Erp implementation as of january 2013

ERP System
Implementation

1

Application Service Providers
Chapter 10
• Outsource ERP
• Popular Concept used by SMEs
 Unocal pared IT staff 40% in two years
 Focus on core competencies, shed cost centers
• Many specific functions can be outsourced
• Outsourcing benefits
 Speed
 Organization lacks IT skills
• ASP the most popular way to outsource

2

ASP Risks
Chapter 10

• Q. What are the Risks of ASP?
• A. Your applications and data are controlled by
others
• A. Service failures are out of your control
• A. Confidentiality failure is a possibility
• A. Performance issues are possible

3

Key Planning and Implementation
Decisions
Chapter 10

• To ERP or not ERP?
• What to hold on to?
• Customization: Big R or small r?
• Big bang or phased implementation?
• Single package or best-of-breed?
• Which ERP package?
• What Enterprise?

4

ERP or not to ERP?
Chapter 10

• Business Case Rationale
 Technology
o Disparate Systems
o Poor quality existing systems
o Difficult to integrate acquisitions
 Process
o Personnel and IT cost reductions
o Productivity improvements
o Closing the financial cycle

5

ERP or not to ERP?
Chapter 10
• Business Case Rationale (cont.)
 Strategic
o Able to implement new strategies not supported by
the current software (eCommerce and portals)
o Improving customer service and satisfaction

 Competitive
o “Competition has it”
o Improved customer response

6

W to hold on to?
hat
Chapter 10
• Outsourcing
 Continue to focus on core mission
 Avoiding a huge financial commitment
 Minimize impact on IT department

• In-House
 Better match between the software and the
business
 Applications are optimized for the organization
 Security

7

Big Bang or
Phased Implementation?
Chapter 10

• Big Bang (All modules at all locations
implemented at the same time)
 No need for temporary interfaces
 Limited need to maintain legacy software
 Cross-module functionality
 No going back
 Lower cost if no surprises

8

Big Bang or
Phased Implementation?
Chapter 10

• Phased (Modules implemented one or a
group at a time, often at a single location at
a time)
 Smoothing of resource requirements
 Able to focus on a particular module
 Legacy system fall back
 Reduced risk
 Knowledge gained with each phase
 Used to demonstrate a working system

9

Other Implementation Approaches
Chapter 10

• Wave – different waves of change to a different
business unit or region
• Parallel – both ERP and existing system run together
for a period of time
 Basis of comparison
 Existing system serves as backup
 Requires more computing and human resources –
more costly
 Existing system may not be properly maintained
during the period
 Reengineering not supported by existing systems

10

ERP Implementation Life Cycle
Chapter 10

• Phases of ERP Implementation Life Cycle
 Pre Evaluation Screening
 Package Evaluation
 Project Planning Phase
 Gap Analysis
 Implementation Training

11

ERP Implementation Life Cycle
Chapter 10

• Phases of ERP Implementation Life Cycle
(Contd.)
 Testing
 Going Live
 End User Training
 Post Implementation

12

Pre Evaluation Screening
Chapter 10

• Hundreds of ERP Vendors
• Limit the No. of packages to be evaluated to
less than five
• Thorough evaluation of a small no. of
packages
• No superficial analysis of dozens of packages

13

Pre Evaluation Screening (Contd.)
Chapter 10

• Zero in on a few best packages by
 Looking at product Literature
 Getting help from External Consultants
 Package used by similar companies
• Vendor’s standing in the Market
• Local Implementation and post Implementation
support

14

Package Evaluation
Chapter 10
• Do it right the first time
 Huge Investment
 Not easy to switch to another one, once
purchased one package
 A very little room for error
• None of them are perfect
• Objective should be to find the best fit
• Develop selection criteria

15

Package Evaluation (Contd.)
Chapter 10

• Functional fit
• Integration between various modules
• Flexibility & Scalability
• Complexity
• User friendliness
• Quick implementation
• Support Multi Sites

16

Chapter 10

• Technology
 Client / Sever capabilities
 Database Independence
 Security
• Availability of regular upgrades
• Amount of customization required
• Local support infrastructure

