A11-02-0006

Copyright © 2002 Thunderbird, The American Graduate School of International Management. All rights reserved.This case was prepared by Professor Winter Nie and Renee Santo for the purpose of classroom discussion only, and not toindicate either effective or ineffective management. The author may have disguised certain names and other identifyinginformation to maintain confidentiality.

ERP in Tosco (B)It was a warm February day in 2001. Sunshine provided some (badly) needed relief from the winter’sblues. Donna was sitting in her office observing the green lawn bathing in the warm sun. What abeautiful day. After four-and-a-half years of implementation and approximately $40 million (excludingcosts of Tosco’s internal staff and ongoing maintenance costs of COMETS) over the initial approvedbudget, COMETS was a success. Unlike many IT projects that are scrapped after millions have beenspent, COMETS worked and had allowed Tosco to grow through major acquisitions, even during theimplementation process, without adding many more personnel. However, implementing COMETSwas far from smooth or easy.

The COMETS project was finished. Donna reflected on the whole experience.

Project Implementation

Because of the unique business process Tosco maintained, the company decided on the customizedapproach. To write the software programs for COMETS, Tosco formed teams comprised of operationaland accounting users, systems analysts and programmers, and consultants from Aspen Consulting.Most of the Tosco people assigned to the project were assigned part-time. People, when available, werepulled off their jobs from different functional areas and locations. The teams were made up of 70%Tosco and 30% Aspen Consulting in order to keep costs down, obtain buy-in from upper management,and retain knowledge within Tosco. Budget was tracked monthly within the COMETS project.

In the first year of implementing the COMETS system, Tosco had another major acquisition, thatof the Circle K convenience stores, headquartered in Phoenix, Arizona. The teams had to re-examinesome requirements and get additional funding, although the convenience stores would largely continueto be run on their own system. The Circle K acquisition expanded Tosco’s core business, and adjust-ments had to be made to the COMETS system.

In 1996, as Donna expected, the cost overruns on the COMETS project started to surface. Costescalations began gradually and were mainly due to underestimating the difficulty of the project designphase. Time and again, Donna was approached with news that a particular process was taking longerthan expected, sometimes dramatically longer, and often doubling the initial price tag of the task. Eachtime, Donna went back to Aspen Consulting and argued for them to absorb the costs. The changeorders to date were growing and she often wondered if COMETS was ever going to materialize. She wasgrowing weary of the heated discussions within their five-person management team (three from Tosco,two from Aspen Consulting). If requirements had not been clearly communicated by Tosco or if re-quirements were added, Tosco would have to pay. Fortunately, Donna had kept good records of Tosco’sstated requirements that enabled her to win at a 70-80% rate. Still, these change orders escalated the costof the project from $10.5 million to $40 million, even after she cut out the fluff.

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In her monthly meetings with the COMETS Steering Committee, which was composed of headsof different departments such as operations, accounting, and marketing, everyone realized that theproject was much more complicated than previously envisioned and that changes would need to bemade to the system. After Donna gave her report on the progress of COMETS, the Committee’s discus-sions about which reports to add or subtract would often become quite complex and lengthy.

Donna was also struggling with getting buy-in from certain key groups, primarily the Commercialdepartment. The traders in the Commercial department were the most important users of the systemsince they initiated the input of required information that everyone else down the process would need.If they refused to use the system and use it the way it was designed, the whole ERP system would notfunction. The traders were frustrated by the drastic change in their job duties. A few individuals beganderiding the system, calling it “Vomits” in private conversations. Donna was sympathetic, realizing thatwhile traders did their core job well (getting the deal done), they often neglected the actual filling out onthe details of the contracts in the computer.

Getting the traders to input relevant information into the new system, which was more demand-ing than Tosco’s earlier systems, was proving too challenging to do on her own. The system drasticallychanged their work requirements. Donna had to make sure they did their jobs right or else the wholesystem’s integrity would be compromised. She wondered about the implications of going to uppermanagement at this stage, but she felt she really had no other choice. How else could she get them totrust the system, which depended on their using it? They were holding up the whole project and all theother departments. She felt she would never get them to be enthusiastic about COMETS, but she feltthere was little she could do about that, particularly under the short time constraints. While going toupper management forced the Commercial department to comply, she knew that a sacrifice in employeemorale, and perhaps even her own reputation, had been made.

In March 1997, the pressure to get COMETS online dramatically increased with the $1.4 billionacquisition of three Union 76 refineries in Los Angeles, Santa Maria, and San Francisco, as well aspipelines, terminals, and the 76 service stations. COMETS had not been launched, and the require-ments had just become bigger and more complicated. True to his word, Tom O’Malley was on a missionof growth. Donna was thankful that the first part of COMETS would be launched the next month. Sheneeded to get it moving and get some successes under her belt. While there were many successful ERPimplementation stories and how ERP saved companies millions of dollars after installation, Donna waswell aware of perhaps as many stories of other companies’ failures in installing new information systems.Hershey Foods Corporation hurried a supposedly four-year $112 million ERP project into just 30months and went live with the whole system in July 1999. In the following months, the new ERPsystem cost the company tens of millions in lost profits instead of providing millions in savings due tosystem glitches that led to shipment delays, deliveries of incomplete orders, and inventory pileups.1

In April 1997, COMETS first phase was launched, which included deal capture, scheduling,contract issuance, and administration. This was supposed to stop the independent Microsoft Accessdatabases being used in the Commercial division, but they continued as questions about the data integ-rity, particularly about inventory numbers, persisted.

