The mergers and acquisition (M&A) market seems to be coming back slowly. One evidence of this could be the late-March acquisition of long-struggling inventory optimization (IO) provider Optiant by long well-performing supply chain management (SCM) provider Logility.
Now, I certainly wasn’t surprised by Optiant’s acquisition per se. After all, it was only a matter of time before Optiant would be acquired (or simply go out of business).
The company’s decade-long history has been plagued by repeated management turnover, staff exodus, strategic direction wanderings, bleeding cash, and poor sales execution. Optiant’s original primary investor Battery Ventures has recently moved on after sinking considerable sums of money into the company (about US$25 million by some estimates), and of late, Supply Chain Ventures had been a primary banker of the company, who was desperately seeking a white knight.
What surprised me, though, was the dearth of this event’s meaningful coverage. Bob Ferrari, an authority on IO (as one of the first analysts to cover that fledgling space in the early 2000s at AMR Research), was also the Vice President of Marketing and Business Strategy for Optiant two years ago. Thus, his in-depth knowledge of the company’s legacy, technology, and customer deployments is likely unsurpassed in the market, and there is not much I can add to his prompt blog post.
Joe Shamir, CEO of ToolsGroup, a direct competitor of Optiant, said the following in an e-mail exchange:
Logility buying Optiant shows that Inventory Optimization has become an important component of a modern supply chain planning (SCP) or enterprise resource planning (ERP) suite. Adding Inventory Optimization isn’t just about building a few screens based on textbook formulas.
It is Intellectual Property that takes years to develop; or you have to buy it. Given Logility’s mid-market focus, the acquisition also suggests that they foresee growing demand for Inventory Optimization from mid-tier companies.
Optiant was founded by two MIT Ph.D. graduates in 2002 and has since garnered a few dozen customers across its target industries of consumer products, high-tech, life sciences, and process and discrete manufacturing. These are largely the industries of focus for Logility as well, which makes the acquisition even more justifiable. Logility believes that Optiant’s success in attracting high-profile customers, such as Hewlett-Packard (HP), Intel, Microsoft, Black & Decker, Boston Scientific, Kraft, and Procter & Gamble, should give Logility a boost in the market.
Gartner’s SCM division AMR Research had its brief alert on the event stating the obvious: the market for standalone IO providers is getting tough, as these capabilities become ever-more commoditized. I would agree that IO is becoming a necessary part of any broader SCP suite, and it is becoming ingrained in the realm of sales & operations planning (S&OP) as well.
Standalone IO Market: Not Sustainable in the Long Run
Make no mistake, Optiant was an extreme of poor financial performance, as some of its competitors are still doing fine, mainly ToolsGroup and SmartOps. However, all of these specialist vendors’ final destinations will likely be some broader SCP platform and ecosystem; the only question is when and for what selling price they will be willing to succumb to this inevitability.
Indeed, Oracle, RedPrairie, and Manhattan Associates have recently delivered their own IO solutions; SAP has an almost exclusive partnership with SmartOps; IBM has achieved such capabilities via the ILOG (Logic-Tools) acquisition; and JDA Software (having recently acquired i2 Technologies) currently has two solid IO solutions. This deal leaves just a few independent IO vendors — ToolsGroup, SmartOps, Barloworld Optimus, and a software as a service (SaaS)newcomer InvOpt.com. Please let me know if there is anyone else in the IO market that I might not be aware of (not counting MCA Solutions, Servigistics, and Baxter Planning System in the even more specialized service parts IO space).
The Importance of IO
Many enterprises have been forced by the recent recession to watch their inventory levels more diligently, since unsold finished goods present inactive working capital. Generally speaking, traditional manufacturing requirements planning (MRP) and distribution resource planning (DRP) systems do not have much in the way of logic to determine the ideal ordering rules and policies, such as safety stock, order quantities, and so on in a complex multi-echelon supply chain.
While not easy to solve, the idea of the perfect order, or getting the right product to the right place in the right quantity at the right time, has been enabled by a number of IO solution providers. Technology, particularly smart software that uses appropriate optimization algorithms to make more efficient decisions, is used in the background to help manage this difficult challenge in a multi-echelon (multi-node) supply network.
There are a number of companies providing logic that looks at the entire supply chain and calculates optimum strategic inventory targets at each node of a multi-echelon distribution network, while balancing the inventory investment (i.e., working capital) against the risk of stockouts (i.e., poor customer service and fill rates). Optiant’s Powerchain (now Logility Voyager Inventory Optimization) product also allows enterprises to effectively measure the tradeoff of inventory investment and desired customer service levels.