17

Chapter 10
• Availability of reference sites
• Total cost of ownership of an ERP Solution
 Cost of licenses
 Cost of Training
 Cost of Implementation
 Customization cost
 Hardware cost
 Maintenance cost
 Infrastructure Cost

18

Chapter 10

• Form a Package selection committee
 People from various departments ( Functional
Experts )
 Top Management ( CIO, COO etc.)
 Consultants ( Package Experts )
 Package selected by the committee will have
company wide acceptance

19

Project Planning Phase
Chapter 10

• Time Schedules
• Deadlines
• Development of Project Plan
• Roles & Responsibilities
• Project Manager selection & appointment
• Selection of Implementation Team Members

20

Project Planning Phase (Contd.)
Chapter 10
• Task allocation amongst team members
• When to begin the project, how to do it & when
it is supposed to be completed
• Contingency plan
• How to Monitor the progress
• Control measures to be taken
• Corrective action plan, in case something goes
wrong

21

Project Planning Phase (Contd.)
Chapter 10

• Implementation Team will meet periodically
• Review the progress
• Chart the future course of action

22

GAP Analysis
Chapter 10
• Best Fit
 Meets 80% of Functional Requirements
• Solutions for the GAP
 Alter business processes to fit the package
 Pinning hopes on Upgrades
 Third party Interface
 Write additional programs
 Altering ERP Source Code ( Most expensive )

23

Implementation Team Training
Chapter 10
• How to Implement the package
• Running the system
• Consultants will Implement at the first site
• Selection of the employees for training
 People with the right attitude
 People who are willing to change, learn new
things, have good functional knowledge and are
not afraid of technology

24

Testing
Chapter 10
• Test for extreme case scenarios
 System Overloads
 Multiple users logging on at the same time with
the same query
 User entering invalid data
 Hackers trying to access restricted areas
• Design the test cases to find
 Weak links in the system

25

End User Training
Chapter 10
• Actual user will be given training on how to use
the system
• This should be done before going Live
• Identify the employees – the users of the new
system
• There will be resistance to change
• Most Implementations fail because of lack of
user training

26

Going Live
Chapter 10

• Data Cleansing and Conversion
• Databases should be up & running
• Prototype should be fully configured & tested &
should be ready to go operational
• New system is Live when the old system is
removed & only new system is used for doing
business

27

Maintenance of an ERP
Chapter 10

• System bugs
• User assistance
• Changes to system
• Manage different input and output
requirements
• Documentation
• Training
• Maintaining and updating software
• Budgeting for Maintenance
28

Difficulty in implementation
Chapter 10

• Very difficult
• Extremely costly and time intensive
• Typical: over $10,000,000 and over a year to
implement
• Company may implement only certain modules
of entire ERP system
• You will need an outside consultant for first site
Implementation

Common Pitfalls
Chapter 10

• Do not adequately benchmark current state
• Did not plan for major transformation
• Did not have executive sponsorship
• Did not adequately map out goals and
objectives
• Highly customized systems to look like old
MRP systems

Key Issues - Process
Chapter 10
• Do it OUR way
 Considerable business process
changes for the organization
• OK, don’t do it our way
 Customization: cost, maintenance
(upgrades), compatibility issues

31

Key Issues - People
Chapter 10

 Employee resistance
 Job Changes
o Retraining and re-orientation
 Likely more data collection screens
than in legacy system
 Loss of ERP veterans
 Security

32

Key Issues - Technology
Chapter 10

• Data migration from legacy systems
• Lack of interoperability among different
vendor products
• Maintenance

33

Key Issues - Financial
Chapter 10
• Cost
 Range = $400,000 - $300 million
 TCO = $53,320 per user (Meta Group)
 Hidden costs
o Training
o Integration and Testing
o Data Conversion
o Data Analysis
o Consulting Fees
o Turnover

34

Definition & Measurement of
Success
Chapter 10
• Success depends on the Point of View

 Point of view of Project Managers & Consultants –
Completion on time & within Budget

 Adopters view – Smooth transition to stable
operations with the new system, Achieving intended
business improvements like Inventory Reductions,
gaining improved decision support capabilities etc.

