Case 03The 11 Greatest Supply Chain Disasters

Group 312EM03 Arjyama Choudhury

25NMP26 Mahendra Pratap

25NMP47 A. Suresh

25NMP48 Ajay Singh

25NMP51 Pradeep Toppo

25NMP54 Narendra Raju Poranki

Management Development Institute - Gurgaon

Supply Chain Management

National Management Programme: XXV / Energy Management: 2012-13Term-IV (Jan - Mar 2013)

Presentation Date: 29.01.2013

Role in Supply Chain

Drug Manufacturer

FoxMeyer(Distributor & Wholesaler)

Retailer Stores

1. The FoxMeyer’s 1996 Distribution Disaster

Second largest drug exporter in US, 1996 (Sales: $ 5 Billion)

Intense Competition / Increased cost pressures

Revamping IT & Distribution Systems• New ERP System• Highly automated DC in Ohio

Anticipated huge operational profits Started bidding for future contracts expecting

cost reductions

1. The FoxMeyer’s 1996 Distribution Disaster

FoxMeyer DisasterSAP’s first high distribution foray

Unable to handle huge volumes & was unmanageable

DC Automation System - Disaster• Constant Bugs• Software fail (hence Stop & Restart) in the middle of the

process• Deployed hundreds of workers to fix the issues

•Ran simulations with low volume data•Ignored consultant’s many warning signs & felt

trivial

Tens of millions of $ unrecoverable shipping errors

Sold @ $ 80 million after Bankruptcy & lawsuits are continuing

Reasons for the Disaster

• Planning– Poor selection of the ERP Software– No consideration of other consultants’ advice– Lack of contingency planning– No end user involvement (Top down approach)

• Implementation– No restructuring of the business process was done– Insufficient testing– Over-ambitious project scope– Lack of end-user cooperation (ignored warnings)– No end-user training program

Failure in integration plans in the distribution & order fulfillment segment

Disaster

1980’s : GM’s CEO, Smith, fascinated with technology

Smith planned to increase the number of robots in GM plants from 300 to 14,000 GM’s Radical business plan to automate and modernize• Cost - $ 40 – 45 billion• Robots never really worked & productivity lowered, Finally scraped

2. GM’s Robot Mania

Robots painting themselves and dropping windshields on to front seats“GM could have bought both Toyota and Nissan for this amount” - CFO, GM

Avg. no. of autos produced by an employee

GM 11.7

Ford 16.1

Toyota 57.7

False assumptions - Replacing people with machines could increase productivity

Involvement of high cost- high tech un-proven technology Missed essence of Toyota’s low-cost production success

JIT inventory, TQM, Attention to production processes, Lean production, Extensive employee training, Close cooperation with suppliers

Consistency of manufacture comes before automation Push supply chain approach: anticipating customers orders

Productivity is not only based on labor costs but the entire production system

2. GM’s Robot Mania

Manufacturing cycle: ISCM Problem

• Business model was constructing highly automated warehouses costing $25-30 million per WH

bring a faster, cheaper, more efficient delivery and drive out logistic cost to make solid profits.

• However the strategy was dependent on high volumes to drive high level of system utilization, which never materialized.

3. The Webvan story

Analysis of Failure:• Aggressive expansions, spent too much on

infrastructure and exhausted its reserves without maximizing operating efficiency

• Over estimation of demand, which never reached the level that were high enough to pay off huge investment.

What they should have done:• Company should have worked on making

existing operations more efficient.• As it was not a tried and tested model, ideally a

smaller pilot project should have been developed and taken further if successful.

3. The Webvan story

SRM

ISCMDisaster

SRM

• Implemented New warehouse management system in its DC.• Tried to force Integrated Software Logistics to port their Unix-

based system. • Didn’t take the time to find a suitable initial WMS vendor. • First vendor abandoned the project, subsequently another

vendor was found.• Frustrated by long project delays, Adidas went live before

system was ready.• The new system did not work, leading to failure in right time

order processing and shipment• Company could execute only 20% of its $ 50 million orders,

result was huge loss of market share.

