Rent-A-Chain: Supply Chain Management Application Service Providers (ASPs)

A supply chain is big and complex. It requires more time and manpower that many IT departments can give. That’s why some companies are letting an application service provider handle tasks for them.

By now, you know all about ASPs. They promise to relieve IT departments of cost and resource headaches, but many have financial problems of their own. Farming out the most important technology implementation in the history of your company is a big bet. Companies should not take that bet unless they have no other choice. It’s best to maintain internal control over a system that critical.

One who has taken the leap is John Strother, director of inventory and logistics at Seattle-based retailer REI. He hired SPS Commerce, a St. Paul, Minn.-based supply chain vendor that offers a hosted version of its execution applications. For a monthly fee, SPS sends the software through the Internet to REI, where Strother does not have to worry about keeping it up and running.

Yet despite these advantages, Strother says REI has not been able to realize measurable ROI from its deal with SPS. He claims that’s because the vendor has been slow to help extend the technology to REI’s suppliers and to correct issues with data accuracy and system response time.

Like so many companies in the ASP market, SPS’s distractions come from trying to stay alive. In March, SPS laid off just under 30 percent of its workforce, and the company’s CEO resigned.

SPS officials say the company will be fine. Chief Strategy Officer and Executive Vice President Jim Frome notes that the company received a new round of financing in May and that sales in early 2001 were up from the same period in 2000.

Strother has a plan B should SPS fail, but it hinges on the two resources he does not have: people and money. He would fight for the company’s software source code, buy equipment similar to what SPS has and move the supply chain applications in-house. How would REI pull that off? Strother doesn’t have an answer.

“We haven’t budgeted for it,” he says. “That would be dealt with on a catastrophic basis.”

Strother has not yet given up hope, however. He believes SPS has a viable revenue model, and he still believes his ASP deal will save him money over time.