Foxmeyer Drug Company Case

A careful analysis reveals what went wrong with FoxMeyer that transformed the pharmaceutical giant into the biggest liquidation case in US Bankruptcy History

FoxMeyer sued SAP, Andersen and Pinnacle. This is just a knee-jerk reaction of a business entity that had gone down. It wants to take others in its fall. It is easier to pass the blame on to something else because the hardest thing in the world is to call one’s self stupid and claim full responsibility. After all, FoxMeyer is an American Firm, it just did what a stereotypical American firm would have done given the situation – pass the buck and sue.

Anyone is his right mind, any disciple of objectivity and rationality will ask the question: “How can a software package alone bring down a large company?” An ERP (Enterprise Resource Planning) and an automated warehousing systems, if they were poorly designed and installed could only be useless at worst. Even as ERP system designed to sabotage a company is not enough to make a business belly up. The ERP is but an improvement of the system.

The ERP package is like psychoanalysis – it tries to get to the bottom of the problem to make the company know itself better and become a better organization. Psychoanalysis, even if conducted by the worst shrink, cannot possibly cause a person to just double up in pain and die. The worst thing that could happen with psychoanalysis gone wrong is the patient wastes money and time on the couch, so to speak. If the person is not feeling any better with psychoanalysis, he could just leave and get an appointment with a more reputable shrink.

The comedy is that in FoxMeyer’s unwillingness to accomplish full responsibility to its own collapse, it went on great lengths in suing SAP, Andersen and Pinnacle. In effect, what FoxMeyer is trying to establish is that it went bankrupt because the ERP system told them so, which makes FoxMeyer even more stupid in my estimation. In effect, FoxMeyer is admitting that it treated the ERP system the way the astronauts in Space Odyssey 2001 regarded the Supercomputer Hal.

It is just that Space Odyssey 2001 is Science Fiction – born out of the imagination of Arthur Clarke and Stanley Kubrick. Sometimes life is stranger than fiction. In FoxMeyer’s case, it is sad but true.

It is also worth mentioning that FoxMeyer’s rival in the 1990’s McKesson hired SAP’s services for the same ERP package and McKesson did not go bankrupt in the process.

After its collapse, a former FoxMeyer executive admitted that what hastened the collapse of the company was a combination of four elements – FoxMeyer entered contracts that weren’t feasible; a ridiculous pricing structure; an overzealous sales strategy; and that it believed its own projections and moved on blindly. These are the heads and tails that led to FoxMeyer’s bankruptcy. It was a case of too many management mistakes going on at the same time. First, it heavily banked on the University Health Care Contract that went dud.

Second, FoxMeyer anticipated the $40 million cost savings per year due to the new ERP and automated warehousing systems. In its desire to capture a bigger market share, FoxMeyer thought that it would be wise to lower prices because it can afford it anyway – with the anticipated $40 million cost savings from the ERP and automated warehouse. In other words, FoxMeyer’s collapse is a tragedy of market aggression gone wrong. Optimism bordering on foolishness. Putting all eggs in one basket and then counting the chicks before the eggs are hatched. Too many chicken analogies. Too many clichés.

In the final analysis, FoxMeyer did not follow the lead of companies that had successfully integrated the ERP system into their business. FoxMeyer should have considered the ERP system as a necessary cost to make its business better. A cost and not a cost savings. FoxMeyer mistook the application of the ERP system as the ultimate goal in itself. The truth is that the application of an ERP system is but a beginning. What FoxMeyer failed to realize is that the value of the ERP system is in its proper use – the use of a systematized information that aids sound decision making so that business can improve its practices and processes, achieving progress in the end.