January 1998 was the mini-launch of Phase 2 of COMETS, the billing module. This installationtook longer than expected, but since it was modular, it could be put in partially. The smallest region waschosen for testing in order to reduce risk. For the most part, it worked despite problems with inventorydata and reports needing to be fine-tuned.

April 1998 brought the company to a major decision point: should the issues brought to light inthe test be fixed (entailing a delay of a few more months) or should they bite the bullet and go to the fulllaunch of Phase 2? Donna’s recommendation that COMETS be launched was supported by the Steer-

1 Craig Stedman, “Failed ERP Gamble Haunts Hershey,” Computerworld, 11/01/99, Vol. 33, Issue 44.

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ing Committee. To the delight of everyone, the full launch went fine. Namely, they billed their custom-ers. Again, there were inventory and reports problems due to bugs in the design, data were not showingright, columns and details had been forgotten, user requirements had been cut or left out, but theircustomers were billed. Problems were worked around during the next several months.

Phillips Buying Tosco

As a fully integrated petroleum company, Phillips was engaged in exploration and production world-wide: gathering, processing, and marketing natural gas and refining, marketing and transporting petro-leum and petroleum product. Phillips also produced and distributed chemicals and plastics. Phillipshad three US refineries that produced 360,000 barrels per day and operated 6,000 retail outlets underthe Phillips 66 gasoline brand and Kicks convenience store name. In February 2001, Phillips Petroleumagreed to buy Tosco Corporation in a $7 billion stock transaction. The acquisition would make Phillipsthe second largest oil company in the United States, behind ExxonMobil, and in the top 20 of theFortune 500 companies, with projected sales of $45 billion per year. Tosco’s refining capabilities wouldgive Phillips a significantly expanded downstream capability. As stated by Jim Mulva, Phillips’ Chair-man and Chief Executive Officer:2

We are acquiring the assets and expertise of the country’s largest independent refiner and mar-keter, combining the complementary skills of the two companies, including Tosco’s refining capa-bilities and convenience store expertise along with Phillips’ branded wholesale skills and exper-tise in refining and fuel technologies.

The purchase was expected to gain full shareholder and government approval by the end of thethird quarter of 2001. Donna was not sure how this piece of news would impact the outlook of COM-ETS. Phillips used the SAP-based system. Would Phillips allow Tosco to keep its own informationsystem? Would Phillips insist Tosco convert to the SAP system for the purpose of integration (onesystem, one company)?

Conclusion

Tosco’s COMETS project was largely finished. While the initial hope was that the system could bemaintained by Tosco’s own IT staff, attrition left Tosco with no choice but to outsource that functionlargely to Aspen Consulting. The problems with inventory were just about fixed, which would cap offthe last large concerns with the system. While Phillips Petroleum waited for the merger to be approvedby regulatory bodies, Phillips was in process of deciding whether to convert Tosco from COMETS to itsSAP-based system. Near the end of her 26-year career at Tosco, Donna was proud of the success ofCOMETS. In an interview, she stated with a satisfied smile, “We billed our customers, and Tosco wasnot in the newspaper.”

2 Team Tosco, a business-building publication from Tosco marketing company, Summer, 2001.

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Table 1 Refining Data Summarya from Tosco’s Form 10-K Submitted to the United States Securities andExchange Commission

For the Year Ended December 31,2000 1999b 1998

Average charge barrels input per day:Crude oil 1,038,700 762,600 837,200Other feed and blending stocks 88,100 88,300 107,600

1,126,800 850,900 944,800

Average barrels of petroleum products produced per day:Gasoline 588,800 456,800 507,200Distillates 253,100 186,900 217,100Jet fuel 104,500 68,500 62,600Residuals 107,100 82,800 93,200Propane 30,500 17,800 20,800Petroleum coke 27,900 24,900 29,800Other finished products 10,600 7,900 11,600

1,122,500 845,600 942,300

a The Refining Data Summary presents the operating results of the following refineries:- Alliance Refinery, located near New Orleans (for the period beginning September 8, 2000)- Bayway Refinery, located on the New York Harbor- Ferndale Refinery, located on Washington’s Puget Sound- Los Angeles Refinery System, comprised of two refineries in Los Angeles- San Francisco Area Refinery System, comprised of the Avon Refinery (for the period ended August31, 2000) and the Rodeo-Santa Maria complex

- Trainer Refinery, located near Philadelphia- Wood River Refinery, located near St. Louis (for the period beginning June 1, 2000)

b The Avon Refinery was shut down in March 1999 for a safety review following a fire at a crude unit onFebruary 23, 1999. All major processing units had been restarted by the end of July 1999.

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Table 2 Retail Data Summary from Tosco’s Form 10-K Submitted to the United States Securities andExchange Commission

For the Year Ended December 31,2000a 1999 1998

Volume of fuel sold (millions of gallons) 6320.7 4451.6 4490.4Blended fuel margin (cents per gallon)b 7.8 11.4 12.1Number of gasoline stations at year end 5,668 4,143 4,476

Merchandise sales (millions of dollars) 2,121.6 2,039.7 2,097.8Merchandise margin (% of sales) 28.4% 28.7% 29.6%Number of merchandise stores at year end 2,126 2,070 2,313

Other retail gross profit (millions of dollars) 157.4 115.9 112.9

a The Retail Data Summary includes the operations of gasoline and convenience store outlets acquiredin the ExxonMobil acquisition (for the period beginning February 29, 2000).b Blended fuel margin is calculated as fuel sales minus fuel cost of sales divided by fuel gallons sold.