Supply Chain Software Once Again Hot Sector

The supply chain gang is back in business.

Makers of supply chain management software fought a rough spending climate as tech budgets froze in the early 2000s.

But over the past year, many of these companies have come back with solid growth and higher stock prices.

Manhattan Associates (NasdaqGS: - ), JDA Software Group (NasdaqGM: - ), Logility (NasdaqGM: - ), privately held RedPrairie and others have recorded double-digit revenue growth in the past year. That compares with a 7% growth rate for all software.

Several factors sparked the rebound. Manufacturers and retailers face stiff global competition, so their supply chains are more important.

At the same time, extended global partnerships have created more complex supply chains, says John Fontanella of AMR Research.

"As companies grow larger and their supply chains extend, they need to scale up their software technology as well," he said. "Some tight purse strings have loosened."

Supply chain software typically consists of two main parts, planning and execution.

Companies rely on supply chain planning software to forecast inventories and plan for future capacities.

They use execution software to manage partner networks, transportation systems, warehouses and other logistics.

Warehouse Software Outdated

Up to half of U.S. warehouses run outdated software that must be replaced, says Mark Verbeck, an analyst with investment bank Cantor Fitzgerald.

He says companies are eager to improve their supply chains. High fuel prices create a need for more transportation efficiency.

"Companies are dealing with more internal complexity to warehouse their goods efficiently and to manage transportation to get those goods in and out," Verbeck said.

Meanwhile, the global retail juggernaut Wal-Mart (NYSE: - ) poses an ongoing threat for all sellers, Verbeck says.

"Retailers live and die by how well they can move goods around," he said. "They need to get the right products to the right stores at the right times, and they need to do it efficiently."

In a recent poll by Capgemini, 38% of U.S. manufacturers said that a lack of resources hurts their supply chain performance.

Mining Supply Chain Data

Most respondents want to invest to fix their processes, says Gary Baldwin, Capgemini vice president of manufacturing in North America.

"For manufacturers to offset rising costs and competition, they have to be more efficient with their supply chains," he said.

Large global companies such as General Motors (NYSE: - ), Dell (NasdaqGS: - ) and Procter & Gamble (NYSE: - ) now mine much data from their supply chains to make them more efficient.

Nevertheless, much improvement in supply chains is still needed, says Peter Moore, vice president of the supply chain practice for Capgemini.

"We're not quite there yet to achieve the vision of a truly globally integrated supply chain," Moore said.

The supply chain management software herd was huge near the time of the dot-com bubble peak in 2000, but it has been thinned by mergers and business failures. Today, the world's largest business software makers, SAP (NYSE: - ) and Oracle (NasdaqGS: - ), loom over the field.

SAP is No. 1 in SCM software, but with only a 12% market share, says AMR. No. 2 Oracle is at 10%. Both are investing heavily to boost market share.

Analysts say pure-play SCM firms could become acquisition targets. Among the best performers of late is Manhattan Associates. Its year-over-year sales have risen at least 14% the past four quarters.

Filling Gaps In Suites

Manhattan stock has gained 35% in the past year and trades near 28. Verbeck this month upgraded his rating on the stock to buy from neutral.

The best SCM firms are rushing to fill any gaps in their software suites, says Peter Sinisgalli, CEO of Manhattan Associates. He says Manhattan has an edge over Oracle and SAP in supply chain software for retailers and consumer goods makers.

"We are the choice for companies that need to differentiate themselves through supply chain management," he said.

RedPrairie's revenue rose 16% last year to $148 million, according to AMR. It's wholly owned by Francisco Partners, a private equity firm.

Privately Held Firm Growing

RedPrairie expects revenue to grow 22% this year, says Jim Hoefflin, the firm's chief marketing officer.

He says RedPrairie's strategy is to make software that can be used to manage both retail operations and manufacturing supply chains.

"Whenever products are in motion, that is our sweet spot," he said.

JDA specializes in software to manage retail stores.

Last year it bought Manugistics, a supply chain software firm, for $211 million. Since last August, the combined company's stock has risen 33% to near 21 per share.

Logility, a smaller SCM firm, has seen its stock rise more than 40% from 7.50 per share a year ago to near 11.

One SCM laggard is i2 Technologies (NasdaqGM: - ), a leader in the tech bubble days. Last year its revenue fell 17%, and the stock has been flat near 16 since last August.

The company was penalized by the Securities and Exchange Commission in 2004 for the way it recognized licensing revenue, a case that also sparked a class-action lawsuit that the company settled. And the company has yet to regain much momentum.

The SCM market shakeout isn't over, says Tim Payne, an analyst with research firm Gartner.

"We expect consolidation to continue," he said. "There is much more interest around supply chain software again, and more thought about how to make it work from a business perspective."