Why Wesco Doesn`t Use ERP
As a Fortune 500 company with $5.3 billion in revenue in 2006, Pittsburgh-based Wesco International plays with the big boys. The electrical and industrial product distributor has more than 6,000 employees, 370 full-service branches across the U.S. and Canada, eight high-tech distribution centers, and more than 100,000 customers worldwide.
What it doesn't have is an enterprise resource planning (ERP) system.
Over the past five years, Wesco has undertaken a major overhaul of its computer systems, giving its managers closer to real-time access to sales and inventory information from the field. It has added business intelligence capabilities, allowing sales analysts to quickly determine exactly which customers are buying more or fewer products. And it has added applications to automate more human-resources functions, such as annual employee evaluations and calculating merit pay.
But unlike most corporations of its size, which have added these capabilities by installing large ERP systems from Oracle, SAP or similar vendors, Wesco chose to take a radically different approach. It has created a de facto ERP system by building applications that tap into a Teradata data warehouse, which has become the centralized repository for most of the company's business information.
It's an approach even Teradata says it wouldn't necessarily recommend for most companies. "We don't actively pursue a Teradata data warehouse as a replacement for an ERP system," says Shaun Connolly, a senior consultant in Teradata's transportation and logistics industry practice. Most companies find that the automated workflow features that ERP systems offer, such as the ability to route sales or purchases for approval, are often difficult to duplicate, according to Connolly. "I think people are surprised more than anything that a company the size of Wesco has chosen to go down this path," he says.
To understand why Wesco chose this approach, you have to first understand its business. The company dates back to 1922 when it began as the distribution arm of Westinghouse Electric, selling Westinghouse-manufactured products across the country. Its strategy has centered on putting inventory, expertise and services where its customers need them. Wesco's customers cross most industries and run the gamut from Boeing to Dow Chemical to PepsiCo. As a result, it has a highly distributed organization with 370 branches, fed by eight distribution centers.
Distribution center managers are given a high degree of autonomy, including the ability to determine inventory, set prices and negotiate contracts. That strategy served the company well from a sales and operations standpoint, but corporate visibility into branch activities was limited.
The Pittsburgh head office, for example, did not have real-time access to inventory at the branch level, and could not as a result easily shift supplies from one location to another to meet demand. It also did not have immediate access to sales information from the field; this data was consolidated at headquarters via nightly uploads to an Informix database. While management could then gain access to top-level numbers, such as overall sales, it could not quickly drill down to important customer-level information, such as which customers had recorded a dramatic drop in purchases and were perhaps getting their supplies from a competitor.
The Informix system, which was installed in 1993, couldn't be tweaked much further. John Conte, Wesco's chief information officer, says it was overloaded and underpowered.
A key sales analysis report, which formatted a full month's sales transaction data for analysis by managers, required 80 hours of processing time an eternity by today's standards. "It's one of our most CPU-intensive reports," Conte says. "It rolls up a tremendous amount of data by region, inventory levels and pricing information, and packages it so it's actionable by the field offices."
Wesco knew it needed to upgrade the system to bring it closer to real time, but the economic downturn of 2000-2001 brought the message home. In 2000, Conte, who was I.T. director at the time, and then-CIO (now chief financial officer) Steve Van Oss, began evaluating an ERP system to move closer to real-time visibility into Wesco's operations. The company looked at systems from SAP and Oracle, among others, but the choices were not very palatable. For starters, there was the cost. Conte says that to get the functionality Wesco needed would have cost close to $110 million.
In addition, to achieve the integration required to get real-time data from the field, Wesco would have had to scrap WesNet, its distributed point-of-sale system. WesNet runs on local servers at all Wesco branches and distribution centers, and is based on a 20-year-old NCR system called ITEM. This option was not at all popular with branch managers who were comfortable with WesNet, nor was it comfortable for Van Oss. WesNet was completely paid for, incorporated a high degree of customization, and could still be expanded.
Conte says it might have been possible to integrate WesNet into an ERP system, but in many ways WesNet provided the sales and inventory functionality that an ERP system was meant to provide.
