Sap FoxMeyer Drug Lawsuit


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One thing no one disagrees on is that FoxMeyer Drug crashed and burned. Once a $5 billion
company, FoxMeyer filed under Chapter 11 shortly after taking a $34 million charge to cover
uncollectible costs related to shipping and inventory troubles.

The reason for FoxMeyer's collapse, though, remains a subject of debate. A FoxMeyer
spokesperson told The Wall Street Journal in late 1996 that computer-integration problems
related to the company's IT effort-whose total price tag ultimately topped $100 millionwere "a
significant factor leading to the bankruptcy filing."

In 1998 the trustee in bankruptcy for FoxMeyer sued SAP for $500 million . . . in 2004 SAP paid a specified amount to settle the case.

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Sap FoxMeyer Drug Lawsuit

  1. 1. 1 Reading: “FOXMEYER'S PROJECT WAS A DISASTER. WAS THE COMPANY TOO AGGRESSIVE OR WAS IT MISLED?” 1. Risk Events: Record each risk event which occurred in the project and which prevented project success. You should have 7 – 10 risk events (failures). 2. What is the Probability and Impact of each of these Risk Events. 3. What Risk Mitigation Strategies do you recommend to minimize these risks? DON'T KNOW WHETHER THE DEficiencies resulted from the fact that the systems just didn't work or from the fact that there was poor implementation," says Bart A. Brown Jr., a Wilmington, Del.-based bankruptcy trustee appointed to oversee the case of FoxMeyer Drug Co., Carrollton, Tex. But if even 20% of what he has read of the situation in previous media accounts is true, Brown says, "then it sounds like there is a claim there." Then the nation's fourth largest distributor of pharmaceuticals to both druggists and hospitals, FoxMeyer in the early '90s bet its future on a massive enterprise-wide software and warehouse- automation project and lost. In August 1996 the company filed for protection under Chapter 11 of the federal bankruptcy code. The bankruptcy court must decide whether FoxMeyer-which expected to save $40 million annually from a massive overhaul of its computer systems that were designed to serve a rapidly expanding customer base-was misled by any of the software companies and systems integrators it dealt with. They are: SAP AG, Walldorf, Germany, which supplied enterprise-wide financial and logistics software; Andersen Consulting, which provided implementation expertise through an on-site team that at one point numbered about 50 people; and Pinnacle Automation Inc., St. Louis, which through its operating subsidiaries supplied conveyors, carousels, and a warehouse-management system for FoxMeyer's distribution center in Washington Court House, Ohio. FoxMeyer executives complained to the bankruptcy trustee earlier this year that the technology vendors had oversold their capabilities during the sales process. Bankruptcy trustee Brown expects to decide by year-end whether his office will pursue legal action against the vendors on behalf of FoxMeyer or to allow the right to make a legal claim to revert to Avatex Group of Dallas, the new name of FoxMeyer Health Corp., the parent firm of FoxMeyer Drug. One thing no one disagrees on is that FoxMeyer Drug crashed and burned. Once a $5 billion company, FoxMeyer filed under Chapter 11 shortly after taking a $34 million charge to cover uncollectible costs related to shipping and inventory troubles. The reason for FoxMeyer's collapse, though, remains a subject of debate. A FoxMeyer spokesperson told The Wall Street Journal in late 1996 that computer-integration problems related to the company's IT effort-whose total price tag ultimately topped $100 millionwere "a significant factor leading to the bankruptcy filing." While executives at Avatex declined comment, some technology experts who were on the scene agreed to be interviewed for this article. Christopher Cole, chief operating officer at warehouse-automation vendor Pinnacle, says the FoxMeyer mess was "not a failure of automation. It was not a failure of commercial software per se. It was a management failure."
  2. 2. 2 T0 UNDERSTAND WHAT HAPpened at FoxMeyer, it's best to start with the company's business strategy and plans for technology to support it. FoxMeyer was afraid its customer orders-involving some 300,000 items daily, according to one person who worked on the technology overhaul-would soon outgrow the capacity of its aging Unisys mainframe. To gear up to handle continued growth in the business, the company embarked upon a search for a client/serverbased system that would enable it to relieve the stress on this system while keeping up with anticipated growth in business volume. A key concern that the FoxMeyer project team had to address early on was the system's ability to handle the sheer magnitude of FoxMeyer's business. FoxMeyer was taking and filling orders from thousands of pharmacies and hospitals each day. Because each pharmacy could order hundreds of items at once, it was common for the company to process hundreds of thousands of transactions daily. To make sure the new systems were up to handling that volume, SAP's software was tested on