Snoburst Bottling is the story of two partners, Jim* the Entrepreneur and Stuart* the Accountant.
Jim’s role was to find and secure new business, innovate on the production floor and generally run the operations. Stuart was the finance guy. Together, they built a 28 year business bottling waters and juices in Phoenix, AZ. The business served regional grocery and convenience stores, and although the business had somewhat stagnated the last couple of years, dropping from a high of $10m in annual revenue to $5m, a new WalMart contract was driving fresh growth and revenues had returned to the $8m range. New bottling lines were planned, contracts to secure the rights to bottle products popular in the Hispanic market were pending – the future looked very bright at Snoburst.
When they first contacted me, Stuart was planning to sell out and retire and they were looking for software solutions to take over the accounting functions – and perhaps even bring in a new Controller to fill Stuart’s shoes. As we examined the potential for a software solution, it turned out Stuart was an ‘old school’ guy. They were running a DOS based greenscreen version of CYMA accounting software – and hadn’t updated in 10 years or so. Stuart was also technology adverse – thinking most modern programs were a ‘waste of money’ and preferring to close the books himself every month, a process that generally took him about two full weeks and 3 people in the accounting department. Year end was a three month process.
It became obvious that Stuart wasn’t really interested in software packages over $8,000, reasoning being that’s exactly what he’d paid for CYMA 15 years ago, (he also wasn’t keen on leaving the DOS world). I thanked him for his time and as we were wishing each other well, he mentioned that “Maybe the next Controller would be interested in software”.
Being a connected kind of guy, I happened to know a gentleman who’d been a Controller for a food-based company, and as we discussed his qualifications, Stuart said he sounded like a good candidate – so I forwarded a resume. My contact ended up with the position as the new Controller at Snoburst.
At this point, I’m thinking, with an inside contact, it’s just a matter of time until I’m working with these guys – showing them how we can save money in the manufacturing end of the business, build efficiencies, cut costs – the usual.
It was not to be.
Stuart’s old school attitude survived him. Snoburst’s management team agreed that software solutions were too expensive to even consider. It would turn out to be a fatal (in company terms, not people) decision for Snoburst.
One of the main things I’d advised was that WalMart could be a tough customer – they had some stringent electronic requirements – and our team has an entire customer support program with representatives in Bentonville designed to help vendors manage WalMart demands and work effectively with the big box stores. I’d helped several customers in the past year with similar requirements, sent several clients to our Big Box Store Solution Center website, invited them to webinars hosted by our staff and our user group community.
In the end, I hated being right – but when the WalMart Quality Inspector showed up 3 months later, the results were not good. There was no Quality Control system in place. There was no lot trace or production record keeping system. Raw material sources were paper based and it took two days to track an additive of one of the juice products. While Jim and his broker went to Bentonville to appeal the decision, the end result was the WalMart contract was cancelled within 2 weeks. All Snoburst inventories were returned from WalMart stores across the Southwest. Over $3m in revenue was lost – at this point it represented 40% of the business. Large layoffs followed, the entire second shift eliminated. While some expansion equipment had already been purchased, expansion plans were immediately on hold.
At this point, I told the Controller how we could have avoided this loss with the right ERP solution – but, the conventional Snoburst thinking went, if they couldn’t afford software when they were an $8m company, it was totally out of the question at $5m, especially with all expansion plans on hold.
A few months later, I ran into the Controller again – and asked how things were going at Snoburst. He was very optimistic and had a bright outlook on the future. It turns out that the Hispanic drink project was coming along and if they could get the plant expansion finished, they had a regional distribution contract and 22 grocery outlets signed up to market a drink that was already very popular in Mexico, but unavailable to the burgeoning Hispanic population in the Southwest US. Preliminary estimates showed the demand could reach as much as $15m in annual revenue the first year. The only thing holding them back from full speed progress was the completion of ‘the lawsuit’.
The story behind ‘the lawsuit’ was that for the last 3 years, Snoburst had been invoicing their second largest client incorrectly. It turns out that Sales Orders were faxed to the office, entered in CYMA, and copied into a paper process to run manufacturing. There was no ability to enter contract pricing into the system, and no way to reconcile against expected contract revenue. As a result, they had fulfilled a contract that called for them to charge the client for freight – and the freight had never been charged. Over three years, these freight charges (think bottled water) amounted to $1.2m. Snoburst had been losing money on the deal from day one, but there was no mechanism in this particular version of CYMA to incorporate manufacturing costs and run reports against customer revenue. There was no way to reconcile freight to the individual shipment or customer contract. They never knew they were losing money, and it would have gone on forever had the new Controller not joined the company and reviewed contracts.
But the end result was that the customer had promptly paid all the invoices that Snoburst had sent them. That satisfied the contractual obligation. The judge threw out the lawsuit and nullified the contract. Not only did Snoburst lose the $1.2m in unpaid freight charges, the client took their $1.8m in business and went to another vendor.
A few weeks later, I took the Controller to lunch. I pulled up to an empty parking lot, and walked to his office through the deserted plant – all the employees were gone, the plant shut down, only he remained to close the books a final time. Fortunately for him, closing the books in the antiquated system took nearly 90 days – much needed employment as he searched for his next position.
Over lunch, we ticked off the true costs of the CYMA system. 1) Three people to close the books for two weeks per month – 1.5 FTE’s at $60K per year in salaries and benefits =$90,000 annually. 2) Loss of WalMart profit, $3m @ 6.1% margin = $183,000 annually. 3) Loss of $1.2m in freight charges = $1.2m over 3 years or $400K annually. 4) Loss of ongoing revenues from $1.8m customer x 8.4% margin = $151,200 annually.
Total Ongoing Annual Losses = $824,200
One time cost for
ERP Software = $156,000
Months to Breakeven = 3.2
Real costs – One 28 year old company defunct. 36 Employees without jobs. $8m in annual revenue gone forever. $15m in potential future earnings from the Hispanic drink project up in smoke.
And while the numbers stink, the impact is worse when you hear about a plant supervisor that had worked for Snoburst for 20+ years, was in his early 60’s and underwent major surgery 2 weeks before the lawsuit was thrown out. Facing a future with no healthcare insurance, no employment, a tight job market for anyone, let alone a 60 year old dude recovering from surgery – it really makes me wish I’d done my job a little better, and gotten in to Snoburst to help analyze some of these costs up front.
While it’s true that we may not have picked up the incorrect freight invoicing issue, we would have easily seen the application of employees to cover system deficiencies, and could have quickly shown a 14 month payback instead of the 3.2 figure. Sunburst also knew of the risk involved with not tracking inventory as far as the WalMart account was concerned as detailed in initial meetings, but had never undergone an Quality Control Inspection.
The bottom line is, if you think an $8m annual revenue company is too small for ERP software, imagine losing the whole thing – that’s the risk you’re taking in today’s food processing world.
Gene Hammons MBA can be reached at Gene@GeneHammons.com.
*Names are changed for obvious reasons. All facts are reported as presented by the Controller cited in the story and from notes taken in meetings with the business principles, Hoovers Online and other public sources. Third party and outside verification is not always possible.