Background of FoxMeyer Drug Company
Discuss about the FoxMeyer Drug ERP Case Study.
The usage of software has become quite commercialized in the industry to improve the productivity, emphasis on collaboration across the department and higher focus on the critical activities and leaving the non-value adding activities to the software. Generally, organizations have option of choosing the best of breed software for each of the departments like procurement, accounting, Order and quotes management and Human resource and then integrate them. The better option is to implement ERPs that combines all these functionalities in a single integrated business suite however ERP projects are complex projects. Today, IT strategy has to be linked with the business strategy of the organization. In fact, organizations would not be able to optimize their business operations of the IT strategy is not liked to business strategy. The specific questions of the case study can be discussed as:
FoxMeyer drug company case study has been selected for the purpose of analysis of its ERP journey and the key reasons for its failure especially when the SAP was a proven product in the market, Anderson consulting has already delivered many successful projects in the past and FoxMeyer also has a huge budget for its ERP implementation project. FoxMeyer Drug Company was founded in 1903 in Texas. It is a wholesale distributor of pharmaceutical and beauty products. It was also the 4th largest distributor in the 1993 and has revenue of 5 billion USD and its budget for ERP implementation is 1 billion USD that includes everything from licensing and consulting cost to training and infrastructure. Management was expecting to save more than 40 million USD every year by using the new SAP system and able to achieve break even in around 2 years (Mann, Kumar, Kumar & Mann 2017, 147). As the company is growing very fast, its existing mainframe systems were no able to cope with the growing business requirements and its legacy system Unisys system was also phased out by the vendor and needed replacement. Due to all these reasons, company decided to implement SAP R/3 systems to automate its business processes. However, due to large number of issues, it declared bankruptcy in 1996 and was purchased by McKesson Corporation which is among the top 5 companies in US in terms of revenue having 200 billion USD revenue in 2017.
The problem started from the very beginning when inadequate efforts were spent in selecting the product and it was selected solely because of the reputation of the SAP and success cases studies of SAP R/3. However, despite warning by several consultants, company ignored the fact that it is a wholesale distributor company and SAP R/3 has not been implemented for any such company in whole industry in past and it is mainly useful for manufacturing businesses (Haddara 2018, 77). Woltz consulting also advised FoxMeyer that their 18 months of ERP implementation plan is way too aggressive and looks unrealistic (Chua 2009, 32). In spite of so many early warnings, company did not have a robust contingency plan. Also, most of the planning was done by the top management and Anderson consultants ignoring the end users who are the real users of the product. There is no importance given to the communication, training and change management in the organizations which are the critical success factors for any ERP implementation project. ERP projects are mission critical project and a complete different ball game altogether and should be handled with utmost caution due to large number of risks (Vogt 2002, 67).
Selecting the SAP R/3 ERP system
FoxMeyer management also has a wrong expectation from the SAP R/3 product. They are thinking that SAP is like a magic wand and will improve the company capabilities drastically without realizing that technology is just an enabler and real success depends on the ability of the company to design business processes that can provide competitive advantage to them and also aligned with the product. Business people contribution, change management initiatives and end users support are much important than just the capabilities of the SAP R/3.
FoxMeyer drug has selected the SAP R/3 ERP system for the purpose of implementation. SAP R/3 was launched in 1992 officially and one of the top product of 1990s. Most of the fortune companies were using the SAP R/3 ERP. During the same time, there are large number of success as well as failure cases were also come into light about the ERP implementation projects and it was clear that these projects involves a lot of risk and costly also. SAP R/3 was an integrated business suite where ‘R’ stands for real time processing while ”3” refers to 3 tiers structure of client, server and database (Koch & Mitteregger 2016, 91). It was arranged into distinct functional modules designed for the common business functions in any organization like purchasing, HR, order processing, finance. Though it has large number of modules designed for special business requirements, there were only 4 modules that were used most widely due to their application in almost all the industry. They are Production Planning (PP), Sales and Distribution (SD), Materials Management (MM) and Financials and Controlling (FICO).
The right wat to select the ERP product is by conducting detailed analysis internally. Organization has to list their requirements clearly and should have also defined their existing processes (Conteh, Nabie and Jalil Akhtar 2015, 120). The strange part here is that sometime organizations do not have the documented process but organizations must prepare before embarking on their ERP journey. Once the company has identified the As-is process, it can improve the traditional way of doing things and design the To-Be business process. People will often resist but they need to be explained that this change is for making the process more productive and eliminating the non-value adding activities (Chen 2001, 375). Take simple example, currently company is keeping the 10% safety stock for every product however as this also results in stock out for some products while excessive inventory for some other projects. As a result, company want to improve the inventory management and thus design the new process where safety stock will be calculated dynamically and different for all the products based on the product’s earlier sales data (Chaushi et al. 2016, 20).
Issues with FoxMeyer’s ERP implementation
When company has detailed To-be list of all the processes, it can simply go to the vendor and check their product capabilities if it is aligned with their requirements and can select the appropriate product. However, In this case, reputation was the main criteria for selecting the SAP although SAP product have never been implemented for wholesale distribution business.
