Apr 23, 1999 i2 Tech: The Supply Chain Gang
fnews.yahoo.com
Though i2 Technologies (Nasdaq:ITWO - news) just reported flat earnings per share for the first quarter, at least two analysts saw enough positive news in the results to upgrade the stock. Revenues grew 64% from a year ago and one of its major existing customers, Ford Motor Co. (NYSE:F - news) , will use i2's supply chain management software for another one of its plants. The stock jumped 2 13/16 on Thursday and has nearly doubled since we profiled it last September.
The performance of i2 Technologies, not to mention its stock price, are all the more impressive against the backdrop of a tough environment for enterprise software vendors. As corporations make sure their computer systems are ready for the Year 2000, many of them are cutting back on software spending in other areas like Enterprise Resource Planning (ERP). Or in some cases, they spent heavily on ERP systems in advance of the Y2K transition, creating a lull this year. Many of the big players in ERP such as Peoplesoft (Nasdaq:PSFT - news) , SAP (NYSE:SAP - news) and Baan (Nasdaq:BAANF - news) are seeing a definite softening in their business, and their stocks are getting slaughtered.
Large corporations routinely pay hundreds of thousands, even millions, of dollars for enterprise software, and it can take a year or more to implement these complex systems. i2 sells what it calls electronic business process optimization (eBPO) solutions--translation: software that helps companies manage their manufacturing and distribution processes more efficiently.
Customers justify the cost because they can break even on the investment in as little as six months after implementation. Among other things, the software allows companies to execute build-to-order strategies, saving on warehouse and inventory costs. The most visible build-to-order success story is Dell (Nasdaq:DELL - news) , and other PC makers such as Compaq (NYSE:CPQ - news) are rushing to emulate it. In fact, Dell, Compaq and IBM (NYSE:IBM - news) are all i2 customers. So are Philips, Motorola (NYSE:MOT - news) and Texas Instruments (NYSE:TXN - news) . The short product cycles of the high-tech marketplace make these customers a natural, but i2 is successfully selling the merits of their supply chain management solutions to non-tech manufacturers as well, including 3M (NYSE:MMM - news) , Bristol-Myers Squibb (NYSE:BMY - news) and a half-dozen steel makers.
Supply chain management refers to the whole series of interrelated events taking place during the product delivery cycle. The process begins with procurement of raw materials, followed by manufacturing, assembly, distribution and customer delivery. Because of trends toward shorter product cycles and greater product variety, planning and real-time decision making play an increasingly central role to the successful execution for manufacturing operations.
Let's say, for example, that a computer manufacturer finds out a component supplier will be late with its shipment of memory chips. Supply chain management software figures out what the consequences are throughout the entire product delivery cycle, and proposes solutions to minimize the disruption and maximize the company's profits.
One solution might include arranging alternate suppliers for the component. If the missing memory chips will delay production of certain products, the software might delay the ordering of other components for those products such as circuit boards and hard drives. It can also allocate scarce resources to higher-margin products, maximizing profitability. In this example, if there are only five hundred units of memory chips, the software might direct them to be used in production of high-margin workstations instead of low-margin sub-$1,000 PCs.
Supply chain management software not only handles crises, but allows manufacturers to keep inventories low and respond to market changes more quickly. The market for supply chain management solutions is young but exploding--experts predict an annual growth rate of 40%-50% for several years to come, from $2 billion last year to nearly $14 billion by 2002 according to one estimate.
The broader category of enterprise software is increasingly crowded and competitive, but the supply chain segment is not so bad. Some of the big Enterprise Resource Planning (ERP) vendors like Peoplesoft and Baan have made acquisitions to address this market segment, but i2 appears to be holding down its position as the leader. i2 had sales of $214 million in 1997, $362 million in 1998, and they are expected to exceed $500 million this year.
i2 is investing heavily in product development, marketing and customer support, and that appears to be resulting in the company establishing a strong market share in this emerging segment. The investment puts near-term pressure on margins, but it could pay off in the long run. While earnings were flat at 5 cents per share in the latest quarter (seasonally the slowest period of the year), the analysts consensus is for growth of 36% this year to $0.49 and for growth of 44% over the next five years.
The key seems to be whether i2 can continue to differentiate itself from the competition as the 600-pound gorillas of enterprise software invade its turf. Instead of trying to compete as a functional component of an ERP system (where ERP vendors can offer their own component with deeper integration), i2 has broadened its product line and the scope of planning addressed by its software to position it as a cross-divisional and inter-company decision support system. This addresses the common need to access and integrate data from various sources, both within an enterprise (ERP applications and legacy systems) and from other companies including suppliers and customers. That puts the i2 application as an added layer of infrastructure on top of the ERP and legacy systems.
This strategy should insulate i2 from direct competition and pricing pressures, but it will also require a stepped-up committment from i2 customers to spend on a whole new layer of information system infrastructure. The payoff for customers is expanded integration with their own customers and suppliers, but it may also take longer to realize the return on investment and therefore may take a while for the market to accept and adopt it.
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