WMS: Easy Money Or Risky Business?

Isn't it funny how a company can recognize the importance of a good WMS (warehouse management system) but still choose to create its own "homegrown" version rather than buy a product from an actual software developer? Somehow, these companies think they are saving money by either creating their own WMS or using a module of an ERP (enterprise resource planning) system to coordinate warehouse operations. In fact, it's rare today to find a business that isn't using some software with the title of WMS. So, are there still opportunities for WMS software developers? That depends on the kind of WMS you offer, your other product offerings, and the type of customers you are targeting.

Justify A WMS With Facts, Not Features
NxTrend Technology, Inc. (Colorado Springs, CO) is one software developer enjoying WMS growth. For NxTrend, a lot of the legwork is already finished for tracking down potential WMS customers. The company has 700 clients using its flagship product SX.enterprise, an ERP software. It's this customer base that NxTrend mines for WMS leads.

NxTrend's customers are typically multibranch, hard goods distributors. Most of these companies fall into the tier two (annual sales of $250 million to $1 billion) category. NxTrend further divides this target audience into six vertical markets: PHAC (plumbing, heating, and air conditioning), electrical, building materials, industrial, paper, and medical. According to Joel Kremke, VP of sales and marketing at NxTrend, the company's sales revenue is almost equally distributed among these six markets.

"When the initial sale of an SX.enterprise system is completed, a short analysis of the customer's warehouse operations is conducted," explained Kremke. "For instance, we'll look at how many warehouses it has, how many lines a day it picks, its number of warehouse employees, and its inventory accuracy percentage. Once we have that data, we determine who is a fit for our WMS product, Total Warehouse Logistics [TWL]." A more detailed analysis, called a value assessment, is conducted once NxTrend follows up with a customer about buying TWL. The results of this value assessment are usually what convince a customer to purchase the WMS.

Quick Payback And Easy Integration Sell WMS
NxTrend's WMS products include TWL and the Integrated Bar Code (IBC) and Integrated Warehouse Management (IWM) modules. IBC and IWM are often sold separately but are included in TWL. Sales of all of these WMS products have grown at least 55% every year since 1998. In 2001, that sales growth rate reached 68%. Kremke admits this growth is probably due, in part, to NxTrend's strong sales push for WMS. However, he said two other related factors are also influencing this growth. First, the interfaces between most ERP and WMS systems - including NxTrend's - have become more streamlined. "The benefits of deep back office integration can't be underestimated," he said. "The WMS has to be intricately woven into the ERP software or some type of paper-based or manual data entry will still be needed. Customers are now realizing this type of integration isn't as daunting as it used to be."

Secondly, because this integration is improved, WMS products are providing a quicker payback. In NxTrend's case, TWL is averaging a one-year payback period, and in some cases, even less. Steve Banker, director of supply chain research for ARC Advisory Group (Dedham, MA), concurred that one year is the average payback for most WMS's. "In the past few years, my impression is that payback for a WMS was two years or more," Banker said.

Currently, NxTrend has 30 customers using TWL and 92 total using at least one of its WMS products. However, with the payback TWL now offers, more than 50% of NxTrend's new customers who are interested in any aspect of WMS choose TWL over the other two modules. "From 1995 to 1999, many companies were buying new ERP systems because of Y2K fears," explained Kremke. "And, cost wasn't a factor. Now, with this type of infrastructure in place, these same companies want WMS solutions with tangible benefits and a specific payback."

Go Global And Add A Channel
Despite NxTrend's current success selling WMS, recent research from Banker at ARC suggests a slower growth for this market in North America. In his study titled "Warehouse Management Systems Worldwide Outlook," Banker said WMS in North America is a mature market. He estimates that WMS growth in North America during the next five years will be only modestly higher than the inflation rate.

For WMS software providers, this research implies that more opportunities lie in the emerging warehousing markets of Asia-Pacific and Latin America. "In a mature market, the importance of indirect channels also increases," the report states. "As industry solutions become more standard and easier to implement, there is a movement away from the high-cost, direct sales channel to lower-cost, indirect sales channels." NxTrend has already created its own reseller channel. Dubbed "Marketing Associates," each of NxTrend's 15 systems integrators typically has 20 years of experience in one of NxTrend's target vertical markets. These companies sell all of NxTrend's software solutions and are subjected to a detailed qualification and certification program.

Sometimes 'No' Means 'Come Back Later'
No matter what type of sales approach a software developer chooses, and no matter how obvious a product's benefits, inevitably there will be customers who just say no. Kremke cited the example of a building materials distributor that had already rolled out TWL at one location but was delaying the installations at its other warehouses. "They were already reaping the benefits of the initial TWL project, but said they had too many other things on their plate to expand to the other locations," Kremke said. Often, those "things" turn out to be issues with mergers and acquisitions, a current trend in the wholesale distribution industry. In these instances, NxTrend is forced to play the waiting game. The same is true for NxTrend's reaction to the other most common objection for not installing a WMS - the slowed economy.

Despite these kinds of objections, with an established customer base of 700 companies, NxTrend expects to stay busy the next few years selling WMS software. In 2001, the company landed 40 new customers that weren't using any NxTrend product. This year the goal is 60 new customers. "We are pouring a ton of resources into WMS development right now," Kremke said. (The company employs 70 technical support employees.) "We really should have done this earlier since the WMS market is such a huge opportunity for us."

Maybe NxTrend's WMS growth is unique because of the company's existing customer base. On the other hand, NxTrend isn't the only vendor of ERP systems, and therefore, there should be other opportunities out there for WMS software developers. The challenge will be to prove to the customer the same thing NxTrend does - that your software can be easily integrated and is superior to the customer's existing WMS system.