Whew!

That best describes the collective sigh of relief from the warehouse management system (WMS) software industry as 2001 came to a close.

'Last year was like pulling teeth,' says Ken Lewis, president and CEO of Provia Software, Grand Rapids, Mich., and number 12 on this year's list of leading best-of-breed WMS suppliers with $30 million in revenue.

Lewis speaks from first-hand experience. While Provia's total revenue and ranking rose slightly from last year ($27.6 million and number 14), Lewis says the competition was fierce for every deal.

That was good news for WMS users. Sharp bidding brought down the cost of the average deal.

Without question, however, it was disappointing news for suppliers. As the economy slowed, many WMS users postponed or cancelled projects that had long been on the drawing board. Deals became fewer and farther between.

Instead of the 10% year-over-year growth that was typical of the '90s, worldwide revenues for WMS systems declined in 2001 by 6% to an estimated $737.5 million, including a 12% decline in the North American market, according to Steve Banker, director of supply chain research at ARC Advisory Group, Dedham, Mass.

But there were two bright spots.

Manhattan Associates, Atlanta, Ga., the clear industry leader, grew total revenues by more than 14%, from $133.1 million in 2000 to $155.6 million.

Revenues for HighJump Software of Eden Prairie, Minn. and number 14 on our list jumped nearly 22% to $23 million.

Other industry leaders weren't so lucky. EXE Technologies, Dallas, Texas, retained the number two spot even though revenues declined to $95.6 million from $115.6 million in 2000. McHugh Software International, number five on the list for overall software sales, saw revenues decline $5 million to $65 million.

It was also a slow news year. While there were several high-profile mergers and acquisitions in 2000, the most notable industry development in 2001 was a name change.

Last June, Midgard Information Systems, Charlotte, N.C., became V3 Systems, to reflect the company's new focus on solutions for Tier 1 WMS users.

In October, Vertex Interactive, Fairfield, N.J., acquired DynaSys, a European provider of supply chain planning solutions. For now, Vertex is offering supply chain planning applications in Europe.

The good news: no one exited the business in 2001.

The bad news: the market is probably not big enough to support all of the suppliers currently selling WMS solutions. Analysts like Banker and vendors like Lewis of Provia expect a shakeout that may start sooner rather than later.

This is our second annual survey of the WMS market. To narrow down our list from the more than 200 companies offering a warehouse or inventory management solution, we focused on those suppliers that offer a best-of-breed WMS solution with deep order-fulfillment functionality.

That is why leading enterprise resource planning (ERP) providers are not yet on the list. Although a company like SAP sells more software than all the WMS players combined, it and other major ERP players have traditionally provided only basic warehouse management capabilities. Best-of-breed functionality exists only through partnerships with other suppliers.

While SAP and Oracle have introduced more robust packages, they don't yet compete head-on with best-of-breed providers. However, that may well change in the foreseeable future.

In addition to deep order-fulfillment functionality, a supplier must do business in the U.S. to make our list.

Finally, we looked at total worldwide revenues, including licensing, support and services for all supply chain execution offerings.

This final consideration does create some challenges because companies report revenues differently. But it also reflects a reality of the industry today: Leading WMS providers are broadening their footprint to offer total supply chain execution solutions. These include transportation management, yard management, order management, supply chain event management and visibility, and collaboration tools. Some leading vendors like EXE and Swisslog are even introducing supply chain planning capabilities.

While a number of suppliers posted revenues that appear close to last year's numbers, many relied more extensively than ever on related revenue streams. These include services revenue from existing customers, the sale of hardware with implementations, and licenses from solutions that extend a WMS system.

As a result, a supplier's total revenues are not a direct indication of how many WMS systems it installed. Furthermore, company numbers will differ depending on the size of end users and the resulting complexity of systems installed.

For instance, a WMS for a high-volume, Tier 1 warehouse or distribution center will typically account for about $550,000 in revenue to the supplier of that system. Of that total, $190,000 is for software licensing fees and $360,000 to implementation costs charged by the software provider. That means a WMS vendor serving the Fortune 1000 market with ten implementations did approximately $5.5 million in revenues from new WMS systems last year; the remainder of their revenues will come from a mix of ongoing services, hardware and additional software solutions besides WMS.

A system designed for a typical Tier II warehouse or distribution center in today's market account for about $290,000 in revenue to the supplier. Of that total, $110,000 will go to software licensing fees and $180,000 to implementation costs charged by the software provider. Translation: a WMS vendor serving the mid-market with ten implementations did approximately $2.9 million in revenues from new WMS systems.

Looking forward, Steve Banker of ARC Advisory Group sees slower growth for the industry. 'I think the days of 10% annual growth are gone be-cause the WMS market has matured,' says Banker. He predicts annual sales of WMS systems won't top $1 billion until 2005.

That growth should come from a combination of core WMS products and associated products that bring value to the WMS, like transportation management and supply chain visibility.

Slower growth and competitive pressures will likely lead to more consolidation among suppliers. With that in mind, companies searching for a new WMS system should evaluate not only the depth of the offerings, but the financial health of prospective vendors as well.

Click the icon to read last year's WMS survey - The Best-of-breed WMS suppliers.