NIKE's ERP Implementation Failure and Lessons Learned - Case Study Example

NIKE’s ERP Implementation Failure and Lessons Learned Name Institution Date Executive Summary Today, globalization and increased competition has made organizations seek for new ways of structuring their businesses so as to be flexible and reliable. ERP systems bring numerous benefits to the company, including communication, coordination, and organizational efficiency (Frey, Fukuda and Rock 2011). However, as will be evidenced by the review of NIKE’s case study in the present paper, installation of ERP systems may imply high risk; including making an organization incur huge losses. The present paper begins by discussing NIKE’s ERP implementation failure which brought significant losses to the company. NIKE’S i2’s ERP system failed making the company experience losses exceeding $100 million. The i2 technologies supply chain management software was intended to make improvements in the management of production, inventory, sales forecasting, and shipping. According to Laudon and Laudon (2010), the i2 software would help the company respond faster to the changes in the shoe market, improving planning of production schedules due to the new demand, and reduce the beginning of new production from one month it previously took the company to one week. Secondly, the paper has discussed employee training as one of the most important factors during the ERP implementation process. The role of employee training in the success of the ERP system has been discussed. Finally, the paper has discussed outsourcing of ERP implementation and the guidelines that an organization should follow before outsourcing ERP implementation. NIKE ERP Implementation Failure In 2001, NIKE started experiencing problems in its supply chain management. These problems led to a fall in stock price. In February of the same year, NIKE had received a warning that its third-quarter footwear sales would not reach the expected mark leading to a fall in sales. The same day this warning was given, NIKE’s stock price fell by almost 20 percent while i2’s stock (the division which powered NIKE’s footwear) fell by almost 22 percent. The problems were originating from its new supply-and-demand software planning system which had started having hiccups in June, 2000. The output of orders by the software was not correct. The output exceeded the amount of Air Garnet sneakers needed by the market by thousands while outputting fewer Air Jordan compared to the amount needed by the market. This led to significant overdue deliveries and inventory problems. The i2 technologies supply chain management software was intended to make improvements in the management of production, inventory, sales forecasting, and shipping. According to Laudon and Laudon (2010), the i2 software would help the company respond faster to the changes in the shoe market, improving planning of production schedules due to the new demand, and reduce the beginning of new production from one month it previously took the company to one week. The success of this software would have enabled the company reduce the production of undesirable shoes, reduce inventory, and increase the production of highly demanded shoes. Despite this knowledge, NIKE was also aware that ERP was difficult to implement and the chances of failure were high. Their consideration that the i2 system was much smaller, the company failed to take the needed precautions before implementing it. At the time of implementation, NIKE had an existing legacy that it was using at that time. Therefore, the implementation of the new i2 meant that for it to work, it had to be customized to this legacy. To make this work, the company adopted the Big Bang approach during the implementation of i2 system. As a result, the i2 system made the company produce more Air Garnetts than the amount demanded by the market while producing less Air Jordan than the ones demanded by the market (Koch 2004). As a result, the company experienced large amounts of class-action lawsuits. There was also a failure by the company to train its employees and make them understand the new system. As a result, these employees ended up producing the wrong products in excess (McVey 2001). The company had spent more than $400 million in the implementation of this system. Despite the high cost of implementation, the system was found to be too slow, failed to integrate well with the existing system, and had some bugs. However, despite experiencing huge losses and significant technical issues, the company still remained operational. To overcome these problems, the company hired the services of consultants who build databases that by bypassed some portions of the i2 system. Bridges were also built within the i2 system to make possible data sharing. Project Management, Training, Teamwork Some authors such as Muscatello and Parente (2006) observe that ERP failure rates are as high as 50 percent because of the difficulty in implementation as well as its high cost. ERP often imposes its own logic on a firm’s strategy and existing culture. NIKE’s ERP implementation is listed among the greatest ERP failures in IT project management in the world. The total ERP related problems at NIKE resulted in a drop of $100 million in the third quarter of 2000. The new supply chain management