IMPLEMANTATING BUSINESS PROCESS RE-ENGINEERING: NESTLE & NIKE

Common Factors for Difficulties There were many common factors for difficulties for Nestl and Nike as each embarked on projects of vast proportions that had not been attempted by companies of their size before[Wor02,Koc04]. Neither company realized that changing their supply chain and resource planning structures would mean very prolonged planning and analysis of their core business systems. They failed to implement broad business process changes before rolling out the software that would make them more agile and competitive. Neither realized which modules of the SCM and ERP would integrate seamlessly and which would not, i.e. i2 and AFP. Both companies outsourced the software implementations to SAP this was at once a success factor but also a point of difficulty since Nestl had to make a last minute change in demand planning software from a core SAP product to Manugistics while Nike turned to i2 which in turn led to their SCM debacle. Nike turned to i2 because the SAP module that Nike wanted was not ready for implementation and such companies as Reebok [koc04] had serious issues aligning their legacy systems and the new modules. Nestl on the other hand did not trust the existing version of SAP demand planning tool for their forecasting and went with a SAP partner, Manugistics. However even this did not save them from an initial rejection of the system by the planning team. Nestl and Nike attempted the plunge methodology to implement their demand planning systems and did not take a parallel or phased approach; had they done so both problems could have been avoided. However, both did adopt a phased approach after the initial difficulties. Although it could be argued that Nike approached the i2 issue as a pilot approach to see if the i2 would work better then the existing SAP module, they failed because the pilot methodology

should be used within a business system such as the planning and forecasting shifting a small part of the division onto i2 instead of rolling it out company wide without addressing the legacy incompatibility issues that would have quickly become evident.[Koc04] They mixed the plunge and the pilot approach and spent an extra $100 million for their efforts. Nike and Nestl underestimated the initial budgets that they would need to accomplish the project. These cost overruns were in the millions of dollars and could easily have scrapped the projects at smaller companies or those that did not have such a strong vision of what they needed to accomplish. Nike spend $400 million on the implementation; $100 million of which was spent on the i2 glitch.[Koc04] While Nestls Jeri Dunn estimated that 5% of her $210 million project cost named BEST[Wor02]. Budget variations were exacerbated by the time constraints placed on each project. Time constraints were not realistic. Nestl pushed its implementation goal to be over by Y2K and failed to meet this deadline, while the rush to meet the deadline caused many of the initial problems of communication within the rank and file of the company. Nike expected the demand planner implementation to be over quickly with the installation of i2 without taking into account the heavy customization that i2 would require and effects that the poor messaging between the legacy systems and i2 would have on the supply chain. They paid a heavy price for failing to analyze the integration demands of i2 and the legacy systems[Koch04] Nike survived because of its size, but the after effects of the debacle have put other companies out of business. Both companies failed to adequately train and prepare its core staff for the software rollout. This failure was evident both in the technical aspects of training users how to use the systems and failing to prepare users in the BPR for the vast changes that the new systems would usher in. Nestl was particularly bad at this and had to shut down the project and change management in order not to flounder [Wor02]. The

Nestl management failed to communicate to the demand planning team that would be using the software system about the software system. This was the worst mistake Nestl made and they repeated it several times until the Manugistics crisis. The upper management took great pains to communicate to stakeholders, but failed to communicated with the right stakeholders that would be most affected by the new system. [Wor02] When the projected was rolled out the demand planning turnover came to 77% yearly, a figure that showed a disastrous discontent among the workers using the system and enough to bring a company to a standstill. The workers did not want to change their business process and culture of demand planning and not even the executive management could move them. Only after reassessment and training could the project go forward. Nike committed a similar error in failing to prepare its demand planners in the requirements of the i2 systems resulting in the demand process overloading the i2 systems connectors and slowing the entire system to a dead crawl. Had Nike communicated with its planners and trained them on the systems as well as conducting careful business analysis as to how the two systems would integrate they could have avoided the $100 million dollar pitfall. Both companies failed to evaluate their legacy IT infrastructure and assess the effects of new software systems on their legacy systems. The mistakes were almost identical as each company found out that their legacy systems and business process where not able to properly communicate with the new systems. The connectors of the i2 systems could not properly translate the data from the legacy system. This resulted in the slowing down of systems to such a degree that effective forecasting became impossible and a minor error reverberated throughout the entire cycle like a tsunami. Nestl did the same thing by failing to align its existing business process with the new business rules of the Manugistics module and then failed to train the end users on how to use the system.

