Follow the Supply Chain
for the Next Big Thing
By John Rubino
Special to TheStreet.com
12/10/99 11:19 AM ET
In my Oct. 1 look at United Parcel Service
(UPS:NYSE), I promised a quick follow-up column
on the related software companies. This week I
finally got to it, and I'm sorry I waited, because it's a
great story.
Consider, first of all, what has to happen before UPS
or FDX (FDX:NYSE) can drop a Palm Pilot or DVD
player off at your door: Myriad raw materials have to
be moved from mine to refinery. Then the resulting
plastic, metal and glass go to a parts factory, and
then the parts go to an assembly plant. Each stage
involves some kind of transport, and at each stage, a
lot of this stuff is sitting around, stockpiled against
unexpected changes in supply and demand.
This excess inventory is bad, both because it costs
money to maintain and because -- especially for tech
companies -- it depreciates. So other things being
equal, the manufacturer that squeezes the most
excess inventory out of its supply chain wins.
Which leads to an interesting thought: By, say,
2005, the unit of competition will no longer be the
individual company. Instead, it will be the supply
chain.
Now, picture a system where everyone up and down
the supply chain can log on to a secure Web site for
real-time data on who's ordering, processing and
shipping what. Thus enlightened, suppliers hold just
enough inventory to satisfy incoming orders, while
manufacturers manage sales to exploit whatever
supply/price squiggles appear down the chain. Lower
operating costs equal higher return on investment,
and that equals faster earnings growth.
That's pretty much how Dell (DELL:Nasdaq) has
been kicking boxmaker butt for years. And now
everyone else is getting religion. Cisco
(CSCO:Nasdaq) recently ordered its many suppliers
to become part of a seamless online network or get
lost. And according to a December Wall Street
Journal article, "Within hours of each other last
month, GM (GM:NYSE) and Ford (F:NYSE) rocked
Silicon Valley by unveiling plans to set up massive
rival online bazaars for all the goods and services
they buy -- everything from paper clips to stamping
presses to contract manufacturing."
So, maybe supply-chain management is the Web's
Next Big Thing, and the companies that can show
manufacturers how to do it right will make fortunes.
To play it, first check out the pure
supply-chain-management software companies such
as i2 (ITWO:Nasdaq) and Manugistics
(MANU:Nasdaq).
i2 is just about everybody's favorite, since it's not
only the leader, but appears to be extending its lead.
The way CFO William Beecher explained it to me
this week, this means both making the best
supply-chain management software and building
customer-management systems that apply strikingly
sentient expert systems (or is artificial intelligence a
better term?) to the supply-chain data stream.
The only drawback here is that we're a year late to
the party. i2's stock is up about 700% so far in 1999,
and according to Yahoo! Finance, 19 analysts have
buy recommendations on it.
Manugistics, meanwhile, is the comeback play. After
pioneering the supply-chain management concept a
decade ago, it nearly imploded via unwise
expansions and badly handled acquisitions. Now,
the obligatory new management team is in place,
and it's playing catch-up. But "it's going to take a
while to regain traction in the marketplace," says
Kash Rangan, an analyst with BancBoston
Robertson Stephens in San Francisco.
Still, its software is widely used, and its stock, even
after quadrupling this year, can be bought for only 4
times sales, vs. a surreal 21 times for i2.
Next come the software companies that are big in
enterprise resource planning (ERP) -- basically an
internal version of supply-chain management -- and
are making the logical transition into this new
market.
J.D. Edwards (JDEC:Nasdaq), for instance, recently
bought into this market by acquiring supply-chain
management company Numetrix. Oracle
(ORCL:Nasdaq) is an e-commerce giant, so while it's
just beginning a move down the chain, you have to
take it seriously. And SAP (SAP:NYSE ADR) and
Baan (BAANF:Nasdaq ADR) are building
supply-chain management capabilities internally,
though it's too soon to say how they'll do.
To varying degrees, this bunch has had a hard year,
as ERP sales fell prey to Y2K anxiety. But with that
pretty much out of way, 2000 should be better.
Meanwhile, "compared to most other software
companies, these stocks are still very cheap," says
Robertson Stephen's Rangan.
Then there's UPS and FDX, which are approaching
this market from the logistics -- i.e., truck and plane
-- side. UPS, for instance, manages the global
supply chain for IBM's (IBM:NYSE) disk-drive
business, which involves merging software from the
customer, suppliers, outside vendors and UPS'
in-house proprietary systems, and getting them all to
communicate sensibly. But because they use
outside software, UPS and FDX are customers (and
possible acquirers), as well as competitors of the
software makers.
So, which stock should you buy? I don't know; they
all seem a little flawed today. i2 is great, but
breathtakingly expensive; UPS and FDX are so big
that no single emerging division is likely to make
much of an impact. Manugistics and J.D. Edwards
have some hard recent history to overcome (though a
glance at i2's valuation shows how far they have to
run, should they get back in the race). Oracle, SAP
and Baan are all potential players, but so far don't
seem to be causing much lost sleep at i2. |
