A funny thing happened to the folks at Cadbury Schweppes on their way to implementing a global IT strategy with the clever acronym, PROBE (Program for the Realizing the Benefits of e-Enabled ERP). They shelled out better than $350 million to automate and integrate just about everything that moves (or as it turned out, didn’t move) – a real state of the art information age scheme. PROBE was projected to save them $90 million or more a year. It hasn’t and it won’t.
The only purpose for a system like this is to get authority out of the hands of the people in all of the remote plants and put it in the hands of the wizards in headquarters. You wouldn’t want some guy who has been making soda pop and candy bars successfully all his life to make any decisions – you only want people with MBAs deciding what candy to make and how to make it. So you give $350 million to SAP, have the people in the plants stop thinking and just do what the computer tells them to do, add a couple more strategic thinkers at headquarters and there you have it! Might as well put your feet up and book the $90 million profit. That’s the plan, anyway.
It turned out, however, that they were just a tad premature in telling the folks in the factory to stop thinking. Cadbury took a $50 million hit in the first quarter alone due to "an excess of chocolate bars building up at the end of 2005". The "excess of chocolate bars was brought about by "IT problems" and "was then exacerbated by a slow start to the UK confectionery market in 2006, when many people’s New Year diets kick in after the over-indulgence of the festive season."
I guess the fact that people make New Year’s Resolutions to lose weight, thereby reducing their intake of candy bars after the holidays is a phenomena not covered in the MBA programs. I can think of no other explanation for one of the world’s biggest candy companies to have been surprised by post holiday dieting. Apparently it has not created an inventory glut in the past because the people in the plants knew this was an annual occurrence and took it into account when they used to schedule the plants themselves. That tidbit of secret, industry insider information must have been left out of the knowledge transfer when the headquarters folks took control.
Note that ignorance is the explanation that puts management in the most favorable light. The alternative explanation is that they knew full well that demand slacks off after the holidays and that they had way, way too much inventory going into the holidays, which would mean they knew their inventory was overvalued when they closed the books on last year. That would be disonest and, in fact, illegal. Assuming incompetence gives them the benefit of the doubt.
The incredible part of the story, however, is that the $50 million hit is not the amount of extra inventory the IT glitch and the poor forecasting caused – it is the discount Cadbury had to give to unload the excess Crunchie, Double Decker and Cadbury’s bars. The inventory value of the excess candy must have been in the hundreds of millions of dollars. I don’t know anything about the cost structure of a Crunchie bar, but the number of them you must have on hand to take a $50 million discount is simply staggering. We are talking about cases on top of cases, loaded on pallets on top of pallets stacked in racks in warehouses of mammoth proportions.
How on earth can management be so out of touch with the operation to create an excess of Crunchie bars on this scale? I understand that candy bars have such complex Bills of Material and they are made under very complicated synchronization environments so you just have to have MRP to deal with them. And I can see that lean manuacturing with its newfangled pull systems only works when you make far simpler products like cars and you work in a Japanese culture, but didn’t anyone have the sense to say, "Gee – we got a ton of candy just sittin’ here – maybe we oughta shut off the machine for a while"?
Is the management of Cadbury’s really possessed of such ignorance and arrogance that they really thought taking control away from manufacturing people all over the world and consolidating it in the hands of a few people at Cadbury headquarters would improve manufacturing performance?
And what does this say about the industry analysts in ‘the City’? (‘The City’ is London – and the common term for the UK’s equivalent of Wall Street) Cadbury’s offered up their explanation of being surprised by post holiday dieting to the financial community – and they bought it hook, line and sinker. The average high school educated ‘industry analyst’ peddling candy bars in a corner convenience store knows that business slacks off in January.
The one thing that is certain about the Cadbury debacle is that they did not lose the $50 million due to post holiday dieting or IT hiccups. They lost it all to dismal management. The official line at Cadbury is that this was just a one time technical glitch, and that they are still on track to save the $90 million a year from PROBE. Fat chance.
This may come as a shock to them, but a system glitch can cause a production shortage – miss a data field and fail to order enough material, or put a decimal point in the wrong place and miscalculate capacity. Over-production of this magnitude, however, cannot possible be the fault of a computer or the data within it. This can only happen when the people calling the shots are hopelessly out of touch with operating reality. This is pure and simple the result of management by the numbers by managers who have no idea what the numbers mean.
A Program for the Realizing the Benefits of e-Enabled ERP? A by the numbers, control freak’s dream … and about as far from lean principles as you can get.
Troy Gay says
It is a little simplistic to assume that all people with MBA’s are in favour of ERP systems, or indeed that complex technical solutions are the best alternative.
Keep to the facts (of which there are few in this article) rather than making broad generalisations.
Bill Waddell says
I don’t know Troy,
Fact One: $350 million ERP system
Plus Fact Two: $50 million inventory write down partially attributed to Fact One
Plus Fact Three: Quote stating balance attributed to dieting after the holidays
If you have any other facts that you would like to add that would lead to a different conclusion, please pass them on. If you are OK with my facts, then perhaps you can come up with a different equation that adds them up and comes to a different conclusion.
You’re right about the MBA nonsense though. I need to tame that down.
Barry "aka the Hillbilly" says
You are pretty close to the Mark about the MBA stuff Bill. As I recall Warren Buffett has said that it has been very helpful to him to have so many American Business Schools turning out thousands of MBA’s a year who are taught that it does no good to think for yourself in the investment world. An interesting future blog article might be a comparison of the number of MBA’s and accountants versus Engineers who have been created in America since WWII. I have heard that both China and India are producing Engineers in quantities greater than the US and Japan. It would be interesting to know just how many Accountants and lawyers they are creating at the same time. I think it was a bunch of MBA’s that got us to the Moon wasn’t it ??? Maybe not !
HA HA, I’m going to use that last sentence quite a bit in the future…if you don’t mind, Barry.
Barry "aka the Hillbilly" says
Feel free to use any of my stuff you like Wilhelm. I’m just a Hillbilly anyway so what do I know.
Bill Waddell says
Don’t buy any of it Andy. Barry is dumb like a fox – this ‘hillbilly’ act is just a ruse.