ERP Case Study - Failure case - FoxMeyer Case


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ERP presentation and a case study on reasons on failures of ERP in FoxMeyer case.

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ERP Case Study - Failure case - FoxMeyer Case

  1. 1. Presented By Dhananjay Anumandla Dhruba Chattaraj Mahesh Borgude Shaunak Sontakke
  2. 2. Contents  Introduction – What / Why / When  ERP History and Evolution  Leading ERP Providers  Prerequisites of ERP  Factors that cause an ERP to Fail  Case Study  Lessons Learned  Conclusion
  3. 3. ERP – What is it ??  Enterprise resource planning (ERP) systems integrate internal and external management of information across an entire organization— embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application. ERP facilitates information flow between all business functions inside the organization, and manages connections to outside stakeholders.  Enterprise system software is a multi-billion dollar industry that produces components that support a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past decade. Enterprise systems are complex software packages that offer the potential of integrating data and processes across functions in an enterprise.
  4. 4. ERP – Why is it needed ??  Separate systems were being maintained during 1960/70 for traditional business functions like Sales & Marketing, Finance, Human Resources, Manufacturing, and Supply Chain Management. These systems were often incongruent, hosted in different databases and required batch updates. It was difficult to manage business processes across business functions e.g. procurement to pay and sales to cash functions. ERP system grew to replace the islands of information by integrating these traditional business functions. Successful implementation of an ERP system will have following advantages 1. Business integration and Improved Data Accuracy 2. Planning and MIS 3. Improved Efficiency and Productivity 4. Establishment of Standardized Procedures 5. Flexibility and technology
  5. 5. ERP – When ??  In 1990 Gartner Group first employed the acronym ERP as an extension of material requirements planning (MRP), later manufacturing resource planning and computer- integrated manufacturing. Without supplanting these terms, ERP came to represent a larger whole, reflecting the evolution of application integration beyond manufacturing. Not all ERP packages were developed from a manufacturing core. Vendors variously began with accounting, maintenance, and human resources. By the mid–1990s ERP systems addressed all core functions of an enterprise. Beyond corporations, governments and non–profit organizations also began to use ERP systems.
  6. 6. ERP - History  MRP II (From the 80's& 90’s) includes ALL Manufacturing Resources for "What If" Pro-Active Process Simulations • MRP - (From the 60's& 70’s) includes only Material Planning Projections • ERP (From the 80's& 90’s) includes ALL Business Management Systems, Philosophies and Performance Evaluation at All Levels
  7. 7. ERP System Evolution Course 1970s 1980s 1990s 2000s Market Characteristics Mass Market Market Segments Niche Market Individuals Demand Focus Cost Quality Feasibility Timelines Manufacturing Method Mass production of limited product lines Small-scale production of various product lines Mass production of various product lines Mass production of customized products Structured Centralized Decentralized Centralized Virtual Management System MRP II JIT/TQC ERP + SCM EERP + SCM Management Focus Focuses on sales, production, materials, and financial management, planning and implementation of manufacturing material integration. Focuses on cost, quality, efficiency, and promptness of material supply. Focuses on research and development, sales, production allocation and distribution, service, integration and optimal utilization of internal financial resources. Focuses on a global operating model that combines internal and external customers and manufacturers. Application Tertiary Large area Large area Worldwide Worldwide Operation Cycle Periodic Periodic Periodic / Ad hoc Ad hoc
  8. 8. ERP’s Evolution and Functions
  9. 9. Leading ERP Providers  ERP now………………Extended ERP  Market Share of ERP in 2012 Market Size - 24.5 Billion USD  Growth of 2.2 % over 2011 SAP 25% ORACLE 13 % Sage 6 % INFOR 6 % MICROSOFT 5 %
  10. 10. Factors that cause an ERP to Fail  Employee Resistance  Lack of Top Management Commitment  Inadequate Training and education  Inadequate Requirement Definition  Inadequate Resources  Unrealistic Expectations of Benefits and ROI  Poor ERP package Selection
  11. 11. Factors that cause an ERP to Fail  Extensive Customization  Change Management  User Acceptance  Going Live is not the end of journey  Anticipation of performance dip after live  Failure of accommodating evolution of Business Process  Companies should anticipate a temporary dip in performance after going live
  12. 12. Case Study FoxMeyer Case - A Failure of Large ERP Implementation
  13. 13. Background of FoxMeyer  Business - FoxMeyer was the fifth largest drug wholesaler in the United States (1995) with annual sales of about 5 billion US$ and daily shipments of over 500,000 items. The business of the company was principally in healthcare services.  Distribution - The company had 25 distribution centers located throughout USA. It conducted business mainly through two operating units: FoxMeyer Corp. and Ben Franklin Retail Stores, Inc. The latter was engaged in franchising and wholesaling to the franchised stores; while the former was engaged in the distribution to the individual units and chain stores and in the provision of managed care and information-based services.