35

Success
Chapter 10

• Second issue is timings of Measurement
 Success in the short run & long run
 Instances when Successfully installed ERP
systems were terminated when the companies
were merged with another
 Successes measured at three different points in
time in ERP experience cycle
 Three distinct phases

36

Success
Chapter 10
• Project Phase
 During this phase ERP software is configured & rolled
out
• Shake down Phase
 During this phase the company makes transition from
“Go Live” to “Normal Operations”
• Onward & Upward Phase
 During this Phase the company captures the majority
of benefits from ERP & plans for next steps for
technology implementation & business improvements

37

Success
Chapter 10

• Success Metrics for different Phases
 Project Phase
o Project Cost Vs. Budget
o Project completion in time relative to schedule
o Completed & installed system functionality relative to
the scope
 Shakedown Phase
o Short term changes occurring after system “Go Live”

38

Success
Chapter 10

 Shakedown Phase
o Length of time before KPI achieve “Normal” or
“Expected Levels”
o Short term impact on Organization’s adopters,
suppliers and customers such as average time on
hold when placing a telephone order

39

Success
Chapter 10

 Onward & Upward Phase
o Achievement of Business results such as reduced
operational cost, reduced inventory carrying costs
o On going improvements in business results
o Ease in adopting new ERP releases, other new
technologies, improved business practices, improved
decision making etc. after ERP system has achieved
stable operations

40

The 12 Cardinal Sins of ERP
Implementation
Chapter 10

• Lack of Top Management Commitment
 Proper commitment of time and resources are
required for a successful implementation
• Inadequate Requirement Definition
 60% of ERP failures are for this reason
 This will also lead to poor package selection
• Poor ERP Package Selection
 Inadequate functional requirements

41

Implementation
Chapter 10

• Poor ERP Package Selection
 Inadequate and improper evaluation of the
package
• Inadequate Resources
 Skills availability within the company
 Working full time on ERP Implementation

42

Implementation
Chapter 10

• Resistance to change / Lack of Buy-In
 Caused by failure to build a case for change
 Lack of involvement of the users affected by the
change
 Inadequate communication
 Lack of visible top management support and
commitment

43

Implementation
Chapter 10

• Miscalculation of time and effort
• Misfit of Application software with Business
Processes
• Unrealistic expectation of Benefits and ROI
 Software providers and consultants are notorious
for overstating benefits in terms of ROI and
understating the total cost of the project

44

Implementation
Chapter 10

• Inadequate Training
 Training needs are underestimated
 ERP related training is crucial
 Employees must learn new software interfaces and
business processes which is going to affect the
operation of the entire enterprise
• Poor Project design and Management
 Short cutting critical events in the project plan, such
as documentation time, redefining and integrating
processes or testing before going live

45

Implementation
Chapter 10

• Poor Communications
 Poor project communications beginning with
announcing the reasons for the ERP project,
continuing advise on the progress and the importance
of ERP implementation to the company
 Communication is a vital part of managing the change
which ERP will bring about in the company
• Ill advised cost cutting
 Simultaneous implementation at multiple sites
 Compressing the schedule to save costs

46

Adopters problems with ERP
Chapter 10
• Project Phase Problems
 Software Modifications
o Strongly recommended to avoid modifying the
software & live with existing functionality
o Difficulty in getting modifications to work well
o Getting well tested & working modifications in a timely
manner is a problem
o When the user understands the software better, they
discover ways to implement needed capabilities
without modifications

47

Chapter 10

 Even though ERP systems are said to be
comprehensive, need for retaining some legacy
systems & third party specialized software cannot
be totally ruled out
 Interfacing these systems with ERP is both
challenging & expensive

48

Chapter 10

 Problems with product & implementation
consultants
o Coordinating the efforts of various consultants is a
challenge ( H/W Vendor, Software Vendor, telecom
Vendor, ERP Vendor, Implementation Consultant )
 Turnover of Project Personnel
o Losing key IT specialists & user representatives
working on the project while the project is going on

49

Chapter 10
 Turnover of Project Personnel
o Losing experienced people after the project is
complete
• Shakedown Phase Problems
 Companies experienced negative outcomes
during this phase
o ERP system performance problems
o Data entry errors

