Essay, Research Paper
FoxMeyer’s Delta Information System
The Failure of a Strategic Information System
October 23, 2000
In the year1994, FoxMeyer was the fourth largest drug wholesaler in the United States with an annual sales of approximately $5.1 billion. The company filled orders from thousands of pharmaceutical companies with shipments of up to 500,000 items per day. However, in the same year, due to rapid growth and consolidation of the pharmaceutical industry, FoxMeyer’s management was concerned about competition from the larger competitors. The threat imposed required drastic measures. The whole industry competed on low profit margins. Therefore, FoxMeyer decided to stay ahead of the competition by implementing a new information system.
Previously, the Information Technology department consisted of the Unisys mainframe, which was able to track inventory accounts. In addition, the company’s warehouse had out-dated packaging and shipping technology. FoxMeyer believed that by improving information technology, warehousing and customer service, that the competitors could be outpaced by a wide margin. FoxMeyer decided to automate their inventory and delivery process in an attempt to provide better service at a lower price than their competition.
The bulk of the project was changing the warehouse from manual to automated. They implemented bar code readers and bar coded all their products for faster tracking capabilities. Further efficiency was added with the installation of automated conveyor belts. The belts lifted the products and delivered them to docks were they were placed in the appropriate trucks for shipment.
Also, the new information system tremendously supported FoxMeyer by making the business process of tracking sales and inventory easier and faster. First, it automated the order taking process by allowing hospitals to enter their orders directly into FoxMeyer’s inventory computer system. Secondly, the system allowed robots to automatically gather the orders and send them off to the shipping docks for rapid delivery. This was thought to have the most strategic impact to fill the most orders.
The direct computer order entry system facilitated control over their inventory. The information system was designed to pick up eighty percent of all items automatically, as compared with an industry average of thirty-three percent (Bulkeley, 1996) definitely, giving FoxMeyer an advantage of superior service over the competition. The new information system tremendously supported FoxMeyer by making the business process of tracking sales and inventory easier and faster.
Conceptually, FoxMeyer’s information system planned to conduct business with its customers on a daily basis. FoxMeyer focused its value chain on activities in their business where competitive strategies could be best applied. (Porter, 1985) However, the implementation was inconsistent with the changing business environment. The new system caused problems at every step of implementation. Problems ranged from inadequate time allocation for development, testing, debugging, lack of interaction between management, systems personnel, consultants and low user involvement.
Initially, FoxMeyer’s management were supportive and committed appropriate funding of $56 million to develop and install the newly named Delta Information System. However, to build its new 340,000-square-foot warehouse, FoxMeyer spent an additional $18 million. The company hired Anderson Consulting, a leading international information systems consulting firm, both to advise them about the project and to supply skilled personnel to construct the system.
Also, FoxMeyer purchased R/3, an inventory management software system from SAP AG, a giant German software company. Although SAP had been designed to run on Digital Equipment Corporation hardware, FoxMeyer purchased a Hewlett-Packard Company client/server system at a cost of $4.8 million. The vendor for the warehouse system was Pinnacle, a system not tightly integrated with SAP R/3. (Caldwell, 1998)
The software had a reliable reputation and was designed to run on client/server hardware. It also enabled its users to replace their old mainframes. The hardware choice proved to not be an issue, as the software ultimately ran well on the Hewlett-Packard equipment. However, the company had serious problems because client/server software is quite complex and was still relatively new at the time. Some difficulties were expected.
However, once the SAP implementation started, management adopted an out of sight, out of mind attitude towards problems that were encountered. In essence, senior management had no desire to know about the problems. This case is a classic example of management over commitment to a project that should not have been undertaken (Neumann and Sabher, 1996). Even management personnel involved in the implementation were discouraged from criticizing the system.
Furthermore, management failed to understand the complexity and risks involved in the implementation process and even fast tracked the project by three months, prior to having the system fully tested. The system, when first installed, was full of bugs and kept shutting down such critical elements as carousels and conveyors. Also, the scanners often failed to read the bar codes on the boxes. The warehouse opened in August 1995, three months late, and with many of the same bugs still not corrected.
