ERP FAILURE CASE STUDIES

ERP systems are complex, and possess a high level of completion, securing information visibility for
companies. Sometimes, however, companies are led to wrong decisions of materialisation and
implementation of such systems. It has been found that ERP systems implementation works fail at a
percentage of 60-70% (Kallivokas and Vozikis, 2009). Almost 41% of companies are unable to use
more than 50% of the benefits that accrue from the use of such systems, while 2 in 5 companies face
operational problems at the Go-live stage of an ERP system (Krigsman, 2010). There are quite a few
examples of failed implementation at various levels. At this point, it should be noted that failure can
either be partial or complete. In the first case, the company will be able to regulate the system
somehow, but there will be some disruptions in its everyday operations, while in the second case the
process of composing the system stops before its implementation, or finally, after it has been
implemented, there is substantial financial and operational damage to the company. In the following
section are presented some well-known examples of failed materialisation of such systems.

2.1. HERSHEY’S CHOCOLATE CORPORATION

The company was founded in late 1880. The brand name “Hershey Chocolate Corporation”
was adopted in 1927 and, initially, it was a successful caramel producing company. It was the first
company that produced milk chocolate in America. Over time, it focused only on chocolate
production and manufactured many innovative products. After the Second World War, it managed to
export its products to 90 countries. In 2006, its sales reached 5 billion dollars and employed over
14,300 people. In 1996, to avoid the familiar problems that could arise from their computational
systems, due to the Y2K problems or the millennium bug, the administration of the company
proceeded to the project “Enterprise 21.”
 Its main purpose was to replace its systems with the ERP system SAP R/3 (/3 is one of the
main product of SAP,where R stands for RealTime and the number 3 relates to three tier application
architecture(Data base,Application Server and Client ) . This replacement was due to be completed by
April 1999. The new system would help reorganise the company’s entrepreneurial operation, and
provide data to suppliers and resellers, to reduce storage and transportation costs, and providing better
services to customers (Peperu and Gupta, 2008). In July 1999, orders dropped. Instead of 5 days, the
company took 12 to deliver an order, and, until August of the same year, the days went up to 15. The
result was that the company lost profits, credibility, and a prominent position on supermarket shelves
(Peperu and Gupta, 2008). Yet, warehouses were full of products. In September 2000, the company
had 25% more merchandise in its warehouses than usual, but it failed to deliver it within the time
limit. Due to its failure, Hersey’s lost 150 million dollars, its share dropped by 8 units in a day (when
the company recognised there was a problem), and lost 0,5% of its market share in 1999 (ibid). One of
the basic problems that led to the failure of the project was that part of the system took some time to
materialise, Failure to set realistic implementation timelines .

ERP implementations are usually complex, so you need to allow enough time when planning
your project timelines. Hershey’s fell victim to this mistake when they tried to squeeze a complex
ERP implementation project into an unreasonably short timeline. If the company don’t allow their
self-time to implement, test, and cut over to the new ERP system, the chances of failure are much
higher. Which had as a result that the company implemented the method Bing Bang in July 1999.
According to researcher, there was a mistake in the selection of the project’s time frame, as well as
the period during which it would be implemented. This period collided with the time when the
company received an onslaught of orders in view of Halloween in America. The huge volume of
works did not allow for the necessary controls or the appropriate training of staff. Furthermore, the
company used, apart from its warehouses—upon the initiative of staff—, some offices and external
warehouses as temporary storage places—things that the system could not take into consideration.
According to many, the failure was due to administrative errors. After changing its administration, the
company proceeded to a new project in 2000 in order to materialise an ERP system. This was
complete ahead of schedule, cost 20% less than the initial estimate, and was crowned with success.

2.2. NIKE Inc.

Nike is one of the biggest sportswear companies worldwide. It is an American multinational founded
in 1964 by the brand name “Blue Ribbon Sports,” it is head offices in Oregon. In 1997, its profits
reached 9,19 billion dollars, while in 2012, they soared high to 25,3 billion dollars, employing 44,000
people. In 1998, because of the millennium, the company proceeded to a change in its systems and the
implementation of an ERP system. According to the Forbes list, after spending 400 million dollars on
software, it ended up losing 100 million dollars in sales, its share dropped by 20%, and faced many
lawsuits. It also experienced a big rift in its personal relations as it could not manage the orders of the
best-advertised sports shoes “Air Jordan.” This failure was due to a technical problem in the so-called
“i2” system to do with the process of order management. a software glitch that cost Nike more than
$100 million in lost sales, depressed its stock price by 20 percent, triggered a flurry of class-action
lawsuits, and caused its chairman, president and CEO, Phil Knight, to lament famously, "This is what
you get for $400 million, huh?"?a "speed bump." Some speed bump. In the athletic footwear business,
only Nike, with a 32 percent worldwide market share (almost double Adidas, its nearest rival) and a
$20 billion market cap that’s more than the rest of the manufacturers and retailers in the industry
combined, could afford to talk about $100 million like that.