Road">A FORK IN THE ROAD
In the end, Conte and Van Oss decided that Wesco didn't need a new ERP system. It would have meant a wholesale replacement of existing systems for gathering data, transacting business, and analysis and reporting. What Wesco really needed was a faster way to get at the data already being sent in to headquarters via WesNet.
The company decided to replace its Informix data warehouse, which had served well since it was installed in 1993 but was long past its prime, with an Oracle data warehouse a version of the Oracle database optimized for analysis of large volumes of data. An enterprise licensing agreement was signed with Oracle in February 1999, and construction of the new data warehouse began.
That's when events took an unexpected turn.
Wesco's NCR account representative got wind of the company's Oracle migration plans and asked Van Oss whether he had considered using an NCR Teradata system instead. (NCR announced plans in January to spin off Teradata as a standalone company.) Conte and Van Oss didn't want to consider changing tack at this stage construction of the Oracle data warehouse had already begun and, just as important, financial approval for the project had already been granted by Wesco's executive board. But out of courtesy to NCR's 20-year relationship with the company, they agreed to a benchmarking exercise.
"Privately, Steve and I said, 'The chances of their being able to make a significant difference over Oracle are slim, so let's just humor them,'" Conte recalls.
Conte handed Teradata a sample set of data required to produce their most challenging report the month-end sales analysis report that previously took 80 hours to complete. In tests using the Oracle data warehouse, Conte and his team had been able to get the analysis report down to 28 hours. "We were so pleased with that, we actually called the report Kickass," he says. With further tweaks, Conte thought they might be able to get the report processing down to 24 hours a single-day turnaround but he wasn't hopeful to make much progress beyond that.
"I said to Teradata , 'If you guys really want to impress us, here's where you can do it,'" Conte remembers.
After about seven weeks of testing, Teradata contacted Conte to say it could get the report processing down to three or four hours. "I said, 'Hold on, you can't be doing it right.' Then they said, 'We think we can get it down to two hours,'" Conte says.
Conte and Van Oss looked at the Teradata results and determined that the results were correct. In fact, in the months ahead they would be able to lower the processing time to 75 minutes.
After a hard deliberation, Conte and Van Oss called the team together and put a halt to the Oracle implementation. "I had already made the decision that if the results of the benchmarking test were just close, we would continue down the path to finish the Oracle data warehouse ," Conte says. "But these results weren't close they were miles apart. We realized we had to stop."
Baseline contacted Oracle to comment on Wesco's decision to implement Teradata and to discuss differences between the two database systems, but in an e-mail, Oracle representatives chose not to comment.
Wesco decided to continue implementing Oracle for some functions, particularly transactional data such as pricing, electronic data interchange (EDI) and the company's e-commerce environment. The Oracle system also feeds information back into Teradata. But Teradata would now serve as the storage hub for sales analysis, accounts receivable and payable, supplier summaries and customer master records.
The reason for this two-pronged approach is basically the same as the explanation for why Teradata was faster than Oracle at producing the sales analysis report the data warehouses are built differently. Although both are built on relational database management system (RDBMS) technology, in which data is organized around related tables (rows and columns) of data, the design of the Teradata RDBMS has always revolved around fast analysis and retrieval of data. Oracle grew up around online transaction processing (OLTP) applications, in which the most important thing is to record transactions such as purchases and payments quickly and reliably. As a general-purpose database, Oracle can also be tuned and configured to support more analytical applications such as data warehousing.
However, because Teradata databases are almost exclusively focused on data analysis, the database software is highly optimized for that singular purpose. For instance, Teradata incorporates a technology known as massively parallel processing, in which database lookups are broken into smaller sub-tasks that are assigned to different processors on a multi-processor server; this technology, along with other factors, allows the database to respond to queries or produce reports very quickly.
In Wesco's case, the data being collected from its branches and analyzed fit more easily into the Teradata system. While it might have been possible to restructure the data for faster reporting from an Oracle database, that would have required a major retrofit of the WesNet system or perhaps some additional data integration and translation technology, according to Conte. The Teradata system was more expensive than a comparable Oracle system $5 million compared to about half that amount but Conte says the difference in processing speed was worth the higher price tag. And it was certainly a lot less than the ERP system the company had priced.
