ERP woes cut Grainger profits

For the third straight quarter, Chicago-based W. W. Grainger Inc. expects problems related to the installation of a new SAP R/3 system to put a damper on its earnings.

Grainger, a $4.3 billion company that sells manufacturing supplies and spare parts, today said its profits for the fourth quarter of last year could be as much as 45% below Wall Street's average expectation of about $50 million.

The big culprit continues to be the SAP AG-based enterprise resource planning (ERP) system Grainger switched on last spring. Problems with the R/3 system already cost Grainger $19 million in lost sales and $23 million in reduced earnings during the second and third quarters of 1999.

At the end of the fourth quarter, Grainger officials said, a physical count of inventory showed that the ERP software was counting more products than were actually on hand in the company's warehouses.

The "inventory shrinkage," which was blamed on transaction-processing failures during the rollout of the new system, required a downward adjustment in the inventory figures. That will affect fourth-quarter earnings, and Grainger said salary and employee benefit costs were also higher than expected due to costs associated with installing the ERP system and doing the inventory count.

David Dobrin, an analyst at Benchmarking Partners Inc. in Cambridge, Mass., said installing an ERP system can be an especially thorny task for a distribution-oriented company such as Grainger.

"There's such an enormous number of things they sell, and they have an extremely complicated business model and lots of [facilities]," Dobrin said. "It's the sort of thing that puts a lot of pressure on anybody's ERP system, not just SAP's."

Hasso Plattner, SAP's co-CEO, mentioned Grainger's struggles after a press conference in November while suggesting that some users could avoid major problems on their R/3 rollouts by calling SAP for help earlier in the projects.

Plattner took some of the blame for the situation himself, acknowledging that SAP hasn't "developed as close relationships [with users] in the U.S. market as we have in Europe."

Grainger is one of several high-profile users that have had difficulties with new R/3-based systems in the past few months. Hershey Foods Corp. and Whirlpool Corp. both said last fall that they were also having trouble processing orders through their systems.

But SAP isn't the only ERP vendor that's being stung by problem rollouts -- for example, Oracle Corp. and PeopleSoft Inc. also recently had users who ran into trouble with installations of their applications.

Grainger CEO Richard Keyser said in a statement that the company has taken steps to correct its transaction-processing problems and has now installed the ERP system at all of its six distribution centers and 370 branch offices.

The ERP system isn't totally to blame for the fourth-quarter earnings shortfall, Keyser added. Grainger also spent more than expected setting up Internet-based business initiatives.

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