For over a year, Nike reeled as a result of this failure. i2 and Nike blamed each other in
public, for the failure and this led to a further downslide in the share price of both the companies.
Analysts pointed to lapses in project management, too much customization and an over reliance on
demand forecasting software. Nike insiders raised doubts about the 'Single Instance Strategy'4 being
followed by Nike

It drives Wolfram crazy that while the rest of the world knows his company for its swoosh
buckling marketing and its association with the world’s most famous athletes, the IT world thinks of
Nike as the company that screwed up its supply chain?specifically, the i2 demand-planning engine
that, in 2000, spat out orders for thousands more Air Garnett sneakers than the market had appetite for
and called for thousands fewer Air Jordans than were needed. The specific system would be part of a
general ERP system but, according to analysts, its selection was wrong as its structure could not
“tally” with the entrepreneurial operation of the company. According to a senior executive, the system
operated on prediction algorithms that could not respond to such voluminous sales.

Nike’s June 2000 problems with its i2 system reflect the double whammy typical of high-
profile enterprise computing failures. First, there’s a software problem closely tied to a core business
process?in this case, factory orders. Then the glitch sends a ripple through product delivery that grows
into a wave crashing on the balance sheet. The wave is big enough that the company must reveal the
losses at a quarterly conference call with analysts or risk the wrath of the Securities and Exchange
Commission, shareholders or both. And that’s when it hits the pages of The Wall Street Journal,
inspiring articles and white papers on the general subject of IT’s hubris, limitations, value and cost.

The idea that something so mundane as a computer glitch could affect the performance of a
huge company is still so novel that it makes headlines. But what doesn’t usually enter the analysis is
whether the problem was tactical (and fixable) or strategic (meaning the company should never have
bought the software in the first place and most likely won’t ever get any value from it). The latter is a
goof worthy of a poster; the former is a speed bump.

Nike claims that the problems with its i2 demand-planning software were tactical and
therefore fixable. It was too slow, didn’t integrate well, had some bugs, and Nike’s planners were
inadequately trained in how to use the system before it went live. Nike says all these problems were
fixed by fall 2000. And the company asserts that its business wasn’t affected after that quarter. Indeed,
at press time, Nike had just announced that its third-quarter 2003 profit margins were its highest ever.

If there was a strategic failure in Nike’s supply chain project, it was that Nike had bought in
to software designed to crystal ball demand. Throwing a bunch of historical sales numbers into a
program and waiting for a magic number to emerge from the algorithm? the basic concept behind
demand-planning software? doesn’t work well anywhere, and in this case didn’t even support Nike’s
business model. Nike depends upon tightly controlling the athletic footwear supply chain and getting
retailers to commit to orders far in advance. There’s not much room for a crystal ball in that scenario.
 Indeed, Nike confirms that it stopped using i2’s demand planner for its short- and medium-
range sneaker planning (it’s still used for Nike’s small but growing apparel business) in the spring of
2001, moving those functions into its SAP ERP system, which is grounded more in orders and
invoices than in predictive algorithms. "This allows us to simplify some of our integration
requirements," says Nike CIO Gordon Steele.

Wolfram says Nike’s demand-planning strategy was and continues to be a mixture of art and
technology. Nike sells too many products (120,000) in too many cycles (four per year) to do things by
intuition alone. "We’ve tuned our system so we do our runs against [historical models], and then
people look at it to make sure it makes sense," he says. The computer models are trusted more when
the product is a reliable seller (that is, just about anything with Michael Jordan’s name on it) and the
planners’ intuition plays a bigger role in new or more volatile products. In this case, says Wolfram,
talking with retailers does more good than consulting the system.

"There’s been a change in the technology for demand planning," says AMR Research Vice
President Bill Swanton, who declined to address the Nike case specifically. "In the late ’90s,
companies said all we need is the data and we can plan everything perfectly. Today, companies are
trying to do consensus planning rather than demand planning." That means moving away from the
crystal ball and toward sharing information up and down the supply chain with customers, retailers,
distributors and manufacturers. "If you can share information faster and more accurately among a lot
of people, you will see trends a lot sooner, and that’s where the true value of supply chain projects
are," Swanton says.

The company had an entrepreneurial plan understandable to all its employees, so it continued
to operate as usual, while the problems that arose from the system failure didn’t impact its general
course (Koch, C., 2004). According to Nike, the problems that arose from the system had been
restored by autumn 2000, and its cycle of operations was not affected from then on. Three years later,
the company announced that it had the biggest profits since its foundation. In 2001, it reduced the i2
system operation to a great extent and installed SAP ERP.

