Hershey Food's Need to Implement ERP
- Hershey priced products low to achieve annual sales of close to 5 Billion USD throughout the 90s.
- Highly efficient logistics and supply chain systems supported by IT were required
- Spending on IT in the food and beverage industry was among the lowest at the time
- Hershey was using a legacy system that functioned through several mainframes, used for different functions; ranging from HR to order processing
- Y2K was expected to be a huge issue with these legacy systems.
- In 1996 Hershey's management gave approval to implement new systems, rather than try to come up with fixes for Y2K date issues
- The main goals were to upgrade and standardize the hardware, shift to client/server environment, and move to TCP/IP network
- By implementing new software, Hershey hoped to better coordinate delivery of its product, to meet retailers growing desire to maintain low inventory, thus reducing holding costs. In general, just to provide better customer service
- The plan was to switch over to ERP by April 1999
- New ERP software was expected to help reorganize Hershey's business processes
- Hershey elected to go with SAP AG's R/3 ERP Suite along with software from Manugistics and Siebel
- The SAP software contained modules for: finance, purchasing, materials management, warehousing, order processing, and billing
- Manugistics would cover: transport management, production, forecasting, and scheduling. These modules were delivered by Manugistics in the old legacy system, and were to be updated modules for the new system
- Siebel modules were to cover the marketing aspects; customer relations, tracking effectiveness of marketing campaigns, and a pricing promotions module
- As part of the project, Hershey installed bar coding systems across it's products and plants in the US, aiming to reduce production costs, track inflow/outflow of materials, and improve logistics management
- Hershey's initially planned to have the new system running by April 1999, this would have been the slowest time of the year before the Halloween/Christmas orders began coming in, and would ensure they were running on the new system before Y2K hit
- By January 1999 some of the SAP modules had been implemented and were running smoothly, such as:
- SAP - Financial, Materials management, Purchasing, and Warehousing
- The outstanding modules from SAP were; Critical order processing and billing systems modules
- The Siebel and Manugistic modules were behind schedule and did not get added until July 1999, 3 months behind schedule, and coming into what was a busy season, as orders were already rolling in for Halloween fulfillments
- Rather than roll out these modules in phases, one at a time, Hershey decided to implement a "Big Bang" approach and roll everything out at once.
- Hershey believed the "Big Bang" approach would enable them to meet all their Halloween orders
- Initial roll-out appeared to go smoothly, however problems related to order fulfillment, processing, and shipping started to arise
- Orders were shipping behind schedule, and ones that did ship had shortages.
- Hershey could not respond to the problems, as their old system had been pulled down to make way for new one
- Having no access to data, Hershey had to phone customers to find details of what they'd ordered and received
- In July 1999 when implementation took place, Hershey had supplies on hand for approximately 8 days, much higher stock than usual, in case problems arose
- Soon after big bang implementation, they were missing their 5 day delivery schedule, and were having to ask distributors for 12 day delivery turnaround. Even with this extension, Hershey was 15 days behind schedule in fulfilling orders
- The delay in deliveries led to Hershey losing credibility in the market place, and began to lose shelf space in stores, for which there was high competition
- Hershey was unable to send orders, due to entry, processing, and fulfillment module issues in the ERP. On the other hand, manufacturing processes were working fine. Leading to an inventory buildup in the warehouses. Essentially Hershey was unable to fulfill orders, despite a huge stockpile of inventory
- By the end of September 2000, the inventories at Hershey were over 25% what they had been at the same time period in the previous year
- Analysis revealed the problems occurred as a result of informal structures within the company, not the ERP software
- Hershey had traditionally managed peak season inflow of products from manufacturing, by storing it anywhere in the company there was space, not just in the warehouses or distribution centres. Hershey even rented storage spaces on a temporary basis, and stored product in empty rooms in their factories
- These informal sites had not been set up as store points in the ERP software, yet inventory were being stored in these spots, as they always had in the past, without being tracked at all
- The order systems would check warehouses for orders, but was unable to query all the locations where product was being stored, resulting in the system thinking there were shortages, when in fact there was overstock all over the place
- Hershey did not acknowledge the existence of the problem until September 1999, when it announced employees were facing problems entering new orders in the new system.
- Hershey blamed the problems on the ERP software. The ERP vendors, insisted the software was not to blame, but the "BigBang" implementation was
- The failure to properly implement the ERP had cost Hershey 150 million in sales. Profits for 3rd quarter of 1999 dropped by 19%, and sales declined by 12%. It's estimated that during the 3rd and 4th quarter of 1999 Hershey also lost about .5% of market share
- In order to repair the damage already done, Hershey appointed a CIO, George Davis, to oversee the ERP
- He implemented a rigorous software testing program, and by September-October 2000, announced most of the initial problems with the ERP program had been fixed
- Hershey was now in a position to fulfill orders for Easter, and the next peak season, Halloween-Christmas, passed smoothly
- Hershey was back on track in 2000 to pre-implementation sales levels
- Analysis after the debacle revealed other issues that compounded the problems with the implementation, and things that could have been done to avoid the problems
- The "Bigbang" implementation was the first core problem. Rolling out all modules at once, without having a time period between each, did not allow for any bugs/glitches to be detected or fixed
- Project management at Hershey was also to blame. Having little experience with software rollout, and no CIO before the implementation, meant the deadlines to implement the ERP suite were unrealistic. Hershey was unable to stick to the deadlines themselves, for preparation of many of the key processes. Rather than implementing in April a low season, they ended up trying to implement in July, start of busy season, that compounded issues. Now they had no time to react and try to repair issues. Experts say minimum of 3-6 weeks after implementation would have been needed to test and repair any issues
- With 3 different vendors working on the system it would have been better to roll out each system successively, and then check for integration issues. The SAP suite on it's own was complex to install and run, implementing 2 other applications along with it, complicated things even more
- The employees were required to follow and understand the new different business process built in to, not just one, but 3 different suites of software, as well as how they interacted with one another. In a nutshell, they were overloaded, and especially in peak season, did not receive the proper training
- Hershey did not have the right processes in place to keep senior management informed of how the implementation was preceding. Consultants involved in the project pointed out top management had really failed to understand the scope of the project. There was, "a lack of technological savvy at the top" They had no CIO, and the IT department was headed by a vice-president
- There was a lack of infrastructure in place to support a project of this magnitude
Many of the problems that arose with the implementation, could have been avoided. A good starting point, would have been to appoint a qualified CIO to head the project from the start. A qualified CIO would have done many things differently. Firstly they would have done a thorough assessment and testing of the network. This would have raised some red flags and prompted a full probe of the network; modelling it, and profiling the future apps that would be run on it. By checking the impact of the SAP, Manugistics, and Siebel loads on its network, they would have been able to identify problem areas, and eliminate them before even beginning to roll out the systems. Having a CIO would have also kept upper management informed, so they'd have an understanding of the scope of the project. This in turn would have led to better project management, refining processes, and having everything ready to go at the planned implementation date of April, while business was slow. This would have allowed for individual roll out of each application, with time to assess and correct any problems. Additionally rolling out each individual vendor's system one at a time, rather than altogether would have eliminated many of the problems. Lastly with a smoother roll-out, there would have been more time to implement a proper employee training program, for the new systems. Though Hershey pointed the finger at the software companies, blaming them for the implementation problems, thorough analysis reveals, the bulk of the problems, were the result of internal organization and informal process systems at Hershey.
