SAN FRANCISCO (CNN/Money) -
It's been a rough couple of weeks for the supply-chain-management software business. A new study shows that customers are dissatisfied with their purchases. The major players have hit roadblocks, and steady encroachment from other software segments coupled with a paucity of tech-spending dollars means the tough times will likely only get worse.
How bad is it? A week ago the Nasdaq halted trading in shares of leading supply-chain software vendor i2 Technologies (ITWO: Research, Estimates) after the company delayed filing its 2002 annual report amid an accounting investigation. At press time, trading had yet to resume, and i2 said in a statement that it expects that it will become subject to Nasdaq delisting proceedings -- a pretty steep drop for a company whose stock once traded near $100.
Another leading supply-chain firm, Manugistics (MANU: down $0.10 to $2.54, Research, Estimates), has also hit a rough stretch. On March 28 it reported a fourth-quarter loss of $111 million and refused to offer first-quarter guidance. The stock got hammered and has struggled to regain its losses. For the year, the company recorded a GAAP loss of $212 million, or $3.04 a share, on $272 million in revenues.
The problems facing the supply-chain-management space run deep. Like so many business software offerings, the technology was wildly overhyped in the late 1990s. And now, in a tough overall economic climate, customers who spent a total of more than $15 billion on that software during the past three years are struggling to make sense of -- let alone make a return on investment for -- their purchases.
"Supply-chain applications are in a trough of disillusionment," Gartner principal analyst Jeff Woods says. "CEOs signed off on supply-chain packages a couple years ago and now are beating their heads against the wall, wondering what they bought."
Last week Capital Consulting and Management Services, based in Alexandria, Va., released a study that showed just how bad things are.
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Consider these numbers: Fewer than 20 percent of companies believe that their supply-chain software package has "definitely" shown a favorable ROI -- a pretty unfavorable response, considering that more than 90 percent of purchasers had expected strategic or operational gains from those packages. And even among the small percentage of respondents who achieved some return, 60 percent said it was less than they had expected.
"When you get down to the factory-floor level, the managers still don't know how to use the supply-chain software, or they use just a little of it, or if the software recommendation doesn't match what their gut says, they follow their gut instead of the program," says Scott Elliff, president of Capital Consulting. "Companies are increasingly realizing the situation."
Unrealistic expectations are endemic for the industry, say analysts, who urge that companies must now ask the strategic questions that should have been asked before the purchases were made.
Woods, for example, says they need to determine if a highly evolved supply chain is a necessary competitive advantage. "Wal-Mart (WMT: down $0.86 to $53.70, Research, Estimates) and Dell (DELL: down $0.58 to $28.01, Research, Estimates) have used supply chains to dominate their industries," he notes. "Companies need to determine if they fit into that space or if they just need parity with their programs."
All this uncertainty could create an opportunity for enterprise resource planning (ERP) software companies, such as Oracle (ORCL: down $0.33 to $11.17, Research, Estimates) and SAP (SAP: up $0.15 to $21.05, Research, Estimates). They can now pitch their more basic offerings by touting the software's simplicity and ease of implementation with existing Oracle or SAP ERP programs.
But Elliff wonders how big an opportunity exists for the ERP firms, given the economic climate and lingering bad taste surrounding supply-chain-management software. "Investment money is tight right now," he says. "Companies' focus will be on better using what they bought rather than going out and buying new stuff."
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