FoxMeyer Drug, a holding company in the health care services industry, with 2700 employees in 23 union and non-union locations throughout the US and Canada. In December 1995, FoxMeyer Drug was a $5 billion-a-year company, one of the leaders among distributors of pharmaceuticals. The business of FoxMeyer included the following: 1. Distribute a full line of pharmaceutical products and health and beauty aids to chain stores, independent drug stores, hospitals, and other health care facilities. In other words, FoxMeyer’s customers were retailers and dispensers.
2. Provide managed care and information-based services to health care facilities, pharmacies and physicians. 3. Conduct business in franchising variety stores and the franchising and operation of crafts stores, and wholesale distribution of products to those stores. Prior Information System Prior to adoption of SAP, FoxMeyer had three linked data processing centers. Their old system involved customers filling out electronic orders, which were sent to one of their three data processing centers. Orders were filled manually and packaged within 24 hours.
The company had recently completed a national distribution center with multiple carousels and automated picking, with the capability of tracking inventory to secondary locations. Implementation of ERP and the Selection of SAP R/3 Driving Factors • High Growth in Health Care FoxMeyer, which was more than a century old, was nearing a crossroads by the mid-’90s. Thanks to the aging of America and a stream of new wonders from labs, pharmaceutical sales were exploding. Due to aging population and growth in health care in United States, FoxMeyer anticipated high growth in their industries.
• Extreme price competition, threatening margins There was high growth in this market indeed, but pharmaceutical distributors’ profit margins were thin as political and social pressures on health care costs mounted and as the cutthroat distribution business began to consolidate. FoxMeyer wanted to be a survivor. • High Orders Processing FoxMeyer had orders for over 300,000 items per day and had to process hundreds of thousands of transactions each day. As explained by former investor relations executive with FoxMeyer, “Shipping pharmaceuticals isn’t like shipping bananas.
There are a lot of government controls and procedures in different states. Many drugs are heavily secured. Some quickly expire. Meanwhile, hospitals need these drugs, because they’re literally dealing with life and death. You can’t make arbitrary or late shipments. ” • Long-term strategies This industry was characterized by extreme price competition, which threatened FoxMeyer margins. Therefore, FoxMeyer adopted long-term strategies of efficiently managing inventory, seeking lower operating expenses, stronger sales & marketing and expanded services. • Old Unisys Mainframe
FoxMeyer’s old Unisys mainframe was creaking under the strain. It could only track inventories daily, for example, as shipments came and went-not minute by minute, as had become the standard at some competitors. Many of its 30 warehouses across the country were older buildings operating on clunky software. Moreover, its Unisys system was being phased out by the vendor and needed to be replaced. The Delta project was envisaged as a client/server R/3 solution integrated with automated warehouses to accommodate future company growth. Decision to Install ERP
Based on a supply chain analysis, it was decided that an ERP would offer a perfect solution for FoxMeyer to provide real time information and automate and integrate inventory systems. This was expected to eliminate unnecessary activities, establish appropriate inventory levels and provide responsive customer services. Ideally, with an ERP system, the company would be able to manage ordering, inventory and sales activities in one system which was expected to streamline operations and provide efficient distribution of prescription drugs which is a critical component of the pharmaceutical industry.
So FoxMeyer decided to invest in ERP, which has become the Big Business Fix of the 90s. FoxMeyer installed ERP system to process the hundreds of thousands of order requests that the company received each day. The system would manage the packaging and routing of pharmaceuticals from dozens of vendors to thousands of hospitals, clinics, drug stores, and other customers. They anticipated the ERP also to enable them to lower unit costs, and thus allow them to undercut competitors on price. In 1993, FoxMeyer decided to select SAP R/3 system, with Andersen Consulting hired to integrate the $65 billion system
The Selection of SAP R/3 SAP R/3 software includes over 70 integrated modules in accounting, logistic HR, sales and distribution etc. The software is built from a business point of view. By collaborating with business and IT experts, SAP gradually developed a unique understanding of the challenges faced by users and provides a total solution to its customers. The software helps companies link their business processes, so the whole enterprise can run smoothly. In the early 1990’s R/3 was a hot commodity.
FoxMeyer, like many other companies, jumped on the bandwagon to capitalize the benefit of using the software because of the software reputation and the consultants’ recommendation. Consulting Company: Andersen Consulting Anderson Consulting (now Accenture) is a large and diversified IT consulting company. In the area of enterprise business software it provides solutions to clients on a global basis. Andersen had at that time over 15,000 IT consultants dedicated to help clients improve their business result by implementing IT solutions. The strength of Andersen’s global
capability with respect to SAP was embodied in the wide breadth of methodologies and tools offered to their customers with their SAP implementation. Because their clients’ strategies vary widely, Andersen actively investigates and evaluates both SAP tools and third party tools. Andersen also has invented its own tools to fill specific SAP functionality gaps or to meet specific customer requirements. Furthermore, Andersen tools are always consistent with SAP approach and complementary to SAP tools. In other words, Andersen seemed to be a most trusted consultant for implementing SAP systems. Implementation of SAP R/3
In September 1993, FoxMeyer contracted with SAP, Andersen Consulting and Arthur Andersen & Co. (AA), the parent company of Anderson Consulting, to implement the R/3 software. This multi-million dollar project covered the entire supply chain–warehouses, inventory control, customer service, marketing, strategic planning, information system, shipping and handling. SAP R/3 was the first information system launched in the pharmaceutical industry that utilized extensive technology coupled with automation of warehouse functions. The implementation cost for SAP was budgeted in 1994 at $65 million.