50

Chapter 10

 Companies experienced negative outcomes
during this phase
o Increased staffing required to cope with slowdown &
errors
o Negative impact on customers & suppliers from an
inability to answer their queries & delayed shipments
o Inadequate management reporting

51

Chapter 10
 These were caused by problems occurred during
Project Phase which were not recognized as
problems or were not resolved when occurred
 The most important problems that occurred
during Project Phase were
o Inappropriately cutting project scope when there are
missing key milestones

52

Chapter 10
 Cutting end user training
o Underestimating the need for training
 Inadequate Testing
o Testing of cross module integration
o Testing of interfaces with legacy systems
o Testing of modifications carried out by external
vendors
o Testing unusual business scenarios

53

Chapter 10

 Underestimating data quality problems &
reporting needs
o Retaining legacy data for many years ( Regulatory
compliance & Product servicing for many years )
o In integrated ERP systems, data must be clean
o Users will be disappointed if their reporting needs are
not met

54

Chapter 10
 Reveals unresolved or unrecognized problems of
Project Phase
 Many of these problems can be avoided by giving
adequate attention during Project Phase to :
o Cross functional configuration & testing of software
o End user training
o Data conversion & management of legacy data

55

Chapter 10

o Reporting needs
o Scenarios for recovering from data input errors
• Onward & Upward phase problems
 Fragile human capital
o Losing ERP knowledgeable IT specialists & end users
o Difficulty replacing them

56

Chapter 10

• Onward & Upward phase problems
 Migration Problems
o Software modifications made earlier convert poorly
during implementation of later releases

o Some organizations vowed never again to modify
ERP software but to make necessary changes to their
business processes

57

Critical success factors in ERP
implementation projects
Fourteen CSFs were identified by majority of the
companies:

Top management support and involvement

Top management support is critical because
top managers have to make fast and effective
decisions,
Top managers have to resolve conflicts,
They have to bring everyone to the same
thinking to promote company-wide acceptance
of the project, and
build co-operation among the diverse groups in
the organization.

Clear goals, objectives and scope
Clearly defined business and strategic
objectives
Clear goals and objectives should be specific
and operational and have to indicate the general
directions of the project.
They should also provide a clear link between
business goals and IS strategy.
Well-defined objectives help to keep the project
constantly focused, and are essential for
analyzing and measuring success.

Project team competence and organization
Selecting and motivating the right employees to
participate in implementation processes is critical
for the implementation’s success.

Teams must consist of the right mix of business
analysts, technical experts, and users from within
the organization and consultants from external
companies, chosen for their skills, past
accomplishments, reputations, and flexibility.

User training and education

A lack of user training and understanding of how
ERP systems work appears to be major reason
for many problems and failures in ERP
implementation.
If the employees do not understand how a
system works, they will invent their own
processes using the parts of the system they are
able to manipulate.
The full benefits of ERP is not realized until end
users are using the new system properly.

Business process reengineering
ERP implementation is a matter of transforming
business practices.

So implementing an ERP system involves
reengineering the existing business processes to
fit best business practices.

Change management
ERP brings in lot of changes in processes,
introduces many checks and controls etc.
These changes might cause resistance from the
users

These changes have to be managed properly

Many ERP implementations fail to achieve
expected benefits in part because companies
underestimate the effort involved in change
management.

Effective communication
The importance of communication across
different business functions and departments is
well known in the information technology
implementation
Communication has a significant impact on the
process by minimizing possible user resistance.
Communication has to cover the scope,
objectives, and tasks of an ERP implementation
project.
Effective communication is required in project
teams and within the organization (i.e. weekly
team meetings, postings on the company

User involvement
Cooperation and involvement of all people in
the organization are essential.

Involving users in defining organizational
information system needs, selection of the right
ERP solution and in BPR if necessary, can
decrease their resistance to ERP systems.

 Users often perceive their role in ERP
implementation as central in their judgment
about new system.

Data analysis and conversion
The quality of pre-existing data and information
systems is very important factor in successful
ERP implementation.

If problems with data are not solved in old
legacy systems they will hardly be solved during
ERP implementation and therefore the quality of
implemented system will be questionable.