In December 2000, Wesco took delivery of a 1.3-terabyte Teradata Warehouse. Initially, the system ran parallel to the existing Informix system, but as the Teradata system proved itself, the Informix setup was phased out. In 2002, Wesco took delivery of a newer 1.8-terabyte data warehouse, and reassigned the initial Teradata system to application development.
One of the key technology decisions was choosing a tool for presenting information from the data warehouse and for conducting business intelligence queries. Initially, Wesco deployed software from Ottawa vendor Cognos, but eventually selected the WebFocus suite from New York-based Information Builders. Conte says both tools performed well in fact, some power users at Wesco still use Cognos but Wesco was able to secure a more cost-effective enterprise license from Information Builders.
The combination of the Teradata data warehouse and the WebFocus tools gave Wesco the two things that had long eluded the company: Closer to real-time access to data from field operations, and a way of drilling down into the data.
Conte's team tweaked WesNet at the branch level to push inventory updates to head office several times a day. That capability had always been possible, but it hadn't made sense to do it more often because the data couldn't be processed quickly enough.
Using the data warehouse as the backbone, Conte's team has since constructed a number of applications more often associated with ERP suites. Each morning, for example, when Wesco's salespeople log in to their e-mail accounts, they receive a report with the previous day's billings, and can drill down to see individual customer or supplier accounts. The e-mail has built-in links to WebFocus, which in turn taps into the Teradata data warehouse. Teradata has crunched the information from the nightly data feeds received overnight via WesNet.
Conte admits the de facto ERP system he has built doesn't have all of the functionality of a packaged system. Some applications, like contract approvals, come out of the box with most ERP suites. "But there are also a lot of things that come with ERP systems that we don't need," he says. For example, WesNet already provides Wesco with a sales and inventory system, something that would be duplicated by a full ERP installation.
THE MONEY FACTOR
When asked what kind of return-on-investment metrics Conte believes Wesco has achieved with the Teradata implementation, he says it depends on how you want to slice and dice it. In total, he says Wesco has spent about $10 million on the Teradata implementation, including the WebFocus piece, and additional applications written for the Oracle databases. That compares to the $110 million price tag scoped out for an ERP system.
He also calculates that Wesco has made a $10 million one-time margin improvement through the use of the system. A prime example is a direct-ship-margin reporting tool. For some sales, such as large-volume, high-value purchases, Wesco will often arrange for direct shipment to the customer. Typically, a blanket profit margin was applied to such orders. While this was a simple approach, Wesco was losing out on an opportunity to apply higher margins to some products that were perhaps hard to find.
Conte's team wrote an application that filters orders from WesNet into Teradata. When it finds a direct-ship order for more than $5,000, it sends an alert to an appropriate manager to see whether higher margins can be applied.
In other areas, Wesco says it achieved a $4 million savings in the first 24 months through better management of its discount practices (discounts are offered to customers making large purchases or paying on time), and an additional $1 million annual savings. It also achieved an $8 million one-time gain through inventory reduction and better distribution of inventory among branches.
Just as important, the company has gained an indefinite extension on its WesNet system. "The strategy we took isn't right for every organization, but it's something they should consider," Conte says. "Companies have invested a lot of money in developing applications that run their business really well. Why give that up for the cookie-cutter approach of an ERP system?"
WESCO BASE CASE
Headquarters: 225 W. Station Square Drive, Suite 700, Pittsburgh, PA 15219
Phone Number: (412) 454-2200
Business: Distributor of electrical and industrial maintenance, repair and operating (MRO) supplies, with 370 full-service branches in the U.S. and Canada.
Chief Information Officer: John Conte
Financials in 2006: $5.3 billion in revenue; $217 million profit.
Challenges: Add new reporting and workflow applications more commonly associated with enterprise resource planning (ERP) systems, without replacing key legacy systems.
- Produce a detailed month-end analysis of sales from 370 branches in 24 hours, compared to 80 hours on old system. Actual result: 75 minutes.
- Distribute one daily report of sales from branches with ability to dig deeper into individual customers, compared to previous system, which could not support daily analysis.
- Increase profit margins by expanding profit margin analysis beyond top 75 customers to include all customers.
- Accelerate organic growth beyond industry average of 7% per year by using business intelligence applications to drive direct-mail marketing campaign to customers. Actual growth: 16%.