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ERP Lmplementation Failure at Hershey Foods Corporation

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ERP Lmplementation Failure at Hershey Foods Corporation ERPlmplementation Failure at HersheyFoods Corporation Casestudy Referenceno 908-001-1 Thiscase was written by Indu Perepu, under the direction of Vivek Gupta, lcFAlcenter for Management Research. lt is intended to beused as the basis for classdiscussion rather than to illustrateeither effective or ineffectivehandlinq of a managementsituation.The case was compiled from published sources. @2008, ICFAI Center for Management Research (ICMR). Nopart of thispublication may be copied, stored, transmitted, reproduced ordistributed inany form or mediumwhatsoever without the permission of thecopyright owner. DlrtÍibuted by sch,UK and USA NoÍth AmcÍie RestoÍth. woÍld GE thecase for learninqffiffI;ïi" ;ïl;:llï;:ï ;ïillll;:Íïiï; - PÍinted in UK and UsA a [email protected] € ê[email protected] 908-001-1 ERP IMPLEMENTATION FAILURE AT HERSHEY FOODS CORPORATION "The Hersheydebacle is not an indictment of ERPsper se, but it should caution any company that choosesto implementsuch a broad suite to make sure that systemwill function smoothly beforeentering a peak salesperiod."l - Chain StoreAge, in 1999. "There is no doubt that 1999was a most dfficult and disappointingyear for Hershey Foods Corporation. llhile the year got off to a slow start due to excessiveretail inventories, we fully expecteda strongfinish in the secondhalf of the yea.r.Instead, the implementationof theJinal phase of the Corporation's enterprise-wide information systemcreated problems in the areas of customerservice, warehousing and orderfuffillment. Thesedfficulties were exacerbatedby our growth in recent years which had resulted ín shipping capacity constraints. As a result, Hershey'ssales and earningsfell well short of expectationsfor theyear."' - Kenneth L Wolfe, Chairman & CEO, HersheyFoods Corporation, in 1999. INTRODUCTION In the third quarterof 2000, HersheyFoods Corporation3(Hershey), the US basedmanufacturer of chocolatesand sugar confectionary,announced that its revenuesincreased to US$ l l97 billion as comparedto US$ 1.097billion in the third quarterof 1999 - an increaseof l2Yo. During the sameperiod, profits increasedby 23% from US$ 87.6million to US$ 107.4million. The company'smanagement and shareholderswere pleasedat this announcement,as Hershey's revenuesand profits for the third quaÍer of 1999as well as for the year 1999as a whole had been adversely affected due to problems related to ERP systemsimplementation in the company. According to KennethL. Wolfe (Wolfe), CEO and Chairman,Hershey, "Admittedly, we were in the depthsof our shipping difficulties during last year's third quarter.ERP system,as well as a revampeddistribution facility in the EasternUS, were both much improved during this period of high demandfor our domesticconfectionery business.'a Hershey had started revamping its hardware and software infrastructure in 1997. In 1999, Hershey faltered during the final leg of the ERP implementation.Hershey had selectedthe servicesof three vendors SAP AGs (SAP), Siebel Systemsulsiebell and ManugisticsTfor the I Matt Nannery,"When the CandyMan Can't," Chain StoreAge, December 1999. 2 HersheyAnnual Report, 1999,(filed on March 13, 2000),www.sec-edgar-online.com. 3 In April 2005, HersheyFoods Corporation was renamedas The HersheyCompany. o Marc L Songini, "Halloween Less Haunting for Hershey this Year," Computerworld, November 06, 2000. t Walldo4 Germany-basedSAP AG is the largest businesssoftware enterprisein Europe. SAP is the pioneerof enterpriseresource planning with its main product SAP ERP. In 2006, the company'srevenues were at € 9.327 billion and net incomewas at € 1.871billion. u Siebel SystemsInc. was foundedby ThomasSiebel in 1993, and was involved in designing,developing, and marketing of CRM applications.In September2005, Oracle Corporationacquired Siebel for US$ 5.8 billion. 908-001-1 project, and some of the modules were implementedas per the scheduleby the company in January 1999. However, the remaining moduleswhich were to be implementedby April 1999 were delayedand were implementedonly in July 1999.This overlappedwith the time when the company usually started receiving huge orders for the impending Halloween and Christmas seasons. In order to quicken the implementationprocess, Hershey opted for Big Bang implementation, where several modules were implementedsimultaneously. Some of them could not be tested properly due to lack of time. This led to severalproblems related to order managementand fulfillment, and orders from many retailersand distributors could not be fulfilled, even though Hersheyhad the finished product stockedin its warehouses.The adverseaffects of failed ERP implementationwere immediate,with a significantdrop in the revenuesfor third quarterof 1999. Annual revenuesfor 1999were US$ 150 million lesscompared to those in 1998,a drop of l2Yo (Refer Table I for the details of Hershey'sfinancials during the third quarter of 1998, 1999 and 2000). TABLE I HERSHEY'STHIRD QUARTERFINANCIALS (1993-2000) In US$ thousand Quarter ending Quarter ending Quarter ending Oct 01.2000 Oct 03, 1999 Oct 04. 