The big question is: how valuable is this type of functionality that optimizes inventory policies, taking into account variability on the supply and demand side, leading to cost-effective inventory settings and supply strategies? One view is that an IO product provides a perfect complement to an MRP or DRP system. This solution dynamically sets time-phased inventory targets based on specific safety stock and order quantity rules.
Another view comes from the originators of RedPrairie’s up-and-coming Flowcasting product: one only really needs to keep safety stocks at the both ends of the supply chain while the goods at all other nodes should just flow through using the smallest possible multiple value of the economical order quantity (EOQ). We won’t be able to answer the question who-is-right until we get a big enough number of supply chains utilizing Flowcasting for comparison.
Many articles at TEC (and elsewhere) have focused on IO software solutions. Only some of these to mention here would be the recent blog posts by my colleague Khudsiya Quadri entitled “How to Reshape Your Supply Chain Network (and Why You Need to Do It Now),” “Can You Bring Cost Down through Better Inventory Management?”, and my blog series on long supply chain tails. Modern Materials Handling magazine’s 2009 article entitled “Inventory: Getting more from less with inventory optimization” is another great read on the topic.
Logility: An Underappreciated SCM “Dark Horse”
The more I think and refresh my memory about Logility, the more this acquisition makes sense. I had an update briefing with Logility in February, where I learned that the vendor was trying to expand its IO capabilities before the upcoming Version 8 of the Logility Voyager Solutions suite was released.
Prior to its acquisition of Optiant, Logility had some capabilities to optimize inventory across the entire supply chain and provide answers to the following questions: “Where should we place the inventory?” and “What service level should we use?” In addition to the normal (Gaussian) error distribution model, the current Logility Voyager Solutions Suite also includes a Poisson distribution model for low volume/lumpy demand items (e.g., for spare parts). Companies could create multiple what-if simulation scenarios, such as by the item’s ABC classification (the Pareto principle), customer, region, etc. and graphically compare the results of the simulations in terms of safety stock inventory investment and inventory holding cost.
However, these native IO capabilities were limited to only single-level bills of materials (BOMs), although the upcoming Voyager 8.0 release will feature the native capability to handle multiple-level BOMs. The difference Optiant that brings is the ability to optimize through both distribution and manufacturing (postponement strategy, for example). Previously, Logility Voyager focused on distribution only. The acquisition is thus a good move for Logility who thereby obtains solid technology and access to a stellar list of customers, all for a reasonable price (US$3.3 million in cash).
Logility also gets Optiant’s strategic network design tool (comparable to the capabilities of Llamasoft, Oracle Strategic Network Optimization [SNO], or Infor CAPS Logistics), as well as its seasoned sales, development, support, and consulting staff. Optiant’s Powerchain software allows supply chain managers and analysts to examine the trade-offs between inventory and customer service levels, delivering analysis on tactics such as postponement and the creation of new stocking or assembly locations, and how such strategies will affect availability to promise (ATP), lead times, and other customer-related metrics.
Lesser-known Facts about Logility
At this stage, let me backtrack and talk more about Logility and why Optiant’s customers should breathe a sigh of relief. While size and global brand recognition are not necessarily Logility’s traits (compared to, e.g., JDA, RedPrairie, or Manhattan Associates), Logility is a focused, proven, and stable company. Logility has 10 offices and 24 distributors worldwide (with 17 percent of its revenues coming from outside the US), which is quite impressive for a company of its size.
The company has a solid track record with a long history of profitability, having posted operating earnings of about US$33 million during the last 4 years. Logility has lately been a cash-making machine, having no debt and keeping more cash and investments in the bank (US$ 49.6 at the end of 2009) than it generated in revenues in fiscal 2009 (US$ 41.6 million). Well, with the Optiant’s cash expense for my estimate of Optiant revenues at about US$5 million, these two figures might soon meet at about US$46 million.
Logility has deep experience and has repeatedly proven itself with quick results and value in distribution-intensive industries such as consumer packaged goods (CPG), pharmaceutical, softgoods, durable goods, service parts, and retail. The vendor has a team of domain experts with a long tenure; in fact, its average employee tenure is about 15 years.
Logility’s experience indicates that distribution-intensive industries value chains (entailing manufacturers, suppliers, customers, and retailers in these markets) face considerable competitive pressure, which is intensified by the high cost of inventory and distribution investments, dynamically changing consumer needs, and variability in overall supply chain performance. These companies need solutions that are capable of delivering significant financial benefits by quickly solving problems that arise in sourcing, manufacturing, and distribution operations.
