Hershey's Halloween Nightmare All Too Common for Supply Chain Implementations

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Hershey's Halloween Nightmare All Too Common for Supply Chain Implementations
S. McVey - November 1, 1999

Event Summary

Hershey Foods Corporation announced a sharp decline in revenue and earnings for its third fiscal quarter ended September 30, 1999. Consolidated net sales were $1,066,695,000 compared with $1,217,237,000 for the third quarter of 1998. Net income for the third quarter was $87,578,000, or $.62 per share-diluted, compared with $107,533,000, or $.74 per share-diluted, for the third quarter of 1998. Hershey Chairman and CEO Kenneth L. Wolfe blamed the lackluster results on problems encountered since July, when the company switched over to new systems for customer service, warehousing and order fulfillment.

Market Impact

The top U.S. candy maker in computer trouble, dire implications for thousands of trick-or-treaters, and the specter of Y2K combined into a drama that few journalists could resist. Sifting through the hype, however, one finds little real insights into Hershey's troubles. More importantly, the heavy media attention given this story obscures the fact that implementation problems are often a major cause of short revenues and missed earnings. Most of these problems never make it to the front page because either a more convenient and less embarrassing scapegoat exists (Y2K) or the company cannot reliably trace the problem back to the software or implementation. In Hershey's case, the problems relate not to the software itself, but to the way in which it was implemented.

Hershey's operational challenges come at the worst possible time of the year. October, November and December provide candy companies with about 40% of their annual sales revenues. The Halloween holiday alone accounts for nearly $2 billion in sales. Hershey's loss creates a potential boon for its competitors who can empty their inventories and lure retailers from Hershey's frustrated customer base. Hershey faces additional depletion of finances in the months to come as it spends more money to correct the effects of its faulty implementation.

User Recommendations

In July, Hershey migrated to new customer service, warehousing, and order fulfillment systems comprised of software applications from SAP, Manugistics, and Siebel. The company chose to follow a "Big Bang" approach, that is, rather than moving to the new system one component at a time, it did it in one fell stroke. Many companies start out thinking in terms of a Big Bang, but later decide to follow a "phased" approach, in which new parts of the system are introduced incrementally. This more cautious strategy allows system bugs to be found and corrected before moving on to the next phase, while reducing the shock within the user community that inevitably accompanies new corporate-wide system implementations. Big Bangs are misleading in their promise of "once and it's done" benefits as investments made to remedy problems can quickly outweigh anticipated savings.

Whatever the outcome, Hershey's problems should serve as a warning to all users who are involved in implementations. Service provider selections and project planning should involve the same amount of due diligence as business IT strategy definition and software evaluation. Users involved in selections or early project planning should seek expertise from professionals who understand the pitfalls of implementations and can offer guidance. Otherwise, they risk repeating Hershey's Halloween nightmare.

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