Snap, crackle, pop–and crash–go the income statements

Enterprise resource planning (ERP) vendors and customers are creating a huge credibility gap that may swallow IT managers and other senior executives. Vendors promise that a new system will reduce inventory costs, improve productivity, and otherwise increase the efficiency of operations are about to be severely tested by a weak economy. Some early indications don’t leave me optimistic, and some ERP proponents may have to traverse some canyons of doubt this year.

If the right combination of ERP tools and managerial expertise are working together, there should be a substantial financial return.

Essentially, weaknesses in sectors of the economy or certain industries–as well as troubled ERP implementations–are leading to some major disappointments. Two announcements in late 1998 highlighted the chasm between what IT managers said would happen and what actually happened.

The crash at Boeing

In 1994, Boeing Company, based in Seattle, Wash., embarked on a major business process reengineering campaign, buying off-the-shelf software to replace hundreds of legacy systems used to manufacture commercial aircraft. It bought Baan’s manufacturing, finance, purchasing, and distribution modules; Metaphase’s product data management package; CIMLINC’s Linkage for process planning; and Trilogy’s SalesBUILDER for configuration management, along with other packages.

Fast-forward to the present. Late last year Boeing announced lousy financial results and major layoffs. It predicts a pathetic pretax profit margin of only 1% to 3% for its commercial aircraft group by the year 2000, up from 0% in 1998. A precipitous decline in airplane orders by Asian airlines is the culprit, according to the company. Wall Street analysts and others watching the company say production inefficiencies, poor planning, and a host of other internal failures bear part of the responsibility for the dismal margin and poor financial results, according to articles about the project in, among others, The New York Times and The Wall Street Journal.

Isn’t all that ERP software supposed to avoid those production inefficiencies?

Last year, only a few months before the roof caved in on Boeing’s financial statements, a computer industry trade publication wrote a glowing report about the wonderful performance of the aircraft company’s ERP implementation. But as far as the financial community is concerned, there isn’t a whole lot of return on investment from five years of ERP implementation at Boeing. Company officials were not available to comment, although it should be noted that Boeing says its ERP implementation is not yet complete.

Soggy results at Kellogg

Boeing isn’t the only company with a prominent ERP project that has not helped profitability. The Kellogg Company, of cereal fame, is suffering from declining market share and other market maladies, such as changing consumer tastes in breakfast food. It, too, had high expectations from a bold ERP plan announced two years ago. Kellogg, based in Battle Creek, Mich., became a marquee account for Oracle Corp.’s brave Consumer Packaged Goods bundle, consisting of software from Oracle (process-manufacturing modules, financial management, sales and marketing analysis, and decision-support analysis); Manugistics (supply-chain planning functionality); Industri-Matematik International (order management and logistics); and Indus International (plant maintenance and asset management).

In 1997, Donald W. Thomason, Kellogg’s executive vice president for corporate services and technology, said in the Oracle announcement of the deal that Kellogg needed new technology to “enable highly efficient and integrated business processing.”

However, financial results to date are not encouraging. Again, market factors and other events outside of the influence of ERP are at work here: Kellogg’s share of the shrinking cold cereal business in the United States has declined almost 10 percentage points over the past 10 years. Meanwhile, net income plummeted while sales were flat amid declining volumes. In 1998, net income for the third quarter dropped 32% from the same period a year earlier, Kellogg reported in October. In response, the company is laying off 25% of its North American employees as part of its cost-cutting efforts. While company officials did not respond to requests for comment, Kellogg officials late in 1998 claimed they would deliver substantial reduction in business costs in 1999 due to “significant” investments in efficiency in 1998; it wrote off more than $70 million last year (1998) for various “streamlining initiatives.”

Hype doesn’t help

Every implementation of ERP that I have ever seen was justified by the productivity increases, inventory reductions, and other promised efficiencies. And I know of several implementations that proved their worth through the positive results achieved. The R/3 implementation at chip maker Analog Devices of Norwood, Mass., for instance, helped the company weather tough times in 1998, when declining prices drove down revenues and otherwise put pressure on the entire semiconductor industry. Analog has continued to show progress in reducing costs in a variety of areas, including staffing and inventory.

If the right combination of ERP tools and managerial expertise are working together, there should be a substantial financial return, as there was for Analog. I hope Analog is not the exception that proves the rule. After all, managing expectations should be part of the job description of every ERP implementation manager, especially if his or her CEO was subjected to a lot of hype by an overzealous ERP vendor. Exaggerated claims made by some sales people are endemic in the ERP market, and the upcoming economic climate may cause some embarrassing moments for many members of the ERP community. //

Larry Marion is the former editor of Datamation. He has been researching and writing about manufacturing technology for more than 20 years. He can be reached at lmarion@mediaone.net.