Data problems could even rise because
modules in ERP solution are interlinked.

Consultants
The success of a project depends strongly on
the capabilities of the consultants because the
consultants are the only one with in-depth
knowledge of the software.

Consultants provide a very valuable service by
filling gaps, providing expertise, and thinking out-
the-box.

They are specialized and can usually work
faster and more efficiently than others involved in
the implementation process.

Project management
 ERP projects are huge, complex, and risky, so
effective project management is crucial.

 Approximately 90% of ERP implementations
are late or over-budget, which may be due to
poor cost and schedule estimations or
changes in project scope.

Project champion
Project champions or sponsors are individuals
who have a clear understanding of what is going
on; they are very critical to implementation
success.
Champions ideally should have experience in
previous implementation efforts to manage
conflicts that arise before and after
implementation.
Project champions play a critical role in the
acceptance of the technology and he/she is
usually at senior management level so they have
the authority to make substantial organizational

Architecture choice (package selection)
All ERP packages have limited capabilities.
Some packages are more suited for larger
companies while others fit smaller firms better.
Some packages have become a “de facto”
standard in certain industry.
Some have a stronger presence in certain parts
of the world.
To increase the probability of success,
management must choose software that most
closely fits its requirements.

Minimal customization
Most companies significantly underestimate the
effort required for code modification.

Vendor’s code should be used as much as
possible, even if this means sacrificing
functionality, so upgrades from release to release
can be done easily.

Therefore, every modification request should be
carefully evaluated and approved, or rejected,
after considering all the options.

Management issues of ERP
implementation projects – reasons
for ERP
Answers to the question “ What are the reasons
of a company to decide to implement ERP
solution” were:
 better access to data,
 modernization of existing business processes with
ERP solution,
 single data entry,
 incompatibility of previous information systems,
 integrity of a solution, demand of owners,
 better reports,
 adaptability and flexibility of ERP solution

Management issues of ERP implementation
projects – why particular ERP solution was
chosen

Answers to the question “Why a particular ERP
solution has been chosen” were:
 integrity of a selected ERP solution,
 efficiency and stability operation of an ERP
solution,
 support of an ERP vendor,
 cost and price of an ERP solution,
 and requirement of an owner or other business
partners (customers, vendors etc.).

projects – was ERP implemented according
to planed time

33.3% of implementations lasted longer than
they have been planned and the reasons for that
were:
 changing scope of implementation,
 weak knowledge about functionality of ERP
solutions,
 passive collaboration within project team during
the analyze phase,
 key users have been overloaded with daily tasks
so they do not have time to participate in the

projects – changes in ERP functionality
during the implementation

Answers to the question “Whether scope of
expected functionality has changed during the
implementation” were:
 14.6 percent answered small decrease according
to planned functionality,
 36.6 percent answered no changes – planned
functionality implemented,
 29.3 percent answered small increase according
to planned functionality
 19.5 percent answered big increase according to

Major reasons reported for changing the
functionality have been:
 “during an implementation we found out new
functionalities of the ERP solution for which it
would be foolish to release it out of the project”;
 “after analyzing and defining business processes
key users understand importance of the ERP
solution better and that was leading to the
increase in scope”,
 “bad analysis and defining processes, and bad
cooperation with top management”.

projects – changes in costs
Answers to the question “Whether the costs of
implementation changed according to planned
costs” were:
 nobody answered much smaller than planned.
 4.9 percent have answered a little smaller than
planned,
 26.8 percent have answered the same as
planned,
 46.3 percent have answered a little bigger than
planned
 22 percent have chosen much bigger than has
been planned.

Major reasons reported for raising of costs were:

 bigger scope of functionality than planned,
 more consultants’ hours,
 bigger number of interfaces with other information
systems as planned,
 persistence at adaptation of ERP solutions to
existent processes and procedures.

projects – major unexpected problems
during the implementation

To the question “If any big problems have
occurred during an implementation process”:
 31.7 percent have answered yes and
 68.3 percent have answered no.

Most often problems reported were:

 user resistance for change,
 bad training and bad user manuals,
 unsuitable consultants, bad computer literacy,
 poorly included middle management,
 the solution has not been tested enough by users,
 bad defining of business processes etc.