  14. 14. What others say about the Failure  According to Christopher Cole, chief operating officer at Pinnacle, the FoxMeyer mess was "not a failure of automation. It was not a failure of commercial software per se. It was a management failure". Perhaps management had unrealistic expectations.  Did management expect technology to be a "magic bullet"? In reality, it was the opposite.  FoxMeyer was driven to bankruptcy in 1996, and the trustee of FoxMeyer announced in 1998 that he is suing SAP, the ERP vendor, as well as Andersen Consulting, its SAP integrator, for $500 million each.
  15. 15. Project -Details  With the goal of using technology to increase efficiency, the Delta III project began in 1993.  FoxMeyer conducted market research and product evaluation and purchased SAP R/3 in December of that year.  FoxMeyer also purchased warehouse-automation from a vendor called Pinnacle, and chose Andersen Consulting to integrate and implement the two systems.  Implementation of the Delta III project took place during 1994 and 1995.
  16. 16. Project Risks  Customer Mandate A definite morale problem among the warehouse employees. This was not surprising, since the project's Pinnacle warehouse automation integrated with SAP R/3 threatened their jobs of FoxMeyer employees. This distrust grew so large that disgruntled workers damaged inventory, and orders were not filled, and mistakes occurred as the new system struggled with the volume of transactions $34 million worth of inventory were lost.
  17. 17. Project Risks Continued….  Risky Scope – FoxMeyer was an early adopter of SAP R/3. After the project began, FoxMeyer signed a large contract to supply University Health System Consortium (UHC). This event exacerbated the need for an unprecedented volume of R/3 transactions. Although, prior to the contract, testing seemed to indicate that R/3 on HP9000 servers would be able to cope with the volume of transactions, in 1994 R/3 could process only 10,000 customer orders per night, compared with 420,000 under FoxMeyer's original mainframe system
  18. 18. Project Risks Continued….  Execution - of the project was an issue due to the shortage of skilled and knowledgeable personnel. FoxMeyer did not have the necessary skills in-house and was relying on Andersen Consulting to implement R/3 and integrate the ERP with an automated warehouse system from Pinnacle. Although at the height of the project there were over 50 consultants at FoxMeyer, many of them were inexperienced and turnover was high.
  19. 19. Project Risks Continued….  Environment - FoxMeyer must have realized the project was in trouble, its perceived dependence on consultants and vendors prevented it from seeing how it could gain control. Since FoxMeyer was competing on price, it needed a high volume of transactions to be profitable. Yet with the UHC contract "the focus of the project dramatically changed", contributing to rising project costs (eventually over $100 million), lowering FoxMeyer's already narrow margins and erasing the profitability.
  20. 20. Factors Responsible The failure of the ERP can be viewed from two perspectives:  Planning  Implementation
  21. 21. Factors Responsible - Planning  Poor selection of the Software -SAP R/3 was originally designed for manufacturing companies and not for wholesalers, especially those doing large number of transactions. R/3 has never been used by a distributor until that time. It lacked many requirements needed for successful wholesale distribution.  No consideration of other consultants’ advice— FoxMeyer did not listen to other consultants’ advice in the early stage of the project, A Chicago-based consultant firm warned FoxMeyer that SAP would not be able to deliver what FoxMeyer needed. FoxMeyer selected SAP mainly because of its reputation.  Lack of contingency planning—there was no contingency planning to deal with changes in the business operations. For example, a major customer, Phar- Mor Inc. that accounted for more than 15% of FoxMeyer’s business, declared bankruptcy shortly after FoxMeyer’s launched SAP. Much of the Phar-Mor business was gone to competitors.  No end user involvement—The project was done using a top-down approach.
  22. 22. Factors Responsible - Implementation  No restructuring of the business process was done—SAP was not fully integrated because FoxMeyer was incapable of reengineering their business processes in order to make the software more efficient.  Insufficient Testing—Due to the rushed schedule, some modules testing was skipped. Besides, the system was not properly tested to identify its shortcoming in handling large amounts of orders. There was inadequate testing and insufficient time to debug the system to ensure its functionality.  Over-ambitious project scope— the project team members and information system staff were unfamiliar with the R/3 hardware, systems software and application software. The project scope was enlarged with simultaneous implementation of a $18m computerized warehouse project.  Dominance of IT specialists’ personal interest—since the project was new for the wholesaling industry, the IT specialists wanted to learn the system and secure their employment in the SAP technology business. They placed their personal interest of getting experience in SAP implementation over the company’s interest in getting suitable software technology.
