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Beware ”Scope Creep” on ERP Projects

Philip E. Theiss, CFO of Natural Organics, tells what happens when the IT candy store opens for business. (Second of a series.)

If you’re installing an enterprise resource planning (ERP) system, beware of “scope creep.”

That’s the advice Philip E. Theiss, vice president of finance for Natural Organics, a privately held company based in Melville, N.Y., has gleaned from his company’s recent “technology lobotomy” — the transformation of its legacy systems into an ERP.

After the company officially kicked off its installation of an SAP R/3 ERP system on March 6, 2000, members of its finance, sales, marketing, and other departments sought reports and functions beyond what was originally intended.

“They were like kids in a candy store, [asking], `Dad, can I have two?’” says Theiss, who, outside of his CFO role, handles information technology, purchasing, and human resources.

The employees of Natural Organics, a manufacturer and distributor of natural vitamins and nutritional supplements (since it’s private it is not required to reveal its financials), weren’t the only ones who wanted more sweets from the ERP candy shop.

Gerald A. Kessler, the owner and founder of the company, also “had a need that didn’t exist in the legacy system” that ended up being “a plus item in the scope of the project,” Theiss tells CFO.com. For example, Kessler wanted the ERP to include a call-reporting system to track the activity of the company’s sales representatives.

Since the tracking system wasn’t part of the original contract for the project, the company had to issue a change order for the new system. Theiss says that was one factor producing scope creep on the project.

The total ERP package, including hardware, software, and consulting, cost the company $3 million.

Like other CFOs, Theiss finds that dealing with people — employees as well as outside systems integrators — is a greater challenge in ERP installation than averting technological mishaps. The first story in the series tells how a CFO dealt with problems connected with lean staffing. While the Natural Organics ERP went live on November 1, 2000, employees are “still settling in” to its use and reacting to its kinks, Theiss says. In installing the system, the company replaced its legacy system, which amounted to “a scattering of in-house systems and other vendor software,” including filePro and Microsoft FoxPro products, the CFO says.

It’s been a challenge transforming the legacy systems into an “integrated and flexible” ERP, according to Theiss. After many years of use, the existing systems were “highly fine-tuned” and “rigid,” he adds.

The response within the company to the new system has been diverse, with some people still attached to the legacy systems and some “intrigued [about] getting something better,” Theiss says.

“You don’t know what the interaction [among all the company functions] is until you go live,” the CFO adds, and “all the scenarios are interacting in real time.”

In fact, the installation has spawned delays in customer service, a matter of great concern to the sales-driven company, which swears by its on-time delivery. Among the dictates of the company’s mission spelled out by Kessler, the owner, is that listed merchandise must always be in stock and that if a store places an order by 3 p.m., it will be on the truck that night, according to Theiss.

Because the customer-service functions were handled by legacy systems that were very specific to those functions, the company has had “performance problems” in the ERP’s early going, he says.

For instance, within the legacy systems, an average order, consisting of about 20 different kinds of products, would be processed within three or four minutes. Using the ERP, the company at first took five or six minutes to handle it.

“You might think that that’s not much [of a difference],” Theiss says. But the number of National Organics’s client stores — it has about 6,000 — made it imperative that the company cut the order-management time down. Had the average order-processing time stayed at five or six minutes, the company would have had to hire more people to take the orders of customers over the telephone, the CFO says.

While the company has managed to get the system to do the work in four minutes, that’s still more than its goal of three minutes, Theiss says. “When you’re replacing a legacy process, that’s what you’re up against,” he adds.

Sparing No Expense

On a technological level, the company sought to mitigate its business risks in installing the system by not doing things on the cheap. “One of the issues in ERP systems is performance, so we tried not to underbuy” as many companies do, Theiss says.

So, for example, if its hardware supplier recommended a specific product, the company would typically buy a more upscale version, he says. With on-time delivery so crucial to the company, it made sure to buy an automatically operating, duplicate backup production server in which “all our data is mirrored,” he adds.

Yet while a company can mitigate its exposure to an ERP system breakdowns by choosing the right hardware and software and not being stingy about it, “it’s the people” employed by the outside systems integrator that need the most scrutiny, the CFO says.

Integrators, for instance, “can alienate the user community and, all of a sudden, the project can come to a halt because of the personality” of the contractors, Theiss says.

What criteria should a company use when choosing an integrator? “It’s not just how smart they are, but [how] they fit” the culture of the client company, the CFO says. Experience with the technology is also key. The integrators should have four or five years’ experience in implementing SAP projects, Theiss thinks.

In choosing its integrator, Spearhead Security Technologies, which is also based in Melville, N.Y., the company relied on the evaluation of Gladwyne Software Surety, a risk management consulting firm National Organics used to sort through contract language on the project, according to Theiss.

Among the issues the company grilled Spearhead and two other competing integrators about were whether the firms had worked with companies that resembled Natural Organics. A lack of specific experience in the client’s industry could add time to the project.

“It would be great to find [an integrator] that did another vitamin company,” Theiss says, recounting his thoughts in choosing the contractor. At the same time, work with a pharmaceutical firm would be helpful experience.

Spanning the Cycle

Spanning “the complete supply-chain life cycle,” the National Organics SAP system pulls together the company’s financial reporting, planning, procurement, production, inventory-control, and bill-paying functions, according to the CFO.

For the order-management and order-checking function, including the auditing of invoices, the company has had to use other software, supplied by Epic Data International. “SAP couldn’t handle the intelligence needed for that kind of operation within our distribution function,” Theiss says, noting that the need for Epic Data surfaced after the installation had begun.

The need for an ERP stemmed from the company’s expansion into new geographic territory and new business segments, the CFO says. Focused on the company’s U.S. markets and its U.S.-dollar-based exports, the legacy systems couldn’t be used to process other currencies.

That proved to be a shortcoming when National Organics added a London subsidiary that bills in pounds. The ERP solved that problem through its capacity to process transactions in different currencies.

Further, Theiss observes, when the company expanded into new business segments, it was faced with the choice of “either putting a major effort into dated technology or moving up into the latest technology,” he says.

While the company’s major business target “is small, independent-health-food-store, mom-and-pop, Main Street business,” it’s “making inroads” into a mass-market segment that includes such mass market sellers as King Kullen, a supermarket chain.

“We can sell [products to an independent store in a day], but it takes a long lead time and a different type of planning and logistical process” to develop sales to a mass-market chain, Theiss explains.

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