ERP Implementation: A Real Pain
Chapter 10
 More ways to fail than to succeed
 Very expensive
 Slow to install
 Medium size projects in tens of millions
and require years of tweaking
 Support Industry surrounding ERP:
 costly services and consultants
 can be 10 times the cost of software
 Consultant’s “Full Employment Act” !

82

Hidden Costs
Chapter 10
ERP implementation costs fall in the range of $3 to
$10 per dollar spent on the software itself
- Meta Group
1. Training
2. Integration
3. Testing
4. Data Conversion
5. Data Analysis
6. Getting rid of your consultants

83

Training
- Consistently Underestimated
Chapter 10
Because….
Workers have to learn new processes
Not just a new software interface

e.g., A receiving clerk at the plant’s loading dock
now becomes an accountant. Because the clerk is
keying new inventory directly into a live system,
mistakes have an immediate impact on the books.
And the plant’s number crunchers can no longer
simply look at their data in batches, now they need
to be able to pinpoint the origin of each data entry
to verify its accuracy.
84

ERP is NOT
Just About Technology Implementation
Chapter 10

• It requires significant change management
o the most elusive budget item

• Training costs: 10% - 15% of total budget
o do not skimp on training;
otherwise, pay more later

• One approach to control price tag
o train the trainers

85

Integration
-- Is NOT Easy
Chapter 10

Links have to be built between ERP and other
corporate software on a case-by-case basis
Monsanto has add-on applications for logistics,
tax, production planning and bar coding.
Integrating them with SAP has consumed more
time and money than estimated

AND…

If the ERP’s core code has to be modified to fit the
business process, costs will skyrocket.
86

Testing
Must be Process-Oriented
Chapter 10

DO NOT…
… Use DUMMY DATA
… And move it from one application to
another

Run a real purchase-order through the system,
from order entry to shipping and receipt of the
payment -- the whole “order-to-cash” cycle -
preferably with the employees that will eventually
do the jobs.

87

Fox-Meyer’s Mistake
Chapter 10

Company received about 500,000 orders daily from
thousands of pharmacies, each of which ordered
hundreds of items.

SAP could only handle a few thousand items a day

No way to test in advance…ran some simulations,
but not with the level of data we have in an
operating environment.

88

Data Conversion
Is NOT 1-2-3
Chapter 10

Because….
• Most companies in denial about quality of legacy
data. Hence, underestimate cost of moving data to
new ERP home.
• Even clean data may need some overhaul to match
process modifications necessitated by the ERP
implementation
• One alternative: outsource data conversion
 claim to reduce costs by 75%

89

Data Analysis
- An Additional Cost
Chapter 10

Reports in ERP package will NOT meet management
information needs because …
… ERP data has to be combined with external and soft
data such as goals, budgets, etc.
… Management reports should be customized to the
organization needs and culture

Cost of data analysis is often overlooked in project
budget because of misconception that ERP package
provides all the analysis users need

90

Consulting Fees
Can Run W ild
Chapter 10
IF…
Users fail to plan for disengagement

Hence…

• Identify objectives for consulting partners when
training internal staff
• Include metrics in contract
e.g. A specific number of staff should be able to pass
a project management leadership test - similar to
what Big 5 consultants have to pass to lead an ERP
engagement
91

How to Uncover
Hidden Costs Upfront
Chapter 10
• Assemble cross-functional teams.

• Include both senior managers.

AND lower-level end users who will have daily contact with
the ERP systems and provide level of detail.
• Systematically question and challenge each other’s
assumptions and estimates
• Examine in depth the six components of hidden costs.

• Cost of ERP software is only a SMALL SLICE of the total
project outlay.

92

The Promise of ERP
Chapter 10

Promise: Change the way companies
work by integrating the back-
office processes into one
smoothly functioning whole.
Problem: Years to implement
Hundreds of millions of $
AND Inward-looking
Focus: Efficiency of the Enterprise
in isolation
93

Case Studies

Chapter 10

- Failure Stories

94

Horror Stories
Chapter 10

• Whirlpool: ERP implementation crippled its shipping
system, leaving appliances stacked on loading docks
and not delivered to paying customers for a full eight
weeks.
• Hershey Foods: A 19 percent drop in earnings was
caused by an incompetent ERP implementation that
wreaked distribution havoc during one of its most
profitable seasons: Halloween.
• Volkswagen: Significant delays in parts shipments
causing product inventories to build up to costly levels.

