FoxMeyer which was the fourth largest drug wholesaler in US had a very complex supply chain. The management conducted an analysis on its supply chain and came up with a conclusion that ERP can be used for automation of supply chain components like inventory systems and for managing processes like ordering, inventory, and sales. The company planned for an upgrade of its legacy Unisys system with the ERP system and the project was code named as Project Delta.
The move was expected to streamline operations of the company and improve the efficiency of distribution of prescription drugs by automating the warehouse and upgrading existing systems. The company expected that the new implementation would eliminate needless activities, optimize inventory levels, and make customer service more responsive. With these process improvements, the company forecasted US$40M per year of saving after its implementation with 200% ROI and 6 months payback period.
However, the automation system after going live started to show problems in operations and this resulted into loss of client contract and complete failure of system thereafter. The company hit its bottom in 1996 after the implementation failure of ERP system and filed for bankruptcy citing the failure as the cause.
The cause of failure is attributed to poor planning and implementation by experts. This report would explore the case of this project failure and would investigate the causes of the failure (Myerson, 2014).
Stakeholders of the ERP implementation project included sponsors, application developers, ERP managers, organizational managers, consultants, system users, project manager, project team members, vendor consultants, and vendor analysts (Chetcuti, 2008).
Sponsors: The sponsor was FoxMeyer in this project that had its strategic ownership. As sponsor, the company management should have knowledge about the expected outcome of the project and should be committed to the project. The sponsor has a freedom to set timelines and project goals for implementation. However, decisions must be taken upon evaluating information about proposed system before making a choice. Sponsor is also the final authority for releasing budget (Agarwal, et al., 2004).
Organizational managers: For an ERP implementation to be successful, the organizational managers must have the clear view of the strategy to be used for implementation. They must also understand how organizational changes would impact the individuals working in the organization. A serious attempt to understand technology and its integration with the social system of an organization is necessary. Clarity on the desired project implementation outcome is also necessary to have for these managers if the implementation has to be successful (Al-Shamlan & Al-Mudimigh, 2011).
ERP Managers: An ERP manager must have a clear plan for management of implementation of the project with clear understanding of resource requirements, project objectives, work plan, and project progress monitoring process. An ERP manager would usually get involved in activities like informing teams about changes, establishing delivery timelines, overlooking testing, and conducting project progress reviews.
ERP Consultants: SAP was the ERP consultant for the FoxMeyer ERP project and its responsibility was to provide technical and business expertise, appropriate configuration guidance, and user training. Although, the company employed two consultants but the views from other consultants were largely ignored. The company was told by another consultant who was not the vendor that SAP would not be and appropriate solution but FoxMeyer did not take the view seriously and went ahead with SAP for it had good market reputation (Ala’a Hawari & Richard Heeks, 2010).
System Users: System users are the final users of the system after it is implementation and thus, they are required to be understood from the beginning of the project. They need to be involved sufficiently during the requirement gathering stage, testing stage and must be trained properly so that they are able to manage the system well after implementation of ERP is completed. However, in the current case, only a few users were involved in requirement gathering and the training provided them was also insufficient which resulted into low level of involvement from them as well as low level of commitment and cooperation because of lack of ownership from them (Bansal, 2013).
Application Developers: The application developers were the people from SAP who were involved in the development of the software but not in the implementation process which resulted into a major implementation fault as the implementer were not very familiar with the system intricacies of SAP solution (Baxter & Jack, 2008).
The project management strategy that was used by the company was not clear but the process of implementation did follow a big band approach to development in which the entire project was handled at one go. This approach can be seen as following the lines of the waterfall methodology as it lacked any iterative structure. A deeper investigation can be done on the implementation strategy used by the company if the causes of failure of implementation have to be understood (Bhagwani, 2009).
The strategy used by FoxMeyer was not efficient as the company did not have sufficient product knowledge. It decided to get the best solutions and thus, hired best consulting organizations for two different systems. The decision only considered the implementation side of it and largely ignored the client perspective. The company decided to make use of a big bang implementation and implemented both systems at the same time without giving either sufficient time for testing. A phase ERP implementation approach involving implementation of two solutions in different phases could have been a more secured approach to development. Also, company decided to make use of the solution which was not rigorously tested for managing a USD 1 billion a year contract. It was like aligning of the company strategy with the technology available. However, an effective strategy could have been aligning of technology with the company strategy (Broward County, 2010).
The project history can be explored to understand the major events that made a difference in the ERP implementation project. It begins with the identification of the need for implementation of ERP by the company followed by the justification of choice of approach and the selection of the appropriate solution.
Facing the intense competition in the healthcare space, FoxMeyer decided to implement an ERP and warehouse automation system during early 1990s to streamline its supply chain operations. The company decided to implemented SAP (R/3) ERP solution while warehousing automation system was to be built by Pinnacle Automation.
The SAP implementation was given budget of US$65M which included US$4M of software by SAO US$4.8M client/server computer systems provided by Hewlett Packard
Andersen Consulting was given the responsibility of integrated ERP with the Warehouse automation system in 18 months. The whole project could cover the entire supply chain that included warehouse, inventory, ordering, handling, shipping, marketing, customer service, and information system.
