MFIs supply chain woes

The ‘company history’ page on furniture retailer MFI’s web site makes interesting reading for any observer of the company’s recent financial problems. “By early 2004, a major SAP implementation project for new systems throughout the Group was concluded,” it reads. As if cut from the SAP brochure, it goes on to list the benefits that the system will deliver: “lower stock levels, fewer failed deliveries, improved levels of customer service and increased efficiency and profitability.”

Those are attractive aspirations for any organisation in the fiercely competitive retail space. But MFI’s most recent financial announcements – characterised by poor sales and spiralling costs – tell a different story. And executives at the company have publicly blamed the software, in which the company has invested £50 million so far, for that.

In particular, they say, “teething problems” with the SAP supply chain system, which was expected to save the company some £35 million per year, have left it unable to fulfil customer orders and have actually imposed extra costs – both in fixes to the system and in compensating disappointed customers. These, they say, will amount to a further £30 million.

SAP executives have publicly denied that there is anything wrong with the software they sold MFI – the same suite is running supply chains at thousands of other retailers. If that is accepted, then the situation suggests serious problems with MFI’s implementation of it.

MFI is not alone in encountering huge challenges in installing supply chain software. In February 2001, sports apparel giant Nike blamed “complications” caused by new demand and supply planning applications from supply chain specialist i2 Technologies for a 24% dip in profits. And in February 2004, chemicals company ICI announced an £11 million write-down charge for supply chain applications from SAP at its Quest flavour and fragrance division.

That begs a question: are supply chain systems particularly difficult to implement successfully? To some extent they are, says Alexi Sarnevitz, an analyst at IT market research company AMR Research. “It’s true that supply chain applications are fairly complex – they need to perform sophisticated planning and forecasting functions,” he says. But, in general, he adds, most supply chain software failures are attributable to five key issues:

° A poor business case “As with any business application, before implementing a supply chain system, be very, very sure that you know exactly why you need it and what you expect it to do for your company,” he advises. A lack of due diligence prior to vendor selection is the primary cause of most supply chain failures, he says.

° Poor planning Supply chain software can only provide accurate forecasting capabilities if it is fed accurate data relating to historical supply and demand fluctuations. “These systems are driven by analytics. You need to have a firm handle on past patterns of demand and customer behaviour in order to get supply chain software working well. Provide the system with statistically valid outlooks derived from rigorous test scenarios and you have a much greater chance of success,” he says.

° Poor uptake by end-users One AMR client, a major US retailer, ran into major problems with a supply chain system it was using for end-of-life dispositioning of products. The reason? Users were only following around 20% of the vendor’s recommendations for its use. Supply chain systems are complicated to use and their implementation must be matched with end-user training. “Real-time applications expect users to react as soon as an event is triggered. In other words, the users must know what to do,” he says.

° A weak underlying infrastructure Supply chain systems are extremely data intensive, warns Sarnevitz. “Companies need a rock-solid hardware infrastructure to run them on and plenty of bandwidth,” he says.

Like many retailers, MFI is trying to become what AMR Research terms a ‘demand-driven enterprise’ or DDE. However, the company warns, becoming a DDE is not merely about technology.

“Although technology can facilitate a DDE transformation, the more compelling prerequisite is changing operational paradigms and organisational behaviours. A technology-centric, trial-and-error approach to DDE is a recipe for disaster,” they say. Instead, companies must first focus on change management procedures (such as concept education, lean impact analysis, organisational and operational process redesign, end-user training, motivation and compensation.

At MFI, company executives have already paid the price of failing to take these factors into account. In September, two of them – financial director Martin Clifford-King and chief operating officer Gordon MacDonald — were forced to resign over the botched SAP implementation. But despite the warning that this case sends out, other organisations will doubtless continue to make supply chain mistakes in future.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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