When Whitehouse Custom Colour, a high-quality printer of digital photographs in Egan, Minn., wanted to implement a warehouse management system (WMS), it took an unusual step.

Rather than go the traditional route and install the software at its warehouse, Whitehouse chose an on-demand WMS system. That’s a software solution hosted by the vendor at a central location and accessed over the Internet by multiple customers who pay a subscription fee. The rate is often based on how much and how often they use the system.

Until recently, the target customer for most on-demand solutions, also known as software as a service (SaaS), has been a small- to mid-sized company like Whitehouse. “An on-demand solution allows even small and unsophisticated companies to provide the information that their larger customers require from them,” says Jim Burleigh, senior vice president of products for SmartTurn.

And until now, the most common application available in an on-demand model has been transportation management systems (TMS). The collaborative nature of transportation management, in which one shipper might work with dozens of carriers, makes it a natural fit for a solution where everyone can easily plug in and access the system online. That may explain why revenues from on-demand solutions are growing at double-digit rates while traditional TMS licensing fees are relatively flat, according to ARC Advisory Group.

WMS providers, on the other hand, have been slower to introduce solutions, especially at the top end of the market. That’s because on-demand WMS seems to work best in a low volume environment with predictable transactions and simple processes, like pallet or cases in and out. Most vendors have questioned whether a Tier I distributor with sophisticated materials handling systems will trust mission-critical warehouse operations to a system hosted by someone else and used by multiple clients.

Some of that is beginning to change. For one, the offerings are broadening to include WMS, supply chain management (SCM) and even enterprise resource planning (ERP) systems. What’s more, larger enterprises, attracted by the lower upfront fees and faster implementation times, are beginning to explore the on-demand market as a viable alternative to traditional licensing deals. In fact, according to Ian Hobkirk, senior analyst of logistics practices at the Aberdeen Group, the early adopters for on-demand SCM have been best-in-class supply chain organizations.

Still, outside of TMS, this is still very much an emerging area. In WMS, for instance, revenues from SaaS applications accounted for just $5 million of the $1 billion market in 2006, according to Steve Banker, ARC’s service director for supply chain management.

However, there have been recent developments that signal to the analysts that something is changing.

In the WMS space, for instance, 7Hills, is offering its suite of supply chain execution solutions in an on-demand model. The company has teamed up with NetSuite, a provider of on-demand ERP solutions, to offer an integrated suite that enables small- to mid-sized distributors and manufacturers to manage their businesses from end-to-end.

Sterling Commerce, which already offers an on-demand TMS, is developing an on-demand WMS for the small- to mid-sized distributor. While the company says it doesn’t plan go to market any time soon, it wants to be positioned for when the market develops.

RedPrairie is now offering a Tier I TMS solution in an on-demand model and is developing a strategy to offer WMS in an on-demand or hosted model. “At the top end of the WMS market, we think end users are going to be more interested in a solution that is managed by us for a fee but hosted at their site,” says Jim Le Tart, RedPrairie’s director of marketing.

In the supply chain management space, Mitrix and i2 Technologies are just two of the players introducing on-demand solutions for managing complex supply chains that rely on contract manufacturers and third-party logistics (3PL) providers. “An on-demand solution provides the ability to share data across many companies and to collaboratively make decisions and changes,” says Amar Singh, Mitrix’s CEO.

An on-demand solution is different, and that’s not just because the software is hosted remotely and accessed over the Internet. At least three payment models are available today.

1. Software as a Service: Typically this refers to a single instance, multi-tenant arrangement. That means one instance of the software is hosted at a central location and used by many different companies. Most often, those companies are paying a monthly subscription fee; that may be a flat fee, or it may be based on the number of users on the system and an estimate of the number of transactions.
2. On-demand: This also typically refers to a singe instance, multi-tenant arrangement. The difference is that rather than paying a set monthly fee, the customer only pays for the time the system is in use. This is sometimes called a “by the drink,” model; rather than buy the whole bottle, you’re paying for individual drinks as they’re consumed.
3. Hosted software: In the hosted model, also known as an application service provider (ASP), one instance of the software is hosted and managed for a single user. The solution may be installed remotely at the host’s location, or it may be installed at the customer’s site but managed by the application service provider.

In essence, the end user is leasing, rather than owning, the solution. Often, the leasing fee includes the cost of the hardware, maintenance of the system and any upgrades to the solution.

Why are companies investigating on-demand? The Aberdeen Group recently posed that question to end users and heard some surprising answers.

“Conventional wisdom holds that the biggest benefit was the ability to easily integrate to a community of trading partners,” say Hobkirk. “What we found in a recent survey is that the No. 1 reason companies are interested in on-demand today is to reduce the total cost of ownership. That was followed by faster implementation times.”

End users can see real savings in both areas, according to on-demand vendors. “Implementation times of six to 12 months are pretty common for a standard TMS software package, which often includes a lot of customization,” says Vincent Biddlecombe, chief technology officer for Transplace. “We can do an implementation in 12 weeks and we can integrate to whatever files your system—or your trading partners’ systems—create.”

The lower cost of ownership comes not just from the fact that the upfront costs are considerably lower for an on-demand solution, but also from the elimination of maintenance and upgrade costs, which are not only expensive, but can be disruptive to operations. “Any seasoned buyer knows that an upgrade to a software package can be a real drain on resources, especially if you’ve customized your system,” says Hobkirk. “In an on-demand model you stay current with the latest version of the software.”

Some users are exploring on-demand as an alternative to licensed software as current applications reach the end of their lifecycles. “They’re looking for a system that can take them through the next 10 or 20 years,” says Malin Huffman, senior product manager for NetSuite.

Finally, a new value proposition is emerging as some on-demand providers combine technology offerings with managed services.

That is the approach being taken by Transplace, one of the largest providers of on-demand TMS solutions. In addition to providing transportation management technology, Transplace offers a range of transportation management services, including supply chain and transportation network consulting. “We can provide the expertise and thought leadership that allows a customer to get the full value from that technology,” says Biddlecombe.

In that same vein, i2 Technologies offers not only an on-demand supply chain management solution, but also the personnel to make the most of that technology. “We call it knowledge process outsourcing,” says Michael Levi, director of solutions strategy. “A customer can provide us with their demand signals, and we can run that information through our planning and management solutions to create a forecast and manage the planning processes behind that demand signal.”

Given some of those advantages and the current momentum behind on-demand solutions, why isn’t the market larger?

Some significant hurdles still need to be overcome, especially in applications other than TMS.

The first, says ARC’s Banker, is the “belief that response times will be affected, especially in a warehouse, where you may be integrating with an automated materials handling system.”

Banker, for one, believes that concern may be misplaced. “The truth is that many people have implemented one instance of their WMS on a corporate server and are using that to run multiple warehouses with complex operations,” says Banker. “That’s pretty much the same thing that a software-as-a-service provider is going to do.”

A second hurdle, according to Aberdeen’s Hobkirk, is that the first WMS solutions coming to market are relatively vanilla, more suited to simple processes than complex distribution.

But the biggest hurdle may simply be that it’s still not commonly done. When it comes to mission-critical solutions, like a warehouse management system, only the bold are willing to risk their careers on an untested model.

That’s why Banker says he’s watching the market carefully. “I think we’re coming close to a tipping point,” he says. “I’m looking at players like SmartTurn that are targeting the small- to mid-sized market, and RedPrairie, which is going after the Tier 1 users. If either of those models succeeds, I think you’ll see more players get into the market.”