Retailer Lumber Liquidators announced disappointing earnings for the third quarter of 2010, due to "reduced productivity" associated with its SAP implementation. Insufficient attention to training workers on the new system appears to have caused the problems and pushed the implementation off-target.
Based on my examination of available information, the problems seem due to poor worker training during the company's transition from manual processes to SAP's automated and structured system. This situation clearly illustrates the business risks associated with insufficient training on enterprise software implementations, whether related to SAP or any other vendor.
In fairness, I must emphasize that no parties associated with the implementation blame the SAP software. To the contrary, CEO Jeff Griffiths said the SAP system is "functioning and doing what it is supposed to do."
Lumber Liquidators is the largest hardwood-flooring retailer in the U.S., with approximately 225 stores and $650 million in estimated 2010 revenue. According to the earnings press release, the training situation caused net income to drop about 45 percent, relative to the previous year; in addition, the release states:
The Company estimates that reduced productivity resulted in approximately $12 million to $14 million in unrealized net sales during the third quarter.
To understand these numbers, it is helpful to recognize the company accepts deposits on orders from retail customers, which then convert to a completed sale once the order is fulfilled. Any delays in delivering finished product to customers thus delays Lumber Liquidators' ability to receive the cash associated with those orders.
During the earnings call, Griffiths described the productivity issues that prevented the company from completing customer orders in a timely manner:
We were not able to service customers or identify new sales opportunities at the level that has been typical for our business historically. Overall, we were not as effective or efficient in identifying open orders, or tracking and processing orders. We also encountered issues with visibility into what inventory was in stock to fulfill customer orders, which led to orders not being completed during the quarter, as they should have been.
All of this combined with our associates acclimating to the new system reduced the time that could be spent helping potential customers shopping at our stores and converting those shoppers into sales.
Griffiths and company CFO, Bob Terrell, further explained that "reductions in warehousing and merchandising productivity" hurt the company's wood finishing operations, lowering the number of units it could finish per hour. As sales slowed from these problems, Lumber Liquidators increased promotional activities, which contributed to higher expenses and further reduced profitability. The company also faced higher payroll, as workers required more time to complete work, and increased transportation costs for expedited shipping.
The company's 10-Q report, filed with the SEC on 11/9/2010, adds more detail:
[T]he implementation of this system had a pervasive impact across our operations, primarily resulting in reduced productivity in our store and warehouse operations, adversely impacting our results in the quarter ended September 30, 2010. This reduction in productivity included:
The effectiveness of our store operations to satisfy existing customer orders, and generate new demand,
The efficiency of our product allocation and distribution, and
The allocation of resources required to operate our business.
The reduction in productivity was greatest in the initial weeks following implementation. Although the Company did not reach pre?implementation productivity by the end of the third quarter, operational efficiency and effectiveness improved during September and improvement has continued in the fourth quarter of 2010. Additional resources were allocated to address specific areas of concern in September, and we will continue to dedicate appropriate resources through the remainder of 2010 to improve operating productivity. In addition, general operating familiarity improved with continued execution. In an effort to focus appropriate resources on serving our domestic customers, we have postponed the opening of our first stores in Canada until the first quarter of 2011.
During the earnings call, CEO Jeff Griffiths said the company had an "ambitious plan" to transform its allocation and planning processes but "did not have tools," prior to SAP. Griffiths added that the company used many "manual processes, running a lot things off of excel spreadsheets." He also said, "The architecture of the previous system did not allow us to implement in phases."
Lumber Liquidators refused my request to interview either Jeff Griffiths or Bob Terrell, saying "they are not available for comment." Aside from making general statements of commitment to Lumber Liquidators, neither SAP nor DataXstream, the company's system integrator, was willing to offer substantive comment for this blog post.
Lumber Liquidators problems arose because, apparently, the company did not anticipate the difficulty employees would have transitioning from the old system to SAP. Poor training is a common obstacle on enterprise implementations of this type.
In a blog post describing the impact of training on implementation success, the CEO of system integrator, Panorama Consulting, Eric Kimberling, wrote:
Unfortunately, Lumber Liquidators isn’t alone in its insufficient attention to organizational change management, ERP training, and communications. Most companies view these activities as optional, nice-to-have activities. However, as many companies realize the hard way, these are critical necessities. As Lumber Liquidators illustrated in its Q3 results, a few hundred thousand dollars and even just a little more time focused on organizational change management would have easily taken a dent out of the $12 million plus of lost sales that resulted from poor user acceptance of the new system.
I asked financial analyst, Matt McGinley, who covers Lumber Liquidators as Managing Director of ISI Group, for his take:
"The problem seems related to sloppy execution due to insufficient training of store staff, rather than core system issues, during the rollout to stores. Lumber Liquidators should have done a better job ensuring that all users were properly trained when they flipped the switch to go live."
Open questions. Beyond identifying training and change management as issues, it would be helpful to understand the decisions that brought Lumber Liquidators to this point. Unfortunately, without detailed information from Lumber Liquidators, we can only speculate as to cause. One anonymous observer offered the following thoughts:
Situations like this usually involve poorly trained consultants, high consulting turnover, poor consulting vendor selection, and bad vendor management.
Unfortunately, Lumber Liquidators refusal to comment encourages observers to assume the worst.
Advice for enterprise buyers. Lumber Liquidators earnings hit reminds us that business change takes time, training, and attention. With relatively few exceptions, most technology implementations do not allocate sufficient resources to manage critical periods of business transformation.
Most projects begin life with the hopeful enthusiasm of anticipated triumph and success. However, success requires paying planning for details that do not become relevant until much later in project; training is a perfect example.
Early in the process, the best consultants inform project stakeholders of the need to allocate resources to handle these downstream requirements; the best enterprise customers then act on that advice. Unfortunately, in practice, many consultants do a poor job explaining what's needed and enterprise stakeholders often ignore advice when it's given.
If you are an enterprise buyer, do not allow the euphoria of a new project to overcome prudence. Wise buyers find experienced consultants and demand candid forthrightness from them. To achieve success, you must replace the temporary bubble of euphoria with a realistic examination of common project risks.
[Image from iStockPhoto. Disclosure: SAP is a client, although not in areas related to this project.]