Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

An Industry Analyst’s Reaction to Manhattan Associates’ Quarterly Financial Call

Logistics Software Vendors | By •

I am an industry analyst that follows supply chain software solutions. Industry analysts are very different from financial analysts, who generally care about whether buying a company’s stock will be a good investment. As an industry analyst, I care about the technology. How functionally rich is it? How scalable? What new products are being introduced? I also need to make intelligent recommendations to our clients about whether they should implement a particular supplier’s solution.

Both financial and industry analysts listen to quarterly financial calls from public companies. Manhattan Associates had its call a few weeks ago. But often the things that make financial analysts happy actually disappoint industry analysts, and vice versa.

Financial analysts would, of course, have been pleased to hear about Manhattan’s record revenues and earnings per share, and its guidance that revenues and profits will continue to increase. An industry analyst cares about this too, but in a different manner. I want to know whether a company is financially healthy or in distress, and Manhattan Associates is clearly in the former category.

The company is exhibiting steadily growing revenue and profits, which makes it less likely to be acquired. In the software industry, there is a history of venture capitalists, or other software firms, buying underperforming companies at a low price, reducing or even virtually ceasing to invest in the technology they purchased, and “milking” the installed base for maintenance revenues. When Eddie Capel, the CEO of Manhattan Associates, refers to the company’s organic investments, and its decision not to play the consolidation game, he is saying that Manhattan Associates is not that kind of company.

But what I love is that Eddie defends the company’s investments in research & development (R&D). Some financial analysts clearly consider the R&D investments to be too high. In a company with 2,510 total employees, 650 work in R&D. Over ten percent of Manhattan’s revenues are devoted to R&D. And in fact, during the course of his career, Eddie has had senior product management positions. Based on my interactions with Eddie over the years, I continue to think of him as a “product” guy.

It is also clear from the financial calls that a significant portion of Manhattan’s R&D is being focused on building out solutions to support the omni-channel initiatives of the company’s retail customers. I consider omni-channel commerce the hottest trend impacting supply chain management, so this is something I continue to be glad to hear. Financial analysts are happy to hear that while omni-channel revenues are currently not a large portion of revenues, a “meaningful portion” of the warehouse management deals that are closing, which is Manhattan’s main product line, are being driven in part by omni-channel products and investments.

Industry analysts and prospective customers also care about the quality of the service a company provides. During the question and answer period a financial analyst asked about Manhattan’s willingness to develop a bigger system integrator ecosystem, particularly around its new omni-channel products. Eddie replied that very often consultants are involved in deals, particularly in the role of helping customers with change management issues, “but when it comes to [installing] our software, we think we are pretty good at it. No one can surpass our capabilities.” While financial analysts like the service revenues generated by Manhattan, some seem to be tacitly wondering whether Manhattan’s revenues would be higher if they had more consulting partners.

And as an industry analyst, I also pay attention to the ratio of total service revenues to software revenues. At Manhattan, service revenues are several times larger. This suggests, and customer interviews confirm, that when Manhattan’s WMS is put in, the costs associated with implementation are substantially larger than the software license fee. In past financial calls, and our calls to customers confirm this, Manhattan has said the ratio of implementation costs to software is closer to one-to-one for TMS implementations. I’d love to know what the ratio is for newer products like distributed order management (DOM), a key omni-channel product, but that has not come up in these calls and I’ve yet to interview a Manhattan DOM customer.

Eddie also talked about customer retention of 90 percent plus. Financial analysts hear this and think about a predictable stream of maintenance revenue. Industry analysts take it as a measure of customer satisfaction. In this case, this metric is about par for the course.

In conclusion, both industry and financial analysts listen to quarterly calls, but they are listening with different purposes, at times taking the same piece of information and interpreting it quite differently. Manhattan Associates is one of a relatively small number of companies that can have these quarterly calls and actually mostly please both sets of analysts.

Walmart’s Omni-Channel Dilemma

Retail | By •

I’ve been reading everything I can get my hands on about what Walmart is doing in the area of omni-channel fulfillment. I am struck with conflicting emotions – awe at the company’s vision and technological approach, and a great feeling of dread that it won’t be able to achieve its vision because of poor in-store execution.