4. Adidas 1996 Warehouse Meltdown

Analysis of Failure:• A poor and rushed management decision• Lack of technical expertise of WMS vendors as

well of Adidas faulty implementation• Launching without proper system testing and

debugging.

What they should have done:• Adidas already knew how its supply chain was

configured and simply needed to choose an adequate WMS vendor to supply a functioning system.

• should have taken time to test and verify the usability of the new system

4. Adidas 1996 Warehouse Meltdown

Disaster

• Denver International Airport and United Airlines attempted at implementing an automated baggage handling system.

• The system failed as a result of poor communication between contractors, the airlines, airport officials.

• Little background checks, backup plans and collaboration was used between the parties lead to one of the greatest material handling fiasco of all time.

5. Denver Airport Baggage Handling System

Analysis of Failure:

• Complex system, mismatch of design considerations• Inability to understand the complexity of issues• Miscommunication, failure of implementation of systems, not

enough test-runs are all causes of failure• The stages of implementation were staggered and lost in

translation between contractors, vendors, and the airline.What they should have done:

• Proper Communication• Airport officials should have made sure that all parties

involved with the project were on the same page.

5. Denver Airport Baggage Handling System

6. TOYS R Us.com

Pre Dec10’ 1999

• Online retailing started to heat up

• Heavy ads with promise to deliver Christmas orders placed before Dec10

Post Dec10’ 1999

• Tens of thousands of orders

• Inventory mostly in place

• Picking, Packing and Shipping is not fast even for closer places

• Some Employees worked for 49 straight days to fill the order

2000

• Unable to fulfill orders in time

• Co. sent 1000s of “We’re Sorry” mails 2dy before Xmas

• - ve PR in Media• Customers irritated• Outsourced on-line

retailing to Amazon.com

Analysis Economy of Scale: by Outsourcing online retail to Amazon.com

• Toys R Us was inventory systems masteredo Poor online-specific customer service (tracking orders, …)

• Amazon.com was online delivery mastero Experience in online logisticso Trust in the Amazon name for online shopping

Why failed ?• Poor Demand Forecasting

o Failure in estimation of order fulfilling capacity• Inexperience in handling e-commerce platform

Take Home

Problems

Picking

Packing

ShippingUpstream Side

DownstreamSide

Focal Firm

Detailed e-fulfillment capability analysis is required before going

online

External support may be sought if new technology is used with

inexperienced manpower

Packing and Shipping are equally critical as Inventory

7. Hershey’s Halloween: Nightmare 1999

1998-1999

• $100m spent on New order management, SC Planning, & CRM system

• To transform company’s IT infrastructure & SC

• Intended to ease shipping and logistics between plants and retailers

Post April’1999

• System schedule Apr’99 slips

• Rather than waiting till next year, Co. switched over in the summer to the new system before Y2K

• Resulted in failure of Transactions and Inventory visibility

September 1999

• More than $150m order were lost

• 3rd Qtr profits dropped by 19%

• Headlines across business press

• Stock drops from 57 (Aug’99) to 38 (Jan’00)

• Took couple of years to recover

Upstream Side

Downstream Side

Focal Firm

Problems

Tracking Inventory

Order Fulfillment

Take Home• Phased wise implementation in place of Big

bang approach • it timed its cutover during its busy season-no

slack time available• Testing & Simulation could have been done for

the processes and systems• Risk analysis could have been done

beforehand

8. Cisco's 2001 Inventory Disaster

• Rode technology wave of the 1990s• famous for 'being the hardware maker that did not make

hardware’• This allowed to concentrate on marketing & product innovation,

also liberated it from hassle and expense of maintaining inventory

• Ordered large quantities well in advance, based on demand projections from the company's sales force

• To make sure that it got components when it needed them, Cisco entered into long-term commitments with its manufacturing partners and certain key component makers

Cisco

Contract manufacturers responsible for final assembly

Suppliers of processor chips and optical gear

Commodity suppliers all over the globe

Cisco's supply Chain Disaster

ISCM• It was caught in a vicious

cycle of artificially inflated demand

• Cisco's supply-chain system couldn't show the spike in demand representing overlapping orders