During the same time, company has also placed a US$ 1 billion annual bid for a University HealthCare contract project which further added to the scope of the ERP and automation project because of contractual demands. The system was then required to increase it’s throughout capacity to accommodate for new project with addition of 6 warehouses (Umble, et al., 2003).
The two companies selected for automation and ERP integration were top consultants in USA. Andersen Consulting now called Accenture was a globally recognized IT consulting organization that had employed 15,000 dedicated IT consultants and the company had a long experience of SAP implementation (Ziemba & Ob??k, 2013).
The warehouse automation system was built by 1996 and it was made live. A 340,000-square-foot computerized warehouse was built in Washington Court House, Ohio which used robots for filling orders received from pharmacies and hospitals. The entire system of automation costed the company US$18M.
The company had the plan to implement ERP in 17 old and 6 new warehouses but actual implementation could happen in only new warehouses that could handle only 10,000 transactions per day which was much less as compared to the capacity of older warehouses that were handling 420,000 transactions per day. The new systems started to show data errors and inaccuracy in maintaining sales histories (Yousef, 2010). Warehouse system began to mishandle orders and as a result packaging equipments would break down frequently. The operations became more error prone, time consuming and costly as compared to manual management systems. As a result of frequent system failures, the company lost some parts of the University contract to its competition (Umble, et al., 2003).
Around US$16M of amount was spent by the company only for correcting errors in orders within the first six weeks after the warehouse was opened. Some errors could not even be corrected and the final bill for implementation reached US$100M without receiving any acceptable performance of the system. Robert Peiser was hired as CEO in 1996 who decided to file for protection from the creditors against Federal Bankruptcy laws in August 1996 (Turban, 1999).
The study of the project reveals some planning inconsistencies and faults that had contributed to the failure of the ERP project such as (Shenhar and Aaron , 2008):
Lack of Contingency Planning: There was no contingency planning done by the company for the project and the company lost its major business from the customer PharMor Inc. that was contributing to 15% (Bisson and Christian, 2015) of the company after launching SAP ERP system to its competition (Burns, 2015).
Poor Software selection: SAP R/3 was a system that was made for manufacturing organizations and not for the distributer like FoxMeyer and thus, many requirements of a distributer could not be fulfilled by the software without a major modification in the system. Further, if any such modification was to be done, it would add to the cost of implementation. Despite the investments made for customization, SAP system was still unable to handle the large volume of orders that the company received daily. While actually requirement was to handle 500,000 orders per day, the new system could only handle 10,000 orders which were only 2.4% of what legacy systems were handling earlier (Carton, et al., 2007).
Lack of consideration of consultant’s views: The Company ignored the views of other software consultants one of which from Chicago had suggested that SAP would not be an appropriate choice for their systems. The choice of SAP was merely out of reputation of the consulting organization (Seymour, 2010).
Lack of involvement from end user: The management took a top-down approach to planning the project and thus, the planning process only involved top management, some technical people and Andersen Consulting. There were very few end used who participated in the analyses and designing process. A large communicating gap was observed between the system planners and the end users (Scott, 1998).
The study of the project reveals some implementation mistakes that had contributed to the failure of the ERP project such as (Chen, et al., 2007):
No Business Process Restructuring: Because of no reengineering done on processes, the consultant was unable to fully integrate SAP ERP with FoxMeyer systems. Further, with the new US$5 billion contract taken from University HealthSystem Consortium, the focus of management shifted to materializing on SAP implementation to receive a projected saving of US$40m from strengthening the implementation of SAP. The delivery which was scheduled earlier in 1995 was postponed to add 90 more days for meeting the requirements of the new contract and the reengineering was totally skipped (Chetcuti, 2008).
Insufficient Testing: Testing for some SAP modules was skipped because of the deadline pressures and as a result the shortcoming of the system in handling large number of orders was not discovered (Cesarone and John, 2007).
Lack of Experience and Expertise: The IT staff of the company was unfamiliar with R/3 hardware and software systems and thus, they were unable to manage technical problems they faced which resulted into delays and additional costs (O’Sheedy, 2012).
Personal Interest domination: May SAP users were only interested in gaining knowledge of SAP such that they could gain a better standing in the employment market so they ignored the problems faced and did not report the same to top management (Agarwal, et al., 2004).
Lack of Support from Top Management: An initial support was provided by top management before the implementation started but after the project reached implementation stage, the management was resistant to acknowledge the problems faced by the system. They could not make a true assessment of complexities and risks involved and agreed on early implementation without going through a rigorous testing phase. The management could also not fully understand the need for resources and timelines (Deacom, Inc., 2015).
