It became obvious that Stuart wasn’t really interested in software packages over $8,000, reason 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 new Controller would be interested in software”.
Being a connected kind of guy, I happened to know a guy named Frank 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 had Frank forward a resume – and he ended up with the position as the new Controller at Snoburst.
At this point, I’m thinking, with my guy Frank on the inside, 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, quality control you’d expect with so much on the line for a chain like WalMart. Our F&B team had an office 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 almost 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 Frank 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 Mexican soft 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 an already popular and well known brand 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’.
A few weeks later, I took Frank 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 Mexico 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.
To find out more about doing a Cost/Revenue Model for your business, email us at Info@ProfitFromERP.com or contact Gene Hammons MBA directly at GH@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.