Case 003: VF Corp. - Inching Along

 
 
By Edward Cone  |  Posted 2001-10-29
 
 
 

Terry Lay knew that bringing a common enterprise resource planning system to every part of VF Corp. would be a tough job, but he didn't expect to get hung up on underwear. After a successful rollout to VF's huge Jeanswear business, which includes the Wrangler and Lee brands, the Vanity Fair and Bestform intimate-apparel units were supposed to be next in line for the SAP-based platform. Instead, the world's largest publicly traded apparel company has quietly delayed the rollout to Intimates and is redirecting the effort to its outdoor-wear brands.

PDF DownloadThe surprising shift from Intimates mothballed a project that was almost a year under way and contributed to dozens of layoffs of IT staff. It is the latest course correction for a project that has seen its share of both setbacks and successes, and more surprises are possible as the ERP initiative unfolds at the Greensboro, N.C., company.

"There will undoubtedly be some further change to the plan," says Lay, vice president of global processes and the man responsible for the deployment of common systems across the company. VF doesn't have a centralized CIO function; instead, six IS leaders operate as a steering committee that reports to Lay, who started his VF career in 1974 at Lee and has extensive experience in both marketing and operations.

Casually dressed in VF clothes at his Greensboro office, Lay cites shifts in technology, development schedules and business needs as change agents in the rollout plan. Still, he says the project is fundamentally moving in the right direction. "We understood this was a journey from the start," says Lay. "This shift in strategy represents a modified approach to get at the most benefits in the shortest time—not a redefinition of the vision."

VF is seeking a companywide ERP platform to support its growth strategy, which includes linking similar but heretofore autonomous brands into "coalitions." Thus, the Wrangler and Lee units are now part of a Jeanswear coalition, where the first of VF's new-generation ERP systems went live in February 2000. The Outdoor coalition includes brands such as JanSport and North Face, while intimate apparel is being cobbled together from the Vanity Fair unit and BestForm, acquired by VF last year. The guiding principle is what CEO Mackey McDonald calls "consumerization," a closer alignment of the business with the marketplace that is meant to have tangible financial results.

Like most companies in the Fortune 500, VF has articulated several long-term financial goals—and has strategies for meeting them. It wants to grow sales and income by 8% to 10% a year— a goal it is pursuing partly by acquiring small but fast-growing competitors. It wants to raise overall return on equity to at least 17% from less than 12% currently. A more immediate goal on VF's part involves improved inventory management—an area where executives believe information systems can make a difference.

That belief is reasonable. Efficient inventory management begins with accurate demand forecasting—a task well-suited to information systems, with their ability to identify trends and deviations. Accurate forecasting is becoming more critical to VF as it absorbs new businesses whose dynamics it does not yet fully understand, and as it outsources more work to offshore plants that must be deployed efficiently.

But to study VF's inventory performance, even in the short time since the company cited inventory reduction as a key financial goal, is to grasp the limitations of information technology in the face of larger macroeconomic forces. Barely six months after VF said it wanted to reduce inventory by $100 million, a big drop in demand has driven up that inventory by $80 million to more than $1.2 billion. This makes it unlikely the company can reach its goal of reducing inventory to $1 billion by the end of the year without slashing prices in a way that would hurt other financial objectives, such as profitability.

But even if VF might miss its own near-term objectives for inventory management, it has historically done a good job in this area (see "The Swift Turnover of Goods," facing page). And executives at the company are optimistic that once the economy recovers, the tools VF has at its disposal—including technology—will allow it to get back on track with its initiative of streamlining inventory.

"We are seeing a definite improvement in terms of scheduling, a significant improvement," Lay says, giving much of the credit to supply chain software from i2 Technologies. VF's installation of i2's Supply Chain Planner is the world's largest by a long shot, running across about 80% of the company's business by dollar volume. That includes Jeanswear, which represents more than half of VF's nearly $6 billion in revenue, where i2 has been successfully integrated with the SAP system.

The Jeanswear system—the basis of the VF corporate platform—is built around ERP software from SAP, with components including a homegrown, legacy order management system and applications from i2 and software maker Logility. Its rollout in February 2000 did not precipitate any dip in financial performance at the company's largest and most profitable unit. By contrast, troubles implementing i2 were among the things cited by footwear maker Nike in explaining a poor quarter earlier this year. VF avoided those problems through user training, with a special focus on making sure the software itself would operate on the large scale needed.

But even so, the project had to change on the fly and took 15 months longer than expected, with the original plan for an all-SAP system scrapped in favor of using best-of-breed add-ons. "Our implementation strategy changed," says Boyd Rogers, VF's operations VP. "We thought originally SAP was the solution for everything. We started down that path with the original ERP charter. We were going to quit developing software and go off the shelf."