system as NIKE became an undoing of what the company intended to achieve. The original idea behind this supply chain management system was to enable the company forecast market demand as well as meet this market demand quickly. A phased geographical approach was also used in the implementation of SCM, CRM, and ERP systems. Despite the time plan for this implementation being 2 to 3 years, the implementation took a period of 6 years and an extra $500 million (Koch 2004). A combination of ERP, CRM, and SCM implementations brought great successes to the company. However, there were few problems during the implementation of SCM. Nevertheless, the company was able to make improvements in revenue, productivity, and sales. As indicated earlier in the paper, the failure of the i2 system was brought by NIKE’s failure was brought about by the company’s failure to adopt effective project management across its departments. The NIKE’s Project Management Office (PMO) played an important role in the final success of the ERP implementation project. One of the main factors that led to the final success of the ERP implementation project was employees’ training. After the realization that the i2 system was not going to work, the company immediately switched from the original plan to the SAP ERP system. According to Koch (2004), the latter system employed more predictive algorithms which were used to estimate demand. To make the implementation work, more focus was also directed to employees’ training with all employees receiving 140-180 hours of training aimed at helping employees understand the system and how it works. The company had to engage in change management because the previous ERP implementation had become a failure. Correct schemes for change management include employees training and they are crucial during the process. Failure to adequately train employees is considered to be one of the factors leading to a failure in the ERP system’s implementation Bill Wohl (one of the individuals involved in NIKE’s ERP implementation project) said, “what we know about a software implementation project is that it is not just about turning on the software.” According to Farmer and Luening (2001), during the software implementation, both the business daily operations and employees are affected. Training plays a very important role because it helps incorporate the appropriate technology advances as well as ensures that human resources are not overlooked. NIKE managed changes in the implementation process leading to employees’ acceptance of the system. First, training allowed NIKE’s employees become more comfortable with the system as well as increase their level of expertise and knowledge. Employee participation in the ERP system implementation was essential at NIKE. Most of the issues in NIKE ERP failure ware not entirely technical; they were also people-related and culture-related. According to Umar (2003), the main issue about integration of ERP into company’s system is not technological but governance and change management during the integration project. Successful integration requires a good technical solution as well as a commitment from the human resource side of a firm. The training of employees as well as managers is just as important as the technical training of the core team of individuals who are installing the software. Since NIKE’s ERP system was designed to operate by codifying a set of business processes, it was more appropriate in the beginning to pay attention to the impact on business processes as well as people processes. It is evident that employees training plays a critical role in ERP system implementation because since NIKE integrated employees training in the implementation, it has never experienced the problems it experienced previously during the initial implementation. Today, NIKE provides hundreds of hours of employee training in the use of the new ERP and CRM systems. Training enhances teamwork and job collaboration thus eliminating any problems and challenges arising in the ERP system. ERP Outsourcing After the failure of the ERP system implementation, NIKE laid all the blame on i2’s demanding software for the disappointing results. It was argued that the software was too slow, failed to integrate well, employees were not well trained, as well as that the software had some bugs. On their side, i2 claimed that NIKE failed to follow the provided implementation guidelines. It is important to note that ERP implementation has a high degree of complexity. Also, outsourcing of ERP implementation has its own high degree of complexity. Based on both complexities, there are certain considerations that a company should make before fully engaging in any of them. One of the most important factors is to estimate the actual cost of outsourcing the ERP implementation. Frey, Fukuda and Rock (2011) proposed that an organization should adopt a framework used to estimate the actual cost of outsourcing in order for it to understand and get clues that can be used to make decisions regarding the adoption of ERP systems. Based on the findings from NIKE’s case study, there are certain guidelines that an organization should follow when outsourcing ERP implementation. First, an organization should investigate whether it has enough resources to develop all the implementation capabilities