As the system at the new warehouse repeatedly failed during the busiest working hours, the operators had to stop and then restart it. Boxes did not reach their loading position on time. Much of the work had to be done manually with the data being entered into the computer, leading to many errors in the system.
However, the most significant problem was that many orders were shipped with items missing, but with an invoice for a complete order. In most instances, the missing items had arrived at the dock late, due to system problems, and they were then put on a follow-up truck. Customers saw service quality deteriorate, as they did not receive invoiced items when the original shipment arrived. The customers called FoxMeyer’s customer service, which ordered the missing items and shipped the items the following day. Later, the missing items would arrive on trucks.
The result was that when the shipment of missing items ordered by customer service arrived the next day, many customers had received many duplicate items. However, because the SAP inventory system produced accurate bills based only on the order, customers were not billed for the duplicate deliveries. (Caldwell, 1998) The expected result was that many of the customers did not bother reporting the extra deliveries. The enormity of the duplicate orders was not clear until inventory, but the problem led to huge loses to FoxMeyer. The company was forced to announce a $34 million charge to cover the non-collectible losses from customer orders. The fact was that the company did not know to whom the duplicate orders were sent or what was the content of those orders.
The most serious reason why the system was dysfunctional can be seen in FoxMeyer’s management of the project. Their implementation of the project entailed a top-down approach, whereby management, Andersen Consulting and few technical people planned and implemented the project right from the outset. User participation was not solicited and client participation was missing. Few end users participated in the analysis, design and implementation of the system. Therefore, the communication gap that developed between users and system personnel was predictable.
The lack of all departments’ involvement in the project left workers threatened by the implementation of the system, particularly at the warehouse level. The workers had zero input into the automated system. Consequently, workers left for opportunities elsewhere. As the workers left, the company replaced them with temps until the new warehouse opened, but the temps were not able to handle the job and service deteriorated significantly. FoxMeyer was forced to open the new warehouse before the problems were corrected. The result was the crippling of the warehouse inventory management system and ultimately customer service.
The Delta Information System failed because FoxMeyer’s management neglected to understand the complexity of the project. They also did not recognize the risks, timelines, resources and testing in the implementation process. Furthermore, the technological factors related to the lack of understanding and knowledge of the intricacy of the system. The result was a system that was nonfunctional and inadequate.
FoxMeyer’s stock suffered heavily from the automation problems. Their stock, which reached a high of $26 per share in 1994 when the Delta Information System project was announced, dropped to about $3 per share by December of the following year. (Bulkeley, 1996) The company eventually filed for court protection under Chapter 11 of the Federal Bankruptcy law. A spokesperson for FoxMeyer, claimed that “fundamentally, the computer-integration problems we had were a significant factor leading to the bankruptcy filing.” (Madden, 1998)
Later, the McKesson Corporation purchased the FoxMeyer Drug Company. They bought the company at the bargain price of a mere $80 million in cash. Interestingly, it is obvious that the Delta Information System’s technology was capable of functioning as designed, since McKesson Corp made the technology work, including the automation of the warehouse.
In the competitive world of business, changes must be made to stay on top. Often, information technology is the change a company needs to ascend them ahead of the rest. In the case of FoxMeyer’s Delta Information System, the technology was ready and capable; however, the management was defective. FoxMeyer bet its company on the new system and lost.
1. Bulkeley, W. (1996, November) “When Things Go Wrong” The Wall Street Journal.
2. Caldwell, Bruce. (1998, July) “FoxMeyer Sues Andersen Consulting Over Flawed SAP R/s Implementation” InformationWeek Online.
3. Madden, John. (1998, November) “SAP Dismisses as ‘Unfounded’ a $500 Million Lawsuit Filed by the Trustee of a Bankrupt Drug Company” Philadelphia Business Journal.
4. Neumann and Sabher (1996) “How Information Can Help You Compete” Harvard Business Review.
5. Porter, M. (1985) “Competitive Advantage” New York: Free Press.
6. The SAP Home Page http://www.sapinfo.net/