Failed ERP Implementation Pushes Company to the Tipping Point
Sector: Apparel Manufacturer/Distributer
Scale & Scope: ERP implementation failure, Customer defection, Replenishment crisis, Financial irregularities, CRO role, Sourcing, Chapter 11 filing & emergence in six months.
SUMMARY:
A key investor hired INVIGOREN for a five-week operational audit after he learned that a company he invested in nine months earlier, not only needed additional capital, but its largest Customer might defect. The audit revealed it was a rapidly deteriorating situation that appeared to be terminal, and yet INVIGOREN was retained for an extended period. The audit quickly evolved into coaching, an intervention, and to a CRO role with the company entering Chapter 11 protection over a six month period. The company emerged from protection in six months and a day later. Over the next three months INVIGOREN transitioned the helm to new leadership, with the entire engagement spanning approximately thirteen months.
SITUATION:
A year prior, an investor made a significant investment in a manufacturer and distributor of apparel. The current founders and officers of the company had contacted the investor requesting additional funding and at the same time informed the investor that the largest customer had recently notified the company that they were in default of their sales contract. The investor retained INVIGOREN to conduct a five-week operational audit to better understand how the original funds were spent, were the additional funds necessary, and was the new CEO productively pursuing remedies to retain the customer. Even before the audit commenced, a second customer noticed the company to be in default and it was quickly apparent that the company had a severe inventory replenishment failure.
GAINING VISIBILITY:
A decision was made to approach the customer at risk as the first priority. This allowed the team to assess the scope and scale of the problem from the customer’s point of view, and clearly communicated to the customer’s team that they were the first priority. The customer’s service levels to its customers had degraded rapidly since they had few to no alternatives. A commitment was made to provide the customers with a detailed solution within 14 days.
The team proceeded to the client company’s corporate headquarters and assessed the situation with staff. Not only was the company out of stock on a large number of critical SKUs, the manufacturing pipeline was dry for all customers. Purchase orders were hung up in the ERP system, and on people’s desks. It was learned that an ERP conversion was undertaken some six months prior and was astonishingly rolled over in the middle of a month, and in the middle of a week. While many of the operational systems were rolled over to the new system, the financial systems have been delayed and were running on another platform out of sync. The lack of ability to obtain reconciliation between the two systems had led the company to be quarters behind in monthly closings and the posting of payables. In addition the team would later learn that there were issues with the payment systems that allowed orders to be credit card authorized, shipped, but never presented for payment.
As this process was underway the second largest customer also provided notice that the company was in default of it sales contract. It too was now experiencing severe out of stock situations.
Since the MRP ability of the new system was not fully functional it was decided to model, forecast, and order goods in a manual spreadsheet process. A similar manual process was deployed to gain insight to the operating financials of the company. As promised to the customers, the team returned within 14 days to present a recovery plan, with demonstrable progress points identified and dated. While the customers were not pleased with the current situation or the timeline for correction, they were convinced that the company was their best source of relief, and that companies recovery plan was well documented and executable.
As the team gained more visibility on the financial operations of the company it was evident that there were significant financial irregularities as well. While the investor had committed the resources to achieve to resolve the in stock position to support the company’s customers and sales, many other issues still needed resolution. INVIGOREN was asked to present the situation to the company’s board, which consisted of the original founders, their associates, and the new investor. The initial recommendation by INVIGOREN concluded that the situation was grave, and that the probability of success was low and the cost to remedy was too high.
CRAFTING SOLUTIONS:
However, the investor independently decided it was in his best interest to go forward and he retained INVIGOREN for an additional engagement. There were many shortcomings to be addressed and the team was focused on the following key activities:
• The retention of customers which would be achieved by a focus on replenishment activities, and clear communications to the customers on our progress.
• Secondly the company needed to gain visibility to the current financial status of the company to better understand its obligations, resources, and future opportunities. And last of all…
• The company needed to resolve the implementation issues within the ERP system.
ACHIEVING RESOLUTION:
INVIGOREN initially worked with the existing management team to resolve the situation, but it became apparent that INVIGOREN would need to take a more active role. INVIGOREN partners assumed the CEO and CFO positions with the approval of the board, and a comptroller was retained on a contract basis along with some other staff with key expertise. INVIGOREN went to work on the customer issues, the replenishment issues, the ERP issues, and the accounting issues, while developing strategic options for the company.
In the fourth month of the engagement, INVIGOREN was appointed the CRO firm and became more active in pursuing solutions with all stakeholders. INVIGOREN retained counsel for the company, and began negotiations with the two involved lender, who were under collateralized. Negotiations were fruitless, and the company entered Chapter 11 protection in month six.
The company emerged from Chapter 11 six months and a day later with all prior customers in intact with a sales gain over the prior 12 month period. The U.S. Federal Court Judge, who presided over the case made the following comment within the Court Order… “Well, I have complimented all of the professionals and the client representatives in this case before, and I will do it again. There were obviously many millions of dollars at stake, a couple of financiers. One situation was quite contentious. The other one was more friendly. We had overseas vendors. We had operational issues. We had restructuring issues. And I think it all came together very, very well, and I was very pleased with how smooth and quick it was all executed.”
INVIGOREN assisted the transition of the company to a new management team and exited two months later.
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