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.
Tell you what. I'll pick J.D. Edwards -- and
we'll talk again in a year.
John Rubino, a former equity and bond
analyst, writes a column on mutual funds for
POV and is a frequent contributor to
Individual Investor, Your Money and
Consumers Digest. His first book, Main
Street, Not Wall Street, was published by
William Morrow in 1998. At time of
publication, he had no position in any
stocks mentioned. While Rubino cannot
provide investment advice or
recommendations, he invites your feedback
at rubinoja@yahoo.com.
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