Lack of training and cooperation from end users: Users were not provided with sufficient training and thus, they could not define their needs and priorities. Workers involved in warehouse operations were scared by implementation as the automation brought in many difficulties. Because of low involvement of users on the project, the users would not feel the sense of ownership and depended on specialists to solve problems they faced with the system without taking any initiatives on their own. The industry was also faced with high number layoffs and workers knew they could anytime be terminated which reduced their morale and thus, they were not very dedicated to the new system (Lieber, 2000).
The project resulted into a complete implementation failure of ERP system that could not handle the order volumes in the warehouses. A critical inquiry in the possible causes of this mishandling and the approaches taken by the company for implementation of ERP can be useful in understanding the cause of this IT project failure (Eval-Source, 2014).
An ERP implementation project needs a high level of involvement from all the people working in an organization and it also needs presence of experts who could understand all the business processes running in the organization such that a business support can be provide to the consultants during implementation. However, in the case of FoxMeyer ERP implementation project, sufficient support was not taken from process managers who could have helped in reengineering of the company which was entirely skipped (Fang & Patrecia, 2005).
Also, after implementation, any complicated system like SAP would require a manual to be prepared to the ease of understanding of users. However, on this project only a standard Accelerated SAP (ASAP) manual was provided to end users and there was no-step by step guidance available for users. The system also lacked user-friendliness and thus, was difficult to understand for users (Bisson and Christian, 2014).
The two systems chosen for implementation was from different vendors despite the fact that SAP itself had both ERP and warehouse automation systems. If both the systems would have been taken from SAP, the integration would have been easier and efficient. With Pinnacle into the picture for providing a warehouse automation solution, the ERP software had to go through a high level of customization which needed reengineering of business processes if the product capabilities were to be fully realized. However, reengineering was skipped (Myerson, 2014).
The project scope is largely affected by the strategy used for implementation which in this case of big-bang which increased the scope of the project thereby also increasing risks (Turk and Wayne, 2010). A phased approach could have been better as the risks could have reduced if the two systems were implemented and tested one by one rather than putting them both together (Garg & Garg, 2014).
One reason that added to difficulties for the company in implementation could also have been a lack of staff who was experienced with ERP implementation projects. Although, the knowledge of ERP consultant can make a huge contribution, the company faced difficulties in adoption by the users because of their unfamiliarity with ERP system implementations. The implementation partner who was to carry out integration was also not very experience with SAP ERP implementations. SAP who was the core ERP provider was not even involved in implementation process which was entirely left to Andersen. Andersen did not receive any support from SAP for implementation which could have been a reason for faulty implementation as Andersen may not be efficient enough to understand all complications and risks that could occur with the SAP system (Graham, 2016).
SAP is a system which is highly customizable for any kind of business process requirement but every modification requires modification on coding and in database and thus, testing plays a very important role in ensuring the new codes work well in a system. However, the company ignored the importance of testing and skipped some modules in the testing procedure. Considering this approach, the project was highly likely to face issues if bugs were not identified (Mazzawi, 2014).
In the case of FoxMeyer ERP project, the implementation was largely misguided and the strategy used for implementation was also not appropriate for the case. Another challenge was that the scope of the project was too wide because of two different systems implementation, their integration and the addition of warehouses that were to be constructed for incorporating the business needs of the new contract company had received during the SAP ERP implementation. High overheads, vague implementation, and inappropriate structure resulted from the complexities involved due to misguided implementation in lieu of huge scope (HAWARI & HEEKS, 2010).
The company was more focused on the implementation of ERP throughout rather than on bring the change in the organization. ERP projects are more about leading an organizational change rather than only building a new system, a principle which was largely ignored by the management of the organization (Kazerooni, 2003).
The project failure can also be seen as an outcome of a mismatch between the objectives of the project and the motivation of different stakeholders of the project as was observed in the stakeholder analysis of the report. Because of this mismatch, wrong implementation strategy was adopted (Bhagwani, 2009).
Conclusion and Reflection
The report presented a critical evaluation of a case of ERP implementation failure in a pharmaceutical distribution company called FoxMeyer. The company wanted to automate its warehouse and streamline its business operations for which it decide to implement two solution including ERP and warehouse automations system and integrate them all for this. The company had taken ERP solution from SAP and warehouse automation system from Pinnacle and then hired Andersen to integrate two systems. However, the integrated system failed to perform after implementation which resulted into a complete failure of the system that lead the company into huge losses such that the company had to be later filed for bankrupts. The report investigated the case deeply to understand the causes of failure of the project.
As reflected from the case, all the three organization including FoxMeyer and the two consultants including SAP and Andersen were at fault. While FoxMeyer focused more on the business benefits to receive from the implementation, Andersen could to manage the implementation properly. SAP on the other side did to provide any support for the implementation. Another fault with FoxMeyer was that it took care of its reputation over the actual requirement and thus, ignored the caveat given by another external consultant on inappropriateness of SAP ERP as a solution for them.
A major drawback with this implementation was the lack of alignment between business processes and the technology which resulted from the ignorance of FoxMeyer that skipped business process reengineering part of the project. Also, the company did not allow for sufficient testing which was anther fault that resulted into failure of identification of bugs that alter caused major issues in the warehouse operations.
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