internally. Based on the findings of the NIKE’s case study, the company did not have enough capabilities internally. Some of the important lessons from the case study are that an organization should outsource ERP implementation if it does not have enough internal capabilities and should engage in employee training prior to ERP implementation. Some of the guidelines that an organization should follow include: i. Taking an honest look at firm’s internal resources An organization should conduct a rigorous assessment of the capabilities and skills in its in-house team and compare them to the skills required to successfully complete the ERP implementation process. i2 blamed NIKE for its failure to follow the guidelines, methodology, and templates. It is important for an organization to define the roles and responsibilities prior to the beginning of ERP implementation and deployment. ii. Value both business smarts as well as technical competency Although the functional and technical skills are critical, they are not all that is needed for an implementation to be successful. In case an organization decides to outsource the technical aspects of the implementation project, it should also focus internally on how an implementation is executed. NIKE considered the technical aspects but completely ignored the business components aspect. iii. Seeing the big picture that incorporates people and processes Three factors are important to consider before outsourcing ERP implementation, including technical proficiency, functional expertise, and software-specific expertise. However, it is important for an organization to realize that software configuration is relatively straightforward. Processes and people aspects are not straightforward. The latter two are the ones engaged in communications, project and change management as well as business process reengineering. Such competences are not readily available in many ERP consulting firms. When outsourcing ERP implementation, it is important for an organization to find one with both technical skills set as well as a proven methodology on how to address other critical people and process aspects. iv. An organization should be discriminate during the outsourcing process It is important for an organization to rely on external help when and where necessary. External consultants may be very talented but there are certain areas in which they cannot make business decisions. Therefore, it is important to identify the skill and responsibilities that can be provided by the internal team. v. An organization should avoid making any mistake It is important for an organization to be honest about what it can do and what it cannot do. Through such an understanding, an organization will be able to choose tasks that it should keep in-house and the ones it should outsource. Such an approach will help an organization leverage its internal team effectively, establish the right ERP partnership, and realize success in the ERP implementation process. Conclusions NIKE’s ERP implementation project provides some very important ERP implementation lessons. First, a small mistake during the implementation process may bring huge negative impacts on the company. Secondly, it is important to integrate company’s employees in the implementation process thus making employee training an important factor prior to the ERP implementation commencement. Thirdly, an organization should follow certain guidelines in the ERP implementation project. These factors have been discussed in consideration of the failures at NIKE and the latter change management process that was adopted by the company. Finally, it is important to consider the existing legacy of the company in order to establish whether the ERP implementation is customizable to that legacy. NIKE had an existing legacy that it was using at that time. Therefore, the implementation of the new i2 meant that for it to work, it had to be customized to this legacy. However, the company did not consider this legacy. Consideration of these factors and taking appropriate action will lead to successful ERP implementation. References Frey, D., Fukuda, S. and Rock, G. 2011. Improving Complex Systems Today: Proceedings of the 18th ISPE International. New York: Springer Science & Business Media. Koch, C. 2004. Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster. CIO.com. Available at http://www.cio.com/article/32334/Nike_Rebounds_How_and_Why_Nike_Recovered_from_Its_Supply_Chain_Disaster?page=1&taxonomyId=3207 Laudon, J. and Laudon, K. 2010. A New Supply Chain Project Has Nike Running for Its Life. In Essentials of Management Information Systems: Managing the digital firm. Pearson Education McVey, S. 2001. Nike Blames i2 For Finish In Losers Bracket. Technology Evaluation Centers. Available at http://www.technologyevaluation.com/research/articles/nike-blames-i2-for-finish-in-losers-bracket-16344/?tecreferer=http://www.technologyevaluation.com/search/default.aspx?searchterm=+nike+scm+&doctype=colid98&languageid=0 Muscatello, J. and D. Parente. 2006. Enterprise Resource Planning (ERP): A Postimplementation Cross-Case Analysis. Information Resources Management Journal, July – September, pp. 61 – 80. Umar, A. 2009. E-Business and Distributed Systems Handbook: E-Business and Distributed Systems Handbook. Nge Solutions Inc. Read More