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Clorox Brightens Its IT with SAP

By Larry Dignan  |  Posted 2003-08-08 Print this article Print

The consumer-products giant is in the middle of an SAP implementation it hopes will help save $250 million annually.

When Gerald E. Johnston was promoted from chief operating officer to chief executive of Clorox, he deemed the installation of SAP software one of his "personal priorities."

That SAP rollout is a big chunk of the company's "Project Delta," an effort to save $250 million a year by 2005, partially through an information system overhaul. Also involved: software from Siebel Systems to manage and track Clorox's marketing promotions with retailers. Siebel connects to Clorox's SAP R/3 system, which handles such tasks as accounts payable, accounts receivable and inventory management.

The goal is to cut costs by reducing redundant products, streamline operations and enable better decision-making.

Clorox, maker of bleach, Glad storage bags and Kingsford charcoal, is aiming to boost its bottom line and grow sales. After a rainy spring, the company lowered Wall Street expectations of its sales and profits.

Now it's up to Johnston to impress Wall Street, deliver the savings and create future products that will enable the $4 billion company to take on rivals such as Colgate-Palmolive, S.C. Johnson and Procter & Gamble.

"Project Delta is a real enabler to out-executing the competition now and in the future," said Johnston on a conference call introducing him as the successor to outgoing CEO G. Craig Sullivan.

For example, Colgate-Palmolive, credits its SAP deployment with reducing costs and speeding up delivery of products.

With SAP, Clorox will be able to spot inventory and consumer trends, and to make new product decisions based on real data instead of hunches.

With its fourth-quarter results due Aug. 12, Wall Street is mixed on Clorox.

"We remain very comfortable that the company can achieve its $250 million targeted savings and believe there is another leg of savings beyond that, once SAP is fully implemented," says Goldman Sachs analyst Amy Low Chasen in a report.

Art Cecil, an analyst at T. Rowe Price, whose Equity Income Fund owns 1.7 million shares of Clorox, says, "If there are people believing there are additional cost savings, it isn't showing up in the stock." He notes Clorox' stock price is hovering at a lower multiple of its earnings than rivals such as P&G. "Not all companies have had a smooth transition with these things,'' he says.

Indeed, the returns on investment for SAP and Siebel—and most other enterprise software installations—aren't immediate. A paper by Professor Lorin Hitt at the University of Pennsylvania's Wharton School of Business concludes enterprise-planning software on average takes three years to install with returns starting after 31 months.

Management won't comment, but it has a lot riding on its SAP installation. Former CEO Sullivan had 25% of his 2002 compensation partially linked to "ensuring the success of the company's SAP implementation," according to filings. Clorox hasn't revealed Johnson's new pay package as CEO, but according to the company's latest proxy (Oct. 2002) he made $1.65 million in salary and bonuses as operating chief. Clorox's filings don't indicate whether a portion of that bonus hinged on installing SAP.

For its part, Clorox said in its most recent annual report it will spend $250 million—or the amount it's targeting in cost-savings—to implement new information systems over the next two years. About $150 million of that is an increase over previous plans.

Clorox wouldn't reveal what systems it is replacing with SAP, but Clorox employees say it's a hodgepodge of internally developed applications and niche software.

Next page: Next steps for Clorox.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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