| Non-IT costs drove ADI's ERP implementation Hardware and software costs, including the initial R/3 license for more than 300 users and the Oracle database license, were lower than the cost of people, both internal staff as well as consultants ($ in millions). |
Source:Analog Devices Inc.
Fear, panic, and alarm were raging through the halls of Analog Devices Inc. back in 1993. The Norwood, Mass.-based chip maker was facing a bleak future.
In the early 1990s Analog Devices (ADI) was dependent on military projects for a large part of its revenues. Following the end of the Cold War, however, the company faced a decline in military markets. On top of that, its processes, systems, and staff were not prepared for the stiff competition, price sensitivity, and rapid changes in the obvious new markets it wanted to enter, such as cellular telephones, personal computers, and other electronic systems.
Company officials discovered, during a major rethinking of their business, that ADI had high costs, lackluster customer service, and inefficient systems and processes relative to the competition in these new markets. With less than $1 billion in revenue at the time, the companys operations were spread around the world, with manufacturing, warehousing, distribution, sales, and customer-service facilities in North America, Europe, and Asia. And ADIs sales, general, and administrative (SG&A) costs were 29% of revenue, while its competitors costs hovered in the low 20% range, according to company officials.
To avert disaster, ADI turned to enterprise resource planning (ERP) as part of a massive revamping of the company.
At that time, ERP implementations were not pretty. Between 1993 and 1995, a number of large organizations began ERP projects that consumed people, money, and time in ways IT managers had only seen in nightmares. Boeing, Alcoa, Chevron, and other organizations endured projects that in some cases cost more than $200 million and are still not complete, due in part to significant IT challenges. Yet some early ERP implementations were not only completed within a reasonable amount of time and money (given the immaturity of the technology), but also provided a model for successful IT management of an ERP implementation.
In fact, ADI's implementation of the R/3 ERP suite from Walldorf, Germany-based SAP AG beginning in 1993 and continuing through 1996 proved--at the time--to be a singular example of best practices in IT restructuring and management. Since then the company has enjoyed the substantial financial benefits of an ERP system, including a shortened order-fulfillment process, reduced inventory costs, and increased productivity, according to ADI officials. While ADI spent $21 million on the implementation--way beyond what it would cost these days--its accomplishment shows the importance of strong managerial direction and support, the selection of a global implementation team for a global project, and the value of centralizing an IT organization within a decentralized company.
Sizing things up
Business consolidation was the first order of the day at ADI--a major and traumatic undertaking. Numerous logistical inefficiencies had to be changed if the company was to successfully compete in commercial markets. Customers there demanded fast and certain delivery; ADI sales reps, however, could only guess when products would be shipped. Extra shipping steps required by the companys existing processes, along with the number of finished goods caught up in the lengthy shipping process, added to the cost as well as contributed to the delay.
Radical reengineering also was required within the companys financial organization. Its costs, as a percentage of revenue, were substantially higher than the competition, recalls Joseph McDonough, chief financial officer of ADI.
A single, integrated, order-management system providing real-time information around the world offered a way to improve customer service. So in addition to reengineering and restructuring the business, the company focused on its information systems. "With a single, integrated system, factories can ship directly to customers rather than to intermediate warehouses," says Gerry Dundon, now ADIs director of logistics.
This focus on information systems turned a hot spotlight on a classic host-centric IT organization. PCs, LANs, and client/server computing were new to the company. IT itself deployed a decentralized staff for each operating unit. Each corporate entity, for example, ran its own general-ledger system. There were eight host computers running 11 accounts-payable databases, three accounts-receivable systems, five purchasing systems, and six fixed-asset systems; ADIs three-building headquarters outside of Boston had five different accounts-payable systems. Reconciliation of the various systems was done on a PC using a spreadsheet, with numbers entered manually. The warehousing and logistics systems were equally fragmented.
"ADI had an incredibly ugly collection of systems with little commonality," recalls Jim Shepherd, vice president/research at AMR Research Inc., in Boston.
The splintered approach to systems deployment throughout ADI made implementation of the global business vision extremely challenging. In fact, company officials acknowledge that there was little coordination among the decentralized IT staffs. And ADI managers considered the IS organization to be unresponsive.
Not surprisingly, ADIs spending on IT was significant, about 4% of revenue, including IS department and business-unit spending. "Management didnt think it was getting the right amount of IT bang for its bucks," notes ADIs McDonough, "due to the lack of a strategic roadmap."