Unique Factors for Nikes Difficulties The specific instance of demand planning software known as i2 was a unique factor as it cause the major problems discussed in the article[Koc04]. Nike failed to properly evaluate how the demand planning software would integrate into its legacy system. They rushed the implementation before their main SAP package was ready for deployment resulting in the i2 system failing the Nike supply chain. Nike had a unique supply chain process that required stores to pre order merchandise 6 months in advance, the difficulty of this is that Nike could never know if the sneakers that a store ordered would still be in style 6-9 months later when they would deliver them to the store. The fashion designers and the demand planners could not accurately judge how much they should order with such a long lead time and depended solely on Nikes brand name that the new sneakers would actually sell. In the market where stores increasingly demanded a short order to ship time, Nike was under competitive pressure to get their supply system to work in 3 to 6 months. The risk of not getting their SCM in place would open them to losing market share in a fiercely competitive market. Thus when Nike implemented the i2 system and the system could not hold up to the vigorous demands of the planning the 9 month cycle began to collapse and the forecasting data completely threw off the supply chain resulting in some $100 million in direct damages and untold millions in consequential damages such as reputation, law suits, and SEC investigations. [Koc04] Unique Factors for Nestls Difficulties One unique difference for Nestl is the extent to which they failed to involve the key stake holders for the groups that would be most influenced by the new software in the planning process. This is both a factor of difficulty and one of success since these early blunders helped Nestl leadership adjust and reassess. Nestl made a good effort to bring

together its business leaders and stakeholders but failed to let the rank and file know what was taking place. To add to the confusion, Nestl had to deal with many different suppliers that were not all paying Nestl the same for goods and services. They had highly fragmented system and even within departments the left hand did not know what the right hand was doing. The 29 different flavors of vanilla [Wor02] illustrated the frustration Nestl had with all of its thousands of products. The waste that went on during demand planning and the lack of coordination between the different departments was a glaring difficulty that had to be addressed and that the ERP implementation aimed to cure. At the same time Nestl failed to realize how much the ERP system would change their entire business process and the pushback that they would receive from the end users when these changes became evident. Nestl operational problems stemmed from its massive acquisitions drive in the early nineties. The company was comprised of so many different units and held together in a loose network that each subsidiary had a unique business process and any attempt to change the process was regarded by management as an attempt to take away autonomy and in the worst case decrease competitiveness. Thus, when the new changes were thrust upon the unsuspecting management the pushback halted the project and necessitated emergency measures, including the reassignment of one key project manager to a different country [Wor02]. Common Factors for Success[i] The common factors for success are that at both companies the projects had unwavering support from the executive leadership and were driven through all difficulties by the strong management. Both Nestl and Nike knew that to retain competitive advantage in the market place and to sustain their competitive advantage they needed to make drastic changes to align themselves with new market