While being conservative in terms of its marketing expenditure, Logility is quite focused and spends heftily (about 20 percent of its revenues) on research & development (R&D). With the R&D themes of “Demand-Driven,” “S&OP,” “Optimization,” “Globalization,” “Product lifecycle,” “Collaboration,” and vertical focus, Logility solutions are capable of helping these companies collaborate with their trading partners to improve customer service and optimize their sourcing, manufacturing, inventory, and distribution networks.
In addition, all of its products are designed for ease of use, which has lead to an industry-leading rapid time-to-benefit and implementation success rate. Namely, 90 percent of customers reportedly deploy Logility Voyager Solutions in fewer than 9 months. As a result, the Logility Voyager Solutions suite has an excellent reputation for customer satisfaction. Some supporting stats for the Voyager Solutions customer loyalty would be the following: 21 percent of customers are on maintenance contracts for over 10 years, while 65 percent of customers are on maintenance for over 5 years (and annual renewal rates continue in the enviable 90 to 95 percent range).
Slow and Steady May Win the Race
Although Logility is an impressive company, it has been firmly entrenched in its “little” world. Even though it has been public since 1997 (under the “LGTY” ticker symbol), Logility still strikes me as a lifestyle, family-run company. The company doesn’t seem to aspire to aggressively grow, and Optiant is not likely to be a sign that things are changing in that regard.
Logility has been a prudent acquirer, with only 3 acquisitions in last 12 years including Optiant. Given how reasonably little the company has paid for all of its acquired companies, the results have more than exceeded expectations. As of July 2009, Logility is a wholly owned subsidiary of American Software (which previously owned 87 percent of Logility). The Logility subsidiary provides collaborative supply chain software solutions to streamline and optimize the forecasting, production, distribution, and management of products between trading partners.
In the late 1990s, Logility acquired a Chicago-based transportation management system (TMS) provider called Distribution Systems Inc. (DSI). That product was the foundation for what is today’s Voyager Transportation Planning and Management module that provides a performance-driven, multi-modal solution for transportation savings in time, effort, and money. The product enables automated shipment planning, shipment execution, and freight (cargo) accounting.
User workflows, driven by exceptions, increase visibility and accelerate more proactive communications among trading partners. The optimization engine evaluates logical alternatives for grouping and shipping orders considering business rules, consolidation parameters, carriers, rates, and date/time requirements, all in order to avoid wasteful deadheading.
In late 2004 Logility acquired certain assets and the distribution channel of privately-held Demand Management, Inc. (DMI), a St. Louis-based provider of SCP systems that was founded in 1985 and continues to be marketed under the Demand Solutions brand. The acquisition provided more than 800 active customers in the growing small and midsize enterprise (SME) market and added about US$10 million in revenues.
Today, Logility’s customer base encompasses about 1,250 companies located in more than 70 countries. These facts give Logility the largest installed base of SCP customers among application software vendors. Logility is possibly the only SCP vendor that can meet the needs of the SME’s, large companies (i.e., from $200 million to $1 billion), and Fortune 1000 markets (with over $1 billion in revenue).
It is perhaps ironic that Logility has outlived its once much bigger and better-known competitors Manugistics and i2, let alone the smaller formerly independent competitors such as Mercia (now part of Infor) and Demantra (now part of Oracle Value Chain Planning). Another best-kept secret in the market is that Logility has possibly the most complete SCM functional footprint. Namely, its fully integrated Voyager solution optimizes supply chain processes from forecasting to supply planning and global sourcing and production to final delivery (execution).
Part 2 of this series will analyze current Logility’s offerings for companies of all size. In the meantime, please send us your comments, opinions, etc. on Optiant and Logility (especially your experience with their solutions). We would certainly be interested in your experiences with the abovementioned SCM software categories (if you are an existing user) or in your general interest in evaluating these solutions as prospective customers.
This was a very thorough article. I found out a lot of things that I liked about the Logility’s conservative approach to managing its business. It does appear as if Optiant has been purchased by a”good actor.”
As to the question of inventory optimization popularity, the statement regarding inventory optimization and multi-echelon planning (MEIO) vs. DRP or MRP is not complete, and should be broadened to include MEIO vs. advanced planning. Having experience with both technologies, I have become convinced that for supply planning MEIO is both easier to maintain and an improved solution for supply planning. Secondly, the major brands in supply chain software do not have MEIO. Thus they don’t push it, nor do the major consulting companies. (which have been captured by the major software vendors) This is first because they do not see it in their financial interests, and secondarily because most of them simply don’t understand it, and can’t explain it to clients beyond the use of high-level buzzwords. MEIO is a big deal, but the awareness and understanding of why is so important is simply not there at companies seeking to improve their supply chain.