The vision is audacious. Neil Ashe, President of Global e-Commerce, said the following during Walmart’s most recent quarterly financial call: “We want to know what every product in the world is. We want to know who every person in the world is. And we want to have the ability to connect them together in a transaction.”

To do this Walmart is building a proprietary “global-technology platform.” I don’t believe this vision is fully attainable, but the vision is causing the company to invest big — $430 million this year — in key initial pieces of this platform that could greatly improve its omni-channel capabilities.

Walmart has invested in search. Its new search engine is making the online shopper’s experience better and easier. But Walmart has also invested in search capabilities that allow it to search the Internet, see how competitors are pricing items, and then dynamically reprice its product offerings.

Walmart is also investing in what will undoubtedly be the biggest and most complex distributed order management (DOM) solution in the world. This DOM will give Walmart a view of inventory in its network of retail and e-commerce distribution centers, as well as inventory in the stores. The platform will also need to make very quick decisions about which items Walmart will allow customers to order online and then pick up, with no delivery charge, at its stores. The algorithms and decision rules used to make these decisions could get very complex – mixing product rules (don’t allow perishable or bulky products to be offered for in-store pick up), inventory rules (pick “excess” inventory from a local store, not from an e-commerce warehouse), profitability rules (Walmart has said it is willing to live with lower margins around e-commerce sales, but it clearly still wants to make a profit), and customer rules (if this online sale will get this particular customer into the store for an extra visit, and the customer is likely to buy other things while at the store, do you offer the online product at a loss?).

But this massive investment in technology will not pay off if Walmart cannot execute. I’m not worried about the company’s upstream execution. Walmart has one of the best supply chains in the world. If an online item is going to be delivered to the store for customer pickup, I believe its supply chain team can get the item on the truck and to the store in a timely fashion. But what if Walmart has extra inventory at the store and it wants to pick from the store shelves? I have limited confidence in Walmart’s store operations team to execute.

Bloomberg news reported in March, “Last month, Wal-Mart placed last among department and discount stores in the American Customer Satisfaction Index, the sixth year in a row the company had either tied or taken the last spot.” The article quoted one unhappy shopper saying “If it’s not on the shelf, I can’t buy it. You hate to see a company self-destruct, but there are other places to go.” Bloomberg reporters interviewed store workers and got the notes from an executive meeting and concluded, “It’s not as though the merchandise isn’t there. It’s piling up in aisles and in the back of stores because Wal-Mart doesn’t have enough bodies to restock the shelves.”

In theory, Walmart’s 4,000 forward-deployed warehouses in the U.S. (otherwise known as stores), could make it a formidable omni-channel competitor. But not as things currently stand. Walmart’s dilemma is that it is one of the world’s best technology companies, with one of the world’s best distribution center to store supply chains, but it is not close to being good enough in the area of store operations.

Distributed Order Management, A Critical Application

Logistics Technologies | By •

A relatively small number of software vendors offer distributed order management (DOM) solutions; IBM, Manhattan Associates (a Logistics Viewpoints sponsor), and Oracle are the best known of these vendors.

What is DOM? It is a central order orchestration hub for companies with complex fulfillment networks. A DOM provides…

  • a common view of inventory for companies with diverse order management or enterprise resource planning (ERP) systems;
  • the ability to designate how an order should be fulfilled even for orders with complex flow paths and lifecycles;
  • event management functionality that provides visibility into whether orders are being, or will be, successfully fulfilled;
  •  a cockpit to resolve issues for orders that have run into problems.

For companies that have ERP solutions with order management capabilities, how does distributed order management differ from traditional order management? The answer is that for many companies, their existing ERP solution can’t properly support the growing complexity associated with their fulfillment processes.

Consider the following potential flow paths for a PC order that a manufacturer of advanced consumer electronics needs fulfill. The order can be placed in a variety of sales channels. The “product” is a mix of components and services supplied by both the company and key trading partners. Delivery of the product can occur at the store, at home, or some mix of the two.

