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Sweet Victory
Hersheys holiday sales melted when it switched software in 1999. Now, a second try is succeeding. Here are the lessons learned.
BY DAVID F. CARR
WAS IT A FLUKE? In September, Hershey Foods said it had completed an upgrade to mySAP.comon schedule and below budget. IT WAS A SIGNIFICANT TURNAROUND for a company that had become an example of how not to do a major software project. In 1999, Hershey stumbled while rushing to complete an enterprise systems overhaul, with a new SAP implementation at its core. Basic order management and fulfillment processes broke down, causing the company to fail to meet many retailers orders. The immediate impact was about $150 million in lost sales for the year. The damage to sales and retailer confidence lingered into early 2000. HERSHEY IS STILL RELUCTANT to discuss what happened and what caused it; the company declined repeated requests for interviews from Baseline over the past year, and asked SAP and Accenture (which helped with the mySAP implementation) not to talk, either. But we gathered insight from insiders and former employees, and from some public statements Hershey has made about its supply-chain improvements. Heres a look at three things that went wrong at Hersheyand the subsequent lessons learned.

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P H O T O G R A P H B Y C H R I S T O P H E R H A RT I N G

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BASELINE DECEMBER 2002

WHAT WENT WRONG: THE BIG BANG

The overriding problem appears clear: Hershey was simply trying to do too much at once. In cosmology, the Big Bang theory tells us the universe sprang into being in an instant, wiping out everything that went before. In Hersheys case, it was the old logistics systems that had allowed it to do business for years that were wiped out in a flash. In late 1996, Hersheys management approved what came to be known as the Enterprise 21 project, which would largely replace legacy mainframe systems with new enterprise client/server software. Enterprise 21 was partly a Year 2000 project, allowing Hershey to scrap rather than repair legacy software that might not process date-related procedures correctly after the turn of the century. But the new systems were also

supposed to allow Hershey to change and streamline its business processes. Hershey selected SAP to provide the heart of the system, which would be complemented by planning and transportation management software from Manugistics, and new sales software from Siebel Systems. Siebel doesnt seem to have had much to do with what went wrong, though by including it Hershey put a third major systems implementation project on its plate. Hershey wasnt inexperienced with Manugistics, having used mainframe versions of its software for years, but now it was switching to a client/server version that would be configured as a bolt-on to SAP. Much of the projects complexity was in the integration of the SAP and Manugistics software, which had to work together to manage orders and schedule

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HERSHEY FOODS INC. BASE CASE

Headquarters: 100 Crystal A Drive, Hershey, PA 17033 Phone: (717) 534-6799 Business: The leading chocolate maker and manufacturer of other confections. Chief Information Officer: George Davis Financials in 2001: $4.6 billion in revenue, $207 million in net income Challenge: Restore confidence in distribution systems following a 1999 breakdown in Halloween orders, while extracting additional efficiencies from supply chain BASELINE GOALS: Maintain sales growth of at least 3% to 4% per year, outpacing growth in the confectionary industry Save $75 million to $85 million by the end of 2002 through restructuring initiatives, including closing of older distribution centers Use supply-chain efficiencies to help increase gross margin above the 41.5% level achieved in 2001

shipments to customers. Indeed, Alan Stenger, a professor at Penn States Center for Supply Chain Research who has studied the 1999 mishap, says some Hershey executives wanted to supplement principal integrator IBM Global Services with another consulting firm that had more experience with the SAP-Manugistics interface. Hersheys management chose not to take that step. Although the plan had been to switch on the new systems in Aprilan off-peak time for candy orders the project ran behind schedule and wasnt completed until July. With Halloween orders already starting to roll in and the immovable Y2K deadline looming, Hershey decided in favor of a direct cut-over strategy in which all the new software would be turned on at once; it rejected another strategy in which the system would have been phased in one module at a time. The problems caused by this abrupt transition werent immediately apparent, but essentially orders began falling through the cracks. Despite having plenty of inventory on hand, Hershey couldnt get it to customers. By September 1999, in any event, it was too late for Hershey to backpedal. It had essentially demolished its old logistics systems to make way for the new one, and workers spent the next few months going through contortions to work around the problems and ship candy despite the system, rather than through it.

consolidated the processing of more than 95% of its revenue and business transactions within a single system. Hershey is also using SAPs Business Warehouse for analytic applications for marketing and brand managers. Besides upgrading to the latest SAP software, Hershey said it was able to enhance business processes central to its order management, such as generation of the pick lists used by warehouse workers to pull together all the products that make up a shipment to a particular customer. Theres another Hershey project that shows how its approach to big projects has changed. The opening in 2000 of a new Eastern distribution center, EDC III, was part of an initiative to strengthen the overloaded physical logistics infrastructure that exacerbated the systems problems of 1999, but it also had a systems component. For the first time, Hershey was dictating the choice of warehouse management software, a decision that previously had been left at the option of the third-party logistics companies it hired to manage its warehouses. Hershey picked a solution from RedPrairie (then known as McHugh Software). Speaking at RedPrairies user conference earlier this year, Kenneth D. Miesemer, director of Eastern distribution operations at Hershey, made the connection explicit. Hershey had really come out of a bad ERP system implementation, so this project was very critical, he said. This time, Hershey made sure to take the time and resources to thoroughly test the computer systems. Testing included putting bar codes on empty pallets and going through the motions of loading them onto trucks so that any kinks would be worked out before the distribution center opened for business. If we had any problems, we wanted to keep it out of the press, Miesemer said.