“Ha lf o f the is s ue s in ERP d is a s te rs a re no t te c hnic a l but a re
p e o p le re la te d a nd c ulture re la te d . ”
95

The Reality :
Fox-Meyer Case Example
Chapter 10

- Once a $5 billion drug distributor
- 4th largest in the US

- Tight Margin Business

- CIO Magazine praised them in 1995 for
new client/
server initiatives in 1993

96

Fox-Meyer’s ERP Project
Chapter 10
- Launched ERP Project in 1993, a hot new idea
at the time

- SAP’s R/ had a track record only in the
3
manufacturing industry

- Goal: First mover advantage in distribution
industry

- “W are betting our company on this”
e
- CIO Robert Brown
97

Fox-Meyer - The System
Chapter 10
- Cost – $100 million

- Implemented SAP’s ERP and
Pinnacle’s Computerized Warehouse
Systems at the same time

- Big problems surfaced in late 1994
e.g.: R/3 miscounted inventory, which in turn
screwed up customer orders
- Outright crashes were routine

98

Fox-Meyer – W Happened?
hat
Chapter 10

- R/3 could not handle the volume
- Could process just 10,000 invoice lines per night
compared to 420,000 in the old Unisys system
- Software usable only in 6 of 23 warehouses
- Had to revert to old Unisys system
- Data conversion bungled by implementation
consultants
- Used incorrect product codes
- Faulty interfaces between old and new systems
- State of the art warehouse opened late
- Incorrect orders cost millions in excess shipments
99

Fox-Meyer – The Blame Game
Chapter 10
- Fox Meyer Management:
- Claimed vendors oversold capabilities
- Consultants were neophytes
- “Installation guinea pig – far worse than original system”

- Pinnacle COO – “not a failure of automation – It was a
management failure”

- SAP – “users who install R/3 are usually changing basic
business processes at the same time – this is where most
of the pains and challenges of implementation come
from”

- Vendors claim project was completed according to their
agreement
100

Fox-Meyer - Aftermath
Chapter 10

- Filed for bankruptcy in 1996

- Purchased by a major competitor for
$80M

- August 1998 - Bankruptcy trustee for
Fox-Meyer sues Vendors for $500 million
each.

101

And Others...
Chapter 10

- Allied Waste Industries
 Pulled the plug on a $130 million SAP R/3
system

- Waste Management Inc.
 Cancelled SAP installation after spending
$45 million of a $250 million project.

102

A Notorious Disaster
Hershey Foods – October 1999
Chapter 10
– IBM-led installation and integration of software from 3
vendors:
SAP, Manugistics (planning applications) and Siebel (pricing
promotions)
– Embarked on the project in 1996
. . . Partly to satisfy retailers who were demanding fine-tuning
of deliveries to keep their inventories and costs down
. . . Also faced Y2K problems in old system
– Investment : $ 112 M, 5000 PCs.
– “To be used by 1200-person salesforce and other departments
to handle every step from order placement to final delivery . . .
Touches nearly every operation; tracking raw ingredients,
scheduling production, measuring the effectiveness of
promotional campaigns, setting prices, and even deciding
how products oughtMohan stacked inside trucks”
L.
to be
-
103

Why “Hershey’s Biggest Dud
Is Its New Computer System”
Chapter 10

1. “Scope – Creep” in Defining Objectives of the Project
– Had to select 3 different vendors to meet project
objectives

2. Big-Bang Implementation Approach
– Replaced all legacy systems at once despite
complexity of integrating 3 packages; Not a phased
approach – one module or unit at a time
– Successful Implementation in Canada; but, it is a tiny
fraction of the size of the U.S. business

3. Initial Time Estimate - 4 years
– Squeezed into 30 months
104

Why “Hershey’s Biggest Dud
Is Its New Computer System”
Chapter 10
4. Expected to go live in April ‘99 - a slow period
– Date pushed to July, when Halloween orders begin to
come in
– 40% of candy sales between Oct. & Dec; Halloween
is the single biggest sales day, followed by
Christmas