• Communication gaps between the tiers

• In 2000, Nike launched the Supply Chain project through SAP• Purpose: For effective forecasting & changing trend• Feb, 2001 Nike went live with new system: “Big Bang” approach

What happened• Erroneous forecast – Integration Problems, lack of training etc.• Software provider blamed Nike for improper implementation

Effects:• $100 million revenue shortfall• Nike's stock value fell by more than 20 %• Supply problems led to significant inventory shortages & excesses

9. Nike’s 2001 Planning System Perplexity

9. Nike’s 2001 Planning System PerplexityLearning:• Risk Analysis : Knee jerk overhaul of supply chain should be

done with due diligence • Change in system is complex and challenging• Implementation partner should be experienced

Disaster

Disaster

10. Aris Isotoner’s Sourcing calamity• Aris Isotoner was a highly successful division of Sara Lee

Corp.

• A manufacturer of gloves and slippers - sales of $220 million, 15% net profit, and high growth.

• Isotoner’s plant in Manila had highly skilled labour – producing 27 million pairs of gloves a year at very low cost.

• Chasing even low costs: Manila plant closed and sources production to other Asian locales

10. Aris Isotoner’s Sourcing calamityWhat happened• So called ‘ Low Cost” supplier - Ended up costing

between 10% and 20% more• Turn around of orders as quickly as before• Product quality plummetedEffects• Sales had fallen in half, to $110 million. • In late 1997, sold to Totes Inc. for a bargain price

Learning:• Focus for overall result is prime in place of

overemphasizing on cost cutting• Sourcing : It affects efficiency and responsiveness

in a supply chain.

Disaster

11. Apple: Missed Power Mac Demand

Mid-1990s 1993 1995Apple was often the leader in market share in the then still deeply fragmented PC market

Apple had been unable to predict demand for PowerBook laptop and had been burned by excess inventory and production capacity

• New Power Mac PCs introduced in a very conservative manner just before the Christmas season

• Low forecast, Explosive demand, Lack of flexibility in SC & Delivery issue from suppliers

• $1billion unfulfilled orders • Stock price crashed by half • CEO lost job & Shareholders law suits

pouring in • Apple lost the market position &

Recovered years later with iPod launch

Take Home• Conservative Demand forecasting will lead to

big loss• Lack of Planning in Risk Management :

proactive plan in place of a reactive.• Lacked in both push & pull cycle• Vendor Management system can’t be ignored in

view of Capabilities, Capacity & Constraints.• Flexibility is important in supply chain

Disaster

Other Supply Chain Disasters• Ford’s land Star division

– In 2001 its sole source of chassis for a new vehicle was nearly bankrupt and started back mailing to keep production going

– New model’s launch was about to be cancelled – Land Rover purchased the supplier and situation salvaged

• Federal Emergency Management Administration– Poor response to ensure supplies to victims of Hurricane Katrina

• Snap-on Tools- There was failure of order management system which led to loss of $50 million and operating cost increased by 40%

• Tri-Vally Growers— New ERP and Supply chain planning system could not be used and replaced with new one

• Norfolk Southern— It was unable to successfully combine its systems with fellow rail carrier Conrail— Lost $100 million in business

ConclusionEven a small disruptions in SRM, ISCM, CRM & integration can lead to

• Financial Impact (Bankruptcy)• Decline of Stock Price• Loss of Brand Equity• Ineffective Market coverage

Hence, the planning & implementation of SCM should include

Process Workflows Supporting Workflows • Business Modeling• Requirements • Analysis & Design Implementation• Test & Deployment

• Configuration & Change Mgmt

• Project Management• Environment

http://www.personal.psu.edu/fup2/blogs/ba302/2008/09/11_supply_chain_disasters.html#comment-35469

http://www.informationweek.com/570/70iuad2.htm

http://csantaella2011gs.wordpress.com/2012/10/27/disaster-incubation-theory-adidas-1996-warehouse-meltdown/

http://www.logisticalchallenge.com/2009_11_01_archive.html

en.wikipedia.org/wiki/History_of_robots

http://www2.isye.gatech.edu/~jjb/wh/tidbits/top-sc-disasters.pdf

References

Thank You…