client/server hardware supplied by both Digital Equipment Corp., Maynard, Mass., and Hewlett- Packard Co. (HP), San Jose, the latter of which ultimately was selected. "But there are a lot of variables in doing benchmarking and volume testing," says Kenneth Woltz, president of Woltz & Associates Ltd., Chicago-based consultants, "and I believe that just increased the risk. I would hate to guess how many HP systems they had coupled together and what changes had to be made to the Oracle database to process their huge volume." Woltz, who advised FoxMeyer during the early stages of the project, contends that the implementation appeared troubled almost from the start. "Andersen had been selected as the SAP partner," he recalls. "And I remember a meeting where a presentation was being made that laid out a schedule for the entire implementation to be completed in 18 months." Woltz says he challenged that goal as totally unrealistic. "Many IT personnel put forth these master schedules where each of the modules is to be implemented in two to three months," he explains, "but I've never seen that happen in reality in a large, complex organization." A successful implementation of a new general-ledger accounting system sometimes takes up to a year by itself, Woltz argued. He believed FoxMeyer lacked available users on staff with the sophistication to handle a fast-track installation. "My position was, 'Go slower.' Competition was tough in this industry, but many companies underestimate how long it takes to implement changes in core business processes," he says. Andersen's role, Woltz says, was to install SAP. "They put together the master schedule for implementing SAP financials and logistics modules," he adds. Comments an Andersen spokesperson, "We delivered, the work we performed was successfully completed, and we were paid in full." SAP officials agree that volume was an issue at FoxMeyer and continues to be a source of some concern at McKesson Corp., San Francisco, which bought FoxMeyer Drug's assets in October 1996. (The value of potential claims against SAP, Andersen, and Pinnacle were excluded from this transaction.)
  3. 3. 3 However, Robert Pawlick, who served as project manager for SAP America Inc. at the FoxMeyer site, says that thanks to the test runs conducted at FoxMeyer, "there was some measurement evidence that these systems could perform at that level." SAP's functionality came under close scrutiny as well. At that time, SAP was regarded more as a supplier of accounting and manufacturing software than a developer of systems with extensive functionality for warehouse management. So FoxMeyer elected to go with a warehouse system from McHugh Software International (formerly McHugh-Freeman), which it purchased through Pinnacle. SAP, though, thinks it could have provided both systems. "Part of our claim to fame is that we have an excellent salesand-distribution set of functionality," says Peter Dunning, SAP America's executive vice president for global accounts. aI think the slight wrinkle [at FoxMeyer] was that they were in more of a high-volume, complex-pricing environment." As a result, "There were certainly some differences that they wanted in the software." SAP solved them without holding up any software-implementation deadlines, he says. Regardless, the decision to go with two different vendors for two of the company's most important business systems added still greater complexity to an already challenging situation. "Now you had two major packages that needed to be integrated," Woltz asserts, "and that is a tough [job], in part because it is difficult to get two diverse vendors' knowledge of the nitty-gritty of their products in order to design a real-time integration. Despite the difficulty in assessing the internals of application packages, we did get into enough depth to know that there were many functional holes." A SIGNIFICANT CHANGE IN FOXMEYER'S BUSINESS added to the problems. In July 1994 the company won a contract to supply University HealthSystem Consortium (UHC), a nationwide network of major teaching hospitals, in a deal that was expected to yield up to $1 billion in revenues annually for five years. Once this pact was signed, recalls Pawlick, who now is SAP America's global support manager, "the focus of the project dramatically changed from giving them headroom on their current mainframe system, which had been one of FoxMeyer's driving factors, to satisfying the needs of the University HealthSystem Consortium." Prior to this contract, explains SAP's Dunning, FoxMeyer had planned to have a small amount of capacity left on the Unisys platform once the SAP implementation was complete. "But with this new contract," he says, "their volumes would severely increase, and they ran out of capacity on their mainframe." The throughput capacity of the SAP project had to be increased, Dunning says. SAP claims to have met such technical challenges in a manner that FoxMeyer found satisfactory. "In fact, FoxMeyer was a selective, but very good reference for SAP," Pawlick maintains. Adds Dunning, "McKesson reinforced the work we had done at FoxMeyer." Shortly after purchasing FoxMeyer's assets, he explains, McKesson, planning an SAP implementation of its own, examined the FoxMeyer installation and was so impressed that it decided not only to keep the equipment, but also to speed up its own project. "They had SAP fully installed," says Buzz