Potential Order Flow Paths for a PC Order
Potential Order Flow Paths for a PC Order

In short, order lifecycles are becoming more complex. In retail, the changes are more obvious. Retailers seek to play in an omni-channel environment where customers seek to “buy anywhere, fulfill anywhere, and return anywhere.” But even manufacturers are finding that increased outsourcing, expanding service offerings, and ecommerce are making orchestrating orders more difficult. For these manufacturers, managing this more complex order fulfillment process effectively and profitably is too difficult for their existing IT infrastructure.

Finally, sometimes the need for a DOM solution is dictated by a company’s heterogeneous IT environment – that is, a company that has multiple ERP and supply chain solutions. This heterogeneity prevents companies from presenting “one face to the customer.” It is not uncommon, for example, for customers buying from large companies to experience a cumbersome ordering process where they have to place several different orders to different company divisions. One solution to this problem is to implement one global instance of an ERP. But implementing a new global ERP can be difficult to cost justify, difficult to scale, and highly disruptive to the existing business.

Stock keeping unit proliferation, increasing numbers of channels to the customer, the continued growth of ecommerce fulfillment, increased use of outsource partners – all of these trends are making order fulfillment even more complex. Distributed order management solutions are critical applications that help companies efficiently and effectively deal with this complexity. For many companies, distributed order management has become a strategic application, but far too few executives even understand what this solution is about.

This Week in Logistics News (January 28 – February 1, 2013)

Cloud/Software-as-a-Service | By •

Wow, 2013 is already one-twelfth over. With no time to waste, let’s go straight to the news…

Manhattan Associates reported record fourth quarter total revenue of $95.4 million (up 14 percent from Q4 2011). License revenue, however, declined 13 percent in Q4 2012 compared to Q4 2011. For the year, the company reported a record $376.2 million in total revenue, up 14 percent from 2011, with license revenue also up 13 percent. Manhattan expects total revenues to grow between 9% and 10% in 2013. Some additional info from the earnings call:

  • New customers accounted for about 35% of the company’s full year license revenue.
  • About 65% of the company’s license fees were tied to WMS in 2012.
  • The retail, consumer goods and logistics service provider verticals made up more than half of the company’s license revenue for both Q4 and the full year.

Like other supply chain and logistics software vendors, Manhattan sees a bright future in retail. In his prepared comments, Manhattan CEO Eddie Capel said:

We’re in the crucible of a retail revolution, really the first one in 25 years or so. The way in which consumers engage with retailers has changed. They, the consumers, have tremendous access to information on hand via smartphones and tablets. And they can get it anytime that they want.

 

And the cost for their loyalty is the retailers’ ability to offer flexible shopping choices and timely service. And for retailers to do this, they need a wealth of capabilities that few previously had. They include not only a single view of the customer but the ability to leverage the biggest asset retailers have over fewer e-commerce players, inventory and associates and hundreds of stores nationwide. The push retailers are making to integrate stores into their fulfillment network use the web more than ever and bring these experiences to customers on their mobile devices, plays well with both our heritage and our future.

 

This is obviously quite exciting for us and for them, too, of course. Now the combination of our Distributed Order Management solution, with our recently announced store at commerce activation offering, serves as a one-two punch for making network-wide inventory available for orders and executing those orders efficiently.

Steve Banker touched on some of these trends in his posting this week. What’s missing, or not as clear to me, is Manhattan’s strategy around network connectivity, a topic I recently discussed on The Rise of Supply Chain Operating Networks, and part of the “Cloud” evolution taking place in the industry. While warehouse management, for the most part, remains a “inside the four walls” process, many other supply chain and logistics processes depend on the exchange of data and information with many external trading partners. As companies begin to rethink their approach to connectivity, I believe Manhattan Associates and its peers in the software industry need to better articulate their role and strategy in this area.

Earlier this week, I wrote that the clock is ticking on Hours of Service. Well, it turns out that the American Trucking Associations (ATA) is looking to extend the deadline for compliance. ATA President and CEO Bill Graves wrote a letter last week to Federal Motor Carriers Safety Administrator Anne S. Ferro asking for a three-month delay following a pending federal court decision on the regulation. If the request is approved, the deadline for compliance would get pushed out to October 1, 2013. Stay tuned.

Speaking of retail, J.C. Penney is reversing course and bringing promotions back. According to a Wall Street Journal article:

The retailer broke with the rest of the midtier department store pack at the beginning of the year when it said it would lower prices across the board—advertised as “fair and square”—rather than resort to daily discounts of artificially marked-up prices. But Penney is learning a hard lesson: Customers like markdowns.

