Follow the Supply Chain for the Next Big Thing

i2 is a runaway hit in the supply-chain management game, but it's not the only player.
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In my Oct. 1

look at

United Parcel Service

(UPS) - Get Report

, I promised a quick follow-up column on the related software companies. This week I finally got to it, and I'm sorry I waited, because it's a great story.

Consider, first of all, what has to happen before UPS or

FDX

(FDX) - Get Report

can drop a

Palm Pilot

or DVD player off at your door: Myriad raw materials have to be moved from mine to refinery. Then the resulting plastic, metal and glass go to a parts factory, and then the parts go to an assembly plant. Each stage involves some kind of transport, and at each stage, a lot of this stuff is sitting around, stockpiled against unexpected changes in supply and demand.

This excess inventory is bad, both because it costs money to maintain and because -- especially for tech companies -- it depreciates. So other things being equal, the manufacturer that squeezes the most excess inventory out of its supply chain wins.

Which leads to an interesting thought: By, say, 2005, the unit of competition will no longer be the individual company. Instead, it will be the supply chain.

Now, picture a system where everyone up and down the supply chain can log on to a secure Web site for real-time data on who's ordering, processing and shipping what. Thus enlightened, suppliers hold just enough inventory to satisfy incoming orders, while manufacturers manage sales to exploit whatever supply/price squiggles appear down the chain. Lower operating costs equal higher return on investment, and that equals faster earnings growth.

That's pretty much how

Dell

(DELL) - Get Report

has been kicking boxmaker butt for years. And now everyone else is getting religion.

Cisco

(CSCO) - Get Report

recently ordered its many suppliers to become part of a seamless online network or get lost. And according to a December

Wall Street Journal

article, "Within hours of each other last month,

GM

(GM) - Get Report

and

Ford

(F) - Get Report

rocked Silicon Valley by unveiling plans to set up massive rival online bazaars for all the goods and services they buy -- everything from paper clips to stamping presses to contract manufacturing."

So, maybe supply-chain management is the Web's Next Big Thing, and the companies that can show manufacturers how to do it right will make fortunes.

To play it, first check out the pure supply-chain-management software companies such as

i2

(ITWO)

and

Manugistics

(MANU) - Get Report

.

i2 is just about everybody's favorite, since it's not only the leader, but appears to be extending its lead. The way CFO William Beecher explained it to me this week, this means both making the best supply-chain management software and building customer-management systems that apply strikingly sentient expert systems (or is artificial intelligence a better term?) to the supply-chain data stream.

The only drawback here is that we're a year late to the party. i2's stock is up about 700% so far in 1999, and according to

Yahoo! Finance

, 19 analysts have buy recommendations on it.

Manugistics, meanwhile, is the comeback play. After pioneering the supply-chain management concept a decade ago, it nearly imploded via unwise expansions and badly handled acquisitions. Now, the obligatory new management team is in place, and it's playing catch-up. But "it's going to take a while to regain traction in the marketplace," says Kash Rangan, an analyst with

BancBoston Robertson Stephens

in San Francisco.

Still, its software is widely used, and its stock, even after quadrupling this year, can be bought for only 4 times sales, vs. a surreal 21 times for i2.

Next come the software companies that are big in enterprise resource planning (ERP) -- basically an internal version of supply-chain management -- and are making the logical transition into this new market.

J.D. Edwards

(JDEC)

, for instance, recently bought into this market by acquiring supply-chain management company

Numetrix

.

Oracle

(ORCL) - Get Report

is an e-commerce giant, so while it's just beginning a move down the chain, you have to take it seriously. And

SAP

(SAP) - Get Report

and

Baan

(BAANF)

are building supply-chain management capabilities internally, though it's too soon to say how they'll do.

To varying degrees, this bunch has had a hard year, as ERP sales fell prey to Y2K anxiety. But with that pretty much out of way, 2000 should be better. Meanwhile, "compared to most other software companies, these stocks are still very cheap," says Robertson Stephen's Rangan.

Then there's UPS and FDX, which are approaching this market from the logistics -- i.e., truck and plane -- side. UPS, for instance, manages the global supply chain for

IBM's

(IBM) - Get Report

disk-drive business, which involves merging software from the customer, suppliers, outside vendors and UPS' in-house proprietary systems, and getting them all to communicate sensibly. But because they use outside software, UPS and FDX are customers (and possible acquirers), as well as competitors of the software makers.

So, which stock should you buy? I don't know; they all seem a little flawed today. i2 is great, but breathtakingly expensive; UPS and FDX are so big that no single emerging division is likely to make much of an impact. Manugistics and J.D. Edwards have some hard recent history to overcome (though a glance at i2's valuation shows how far they have to run, should they get back in the race). Oracle, SAP and Baan are all potential players, but so far don't seem to be causing much lost sleep at i2.

Tell you what. I'll pick J.D. Edwards -- and we'll talk again in a year.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com.