Levi Strauss: SAP rollout 'substantially' hurt quarter

Levi Strauss: SAP rollout 'substantially' hurt quarter

Summary: SAP implementation problems prevented Levi Strauss from fulfilling orders for a week during the second quarter and contributed to a 98% decline in net income relative to the same quarter last year.

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SAP implementation problems prevented Levi Strauss from fulfilling orders for a week during the second quarter of this year.

These shipping problems, combined with other economic issues, caused the company's net income to drop 98% relative to the same quarter in 2007. Levi's most recent 10-Q SEC filing states that negative effects arising from the implementation "constitute a substantial portion of the decrease in the region’s net sales in the second quarter as compared to the prior year."

The company has been deploying SAP in staged releases around the world since 2003. A Levi's spokesperson told me the company launched its US-based ERP initiative this spring, and experienced difficulties connecting and integrating various legacy systems:

We ran into technical issues going through the implementation process, which interrupted shipping for about a week. We experienced shipping delays as we ramped the system back up, resulting in lost orders.

Although Levi's has not disclosed much detail about the problem's causes, the company's SEC filing offers clues:

We are currently implementing an enterprise resource planning (“ERP”) system on a staged basis in our subsidiaries around the world. We implemented the ERP system in several subsidiaries in our Asia Pacific region prior to fiscal 2008. During our second quarter of 2008, we implemented the ERP system in the United States resulting in changes in our system of internal control over financial reporting. Certain controls that were previously conducted manually or through a number of different existing systems were replaced by controls that are embedded within the ERP system, resulting in an update to our internal control process and procedures, the need for testing of the system and employee training in the use of the new system. Subsequent to the U.S. implementation, we encountered issues with the U.S. ERP system which caused us to further revise our internal control process and procedures in order to correct and supplement our processing capabilities within the new system.

The changes described above materially affected our system of internal control over financial reporting during our last fiscal quarter. Our current system of internal controls over financial reporting continues to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed.

Francine McKenna, a former PriceWaterhouseCoopers consultant and auditor, interpreted the SEC filing for me:

It's serious stuff. The language suggests that fundamental internal control errors were discovered after the system went live. Apparently, auditors determined these problems could have resulted in a materially significant impact to Levi's financial statements if not corrected. I can speculate that perhaps it was inventory related, because it's the big balance sheet item for a company like this.

Also, given Levi's previous errors and restatements, and with the recent change in auditors, new auditor PwC is probably taking a very strict approach to assessing Levi's efforts to implement SAP with required controls.

The filing suggests that Levi's anticipated potential ERP problems:

In anticipation of that implementation, we provided advance shipments to wholesale customers in the first quarter of 2008 that would normally have been shipped in the second quarter. Our ability to fulfill customer orders in the second quarter was subsequently impacted by issues encountered during stabilization of the ERP system.

The implementation is currently in a "stabilization period" and Levi's believes the worst is over:

Throughout the ERP system stabilization period, which we expect to last for the remainder of the year, we will continue to improve and enhance our system of internal control over financial reporting. We plan to implement the ERP system in other subsidiaries in the coming years and we continue to believe that the ERP system will simplify and strengthen our system of internal control over financial reporting.

THE PROJECT FAILURES ANALYSIS

Levi's hasn't released much technical detail regarding what caused the order fulfillment difficulties; given this lack of information, it's hard to draw conclusions with any level of confidence.

Nonetheless, a one-week shipping interruption is serious by any measure. Although Levi's apparently anticipated potential go-live problems, the severity and depth obviously took the company by surprise.

One analyst quoted by CIO magazine in 2003 questioned Levi's overall project timing:

Levi’s is bucking the industry-wide trend by going ahead with ERP now. "It’s expensive, high risk and requires a lot of cultural change, and unless you have a really compelling reason to do them you don’t [during a downturn]," says Paula Rosenblum, an AMR Research analyst.

It's interesting to note that Levi's former CIO has quietly disappeared from the scene. From the Guardian:

David Bergen, Levi's chief information officer, who came on board eight years ago to reconcile the company's hodge-podge of systems to a SAP-centric one, has quietly left Levi's. No announcement was made at the time and no reason is given for his resignation by the company.

Devil's triangle relationships. Virtually all large ERP implementations involve three parties, which I call the devil's triangle: software vendor, customer, and at least one third-party implementation services provider.

The complex and interlocking set of business and technical agendas governing these relationships can make failures difficult to dissect accurately. Of course, the parties usually don't want to discuss their failures in detail, which also makes full analysis hard.

In this case, Levi's is the customer, SAP the software vendor, and Deloitte appears to be the primary implementation partner. Levi's responded to my question about Deloitte's role:

A number of business process and systems integration experts have supported our ERP implementation. This included Deloitte among others.

SAP and Deloitte were associated with another recent high profile IT failure: the Los Angeles school district's (LAUSD) morale damaging problem printing paychecks. Regarding LAUSD, I offered the following comments to SAP, which likely apply here as well:

SAP...something has gone very wrong and you’re the ultimate experts. It’s high time you crossed some boundaries and pushed Deloitte harder.

