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  1. 1. The FoxMeyer Drugs' Bankruptcy<br />Was it a Failure of ERP?<br />Presented by:-<br />AshishRaj Makkar<br />Jaspreet Singh<br />AanchalGhai<br />Chandan Gupta<br />
  2. 2. Flow of presentation<br />Introduction<br />Role in Supply Chain<br />Competition<br />FoxMeyer Process<br />New Business Strategy<br />New System<br />Project Risks<br />Project Escalation<br />Steps taken<br />The two perspectives<br />Recipe for Failure<br />What could have been done?<br />Sold to<br />Words of wisdom<br />
  3. 3. Introduction<br />Fox-Vliet Drug Company, a drug distributor based in Wichita, Kansas, that had first opened its doors in 1903.<br />With purchasing of Meyer Brothers Drug Company based at Missouri, St. Louis, the company completed a major acquisition in July 1981<br />FoxMeyer Drugs<br />
  4. 4. It conducted business mainly through two operating units:<br />FoxMeyer Corp. <br />Ben Franklin Retail Stores Incorporated<br />
  5. 5. Role in Supply Chain<br />
  7. 7. Due to the intense competition, FoxMeyer was in a great need of a solution that would have helped it to make a complex supply chain decisions and meet the increased cost pressure.<br />
  8. 8. FoxMeyer Process<br />
  9. 9. Business Strategy<br />
  10. 10. Need of hour<br />Needed new distribution processes & IS to capitalize on growth<br />Wanted to be able to undercut competitors<br />Replacing aging IS key<br />
  11. 11. Project Risks <br />Internal Customer Mandate<br />Scope of Project<br />Execution of Project<br />Environment<br />
  12. 12. Given the high level of risk, why did FoxMeyer initiate the project? <br />Furthermore, why was the project allowed to escalate to the extent of contributing to FoxMeyer's bankruptcy? <br />
  13. 13. Project Escalation <br />Various factors:<br />Project factors<br />Psychological factors<br />Social factors<br /> Organizational factors<br />
  14. 14. Project Escalation <br />Various factors:<br />Project factors<br />They hoped to save $40 million annually<br /><ul><li>complete ERP installation
  15. 15. (estimated cost $65 million)
  16. 16. Warehouse Automation System
  17. 17. (another $18 million)</li></li></ul><li>Project Escalation <br />Various factors:<br />Psychological factors<br />Andersen and SAP were the then market leader in their respective businesses<br />Upper management was in full drive to implement<br />
  18. 18. Project Escalation <br />Various factors:<br />Social factors<br />De-escalating the project was not considered since abandonment would not be good publicity.<br />
  19. 19. Project Escalation <br />Various factors:<br /> Organizational factors<br />FoxMeyer's CEO and CIO were strong advocates of the project<br />
  20. 20. Steps taken in 1992<br />FoxMeyer selected both, a top consultant and the most widely used software to assure successful implementation.<br /><ul><li>Purchased ERP software from SAP-SAP (R/3)
  21. 21. Hired Pinnacle Automation for warehouse automation system
  22. 22. Hired Arthur Andersen Consulting Company to implement SAP</li></li></ul><li>Implications<br />There are high risks involved when adopting new technologies, especially in a unique situation that vendors cannot adequately test prior to actual use. On the other hand, customers should be aware of the risks and be compensated with discounts or other incentives for early adoption. FoxMeyer should have realized the risk in adopting R/3 in its early years and negotiated with the consultants to share the project risks by tying their compensation to project results. The contract with the consultants should have specified experienced personnel by name and no billing for "rookies". Also, FoxMeyer should have made an effort to become less dependent on the consultants. For example, knowledge transfer should have been written into the consulting contract. FoxMeyer needed to ensure that project knowledge was transferred to them from the consultants so that they could develop in-house skills for maintenance of the system after the consultants had left. <br />In hindsight, it is obvious that FoxMeyer should not have "bet the company" (Cafasso 1994) and should have de-escalated the project. To do that, it could have reduced the scope of the project (Montealegre and Keil 1998) perhaps foregoing the UHC contract, or postponing it to a later phase in the project. A phased implementation would have been less risky and would have given the implementation team a chance to test transaction throughput more thoroughly. The pre-implementation testing was inadequate, partly because the UHC contract was added afterwards. Also, if FoxMeyer