realities of leaner competition and cost cutting. Both companies were wiling to spend more money and time to complete projects effectively and to roll out their implementations. Neither project was terminated because of mistakes or glitches even if the glitches cost $100 million. This flexibility is one of the key reasons that the projects did not fail and became successful. This option however is not always viable for a company and many have gone out of business when they tripped over a speed bump[Koc04] Nestl and Nike adjusted their business process to reflect the new realities of their new systems. Nestls demand planning department had to learn a new computer system and go from using spreadsheets to using new SAP interfaces, a move they initial rejected out of hand [Wor02] Nike on the other hand had to train its personnel first on a failed i2 product then on a new SAP product reengineering the business process in each case to adjust to the new systems and ways of demand planning and forecasting. A major factor in the success of these systems was that each company learned from their mistakes and involved everyone in the company including the rank and file employees. Nike was especially good at this since they enshrined the business plan of the company to the point were everyone knew it and supported it. For Nike the problem was more of teaching the employees new systems rather then realigning their entire mindset. For Nestl the problem was twofold, not only did they have to teach the employees how to use the new system to become more effective, they also had to change the way the employees thought about the business. Nestl success can be attributed to the way in which the key stakeholders adapted to gauge the atmosphere of the various divisions before rolling out new business process and software so as to do it at a time that was just right by administering surveys to key user groups.[Wor02] Nike and Nestl believed the ROI on the projects would be greater then the cost and the cost over runs. Nike planned on spending about $400 million dollars on the project hat ballooned by 25% as a result of the i2 fiasco. Nestl on the

other hand planned to about $200 million that ended up being $210 million dollars including the Manugistics project halt. Although exact figures are not available, Nestl claims to have Made back some $325 million dollars, or roughly 150% of the dollars they put into the project. Nike claims that their manufacturing lead time has gone down from 9 month to 6 and in some instance even shorter [koc04], however other ROI indicators are still coming in. What is undoubtedly true for the ROI of Nike is that their systems are more agile and work better with their suppliers, their cash flow is more manageable and their data is easier to access and assess; this part is perhaps more important the figures of ROI. The real return will show itself when Nike is able to introduce another system into its legacy infrastructure without a hitch reacting quickly to market forces and retaining their competitive advantage. Both companies did phased roll outs starting first with a smaller department or division and moving on once the implementation was complete. This was initially what caused the Nike SCM problem; they had thought that a simpler implementation would be easier and did not check the software for compatibility before implementation.[Koc04] This oversight causes the entire debacle; had Nike analyzed the technical requirements for i2 and their legacy system and had done a parallel implementation testing out a small portion of the demand infrastructure they would have seen the problems. By taking the plunge with an untested i2 system cost them 100 million dollars and untold stress. To fix the problem they literally had to build infrastructure bypasses to take the load of the floundering i2 system. [Chi03] Another factor that saved both implementations was SAP. Both companies outsourced their ERP and SCM projects to SAP that provided guidance and support and also customized the packages to suit the particular needs of the clients. SAP had the experience and know-how to advise the two companies on the technical roll outs. It is unfortunate that SAP could not have better advised their clients on the

business process aspects of the rollouts as SAP did not have an intimate understanding of the BPR that would need to take place. Unique Factors for Nikes Success Nikes success lies in the top down understanding on the Nike Business plan by all of its employees and their willingness to be flexible in the eyes of great difficulties. Nikes CEO and CIO both knew that they would gain competitive advantage with the new system or at the very least retain Nikes competitive edge. Roland Wolfram( VP Global Operations) and Phil Knight(CEO) both understand that they need to cut down the time it takes for Nike to manufacture the sneakers and deliver them to the stores. [Koc04] This unique understanding of the process and the alignment of the goals of the company, management, and employees was something that Nestle desperately lacked and why their implementation almost floundered. Nike is one company with its suppliers belonging to Nike and within Nikes system. So while the time to market for Nike is 9 months, Nike did not have the difficulty of integrating between different companies, rather they just needed to make everyone in their company conform to the new system. This is a success factor because everyone in the company understood without too much effort and hand holding exactly what the goals of the implementation were. The effects of a vertical delivery model where the supply chain is under the same management brings not only efficiencies of scale but also better operational agility. Unique Factors for Nestls Success [ii] Jeri Dunn led the effort and was completely supported by the corporate headquarters in Switzerland. Dunn almost single-handedly drove the entire process and involved as many key stake holders as was feasible. She was also willing to be flexible and admit mistakes carefully learning and revising the process as the projected progressed. Nestl

