The Hidden Cost of a Poor SCM Systems Implementation

Friday, April 5, 2024
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The Hidden Cost of a Poor SCM Systems Implementation

Organizations implementing a new SCM system typically look forward to improved operations, lower costs, better user experience, and other tangible benefits. However, all too often, a poor implementation results in business disruption that can have enormous costs. Here are a few examples of well-known failures that resulted from poor systems implementations:

  • Haribo is a candy company best known for its gummy bears. In 2018, the company began transitioning to a new system across 16 manufacturing plants in 10 countries. The short-term result was exceedingly costly. Due to issues with the inventory and logistics systems, there were delays in shipping candy to Haribo's grocery store customers, resulting in a 25% decline in sales for the year. There were reports that some retailers were entirely out of stock of Haribo products for days while waiting for replenishment. While Haribo said they expected some delays and disruptions, problems to this extent were unexpected.  
  • One of the most popular case studies cited when looking at SCM implementation failures is Hershey's ERP implementation in 1999. It is estimated that inventory management and planning failures cost Hershey over 100 million dollars in lost sales due to their inability to fulfill customer orders during the busy Halloween season.
  • Linl is one of Germany's largest grocery store chains, with over 10,000 stores and roughly 150 distribution centers. In 2011, the company announced that it was replacing its homegrown system with a modern packaged ERP. Over the next seven years, the company spent roughly half a billion Euros acquiring and implementing that system. By 2018, the company's CEO pulled the plug on the entire project, stating that "the originally defined strategic goals cannot be achieved with reasonable effort."

Here are some key lessons that can be learned from these failures:

  • Understand your business requirements:  The Lindl implementation is a classic example. There was a significant gap in the inventory management business practices between Linl's existing custom system and the new packaged application. Linl felt that moving to the standard functionality would cause them to lose competitive advantage. Therefore, rather than changing their business processes, they worked to make massive customizations to the delivered logic, resulting in a system that did not work as expected and was not fully supported by the software vendor. In the words of one implementation team member, they were not facing a "requirements gap" but a "requirements chasm." Suppose your organization has specific business practices not supported by a packaged application. In that case, it may be best to modify those business practices or look for a different package.
  • There is no such thing as too much testing:  In both the Haribo and Hershey cases, there were system failures that could have been caught and remedied during a full User Acceptance Test, but both projects skimped on the project's testing phase. In the case of Hershey, a decision was made to have the system live before the busy season leading to Halloween. As a result, when the project started slipping, rather than rescheduling, a decision was made to compress the later project phases. When the system errors were realized, it was too late to recover in time for the busy season. In Haribo's case, the testing phase was also less robust than it should have been, but the reasons for this are less apparent.
  • There is no such thing as too much training:  This is another thing that impacted the Hershey project when the latter phases were compressed. End-user training needed to be improved for the users to fully understand how to use the new system and how to handle errors or unexpected outcomes. The fact that the system went live during the busiest time of the year exacerbated this problem. As a result, users were unprepared to do their jobs on a daily basis and were unable to meet their deadlines to get orders entered and shipped.
  • Executive Sponsorship is critical:  In order for a complex project to be brought to a successful conclusion, the entire team must be focused and have the support of senior management. If management doesn't give the team the time and resources necessary and is unwilling to invest the energy to ensure that everyone is properly working together toward a common goal, the project is likely doomed to failure. The Linl case study exemplifies how a lack of Sponsorship at the senior management level can help lead to project failure. After the new ERP project was started in 2011, Karl-Heinz Holland was replaced as CEO by Sven Seidel. The company cited "unbridgeable" differences between Holland and the Board of Directors over the company's future strategy. In early 2017, as the new ERP system was continuing its slow rollout, Seidel stepped down from his position. A few months later, the CIO also left. In 2018, Seidel's replacement pulled the plug on the project. Anecdotal evidence indicates that the new CIO and CEO had the mindset of "well, that was my predecessor's project" and no longer had the support it needed. This contributed to the downward spiral that finally made it apparent that the project was doomed to failure.
  • Have the right System Integrator and take their advice:  Failed SCM and ERP projects are often blamed on the software vendors. This was at least partially the case in all three of these examples. However, it can be hard to reconcile how these companies failed when other similar companies had successfully adopted the same software successfully. Most large implementations are carried out by 3rd party system integrators rather than by the software vendors themselves. Software vendors generally are good at ensuring that their certified partners have the needed product knowledge. Still, they need to be more diligent about ensuring they have appropriate industry knowledge and a solid implementation methodology. For example, a company may have a certification from Oracle or SAP, but that doesn't necessarily mean that they have the industry expertise that may be needed for a successful SCM implementation. In the examples given here, it may not be that the system integrators were not sufficiently skilled, but that the companies did not take their advice, particularly in regard to their desires to compress timelines and reduce costs.  

Risk Mitigation: 

  • It is completely unrealistic to assume that any new system will perform flawlessly on Day One. Indeed, that is the goal, but it is rarely achieved. Having a risk mitigation plan containing contingencies for potential failures and issues after going live can go a long way in avoiding catastrophic system failures such as those noted here.

A few things could be more disruptive to a product-centric organization than a large SCM system failure. This doesn't mean that companies shouldn't try to improve themselves with new systems, but appropriate project planning and execution are an absolute requirement to successfully implement those systems. Failure to properly plan and execute can cost the organization far more than the original budget of any systems implementation.  

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