U.S. firms will spend on average $4.8 billion a year through 2008 to tune their supply network processes. CPG and retail will invest the most, leading spending in hot areas like order and demand management. SAP and Oracle will join Microsoft and IBM in the innovation race to offer platforms that support firms’ end-to-end SCM processes.

To assess the sagging economy’s impact on supply chain investments, Forrester spoke with 26 supply chain management (SCM) executives in $1B+ manufacturing firms. We found that users are scaling back future SCM investments as they struggle with the hodgepodge of existing planning tools like demand forecasting and execution apps like inventory management. When asked what is dragging down supply chain performance, 46% of interviewees cited difficulties in getting processes and people adjusted to changes. 54% of users question SCM apps’ value—as people and process issues make ROI elusive. The result? Only 8% of interviewees plan to greatly increase SCM spending in the next three years.

Functional SCM Apps Will Take A Back Seat To Processes
In a survey with 124 execs, Forrester found that large U.S. firms spend an average of $6.8 million per supply chain project. Two-thirds of SCM spending goes into packaged software licenses. Yet just 41% of users say their app investments yielded positive ROI. Why have firms failed to extract the most value from their SCM apps? Because apps are deployed within functional silos. Secondly, planning is out of sync with execution. Thirdly, firms’ broader business processes have piecemeal apps support. As U.S. firms recover and resume expansion, they will realize that they are stuck with a medley of SCM apps—which hold them back as they attempt to make their supply chain processes extended, dynamic, and flexible.

Process-focused Supply Chain Spending Will Hit $9.1 Billion In 2008
To extend their supply chain processes across departmental and partner boundaries, Forrester expects firms to stop investing in narrowly focused functional SCM apps. Instead they will hone their ability to monitor, manage, and optimize their supply network processes. Forrester projects that the total spending on supply network process improvement initiatives in the U.S. will rise from $2.4 billion in 2003 to $9.1 billion in 2008—as (see Figure 1):

•Product-centric OEMs discover product life-cycle management. In the next five years, spending on collaborative product life-cycle management (CPLM) from innovation-seeking firms will nearly quadruple—to reach $1.2 billion in 2008.
•Supply management captures companies’ attention across industries. As cost-conscious manufacturers set their sights on strategic sourcing, they will pump up spending on supply management initiatives from $409 million in 2003 to $1.6 billion in 2008.
•Capital-intensive manufacturers will optimize their assets. Asset-intensive manufacturers like ChevronTexaco will invest a total of $4.4 billion over the next five years in extending their enterprise asset management processes to their asset suppliers.
•Outsourcing firms orchestrate their production networks. High-tech and medical device makers who outsource production will increase spending from $277 million in 2003 to $1 billion in 2008 to tune their virtual production networks.
•Customer-facing industries learn to shape demand. Seesaw demand trends have led firms like the Gap to ties demand forecasting to inventory and pricing optimization. Result? Spending on continuous demand management will shoot up—at a 33% CAGR—and hit a whopping $1.5 billion in 2008.
•Distribution-intensive industries overhaul order management. As global shippers seek real-time inventory and order visibility, they will spend an impressive 18% of their yearly supply chain dollars—on average $1.25 billion—through 2008 to overhaul their order fulfillment processes.
•Durable good makers tap the aftermarket potential. As capital good suppliers look to provide margin-enhancing aftermarket services to existing customers, they will increase aftermarket spending from $272 million in 2003 to $946 million in 2008.

Service Innovation Cycle Will Outpace Software Innovation Cycle
Aided by the tech slump, cost-conscious execs are now in charge of IT budgets. The result? Better software and services at a lower price. A deflationary spiral will push SCM investments down to a median of $650,000 per project. As process-savvy users trade big bang deals for bite-sized projects (see Figure 2):
• Spending on license fees will plummet—and stay there. We expect risk-averse users to refuse to cough up multimillion dollars up-front for software with yet unproven value. Instead, users will opt for subscription-based software purchases—or use BPM tools to extend existing apps themselves. The result? Spending on packaged app licenses will not rise above 45% of U.S. firms’ yearly supply chain spending.
• Service spending will grow—especially in process consulting. Today 70% of “consulting” fees paid by users is for packaged app implementation; minor up-front process consulting and modest change management in the back-end account for the remaining 30%. But as users re-engineer supply network processes to incorporate their partners’ roles, they will build workflows that exploit business logic buried in a cluttered apps hodgepodge. As a result, through 2008 we expect users to spend a total of $14 billion on service, with 55% of spend—or $7.7 billion—for process consulting, change management, and app integration.
• Customers will readily pay for post-implementation handholding. Rather than charging users multimillion dollars up-front for an over engineered product, smart vendors will disable unwanted features and offer steep discounts to users to lower the cost of adoption—and later charge incremental fees for turning on new features or connecting more partners to the process mix. U.S. firms’ need for post-implementation handholding will drive yearly spending in ad hoc process fine-tuning and app reconfiguration through 2008 to $135 million of which two-thirds will be for additional services and one-third for software.

Industry Velocity Will Determine Pace And Size Of SCM Investments
The scope and size of investments made by an industry to monitor, manage, and optimize its supply network processes is determined by that industry’s velocity—which is made up of factors like product life cycle and supply/demand variability. Industries with high velocity are poised to lead supply chain spending. In particular:
• Wal-Mart drives CPG suppliers to loosen their purse strings. High-tech, auto, and aerospace used to be the biggest SCM spenders. But CPG will overtake these three verticals starting in 2003, as CPG suppliers learn to dance to Wal-Mart’s tune—and they will spend a total of $6.3 billion over the next five years to enable continuous demand management and streamline order fulfillment.
• High-tech’s optimized processes will accelerate its recovery. As demand picks up in 2004, the battered U.S. high-tech sector will regain global leadership—investing a total of $5.5 billion through 2008 to optimize its supply networks.

The Shift From Apps To Processes Will Radically Change The Vendor Landscape
The pace of vendor consolidation will accelerate in 2003—paving the way for four major supply chain platforms and a constellation of best-of-breed vendors. Oracle is already sprucing up its B2B infrastructure and tools with Web services to provide support for cross-function processes. And SAP is rolling out xApps—composite software that ties together business logic scattered across SAP and non-SAP apps. This platform orientation will drive large SCM vendors to pick a camp. Expect i2 to migrate its Distributed Order Management suite to WebSphere and Manugistics to craft .NET-anchored pricing optimization solutions.

Navi Radjou is Principal Analyst, Business Apps and Services, Forrester Research. Prior to joining Forrester, Radjou worked as IT consultant in Asia for three years. He holds undergraduate degrees in computer science from the University of Paris and CNAM-Paris and an M.S. in information systems from Ecole Centrale Paris. Radjou also attended the Yale School of Management.