would slow down their project and wait for input from the end users to gauge their readiness to accept the new process. [Wor02] Nestle sheer size is also an important success factor as the company gained momentum and could not be easily stopped once a project of such magnitude was underway. With the global implementation happening close to the same time as the USA one, the project was inline with the global company mantra about process change and competitive innovation. Reference: [Chi03] Paul Chin, Cold Case File: Why Projects Fail, Datamation, May 6, 2003, http://itmanagement.earthweb.com//article.php/2201981 [Wor02] Ben Worthen, Nestls ERP Odyssey, CIO Magazine, May 15, 2002, www.cio.com/archive/051502/Nestl.html [Koc04] Christopher Koch, Nike Rebounds, CIO Magazine, Jun 15, 2004, www.cio.com/archive/061504/nike.html [i]POWS analysis for Nike Nikes biggest problem was its traditionally long 9 month manufacturing cycle. This cycle evolved from the 70s and 80s when consumer did not much care for the brand but cared for supply. Retailers could always depend on Nike to sell and did not mind the long manufacturing time. Recently, retailers began demanding faster turn around and did not want to order 6 months in advance creating a competitive pressure on Nike to establish a faster delivery mechanism. Nike would have to reengineer its demand forecasting engine and therein lay the biggest challenge for the SCM project. The opportunities presented by speeding up the manufacturing and demand planning time was that Nike

could cater to smaller stores that did not have the capacity to buy 6 months in advance as well as to a greater extent follow styles and fashions better and adjust to trends faster making itself more agile and responsive to ongoing market pressures. The weakness of Nike was its long manufacturing cycle that may produce sneakers that were no longer in style by the time they arrived at the store. Another weakness was that the demand planners could not really coordinate with the fashion designers and were going more on instant then on hard facts. The strength of Nike is its brand name as well as its business plan. The brand guarantees that Nike will remain the top player in sports apparel market and remain a competitive force. While the business plan is an operational strength that allowed Nike to pull through the SC implementation project by ensuring that everyone in the company knew why the implementation was taking place and bought into the implementation. Nevertheless the implementation did not go smoothly, but it ultimately succeeded because everyone in the company wanted it to succeed, from the CEO to the individual demand planners and supply managers who would have to change their business process entirely. [ii] POWS for Nestle Nestl faced an ever competitive market with a distributed franchise like conglomerate of companies. The business process within each division was different, forecast demand planning varied from one group to another and vendor management was non existent. One vendor could charge the company 29 different ways for vanilla and there was no way of catching this glaring incongruity.[Wor02] This presented at once a challenge and an opportunity for the company to create a single system that would eliminate the waste, create greater efficiencies of scale and cut costs by charging the vendors the same price and forecasting demand in a manner that was respected by the factories[Wor02]. There

was also opportunity to bring down cost for consumers that would result in greater sales due to the decreasing cost of production, planning, and delivery. The main opportunity lay in the promise to eliminate the weaknesses of the present system by changing the business process and strengthening the internal structure of the company thereby eliminating weaknesses in the eyes of the competition. Another weakness was the giant size of the project that Nestl was embarking on. Communication would have to be flawless for the projects succeed and this turned out to be another weakness that the key stake holders did not realize and indeed may stake holders were left out of the planning process completely. The main strengths of the Nestl project were its vast size and large IT budget. This ensured that no matter what glitches the company encountered along the way, it would not scrap the project due to budgetary or time constraints. Nestl market position is another major strength as it is the market leader and the strategy behind implementing the ERP system was designed to keep Nestl in this position thus the justification for the project was extremely strong, ensuring that the project would have top level management support through out its life. This support is crucial since at one point Nestl had a planning fiasco with the implementation of Manugistics that threatened to bring the company forecasting to a standstill, yet with the strong management support Nestl pulled through.