2.3. BEIJING DABAO COSMETICS Co., Ltd

The company “Beijing Dabao Cosmetics Co.” or, as it was then called, “Sanlu Factory,” is situated in
Beijing, China, and was founded in 1985. It is one of the five top cosmetics companies in China. The
company produces, among other things, natural cosmetics, and exports them to 30 countries. In 1998,
its sales reached 64,7 million dollars. The same year, its administration realised that the software is
used for financial and logistic management could not respond to its increasing activity (Xue et al.,
2004). In 1998, the company decided to adopt the implementation of an ERP system. In March 1998,
it chose the MOVEX system used by the Swedish company Intenia AB and appointed the then
Lenovo company—today’s Digital China—as the contractor for the provision of services and the
implementation of the system. The project would cost 213,000 dollars, it had to be completed within
six months, and the contractor would pay 5% of the overall cost of the project, in case of delay. After
15 months of painstaking efforts to successfully complete the project, the whole operation failed, and
“Sanlu Factory” in 2002, after litigation, received the amount of 250,000 dollars as compensation.

The reasons for its failure were simple. The system was not fully adapted for use by the Chinese
company. It was not fully translated from English or adapted to Chinese logistic standards, and the
use of symbols on the financial tables was not compatible with the Chinese financial standards, for
example, the negative symbol (minus) is placed after the number, not before (Xue et al., 2004). It is
noteworthy that in May 2001, the company started anew to implement an ERP system, choosing
Chinese software. The project lasted for a year, and in May 2002 it was successfully completed.

2.4. FoxMeyer Drugs The company

“FoxMeyer Drugs” was founded in 1977, and situated in Texas, USA. It employed over 4,000
workers, with 5 billion dollars in sales (1995), and was the fourth biggest distributor of
pharmaceutical products in the world, second in the US. In 1993, intending to use technology to
increase its efficiency, the company proceeded to the adoption of an ERP system. This project was
called Delta III and started in the same year. The company purchased the SAP R/3 system, along with
a system of warehouse automation by Pinnacle (an international provider of the English information
systems Sage), while it appointed Andersen Consulting as a contractor for the implementation of both
systems, as well as their unification. The project would last for 18 months, cost 65 million dollars, and
was estimated to reduce costs by 40 million dollars a year. Many employees, however, were opposed
to the implementation of the systems as warehouse automation threatened their posts (Scott, 1999).
They took action and massively abandoned the warehouses that would close down to be replaced with
a big centre. SAP at the time did not have a great share in warehouse systems (Jesitus, 1997), and
FoxMeyers, after the commencement of the project, branched out, making new agreements, and
increasing its transactions. Furthermore, FoxMeyers did not have any trained staff to execute the
project, so it relied on a contractor and used the whole work as an opportunity to train its executives.
Finally, there was already some leeway for profit as the company’s prices were competitive— and
this margin for profit narrowed considerably due to the great cost of the project. As a result, the
project lasted 6 months longer than expected, cost 100 million dollars, and suffered damage to
products in the warehouses worth 34 million dollars. For some, its failure led to bankruptcy in 1996.
Two years earlier, the system could process only 10,000 orders a day, in contrast to 420,000 orders its
previous system could handle. In 1998, it was announced that the company would sue SAP and
Andersen Consulting, today’s Accenture, claiming half a billion dollars from each (Scott, 1999).
Finally, the companies reached a compromise without having recourse to justice.

The Delta III project at FoxMeyer Drugs was at risk for several reasons. Using a framework
developed for identifying software project risks (Keil, Cule, Lyytinen and Schmidt 1998), this study
classifies the project risks at FoxMeyer into (1) customer mandate, (2) scope and requirements, (3)
execution and (4) environment. First, the customer mandate relies on commitment from both top
management and users. At FoxMeyer, although senior management commitment was high, reports
reveal that some users were not as committed. In fact, there was a definite morale problem among the
warehouse employees. This was not surprising, since the project's Pinnacle warehouse automation
integrated with SAP R/3 threatened their jobs. With the closing of three warehouses, the transition to
the first automated warehouse was a disaster. Disgruntled workers damaged inventory, and orders
were not filled, and mistakes occurred as the new system struggled with the volume of transactions.
$34 million worth of inventory were lost (Jesitus 1997). Second, the scope of the project was risky.
FoxMeyer was an early adopter of SAP R/3. After the project began, FoxMeyer signed a large
contract to supply University HealthSystem Consortium (UHC). This event exacerbated the need for
an unprecedented volume of R/3 transactions. Although, prior to the contract, testing seemed to
indicate that R/3 on HP9000 servers would be able to cope with the volume of transactions, in 1994
R/3 could process only 10,000 customer orders per night, compared with 420,000 under FoxMeyer's
original mainframe system (Jesitus 1997). Third, the execution of the project was an issue due to the
shortage of skilled and knowledgeable personnel. FoxMeyer did not have the necessary skills in-
house and was relying on Andersen Consulting to implement R/3 and integrate the ERP with an
automated warehouse system from Pinnacle. Although at the height of the project there were over 50
consultants at FoxMeyer, many of them were inexperienced and turnover was high (Computergram
International 1998). Finally, the environment quadrant of the risk framework includes issues over
which project management has little or no control (Keil, Cule, Lyytinen and Schmidt 1998). Although
FoxMeyer must have realized the project was in trouble, its perceived dependence on consultants and
vendors prevented it from seeing how it could gain control. Since FoxMeyer was competing on price,
it needed a high volume of transactions to be profitable. Yet with the UHC contract "the focus of the
project dramatically changed", contributing to rising project costs (eventually over $100 million),
lowering FoxMeyer's already narrow margins and erasing its profitability. Given the high level of
risk, why did FoxMeyer initiate the project? Furthermore, why was the project allowed to escalate to
the extent of contributing to FoxMeyer's bankruptcy?

