Learning from ERP disasters

Posted on 14 Mar 2012 by The Manufacturer

High-profile ERP disasters are thankfully rare. But that doesn’t mean that they can’t occur - and, what’s more, can’t occur to you.

Choosing an ERP system is a lengthy process¾preparing the specification, drawing up the invitations to tender, evaluating the long list, undertaking reference visits, shortlisting and so on.

And when it’s all complete, and the decision has been made, it’s very tempting to sit back and regard the hard work as having been done.  Which could be an enormous mistake¾not to say a career-limiting one.

Because the simple fact remains that right up until the point at which an ERP system is declared a success, it has the potential to turn into a disaster.  For the simple fact is that when implementing or managing an ERP system, many things can and do go wrong.

In short, contrary to what many people think, a piece of software is not a magical shot in the arm that cures all the ailments a user has. In reality, software that is not deployed or managed correctly way can cause all kinds of different problems.

And size is no exception.  Multimillion-pound software deals can and do easily result in spectacular failures and huge nightmares, as well as in embarrassing and costly lawsuits over botched implementations and intellectual property breaches, threatening the reputation of both vendors and customers alike.

ERP implementations are very complex undertakings that involve new technology, new organisational structures, new policies and procedures, as well as a host of technical conversion and data-cleansing tasks. The reasons why they fail range from lack of user involvement and poor requirement definition to unrealistic time scales for implementation.

All of which have something in common: they could have been easily avoided if the right mechanisms had been put in place.

For actually, unsuccessful implementation often turns out to be largely the result of the failure to prepare companies for the human side of change. Very often organisations regard the implementation of an ERP system as a purely technical issue, when in fact at least half the disasters are caused not by technical problems, but by people and culture related issues.

It is no wonder that these failures have created such a bad reputation to ERP among business executives. This is unfortunate, because ERP has the potential to reduce costs, boost efficiency and increase the growth potential of any company.

ERP sets up electronic information systems throughout an organisation in such a way that it brings together the disparate parts that comprise it. This way ERP software acts as a sort of central nervous system for the whole company, gathering and sharing information about the state and activity of each of its different departments.   And if that sounds like something that it is important to get right, you’re not mistaken.

So here, then, are some of the most notorious ERP disasters¾or at least, the most notorious to date.

Hershey’s. In November 1999, Hershey’s reported a 19% drop in third quarter net earnings and placed part of the blame on “computer problems”. The chocolate bar maker was having problems with its new order-taking and distribution computer system. The problems meant that Hershey was unable to deliver $100 million worth of Kisses and Jolly Ranchers for Halloween that year, and also impacted on its performance through the high margin seasons of Christmas and Easter. In a booming stock market, Hershey shares ended the year 26% down from their year’s high, with 1999 earnings-per-share estimated at $2.04, compared to 1998’s $2.34.

HP. In 2004, HP’s project managers were aware of all of the things that could go wrong with their ERP rollout. However, they just did not plan for all of them to happen at once. Gilles Bouchard, then-CEO of HP’s global operations, said at that time that they have had a series of small problems, none of which would have been difficult to handle individually. But together they created the perfect storm. The project eventually cost HP $160 million in order backlogs and lost revenue, more than five times the project’s estimated cost.

Invacare.  The medical care company Invacare lost $30m as a result of a bungled ERP implementation. When the new system went live in October 2007 there were problems with the order-to-cash process despite it having been tested prior to the system going live. Invacare said the fault lay with its specific set-up rather than faults with the software. The company lost $30m as a result of these problems.

Ansell.  Australian medical giant Ansell needed to update its business processes and consolidate no less than 25 separate legacy systems into a single global platform. All this was aimed at supporting faster growth. The company went with a top-tier ERP system, hired a top-tier systems integrator, and invested heavily in design and implementation. Therefore they did not expect to run into quite as many issues as they eventually had.

The first phase of the rollout, which would primarily impact its North American operations, went live in July 2011 and ran into “systems design and interface issues”, particularly with relation to its largest warehouse. A lot of time and significant resources had to be devoted to enhancing the system’s performance, correcting design problems, stabilising the platform and returning it to normality.

The failure of the ERP system caused lost sales estimated to be between $13 to $15 million, the company incurred extra costs and the global rollout was delayed.

Foxmeyer. In 1996, Foxmeyer was the second largest wholesale drug distributor in theU.S., with sales of over $5 billion dollars in a highly competitive industry. The disaster started with an ambitious project to revamp both its IT systems and its distribution facilities. This involved a new ERP system and a highly automated DC.

The company was estimating huge efficiency gains from the new systems – so much so that it started to bid future contracts based on the expected cost reductions. However, the system was unable to handle orders appropriately.

The automation controls had constant bugs, and Foxmeyer had to deploy hundreds of workers to work around the issues.  The whole thing snowballed between the combined system issues. An order would be partially shipped. The customer would receive a partial order, and call to complain. Unable to see the rest of the order had been shipped on a later truck, the customer service representative would authorize a replacement shipment for products already on their way to the customer. Tens of millions of dollars in unrecoverable shipping errors ensued. In the end the company had to file for bankruptcy and the main operating division of the $5 billion company was sold to its larger rival, McKesson, for only $80 million.

Infamous ERP disasters have also occurred in the UK, like those that affected BBC ten years ago or Newcastle University, whose £8m ERP implementation project over-budgeted by £1m. Royal Doulton suffered delivery delays of up to ten weeks and a sales shortfall of up to £12m. “It was very frustrating,” said at that time the company’s spokesperson Valerie Baynton. The chairman, Hamish Grossart, was more forthcoming: “It’s a cock-up,” he was reported as saying, while he attempted to soothe investors’ worries.

All this proves that the risks involved in implementing and managing an ERP system are very serious. But this should not let us forget that the benefits of ERP are countless, helping organisations achieve better coordination between different sites and departments, increase efficiency and effectiveness, improve customer service and reduce costs.

ERP also helps managers and directors make the right decisions because it provides them with all the information they need to run their company. All an organisation needs to ensure that it reaps all the benefits of ERP is to have clear objectives, choose the right vendor, develop a good implementation strategy and train and engage its staff for the new world of ERP.  All of which is simple in theory¾but, as we’ve seen, challenging in practice.