Steve Banker at ARC commented: “Of course, supply chain folks hate promotions. It leads to demand surges that can whipsaw the supply chain. But here again, sales and marketing strategies should often trump what is good for the supply chain organization.”

Finally, the Wall Street Journal published an interesting article on what is arguably the biggest obstacle facing the broad adoption of driverless cars: lawyers and lawsuits. Here is an excerpt:

Arizona lawmakers last year were debating a law laying out guidelines for an up-and-coming technology: self-driving vehicles. Then they got to a question they couldn’t steer around: Who is to blame if a driverless car gets in a wreck?

 

When there is no driver, the answer turns complicated, and the possible targets of lawsuits expand. Is it the company that designed the technology? The car’s owner, or a passenger who should have assumed control? The auto maker that built the car?

And that’s a wrap. Have a great weekend!

Song of the Week: “Ready to Go” by Republica

(Note: Manhattan Associates is a Logistics Viewpoints sponsor)

The Evolution of Omni-Channel Logistics

Retail | By •

Traditional retailers were fairly slow to wake up to the huge threat posed by Amazon. But my recent visit to “Retail’s BIG Show,” put on by the National Retail Federation (NRF), convinces me that they are now wide awake.

One way bricks and mortar retailers have responded to Amazon and other e-retailers is by turning their stores into more of an asset with omni-channel commerce. Omni-channel is based on providing consumers with a more seamless shopping experience by better leveraging both stores and the e-commerce channels. The idea is that a customer should be able to go to a store, see something they like, and order it for home delivery. Or order the item online and pick it up at a store. The same sorts of permutations apply to returns.

Retailers can use new tools to decide whether it makes more sense to deliver an online order from one of their e-commerce warehouses or directly from a store. It will cost more in labor to deliver from the store, but perhaps less in transportation. Further, if it becomes clear that a store has too much of a particular type of inventory, it makes sense to deliver from the store, even if it costs more, rather than pay for transportation to move the excess inventory to another place in the supply chain where it is needed.

Manhattan Associates can help retailers make these fulfillment location decisions based upon a distributed order management (DOM) solution. Manhattan’s DOM solution provides visibility to all network inventory – e-commerce and store –and then provides rules-based decision making on where to fulfill from. JDA addresses the same problem from an optimization perspective. The company told me at NRF that its solution makes these channel/facility fulfillment decisions by instantaneously and optimally trading off the costs of labor, transportation, and inventory.

But a prerequisite of successfully deciding whether an order should be shipped from a store or a DC is inventory accuracy. In a warehouse using a warehouse management system (WMS), a cycle count should show at least 99.9 percent inventory accuracy. A cycle count not only proves that a company has the inventory it expects to have, it also shows that the inventory is in the correct slots, and that the correct number of items is located in each slot. In short, it shows that inventory has neither been stolen or misplaced.

I also saw folks from Checkpoint Systems at the NRF show. The company sells RFID and anti-theft tags (electronic article surveillance). They told me that the highest level of inventory accuracy the store floor can hope to achieve is about 96 percent, and then only through the use of item-level RFID tags. I believe this claim. It is far more difficult to prevent theft at a store than in a DC. Further, the store inventory system may be showing inventory that is really sitting in some shopper’s cart prior to check out.

If you were trying to do in-store fulfillment, a store associate would find at least four percent of the time that the inventory is not on the store floor. That is four unhappy customers out of every 100, which is too high, especially when you consider an unhappy customer may choose to take their business elsewhere in the future.

In the age of Internet retailing and fickle shoppers, I believe we may be greatly overestimating the lifetime value of a customer. But whatever the true lifetime value of a customer is, poor delivery capabilities will adversely affect it.

But inventory accuracy is not the whole problem for store floor fulfillment of online orders. Inventory accuracy does not mean location accuracy. Shoppers pull stuff off the shelf and put it back helter skelter. Therefore, you could achieve a high degree of inventory accuracy and still be unable to fulfill orders in a timely manner.