Apart from this, Phased implementation are generally considered less risky where the organizations can decide that first it will go live with the basic products and gradually add the more modules. However, FoxMeyer do not have any such strategy and instead, they have also combined the implementation of warehouse automation tool called Pinnacle and asked the Anderson consulting to integrate this system with its ERP system (Summer, 2000). Thus, it is clear that this approach involves higher risk and the ignorance of the management and decision makers about the complexity of ERP implementation projects. It is important that organizations should talk to various internal and external stakeholders before making any decisions around ERP implementation. In certain cases, ERP implementation is easy, but organizations find it difficult to manage the change the arise from the implementation of ERP systems (Tarhini, Ali, Hussain Ammar & Takwa Tarhini 2015, 5).
FoxMeyer was too much dependent on Anderson consulting and did not take the enough preparatory steps that it should have taken before the launch of such massive ERP implementation project for example due diligence analysis before buying the product and many more. Apart from this, company had already closed the 3 warehouses and selected the remaining warehouse for automation by the Pinnacle tool. This has reduced the morale of the employees and they were highly insecure about their job. Disgruntled workers dumped a lot merchandise into trucks and also damaged the inventory creating inventory shrinkage. There was no communication by the management about the future plan of company for these employees after implementing an automated warehouse solution (Aloini, Dulmin, & Mininno, 2007).
The scope of the project is quite risky as FoxMeyer also signed a contract to with University Health System Consortium (UHC) and dealing with them requires extraordinary systems to support the unprecedented volume of transactions which were not supported on the HP servers used by the SAP R/3. HP server was capable of handling 10,000 customers per night as against the legacy systems that were capable of handling 420,000 orders. Also, the project is already over ambitious to be completed in an initial timeline of 18 months as warned by various consultants (Chung et al. 2015, 107). On top of that, company has increased the scope by also including the $ 18 million warehouse automation project and integrating it with the SAP systems. Due to this hurried schedule, testing was not given appropriate time and was skipped. Training was altogether ignored and people were unsure of using the new systems. Had proper testing been done, company has proactively figure out the order processing limitation of the new systems (Wong, et al. 2005, 40).
Lessons learned and recommendations
End users were completely ignored by the management and thus end users lacks motivation to contribute for the ERP project and cooperating with Anderson consultants. End users were never communicated about the purpose of the project, their role in the success of the project and how the project will impact them. Company has to ensure their training needs so that they people will be comfortable and company also has to ensure that if any job is rendered useless after ERP implementation, team will be moved to new job and proper training will be provide for the same (Ghosh 2012, 123). Due to this, end users never felt the ownership of the project and project is doomed to failure. Management was ignorant and lose control over the project progress and it was entirely in the territory of Anderson and SAP. It is also possible that though Anderson and SAP were aware about many issues but they are not revealing them as their reputation is also at stake. All these problems and risks were not mitigated in a timely manner and as a result, they have exploded leading to irreversible damages to the company. In general, organizations can also use benchmarking, as an approach, to implement the ERP system. For example, FoxMeyer can learn from the successful ERP implementations of other organizations in the same industry.
The project was a total disaster for the company. Company has realized that it has spent more than 1 billion USD from the beginning and still their requirements are not met and system is not efficient. The reality is the project plan of 18 months is too aggressive and users were never trained to use the new systems (Vaidyanathan, Ganesh & Fox 2017, 18).
As a result of all this, CEO of the company, Thomas Anderson, as well as CFO were asked to resign in February 1996 because the project under them was a fiasco. However, it was too late for the FoxMeyer. These steps could have helped the company if had taken earlier. Also, FoxMeyer was blaming SAP and its consulting partner Anderson for the failure however it was more of a management fault. In 1996, it was acquired by its closes competitor McKesson for the mere 80 million USD (Sumner 2015, 317).
Trustee of the FoxMeyer Drug sued the SAP for the fraud, lack of transparency and negligence, as well as consulting partner, Anderson in 1998 each for 500 million USD each. Though this project has impacted the reputation of SAP and Anderson but not to larger extent because most of the research and key people have blamed the Management at FoxMeyer for the failure and there were numerous consulting companies that provide their assessment before the beginning of the project and whose warning signs have been ignored by the management who is over committed for the project. However, this project has become an important case study and an eye opener for the companies planning to implement ERP as now they want to make sure that the product is suitable for their requirements. In June 2004, the result of the case was that SAP has to pay a settlement amount to FoxMeyer (Staff 2017, 2).
Conclusion
FoxMeyer was in the business of wholesale distribution of pharmaceutical and beauty products and decided to implement the SAP R/3 systems that were primarily designed for manufacturing companies. Despite the warning given by various consultants, Management has chosen SAP due to its reputation and established credibility in the market and ignored the other aspects. At the same time, it choses Anderson consulting as its consulting partner to help the company to implement the ERP. As soon as the project is started, there were large number of challenges faced by the FoxMeyer. On top of that, FoxMeyer has also decided to rush to complete the project in predefined time of 18 months and ignoring the importance of training and testing. It also increased the scope by purchasing warehouse automation software and integrating with its ERP systems. Higher management was though over committed ignored certain basic critical success factors for any ERP implementation project and the project was a complete failure that incurs high cost. FoxMeyer filed for the bankruptcy and sues the SAP and Anderson consulting. In 2004, court ordered SAP to pay a settlement amount to FoxMeyer. Also, FoxMeyer was purchased by its biggest rival in 1996.
References
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