wants to enter the space, it should focus on a particular unaddressed segment of the supply chain. And to be successful, like others in the software space, follow Geoffrey Moore’s crossing the chasm model: pick up one vertical, own it and move on to other verticals.”

Lane believes that logistics and transportation, coupled with real-time capabilities are the hottest segments within the supply chain space. “Providing information and making decision just-in-time are crucial when you consider a supply chain. i2, SAP, and other ERP systems are focused on planning. However, once the plan is in place, I should be able to change it on the fly. Sometimes customer reconfigures an order or supplier doesn’t deliver as many goods as required. There are thousands of such changes that go on. There must be systems in place that allows one to make decisions in real-time, because you lose money for every order that isn’t delivered on time.”

Schoendorf explains that in addition to focusing on a particular vertical market, startups will find a receptive audience if they can provide complete solutions that provide immediate ROI to a particular customer. “Customers are looking for solutions that are quick and easy to install, and solve their problem. Startups can architect their product such that there are shorter implementation cycles unlike those of large ERP systems. The product should have the ability to quickly respond to surprises in a supply chain. Customer traction is important. After all, a well-defined value proposition really resonates with customers,” she says.

However, the road ahead for startups isn’t smooth. According to a Yankee Group research, the supply chain management software market shakeout will accelerate in 2003, leaving three kinds of survivors. First, ERP vendors will continue to expand their share of the supply-chain software market.

Second, large integrated supply-chain planning and execution vendors that provide best-of-breed functionality across the major intra- and inter-enterprise supply chain processes will survive as cautious enterprises identify vendor viability as a significant factor in software selections.

Third, about a dozen niche vendors—with extremely focused products that enable inter-enterprise integration and collaboration—will survive the market consolidation, assuming a Goliath from the ERP or supply-chain execution markets doesn’t make them an offer they can’t refuse!

“Large ERP vendors will likely continue to expand their offerings into the supply chain space. But for startups that is not necessarily a bad thing because it validates that there really is a market,” says Schoendorf, “It is unlikely though that any one ERP vendor will have a single solution for the entire supply chain. There are many supply chain components that ERP vendors don’t address.

Furthermore, the larger vendors don’t necessarily always have the best product offering. Smaller players have advantage in developing tailored product solutions. If the large ERP vendor wants to integrate such functionalities into their product line, they typically have to either to custom build those functionalities themselves oracquire smaller companies who have already developed them.”

“Most enterprises today have 4-5 applications from independent ERP companies to address different components of their supply chain. The problem with such a model is that applications do not talk to each other. Startups can focus on building composite applications, which utilize all transaction systems that form the foundation layer.

In other words, these composite applications must use objects or data from each of the ERP applications-say order status from Manujistics, pricing information from SAP, inventory information from i2, process information from oracle-and comprehend all the data to allow the use to make decisions in real-time. There is opportunity available to startups. They can still reduce 30-40% of the cost out of the supply chain,” says Lane.

Both Lane and Schoendorf believe that an IPO is the likely exit strategy for startups. Their belief stems from the fact that not many acquisitions have taken place in the enterprise software space. But they do not rule out the possibility of merger and acquisition. Schoendorf says, “Just because SAP, i2 or Peoplesoft will enter the supply chain space doesn’t mean that there is no room for other companies to grow large enough and head for an IPO. It is a huge market.” The market is huge. There is plenty of opportunity for startups. As Lane himself puts it, “I think this space will be ready for new investments again. I don’t know when. I don’t think it is this year. May be next year.”

How Shoppers’ Stop almost stopped
With nine stores across India, of sizes varying from 25,000 to 45,000 sq ft, three distribution centers - one each in New Delhi, Mumbai and Bangalore and 300 suppliers who supply stocks to three distribution centers, which then redistribute merchandise to the nine stores, Shoppers’ Stop has clearly emerged as India’s largest retailer. In early 2000, Shoppers’ Stop faced logistics and inventory management problems, which led to stock-outs. The challenge for Shoppers’ Stop was to put in place a supply chain management system to wire up its stores and distribution centers. Shoppers’ Stop spent $2.5 million on the Atlanta, U.S.-based retail ERP system JDA, used by most big retailers worldwide. It became the first retail chain in India to invest on an ERP package. Shoppers’ Stop presumed that the entire buying process and merchandise management would be automatically taken care of. But then it didn’t. Shoppers’ Stop CEO B.S. Nagesh had made a wrong move. In a bid to cut costs, he decided to use an India-based multinational IT company for the JDA implementation. Soon after the trials began, the system crashed, throwing sourcing and inventory management out of gear for seven long months. Once the bugs were fixed, Shoppers’ Stop’s newfound command of the supply chain allowed the company to launch a perpetual inventory system, allowing product to be tracked on a daily basis. Today, purchase orders are issued to suppliers through the central merchandising function. The actual delivery of stocks is controlled on a week-to-week basis through the delivery authorization mechanism. Better sales reporting is helping Shoppers’ Stop accurately measure gross margin return on floor, investment and labor. Lessons Learnt: Selection of the ERP system isn’t the end game. One has to carefully look into the implementation process as well.