had not reduced their prices as much, then they would not have been as dependent on such a high volume of transactions. In other words, FoxMeyer should have reengineered its business practices to be compatible with the capabilities of the technology at that time. Using just one vendor in the first phase would have reduced the risks and complexity of the project. The warehouse automation multiplied the project risk and interactions between R/3 and Pinnacle's automation took FoxMeyer into uncharted waters. Control of the project scope, costs and progress should have been tighter. An objective audit of the project progress might have saved FoxMeyer. Finally, FoxMeyer should have avoided the morale problem in the warehouses by training the employees, helping them develop new skills, putting some of them on the implementation team and using other change management techniques. <br />Although a lack of management commitment can result in project failure, management over-commitment can be even more disastrous. It can cause errors in judgment and lead to project escalation. Overall, the expected payoff from the Delta III project was probably overestimated, given that benefits are often intangible. But regardless of expectations, for FoxMeyer it was not worth taking the risks it did. In conclusion, FoxMeyer's experiences provide valuable lessons on how to avoid ERP failure. <br />
  23. 23. The failure of the ERP can be viewed from two perspectives:<br />Planning<br />Poor selection of the Software<br />No consideration of other consultants’ advice(Woltz)<br />Lack of contingency planning<br />No end user involvement(Top down approach)<br />
  24. 24. The failure of the ERP can be viewed from two perspectives:<br />Implementation<br />No restructuring of the business process was done<br />Insufficient testing<br />Over-ambitious project scope<br />Dominance of IT specialists’ personal interest<br />Lack of end-user cooperation(Threatened & damaged warehouse)<br />
  25. 25. Recipe for failure<br />Not having proper change management policies and procedures, is a recipe for failure<br />Going for consultants without prior experience or ERP solutions in which you are the only company within your industry, could be a recipe for failure<br />Not having a clear end-user training program to transfer skills to employees, is a recipe for failure<br />Having the management over- committed (excessively ambitious, prompting unrealistic deadlines), is recipe for failure<br />Internal resistance to changing the 'old' processes, is a recipe for failure<br />The client does not properly address and plan for the expenses involved, is a recipe for failure<br />The management is not controlling the scope of the project especially when you expect the consultant to provide a magic bullet, is a recipe for failure<br />
  26. 26. What could have been done?<br />
  27. 27. Planning<br />(1) Software selection<br />They should compare different softwares, evaluate their pros and cons and identify the one which best fit the business needs. <br />It may be advisable to seek the advice one or more consultants. <br />(2) Contingency plan<br />Develop contingency plan of how to survive in case of system failures.<br />(3) Stakeholders’ involvement<br />An ERP project should get the involvement of all stakeholders, including end users and customers of the company. <br />
  28. 28. Implementation<br />Inclusion of the necessary business process reengineering<br />ERP is not magic bullet <br />improved supply chain planning systems, enterprise optimization systems, customer relations management, transportation and logistics management and warehouse management.<br />(2) Thorough testing It should be done in Phased manner<br />(3) Realistic project scope<br />Project scope should be clearly identified with realistic time targets. Critical milestones should be set. If necessary, implementation can be piloted in a certain section or rolled out in phases.<br />(4) Close monitoring of project status – Not to be totally relied on the Anderson<br />(5) Seek end user support<br />All employees should be well-trained in the new software. Address to the concerns create a high morale to meet the new challenges. <br />(6) Post implementation—<br />Technology transfer to the internal talent in case of troubleshooting.<br />
  29. 29. Sold to McKesson<br />McKesson paid approximately $ 1.3 Billion<br />$23 million in cash to the debtor, <br />Paid off about $500 million in secured debt and <br />Additional $75 million in other liabilities<br />Inventories & Assets of approximately $650 million<br />
  30. 30. Who is Arthur Anderson Consulting now<br />