WHAT WENT WRONG: UNENTERED DATA

LESSON LEARNED: GO SLOWLY

To be fair, in 1999 Hershey was rushing to meet an immovable deadline, since it was trying to get off legacy systems that might not continue to work correctly as of Jan. 1, 2000. Still, Hershey has demonstrated success in the years since with a less-hurried, methodical approach that leaves time for testing. After stabilizing SAP and the attendant systems, Hershey found itself with something that was merely acceptable. So after a careful redesign, it began work on the upgrade to mySAP in July 2001. The work was completed in 11 months, 20% under budget, and without disruption to customers, according to Hershey and its partners. With this release, Hershey says it has

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How could Hershey lose track of inventory so badly that it couldnt fill orders in 1999? Thats one part of the story thats never been explained well publicly. The project really failed on a very simple thing, which is the recognition that SAP requires a lot of discipline, says Penn States Stenger. SAP needs to know where all the inventory is. Specifically, the problem was that Hershey had devised informal mechanisms for dealing with the tremendous buildup of inventory to prepare for the holiday rush. Hershey had always over the years been very good at crisis management, and they would put candy everywhere they could to store it in anticipation of this peak season. They werent used to having to tell the computer about that, Stenger says. This surge storage capacity included warehouse space rented on a temporary basis, and sometimes even spare rooms within factory buildings. The problem was that these locations hadnt been recorded as storage points in the SAP data model. Before SAP fulfills a customer order, it first checks its records of available inventory, and in this case a significant amount of inventory was not where the official records said it was. Whether the fault for this oversight lay with

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DIP AND RECOVERY: TECHNOLOGYS IMPACT AT HERSHEY FOODS

Even with the technology-related disappointment of 1999, Hersheys sales since 1997 have, on average, met the companys goal of growing at least 3% annually.
$4.6B $4.3B $4.3B $4.56B
45414 432 39546530 1456781256 3% annual growth 657736 7667687843 0657736756 5773675613 756167 $4.48B 2 63954653 6395465306 790986 5923121546 67561548 767644 3 63954653065773

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HERSHEYS ACTUAL SALES

$3.9B
ACTUAL SALES AND BASELINE THIS PERIOD REFLECT DIVESTITURE OF A $344M PASTA BUSINESS.

97 98 99 00 01
Hersheys planned overhaul of its enterprise systems, replacing legacy systems with packaged software, begins. The Enterprise 21 project (based on software from SAP, Manugistics and Siebel) aims to eliminate Y2K worries and make Hershey more efficient.
SOURCE: HERSHEY FOODS, BASELINE

Hershey begins moving toward a company-wide supply chain strategy, establishing a single organization for supply and distribution logistics. As plans shape up for a new distribution center, Hershey muddles through the holidays with temporary facilities for overflow inventory.

After investing $112 million in its new system, Hershey turns it on just as Halloween candy orders start to roll in. The move backfires when a breakdown in the order-management process prevents Hershey from getting its products to market, costing Hershey $150 million in sales.

Hershey begins to regain the confidence of retailers with its performance during the Easter season and gets through Halloween without another embarrassment. It also begins to implement a new warehousemanagement system.

Hershey attributes new efficiency gains partly to full implementation of its core enterprise systemsas well as supply-chain improvements. Company begins the process of upgrading to mySAP.

logistics managers for failing to provide this data or with the information technology experts for failing to identify it as a requirement, somewhere there was a breakdown between the technical people and the logistics people, Stenger says.

LESSON LEARNED: DATA IS KING

Wed had a real problem with inventory accuracy, and a lot of the time we didnt have the right inventory to the right place according to our records, Hersheys Miesemer acknowledged in his speech at the warehouse management conference. Fixing those problems became one of his priorities. Steve Sawyer, Penn State information sciences and technology professor, sees this as a typical example of the data management problems that occur in many enterprise systems implementations. ERP systems require an overarching data model, and typically the experts within the information technology department are database administrators who are used to dealing with individual projects, he says. Often, departments fail to communicate about their data requirements except in an ad hoc way, meaning that problems are not identified until after implementation of a new system.

Penn States Sawyer believes many of the pitfalls of enterprise systems implementation revolve around governance issues. At Hershey, he suspects that business and technology managers aligned with different parts of the business were pulling in different directions, and no one at the top pulled these demands together to guide the creation of a system that would work for the whole business. Thats very typical, Sawyer says: You get 100 little committees, with no oversight. Often, the people within the company charged with project management are so overwhelmed by the number of details that must be addressed that they wind up leaving the definition of basic business processes to consultants who lack the necessary inside knowledge of their business, Sawyer says.

LESSON LEARNED: OVERSIGHT MATTERS

If Hershey didnt understand the importance of systems project oversight before Halloween 1999, it certainly did afterward. In the distribution center modernization, because top management was determined that nothing go wrong, we wound up with a very high-powered steering committee, Miesemer said in his speech. We had the CEO himself involved. By all accounts, Hershey has put significantly more emphasis on close executive oversight of systems projects ever since. And its for that reason that Sawyer suspects that Hershey may have benefited, in a perverse way, from its suffering. Many enterprise systems can use a fundamental redesign after their initial implementation, and they dont often get that opportunity, he says. In other words, most corporations dont fail so dramatically the first time, so their repair is never so good.

Before Hershey hired CIO George Davis, a former Computer Sciences Corp. consultant, the highest ranking information technology executive at the company was a vice president a couple of levels down. Yet the people involved say the lack of a CIO wasnt necessarily the issue in 1999 so much as a lack of management understanding of how much effort, both in systems development and organizational change, would be required for success.

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WHAT WENT WRONG: NO LEADERSHIP