Experience studying implementation failures suggests Levi's also played a contributing role in this situation. Since the company presumably follows a standard methodology for all rollouts and has successfully deployed SAP in other regions, something different happened here. Although we can only guess, perhaps the differences relate to unexpected complexity in the financial environment at Levi's company headquarters or in project management issues unique to the US rollout.

Regarding current status, Levi's spokesperson said, "Although more work remains, we're back to shipping at customer demand levels."

Topics: Software, Enterprise Software, SAP

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5 comments
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  • Whoa Nellie.....

    Through the magic of Google alerts I discovered something I said five (count 'em 5) years ago was used to bolster the notion that an ERP implementation (SAP specifically) was the cause of Levi-Strauss' revenue problems in Q2 2008.

    I really would have loved a chance to opine for THIS story, but no one called to ask.

    Here's what I WOULD have said:
    - Companies have been blaming poor results on ERP implementations for 20 years. In my years as a CIO, I always found this notion to be a convenient scapegoat for other, deeper corporate issues. My years as an analyst have only deepened that conviction.

    - I am completely unfamiliar with the Levi-Strauss situation as it is today. But taking 5 years to finish ANY implementation points to deeper issues, dontcha think?

    Our research (That's RSR Research by the way, I've changed jobs a couple of times since that last quote) consistently shows two significant internal challenges faced by companies when they decide to shift their practices: 1) their existing technology infrastructure is a mess, and keeps them from moving forward with new business initiatives and 2) people (as in the end-users) just don't like to change. Cultural change is hard. I expect untangling existing procedures which have most likely fallen into folklore is an additional nightmare.

    I also would have told you that this also smells a little like a poorly executed attempt to achieve Sarbanes-Oxley compliance, but that would be pure speculation.

    Anyway, I don't know enough about the situation to say more than that. And that would be the end of that. Yes, SAP is a client of mine, but so are most of the other large ERP and point solution providers, including Oracle. I would have responded the same way if the name of the ERP wasn't even mentioned.

    Normally I enjoy working with your reporters, like Evan Schuman. I'm really not that hard to find. Please quote me in context next time, like your other reporters do. I'm easy to find...just google "Paula Rosenblum".
    prosenblum
  • RE: Levi Strauss: SAP rollout 'substantially' hurt quarter

    WOW!

    Just when it seemed that the LS&Co train was finally back on the tracks, these two colossal failures of judgment have derailed it again. We have been hearing of SAP for so long that one wonders if the process itself doesn't need its own As Soon As Possible software; The whole idea of Systeme, Anwendungen, Produkte, hatched in Germany by former IBMrs in 1972, has caused more Corporate misery than those former Arthur Andersen auditors who dreamed of becoming Management Consultants. When you get right down to it SAP is based on IBMs fatal mistake of believing that One Size Fits ALL when it ignored the small onsite hardware revolution that toppled its world supremacy.

    And trying to force every 501 customer in the world to accept a single fit, is the same brand of lunacy. Do they really think the 501 will mould itself to all those ethnically diverse butts without jumping into the ocean multiple times while wearing the product? (My washer lacks a Shrink to Fit setting, doesnt yours?) Tom Watson said you can have any kind of mainframe you want as long as it is Blue, echoing Henry Fords Black Model-T mentality, and now Levis has joined these former marketing visionaries.

    Next we will hear that they have finally decided to start weaving denim to improve profits and shorten lead times.

    UGH!

    Bud Robinson

    A former LS&Co International Division President
    Bud Robinson
  • RE: Levi Strauss: SAP rollout 'substantially' hurt quarter

    well your conclusion (the origins of which i'm not clear on) that the LS&CO implementation took five years is totally misplaced.
    They are talking about 2 different divisions. Asia-pac got implemented in 2years, there was a break and US took nearly an year. If you're expert enough to implement it in less than that would be surprising.
    ashpali
    • I wouldn't know

      Hello Ashpali,

      If you're referring to my remarks, as I said, I really have little to no knowledge of the SAP implementation at LS&CO. This story only became remotely interesting to me because I was quoted, pretty much out of context. And for SURE my remarks were 5 years old.

      If as you say, SAP was implemented in a year in the US, yes, that's quite a respectable time-frame (might even be a bit tight). It does sound from the filing that the documentation of the "is" was not complete, and in any case, I don't buy notion that this was the cause of the company's lost revenue.

      I still don't understand the concept of "lost orders". If the retailers really wanted the product, I'm sure they would have reminded LS&CO that they had some orders placed.

      Anyway, like I said, I'm not sure if you were responding to me or the original piece.

      Best....
      prosenblum
      • Levi's ongoing project

        Paula, as Ashpali points, out, Levi's has been rolling out SAP across the regions for several years. It's a major, global deployment consisting of multiple projects.

        As the post makes clear, back in 2003 you warned of risks due to overall timing. As it turns out, your concerns about project risk were correct even if for different reasons. Hardly an out of context quote, although apparently we disagree on that point.

        Thanks for commenting.
        mkrigsman@...