ERP HellBy Ericka Chickowski Print
Big IT projects sometimes go wrong in spectacular ways, with some common themes running through the disaster stories like fault lines.
Perhaps no other wide-scale enterprise project can strike fear into the heart of a CIO or project manager like an enterprise resource planning (ERP) implementation. And for good reason. ERP touches the nerve center of organizations. If something goes wrong, it goes terribly wrong.
American La France Hosed by ERP
Sometimes a nightmare project can put a company in bankruptcy.
Last year, the venerable firetruck manufacturer American LaFrance was forced to undergo Chapter 11 proceedings after what it called “operational disruptions caused by the installation of a new ERP system.” According to information provided to customers, the company incurred $100 million in debt since it spun off from Freightliner in 2005 due to inventory imbalances and ERP malfunction.
“These problems have resulted in slowed production, a large unfulfilled backlog, and a lack of sufficient funds to continue operating,” the company told customers in January 2008.
When American La France initially bought back its business from Freightliner, the plan was to get its former host company to handle accounting, purchasing, inventory, production, payroll and finance until American La France could work with its consultants at IBM to implement a new ERP system that would handle all of these functions.
But after flipping the switch to set the ERP system running in June 2007, American La France encountered inventory difficulties, resulting in serious liquidity issues for the manufacturer. Though American La France said at the time that it was looking into holding IBM legally accountable for its role in the botched ERP implementation, more than a year later no such action has been taken. Since then the company has come out of Chapter 11, worse for the wear after customers complained of late truck deliveries and a shortage of repair parts that made certain firehouses scramble for months to keep their fleets running.
Lessons Learned: Botched ERP implementations can drastically affect operational capabilities. Spin-offs, company sales and M&A activity must be followed by careful infrastructure planning.
Tom Shane Paid Too Much
As our previous example showed, picking one’s way through an enterprise resource planning project can be akin to dancing across a minefield. With so much money and so many critical functions at stake, ERP projects have the potential to make or break a company.
Unfortunately for Centennial, Colo.-based Shane Co. Jewelers, its foray into SAP broke the company. In January 2009 the family-owned company announced bankruptcy as a result of poor sales returns from 2007 through 2008 and an SAP implementation that executives said cost the company three times its initial estimate and left store inventories unbalanced.
According to bankruptcy filings, Shane Co. reported that it took three years and $36 million to put in place the SAP AG system after being told by SAP that it would only take one year and $10 million. What’s worse, once the system went live in 2007, Shane experienced nine months of inventory issues that ‘adversely affected sales,’ the company told the court.
Most egregious of these issues was a severe overstock of the wrong products in late 2007. Shane told the court that since then it managed to sell off the overstocked products and stabilize the SAP system, but that the financial damage was already done. In 2008 the company experienced a 32 percent decline in sales during the holiday season.
Bankruptcy filings show the company owes more than $100 million to creditors. Shane told the court that it was revamping operations, scrapping plans for new headquarters and putting the kibosh on store expansions. During the bankruptcy, company founder Tom Shane is lending the company money from a separate business he owns to keep Shane Co. operational.
Lessons Learned: Appropriate vendor selection and realistic project goals are imperatives for successful ERP implementations.
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