Item-level RFID will at least permit the items to be found. RFID scanners can be put in Geiger counter mode where they beep louder as you get close to the SKU whose number you have entered into the reader. But item-level RFID is expensive. Right now the only product categories it makes sense for is high-margin apparel and maybe electronics.

There are also customer experience and store management cultural issues that provide arguments against doing online fulfillment on the store floor.

There is likely to be a fair bit of experimentation around how to best practice in-store fulfillment. There will probably not be a one size fits all solution. But I believe most retailers will discover that if they want to use store associates to fulfill Internet orders, they will need to do it in specially designed backrooms, not on the store floor!

(Note: JDA and Manhattan Associates are Logistics Viewpoints sponsors)

Nordstrom Profits from Improved Multichannel Capabilities

Retail | By •

Last August, there was an interesting article in the New York Times titled “Nordstrom Links Online Inventory to Real World.” While many retailers at the time were experiencing year-over year sales decreases at stores open for more than a year, sales at the high-end chain Nordstrom were actually improving and outperforming the department store average measured by Thomson Reuters.

Jamie Nordstrom, president of Nordstrom Direct, attributed the company’s success to improvements in its multichannel capabilities. Specifically, Nordstrom customers can now order an item online and pick it up at a nearby store. In the past year or so, Nordstrom’s same-store sales increased by an average of 8 percent. In the 11 months before the shift, sales had decreased by 11.9 percent.

Nordstrom improved its multichannel capabilities in part to improve customer service, something the retailer was already famous for. The number one request to its call center was whether a customer could go to a local store and shop for an item displayed on the company’s website. But the changes were also driven by a desire to increase sales. Mr. Nordstrom pointed to research showing that multichannel shoppers spend four times more, on average, than single-source shoppers do. Once you get an online shopper into the store, they are apt to buy more.

In order to support this change, Nordstrom had to aggregate its inventory across its network and make it visible. As highlighted in the article:

The change works this way: Say that a shopper was looking at a blue Marc Jacobs handbag at Nordstrom.com. She could see where it was available at nearby stores, and reserve it for pickup the same day. More significant, if the Web warehouse was out of that bag, it did not matter. Inventory from Nordstrom’s 115 regular stores is also included. Maybe there was just one handbag left in the entire company, sitting forlornly in the back of the Roosevelt Field store — it would be displayed online and store employees would ship it to the Web customer.

This change occurred in two stages. About two years ago, Nordstrom added the option for customers to shop and buy items online and pick them up at a store. In September 2009, the company started providing visibility to individual store inventory on its Web site.

As a supply chain analyst that closely follows the market, I’m willing to hazard an educated guess that Nordtsrom almost certainly implemented a Distributed Order Management (DOM) system as part of this change. Leading DOM suppliers include Sterling Commerce and Manhattan Associates (both ARC clients)

Why can’t an Enterprise Resource Planning (ERP) solution provide this level of inventory visibility? The problem is that ERP solutions lack the logic to track order fulfillment events from order to delivery and they lack intelligence to support the logistics of multichannel order fulfillment.

All DOMs bolt on to an ERP solution and add extra visibility and intelligence. DOMs have what I call “order parsing logic”–e.g., if the inventory to fulfill an order can come from multiple sources, which warehouse should it be shipped from? Sterling’s DOM, for example, can calculate order lead-times based on service level agreements, carrier pick up schedules, and warehouse or store processing times. The solution can also dynamically allocate customer orders based on priorities, such as channel or customer types, and it can configure payment types and pre-authorize payments even before the order is placed, which reduces the number of uncollectable payments.

So what were Nordstrom’s results? According to the NYT article, “The percentage of customers who bought merchandise after searching for an item on the site doubled on the first day, and has stayed there (although, Mr. Nordstrom cautioned, that doubling was from a small base).” Nordstrom did have to hire more shipping employees to wrap and ship items from each store, but the increased sales more than offset these costs.

Inventory turns have also improved, from 4.84 in 2005 to 5.41 in 2009 (a five year high). A nice side benefit has been fewer mark downs. “If we’re out of something on the Web site, it’s probably late in the season and the stores are trying to clear it out,” Mr. Nordtrom said.

In conclusion, the changes at Nordstrom were driven by a desire to satisfy customers, but it also translated into higher profits for the company.

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