  23. 23. Factors Responsible - Implementation  Poor Management support—initially management were supportive and committed to the project. However, once the implementation started, management was reluctant to acknowledge the system problems. Management failed to understand the complexity and risks in the process and agreed to have 90 days early implementation although the system was not fully tested. Management failed to recognize the timelines and resources required in the implementation process.  Lack of end-user cooperation—the user requirements were not fully addressed and there was no training for end users. Employees had no chance to express their priorities and business needs. Workers especially at the warehouses were threatened by the implementation. The automated warehouse created many problems. Employee morale was low because of the layoffs. They knew their jobs were soon to be eliminated. As the end users were not fully involved, they felt they didn’t have the ownership for the project and did not work closely with the IT specialists to solve problems.
  24. 24. Other Factors  Social Factors - It is likely that Andersen Consulting and SAP needed to externally justify the Delta project. They probably did not consider de- escalating the project since abandonment would not be good publicity. Moreover their "norms for consistency" were such that perseverance with project problems usually paid off for them.  Organizational Factors - Both FoxMeyer's CEO and CIO were strong advocates of the project. However in February 1996, Thomas Anderson, FoxMeyer Health's president and CEO (and champion of the company's integration/warehouse-automation projects) was asked to resign due to delays in the new warehouse and realizing the SAP system's projected savings. A change in management is often needed for de-escalation. But it was too late for FoxMeyer.
  25. 25. Impacts of ERP Failure  Less Production  Thomas Anderson, FoxMeyer Health's president and CEO was asked to resign due to delays in the new warehouse and realizing the SAP system's projected savings.  FoxMeyer was driven to bankruptcy in 1996, and the trustee of FoxMeyer announced in 1998 that he is suing SAP, the ERP vendor, as well as Andersen Consulting, its SAP integrator, for $500 million each (Caldwell 1998, Stein 1998).
  26. 26. Lessons Learned: Planning  Software Selection:  Project steering committee should have a high level of technical and operational expertise in software selection process  Contingency Plan:  Develop contingency plan of how to survive in case of system failure  Stipulate clearly the roll back procedures in case of deploying any new system  Stakeholder’s Involvement:  An ERP project should get involvement of all stakeholders, including the end users and customers  All stakeholders should understand the goals and expectations of the project and needs to be encouraged to voice-up their opinion  Impact analysis should be done to determine the nature and extent to which different units will be affected.
  27. 27. Lessons Learned : Implementation  Inclusion of the necessary business process reengineering  ERP cannot be expected to improve profits without the prior accomplishment of improved supply chain planning systems, enterprise optimization systems, customer relations management, transportation and logistics management and warehouse management  ERP installation is not the end process;  Thorough testing  Develop an organized comprehensive testing plan, encourage user participation in the testing, and make sure adequate testing scenarios are conducted to the new system.  Realistic project scope  Scope should be clearly identified with realistic time targets.  Close Monitoring of project status  Top management and the implementation team should have a close communication with the software vendor, consulting firms and IT people, ensuring that the project progress is running on the right track, and the project goals are continuously adhered to.  Seek end user support  Employees should be well trained in software.  Identify the change agents and create a high morale to meet the new challenges.  Post implementation review  Develop quality assurance and control programs to ensure system checks are in place.  Develop business metrics to measure project’s intended benefits versus what has actually been achieved,
  28. 28. Conclusion  Is this an extreme case? Clearly. Is this unusual? Sadly, no. • Implementations of ERP systems are struggling throughout the world. • They take too long, cost too much and fail to deliver the promised benefits of competitive advantage and cost reduction. • Despite high investment required to implement ERP systems, statistics show that more than 70 percent of ERP implementations, whether self-created or designed by established ERP software vendors, fail to achieve their corporate goals.
  29. 29. Conclusion .. continued  In a landmark study, the Standish Group, a market research company specializing in software and electronic commerce, looked at implementations in companies with more than $500 million in revenues. The study found that the average cost overrun was 178 percent; the average schedule overrun was 230 percent of original expectations, and the average slide in functional improvements was an astonishing 59 percent deficit.
  30. 30. Thank You……………