5. No Contingency Plan
– Could not backpedal to old logistics systems – they
had been demolished to make way for new system
– Built up 8 days of inventory as a cushion against
computer glitches - by early August, 15 days behind
in meeting orders

105

The Implementation Failure
 Candy “everywhere” but NOT in the stores for Halloween Chapter 10
 Problem : Getting customer orders into the system and
transmitting the details to warehouses for fulfillment
 Rivals, Mars and Nestle, benefiting without much effort
because :
“If you don’t have my toothpaste, I’m walking out (of the
store). But for a chocolate bar (and that too for Halloween), I’ll
pick another brand.” - Shelf-space is hard to win back.
 Hershey sales rep calling Dallas-based 7-Eleven chain candy-
category manager weekly to ask what 7-Eleven has received
because Hershey itself can’t tell what it was
 “They’ve missed Halloween; problems could persist through
Christmas and may be even Valentine’s Day & Easter”.
 Bottom-Line : $ 150 M loss in sales in quarter after system
went live, 29% higher product inventories, compared to year
L. Mohan
before
106

Post-Mortem of Hershey Failure
Chapter 10

#1 Trying To Do Too Much At Once

#2 Unentered Data in SAP

#3 No Leadership

107

Integrating SAP With Manugistics
- More Complex Than Anticipated
Chapter 10

— Hershey had used Manugistics supply chain
planning software for years – but it was the
mainframe version

— The software had to be changed to a
client-server version that had to be configured
as a bolt-on to SAP

— Not enough time for testing, with the rush to
implement by the Y2K deadline

108

The Data Problem
- How Could Hershey Lose Track of Inventory
Chapter 10

 Hershey’s management process
- Very good at crisis management
- Devised informal mechanisms for dealing with tremendous
buildup of inventory to meet peak holiday sales
- “They would put candy everywhere they could to store it…
they were not used to having to tell the computer about that.”

 “Surge storage” capacity created in warehouse space rented
on a temporary basis – even spare rooms within factory
buildings
- These locations were not recorded as storage points in SAP

109

The Data Problem
- How Could Hershey Lose Track of Inventory
Chapter 10

 SAP requires a lot of discipline
- Found that significant amount of inventory was not where
the system said it was
- To fulfill a customer order, SAP checks data of available
inventory in the system

 Breakdown between Logistics Group and IT Group
to identify this data in advance

110

Poor Management Oversight
Chapter 10

 No CIO
- Head of IT only a VP, a couple of levels down

 Different parts of the business pulling in different
directions
- No one at the top to pull these demands together to guide
the creation of a system that will work for the whole system
- “You get 100 little committees with no oversight”

 No high-powered steering committee for project
oversight

111

Lessons Learned AND Applied by Hershey
- The IT System for a New Distribution Center
Chapter 10
Lesson #1: Go Slowly
Hershey took the time and resources to thoroughly test the computer
system.
“Testing included putting bar codes on empty pallets and going through the
motions of loading them onto trucks so that any kinks would be worked out
before the distribution center opened for business”.

Lesson #2: Data is King
Fixing data problems became a top priority for the top management of
distribution centers

Lesson #3: Management Oversight Matters
Top management was determined that nothing go wrong
“Wound up with a very high-powered steering committee… we had the CEO
himself involved.”
112
L. Mohan

No End In Sight . . .
Goodyear – November 2003
Chapter 10
Hits $ 100M Bump in the ERP System
What caused a major accounting blowout ?
– SAP installed in 1999 to run core accounting functions
Had to be linked to existing systems for intercompany billing
which handled internal transactions on the purchases of raw
materials made centrally for use in global operations
– Consulting help from PwC and J. D. Power
– Discovered “financial errors”
Need to identify whether “the errors were in the ERP or in the
internal billing systems so that fixes can be made and
accounting procedures improved”
– System Fallout
Had to restate financial results from 1998 to first half of 2003 - >
$ 100M in profits wiped out !
L. Mohan
113

Erp implementation as of january 2013

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