  4. 4. 4 Adams, senior vice president for process improvement at McKesson. "McKesson has learned some useful lessons from FoxMeyer." McKesson was fortunate to avoid the corporate migraines that accompanied the troubled start- up of FoxMeyer's Washington Court House distribution facility. "I don't think some of the things were thought through well enough," says Pinnacle's Cole, regarding this portion of the installation. (His company supplied hardware that FoxMeyer and Andersen integrated into a 340,000-sq-ft warehouse designed to service hospitals and pharmacies unrelated to the UHC contract.) "As an example, we were told to design a system that could ship in X number of hours, and we designed a system that could do that. Then later, it became a requirement that they be able to ship in one-third to one-half that time." By the same token, he says, "I remember there being an enormous issue on balancing system traffic." While FoxMeyer initially counted on a typical shipment or package to make three or four stops along its automated route within the warehouse, in reality, this figure could wind up at eight or nine, a condition that sometimes caused conveyors to gridlock. But Cole contends that "the problem wasn't that the conveyor shut down; it was that the way they were running orders through there was such that they were gridlocking the system." Pinnacle does accept responsibility for problems such as the occasional motherboard failure, although Cole states that such glitches were "never the pacing issue." Rather, he says that the inhouse Unisys-based managementinformation system under which FoxMeyer was trying to run the new equipment "choked and died." For example, he reports that between the existing system and the new SAP implementation, "they had an enormous amount of trouble feeding us the information we needed on a timely basis." Nor did the facility debut on time. Slated to open in May 1995, the warehouse began shipping goods that August, and even that date was one FoxMeyer had difficulty meeting as a result of labor problems. Workers from other Ohio warehouses that the Washington Court House center was supposed to replace already had begun leaving their jobs en masse. "The transition from closing old warehouses did not go smoothly," Cole recalls. Equipment outages resulted in the shipping of numerous half-finished orders. Then, when customers would complain about missing items, FoxMeyer representatives, unaware of what was happening on the warehouse floor, would authorize makeup shipments that turned out to be duplicates but were never reported as such by recipients. FOXMEYER ALSO SUFFERED LOSSES IN TRANSFERRING INventory to the new center. Because of a debilitating morale problem among departing workers, Cole explains, a lot of merchandise was dumped into trucks and arrived at Washington Court House with packages damaged or broken open or otherwise unsalable as new product. "That led to a huge shrinkage in inventory," Cole states. "As an outsider looking at it, I would imagine that they lost a lot there, as well as with the problems of their own internal computer system." Meanwhile, FoxMeyer was faring poorly elsewhere in its business. The UHC contract, which initially had helped boost the distributor's stock value, ultimately delivered neither the volumes nor the profit margins expected. "FoxMeyer was the price cutter in the industry," says Adam Feinstein, a research associate who follows the drug and medical-supply wholesale industry for Salomon Brothers in New York. That factor, combined with the information-system and warehouse-management initiative, pushed the
  5. 5. 5 company over the edge, he says. "They spent a lot of money and tried to put together a progressive management-information system," he says, "but they overspent and bit off more than they could chew." Woltz offers a somewhat similar assessment. "Most companies would be wise to sell what they can currently deliver, perhaps with modest enhancements required to close the deal, but certainly not commit to a fast-track schedule on a technology implementation that has not been proven," he asserts. As for the system's anticipated savings, Dunning says the $40 million figure FoxMeyer executives liked to use didn't come from SAP. "We generally don't do calculated savings to that extent, especially when it involves a lot of software that's not ours." Dunning sums up SAP's involvement in the FoxMeyer fiasco this way: "It's one of those stories where the operation was a success, and the patient died." Trying to win market share by price-cutting based on anticipated savings from new computer systems proved not to be a smart strategy. "If you put in new systems hoping [that] will give you efficiencies, without improving your overall processes, it rarely works," says McKesson's Adams. Source: Jesitus, John, “Broken promises?” Industry Week, v. 246, n. 20, Nov 3, 1997, p.31-36. Copyright: Copyright Penton Publishing, 1997.