That's not how it worked in the real world. For one thing, SAP didn't have the functionality to support an apparel business, which sizes products based on multiple variables, such as inseam and waist measurements. A development team worked with representatives from VF and Reebok on an order management system based on a version of SAP's R/3 planning software used in the cable industry, which sizes product by length, gauge and width. "VF sent its team on a lot of trips to Germany," says one former SAP executive who worked on the project. "At the time it seemed cheaper than Band-Aiding together a bunch of other products, and if it had worked, it would have been."

But progress was slow in creating an order management module broad and deep enough to work across multiple divisions, so VF ended up keeping its own homegrown system. "I'd say that was half the delay," says the ex-SAPer. VF was also dissatisfied with SAP's forecasting capability and so ended up bolting on modeling software from Logility. Although he generally credits VF's prowess, the former SAP executive says the customer deserves its share of the blame for the delays. "Everyone underestimated the amount of work involved," he says. "It was like changing the tires on a car that's moving. There was some finger pointing. They wanted everything laid out perfectly from the start, not phased in. I don't think they tried enough to look at how to use the product if it was not clear what to do from a button on the top of the menu."

Thanks in part to tight management controls, Lay says overall project costs were not significantly over budget in the Jeanswear business. "We had to make scope choices and manage legacy costs aggressively to control overall costs," he says. Even at a company that spends up to 3% of annual sales on technology, that meant starvation rations for the upkeep of some legacy systems, but Lay says the trade-off was worthwhile. "In the end, it is the impact of delays in getting at benefits that is most costly."

The launch of the Jeanswear system shortly after Y2K was nevertheless a triumph for Lay's organization. The same cannot be said for the effort to deploy the SAP system at VF Intimates, an effort that got under way in the middle of last year. The same functionality problems that slowed the Jeanswear rollout quickly became evident when developers at the Intimates business, which is based in Atlanta, started working with the software. Implementing the current iteration of SAP would have required a quick upgrade to get the required performance, so VF decided to wait. "Once we have the upgrade, we will plan to implement it into our Jeanswear/ Outdoor common model and then return to Intimates," says Lay. "The delays have certainly been frustrating," he admits.

VF was also wondering about SAP's next moves in terms of Internet focus and other technology development. "We will ultimately want to get at the benefits of R/3 Enterprise and mySAP.com, and there are important migration-path questions to be resolved in the coming months," says Lay. And although the intimate-apparel business is smaller than Jeanswear, the technical scope of the project is in some ways more demanding. Intimates is already running i2's Supply Chain Planner, and integrating that back into the new SAP system will require three or four times the 200 or so interfaces required at Jeanswear.

There are also management issues, which didn't drive the decision to shelve the project but contributed to it. One basic problem is geography—Rogers can see the Jeanswear headquarters from his office in downtown Greensboro, but the Intimates division has operations in Alabama and Texas, and is in the process of building a coalition with New York-based Bestform. That has stretched resources thin. At the same time, the smaller size of Intimates has actually made the project harder. "You need critical mass for a project this size," says Rogers. "If you pull two people from Jeanswear to work on forecasting, it may be two out of 20. For Intimates, it might be two of six."

Meanwhile, the new Outdoor coalition, which includes the JanSport brand as well as the recently acquired Eastpak line, was in need of a common system. Rather than go with a stopgap solution, the decision to shift the rollout to outdoor gear seemed straightforward. "Technology is moving so quickly you can't stand protracted jobs," says Rogers. "We are looking for quicker, more-straightforward wins." The Outdoor system is expected to be in place by the end of next year, with scoping and planning now under way. Intimates are now expected to be integrated around this time next year.

Lay says a key success factor in the project is "the ability to stay flexible as business needs and technology change during the process." The former SAP executive says that attitude could lead to the ultimate payoff on a systems investment. "If they can get it to work, they'll be the most dominant apparel company in the U.S.," he says. Maybe, although the role of technology shouldn't be overshadow VF's other strengths, such as owning some of the world's most valuable brands. With the right systems behind those brands, though, VF could indeed make the leap from strong to strongest.

VF Base Case

Headquarters: Greensboro, N.C.

Business: Apparel company with numerous brands, including Lee, Wrangler, Vanity Fair and JanSport

Financials in 2000: $5.7 billion in revenue, $452 million net income

Challenge: Implement a common ERP system across a geographically diverse company whose numerous divisions and brands have been built partly through acquisition

Baseline Goals:

  • Grow sales and income by 8% to 10% annually
  • Generate return on equity of 17% to 20% annually
  • Reduce inventory on hand to roughly $1 billion, by Q1 2002