1998 Net sales 1.196.755 1,066,695 t.217.237 Cost& Expenses Costof Sales 696,431 634.042 706.60s Selline,Mkte. Admn 303.688 268.575 3l 1.658 Total Costs& Expenses 1.000.119 902.617 1,018.263 Incomebefore interest & incometaxes 196.636 164.078 198.974 InterestExpenses net 21.152 20.507 22.691 Incomebefore income taxes 175.484 143.571 176.283 Provisionfor incometaxes 68,079 s5.993 68.750 Net Income 107.40s 87.578 107.533 Source:Hershey Foods Corporation (www.hersheycom). However, Hershey was quick to rebound and implementedmySAP.com by September 2002, much beforethe scheduleand below the estimatedbudget. According to SteveSawyer, professor, ,,In Information Sciencesand Technology, PennsylvaniaState UniveÁity, othei words, most corporationsdon't fail so dramaticallythe first time, so their repair is nèu.. ,o good.,,8 BACKGROUNDNOTE Hershey was founded by Milton Hershey (Milton) as Hershey ChocolateCompany (HCC) in 1894'Before establishingHCC, Milton underwenta four year apprenticeshipwith a canàymaker in Lancastere. ln 1876,he establisheda candy store in ftritaOeiptria,which was closedby l gg2. He then moved to Denver, where he learnt making caramelusing fresh milk. He then starteda candy businessin New York which failed. He moved back to Lancasterto start Lancasrer ' Manugisticsis a softwareapplication company founded in 1969 as Scientific Time SharingCorporation. The-namewas changedto Manugisticsin 1992.The companywas a pioneer in supply chaií softivarebut its fortunes were adverselyaffected by cut-throat competition and tLe dotcom crash in March 2000. In 2006, it was sold to JDA Software. 8 David F Carr,"Hershey's Sweet Victory,,'Baseline, December 'Located 2002. in SouthCentral Pennsylvania, Lancaster is the eighth largestcity in Pennsylvania,USA. 908-001-1 CaramelCompany which was successful.The company'sproducts were sold all over the US and were exportedto Europe. Milton decidedto make chocolates,during a visit to an expositionin 1893,where he purchased the machinery used to make chocolates.Using the machinery, he began making chocolate coatingsfor caramels.HCC was incorporatedafter this businesssuccess in that year. By 1895, HCC was manufacturingmore than ll4 different varieties of chocolates.But milk chocolatewas still made only by a few Swiss companies.Milton aimed to leam how to mass produce milk chocolates,and spent severalyears to try to discover the right combination and methodto producemilk chocolates.By 1899,he arrived at the right combinationof cocoa,sugar and milk throughtrial and error and becamethe first American companyto make milk chocolate. In order to concentrateon the chocolatebusiness, the caramelcompany was sold in 1900for US$ 1 million. A new facility to producechocolates was startedin Derry Township, in Pennsylvania. The First World War had a negative impact on the company, as the sugar it imported from Europe became scarce. This led HCC to explore the possibility of using Cuba as a viable altemative sourceof sugar.It went on to acquireseveral sugar plantations and also constructed sugarrefineries in Cuba. ln 1927,HCC was incorporatedas HersheyChocolate Corporation. At the sametime, another companyHershey Estates was incorporated.This companylooked into Milton's other activities like community projects.Another companyto overseethe Cubanoperations was also foundedat the same time. In the same year, the company went public by offering 350,000 sharesof convertiblepreferred stock of HersheyChocolate Corporation. Hersheywas known for severalinnovations and was creditedwith introducing severalchocolate variants. Some of the variants included chocolatesyrup for home use (1926), chocolatechips (1928>,Krackle Bar, ice creamtoppings, cream topping with milk chocolate,shell toppings,hot fudge, etc. Some of HCC's other popular products included Hershey's Kisses, introduced in 1907,Mr. Goodbar(1925), Krackel Bar (1938),and Hershey's Hugs (1993). During the SecondWorld rily'ar,the US army demandeda chocolatethat weighedfour ounces,did not melt at high temperaturesand provided high energy.The product should not taste good and soldiers should eat it only in case of emergency.Taking up the challenge,Hershey produced specialcandy bars meetingthe above specifications.They were known as 'Field Ration D'. By the end of the War, Hersheywas producingaround 24 million 'Field Ration D' barsevery week. After the SecondWorld War, the Cubanfacilities were sold to CubanAtlantic SugarCompany. Through the years, Hershey Chocolate Corporation acquired several
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