The ERP system was projected to save FoxMeyer US$40m per year. The budget included: • $4. 8 million client/server computer system from Hewlett Packard, • $4M SAP software, • several millions of dollars for consulting fees for Andersen Consulting, and • $18m for a new 340,000 square-foot computerized warehouse in Washington Court House, Ohio, where computerized robots filled orders received from hospitals and pharmacies. In 1994, FoxMeyer won an important contract, a $1 billion-a-year deal from University HealthCare, a huge consortium of teaching hospitals across the country.
FoxMeyer’s trump card was the promise of bargain-basement prices because it was anticipating $40 million a year in cost savings from the ERP implementation. Therefore, this contract required it to add 6 warehouses. SAP and Anderson scheduled the implementation at these warehouses for January and February 1995. Then they planned to implement R/3 at the remaining 17 old warehouses. However, in November 1994, SAP informed FoxMeyer that R/3 could only be implemented at the new warehouses. The other warehouses had a volume of invoices larger than the system was able to process.
The R/3 system at the new warehouses was able to handle 10,000 transactions per day, while the legacy system was able to handle 420,000 transactions per day. FoxMeyer started the R/3 on time in the new facilities and customers’ orders were filled. However, due to data errors, the customers’ sales histories were inaccurate. On top of that the physical move of inventory was done carelessly. Therefore, the benefits from forecasting inventory needs were limited. FoxMeyer had to spend about $16 million correcting errors in orders during the first 6 weeks after the opening of the new warehouse.
Thus, FoxMeyer realized only half the projected savings. Several of the problems were not correctable, forcing, as will be seen later, a bankruptcy. The final implementation bill was more than $100 million, but the R/3’s performance was still unacceptable. It was completed late, went over budget, and failed to deliver the expected benefits. For a company in a low-margin business with a heavy debt burden, the shortfalls were overwhelming. Bankruptcy Nightmare Trying to Find Solutions In August 1996, the company brought in Robert Peiser as chief executive to help clean up the mess. As chief financial officer of Trans World Airlines, Mr.
Peiser had established a strong reputation as a corporate turnaround expert. On the first day he showed up at headquarters, he filed for protection from creditors under Chapter 11 of federal bankruptcy laws. Mr. Peiser says he “felt the company had a pretty decent business base, and I’d have the opportunity to turn it around” thanks to the breathing room provided by Chapter 11. But, only a few weeks into the new job, Mr. Peiser decided the problems at FoxMeyer were too deep. By the end of November 1996, he had departed. In the end, the result of project Delta III, which lasted 2.
5 years, was an investment of more than $100 million. They could only process 2. 4 % of the transactions which they had done with the old system and even this small part was not fully correct. Bankruptcy In early 1997, FoxMeyer announced that it would swallow a $34 million charge related to uncollectible costs on customer orders and to inventory problems. Stock in FoxMeyer’s parent, which had raised to $26 a share in December 1995, crashed to around $3. McKesson, FoxMeyer’s former competitor, agreed to pluck FoxMeyer’s assets out of Chapter 11 for just $80 million. Plus Two Sue Andersen for Sap Snafus
FoxMeyer Corp has sued Andersen Consulting for $500m, alleging that the consulting firm’s botched SAP installation contributed to the drug distributors’ downfall. The suit, filed on June 29 by FoxMeyer’s Chapter 7 bankruptcy trustee Bart Brown in Houston, accuses Andersen of fraud, breach of contract and negligence, among other charges. The suit further alleges that the consulting giant’s faulty and overpriced SAP installation actually played a key part in FoxMeyer’s eventual bankruptcy and liquidation. FoxMeyer blamed R/3’s alleged lack of scalability for at least part of its financial troubles.
It had accused SAP of fraudulent and negligent conduct, saying the R/3 system that was purchased to run sales, distribution, order processing and inventory did not function as promised. Six years later the bankruptcy trustee and Accenture settled out of court and the lawsuit was dismissed on August 8, 2002. What exactly went wrong? How could such a huge corporation have gone so wrong so fast? Some former officials of the Carrollton, Texas, and company place the blame squarely on the ambitious new $100 million computer system that the company installed to handle its rapid growth.
Executives at FoxMeyer’s former parent, now known as Avatex, have sued, claiming deficiencies in the software it bought. But former FoxMeyer executives, industry experts, and securities analysts say FoxMeyer had deeper problems than technology. They say FoxMeyer was so desperate to expand that it made absurdly aggressive assumptions about how much it would save by using an untried computer system that it was ill-equipped to install. According to Christopher Cole, chief operating officer at Pinnacle, the FoxMeyer mess was “not a failure of automation.
It was not a failure of commercial software per se. It was a management failure” (Jesitus, 1997). Well, here comes an interesting and critical question: who is to blame, technology or people? Technology Factors • Poor selection of the Software SAP R/3 was originally designed for manufacturing companies and not for wholesalers, especially those doing large number of transactions. R/3 has never been used by a distributor until that time. It lacked many requirements needed for successful wholesale distribution. SAP R/3 was inflexible software, and any modification required time and financial investment.
R/3 was unable to handle the large number of orders. FoxMeyer filled orders from thousands of pharmacies, each of which have had hundreds of items, totaling up to 500,000 orders per day. The legacy system handled 420,000 orders per day, but SAP only processed 10,000 orders daily (2. 4% of that of the legacy system). • No restructuring of the business process was done SAP was not fully integrated because FoxMeyer was incapable of reengineering their business processes in order to make the software more efficient.
FoxMeyer signed a 5-year, $5 billion contract with a new customer, University Health System Consortium in July 1994, on the assumption that a projected US$40m in benefits from the SAP implementation would be materialized. They placed a higher priority on meeting that customers’ need than on making the SAP implementation success. The delivery was scheduled to start in early 1995, but FoxMeyer pushed the implementation deadline forward 90 days to meet their customers’ needs. Thus, FoxMeyer sacrificed the needed business reengineering processes.