2.5. Hewlett Packard—HP

It is one of the best-known companies in the field of informatics. The company started in 1938 as a
company of electronic products and tools, and its development was particularly boosted by service
provision to the USA administration during the Second World War. In 2004, its turnover reached 80
billion dollars, and its profits 4,2 billion dollars. Hewlett-Packard—HP worked closely with SAP as
of 1989 as over 50% of the latter’s clients used HP infrastructure and counselors for the
implementation of ERP systems. During the third quarter of 2004, the company’s sales had decreased
by 5%, and it announced that this decrease was partially due to the failed attempt at the materialising
the ERP system. The overall damage the company suffered is estimated at 160 million dollars, 5 times
the cost of the system implementation. This fact puzzled the market as HP was the main counselor for
the implementation of SAP’s ERP systems. The company revealed that the problem lay in the
execution of the project and technical difficulties, not in the software. In the past, HP had decided to
redesign its strategy to produce a big volume of cheap electronic products. To this end, in 1993, it
decided to replace the numerous systems it used with SAP R/3. This replacement was completed in
1998. Over time, the company constantly upgraded its systems to meet with new needs, such as
electronic orders and ended up using 35 ERP systems on a global level. The company’s
administration wanted to reduce these systems down to 4, and finally, in 2004, its order-taking
systems were pared down to 7. Still, the administration wanted to further increase the company’s
efficiency through the SAP FOM platform. The first results were visible after fully implementing the
system in June 2004. 20% of the orders could not pass through the old systems due to programming
problems, the company lagged with the execution of orders, lost its credibility, and increased its costs.
Many times, during that period, they ended up dispatching merchandise by air, to keep the deadlines.
Besides, the company did not allow the employees to actively participate in the chance, which had as
a result that the workers had no access to useful information, and were not sufficiently trained
(Chaturvedi and Gupta, 2005). According to Gilles Bouchard, the then CIO of the company, the
problem was that a lot of small technical problems occurred together, which deteriorated the system,
in terms of operationality. As he once stated, “We had a series of small problems that were not
difficult to tackle individually. All of them together, though, brought a perfect storm.” In 2005, HP
proceeded to the adoption of the Genesis system, which failed, too (Chaturvedi and Gupta, 2005)
References

Chaturvedi R. N., Gupta D. (2005). ERP Implementation Failure at HP, ICMR Center for Management
Research, India. Available online: http://astro.temple.edu/~wurban/Case%20Studies/HP’s%20ERP
%20Fail ure.pdf

Gross J. (2011). A Case Study on Hershey’s ERP Implementation Failure: The importance of Testing
and Scheduling, PEMECO Consulting. Available οnline: http://www.pemeco.com/a-case-study-on-
hersheys-erp-implementation-failurethe-importance-of-testing-and-scheduling

Jesuits, J. 1997. "Broken Promises?; FoxMeyer 's Project was a Disaster. Was the Company Too
Aggressive or was it Misled?", Industry Week, pp.31-37. (Keil, Cule, Lyytinen and Schmidt 1998)

Kallivokas, Dimitrios & Vozikis, Athanassios. (2009). ERP PROJECTS FAILURE: ANALYSIS OF CRITICAL
FACTORS BASED ON INTERNATIONAL EXPERIENCE.

Koch C. (2004). Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster
http://www.cio.com/article/32334/Nike_Rebounds_How_and_Why_Nike_Rec
overed_from_Its_Supply_Chain_Disaster?page=1&taxonomyId=3207 (Xue et al., 2004)

Xue, Y., Liang, H., Boulton, W. R., & Snyder, C. A. 2005. ERP implementation failures in China: case
studies with implications for ERP vendors. International journal of production economics, 97(3), pp.
279-295.