Out there in the big wide world of business analysis, it’s surprising how little is understood about the extent to which information technology systems affect the financial performance of company.
Take Fonterra. Just year ago three key players in the New Zealand dairy industry – Kiwi Co-op Dairies, the Dairy Board and the New Zealand Dairy Group – merged, swallowing 95 percent of the industry and forming new entity, the $11-billion farmer-owned cooperative Fonterra.
As you’d expect, but probably hadn’t considered, this also meant the merge of three disparate information technology systems – systems that manage the supply chain, forecasting, financials, manufacturing and marketing of all three companies.
These are the sorts of IT systems that must be seamlessly effective for any company to run efficiently, particularly for those like Fonterra, company in the manufacturing business. Put another way: the cost savings and business benefits that Fonterra shareholders want rely on the success of complicated internal projects like the integration of key IT systems and change management. And that takes both time and money.
Despite this, report from the Shareholder Council on the first-year performance of NZMP, Fonterra’s ingredients products subsidiary, declared NZMP was not adding economic value to Fonterra and said there was “room for improvement”. Other media reports about Fonterra highlighted $50 million first-year loss and milk collection failures. The level of first year corporate spending, including high salary expenditure, has also been criticised.
All of which motivates people like John Shaskey, director global supply chain management for NZMP, to rise to the challenge of making the integration of NZMP’s operations across manufacturing and marketing reality.
Few people understand the complexities of “operationalising” new company like NZMP, he says. “There is significant lack of understanding. Three large entities have had to come together. One of the initial benefits of the merge into Fonterra was that it was going to take costs out for shareholders.
Those kinds of benefits rely on initiatives like the integration of key information technology systems and change to almost every operations business process managed in the former industry structure. Without that change there is no capacity to deliver the prize.”
Shaskey says improved IT systems are foundational. “If we didn’t make the information system (IS) investments we’re making, Fonterra’s name could be splashed on factories and trucks and that’s all that would change from before the merger.”
The supply chain
The most important project of the IS investments Shaskey mentions is JEDI – three-year process designed to fully integrate the supply chain system of Fonterra into one visible, efficient system.
Phillip Bratten, Fonterra global account manager for SAP – the enterprise resource planning (ERP) software provider working in partnership with Fonterra on JEDI – says the project will see NZMP employees using an automated supply system which will improve internal and external customer service.
“JEDI will decrease NZMP stock levels but provide ‘start to finish’ supply chain that ensures customers get what they order’- on time and in full,” he says.
NZMP customers can have very specific orders. “They might want dry whole milk products that have certain percentage of an ingredient. And these are all international customers. The NZMP customer focus is international,” says Bratten.
NZMP went live on September 9 with the first phase of JEDI, which focuses on planning and has started with milk powders. The system will be rolled out to include cheeses, proteins and other product lines by January 2003. Phase two, which addresses supply chain management, administration and logistics, is being run in tandem. “We are also looking at areas where there are no ERP systems and looking at what we can do, for example in transportation planning,” says Bratten.
Corporate spend
JEDI, of course, costs money. Shaskey acknowledges the project is not “trivial commitment” for shareholders but says compelling business case exists. “The supply chain runs from the time we pick up milk from the farmer to selling the end product and the cost benefits of this merger are in manufacturing and marketing.”
JEDI will cost “several million” but the end result will produce ongoing savings of several million annually.
Fonterra is also implementing strategy around its supply chain that will ensure business benefits into the future. “We need to make sure we have global capability, and with SAP we are creating options to ensure we have that when the business case has been built for it,” says Shaskey.
An effective global supply chain will certainly create bottom-line benefit for the NZMP side of Fonterra. The majority of its more than 2000 staff is based overseas in 83 operating companies. The regions include Asia, Africa, Europe, the Middle East, the Americas, and Australia and New Zealand and are all of similar size and scale.
Shaskey says current sales and operations planning processes run on an annual monthly and weekly programme where offshore companies supply requests to recently installed demand forecasting system.
“We have the ability to supply orders in full. But our difficulty is when we receive the demand information back, we prioritise it in terms of what’s going to maximise revenue and then reflect that in production plan. Our compliance to that plan is presently not satisfactory and the JEDI project will deliver the capability to significantly improve that. There is real value created by adhering to an optimised plan more closely.”
Nuts and bolts
So how hard is it and how long will it take? Bratten says SAP has been engaged to focus 110 percent on the Fonterra supply chain, truth that is borne out by the fact that NZMP uses Oracle, an SAP competitor, for its financial and manufacturing systems. “The SAP and Oracle tools will be integrated – there’s not technology or relationship problem – and then there are whole bunch of systems that we need to push information into or get information out of,” says Bratten.
Full supply chain integration will take the best part of three years, while Shaskey is hopeful of it being faster. “It’s project with maximum time frame of three years, but we hope to do it bit faster than that. We have gone through the legacy systems and selected those most appropriate for integration into the new system. They are performing at the moment, but they won’t be able to manage the business at the level we want it to be going forward.”
NZMP’s commitment to SAP is on phase-by-phase basis with business case and approval process for each phase. SAP is presently managing more than 80 people on the project, with NZMP adding strategic planners. Shaskey says there are “top quality” NZMP people on the JEDI project. “There is such financial benefit in this project. It’s very important. We are implementing it according to carefully thought out process. We will deal systematically with all integration issues and we’ve interlinked and well intertwined the IS and business initiatives.”
Change challenges
Both Shaskey and Bratten agree that the biggest challenge of the JEDI project is change management. “A lot of people will be doing their jobs in different ways. For example, we may go into manufacturing plant and say ‘from Monday you will be manufacturing whole different kind of product’,” says Bratten.
Shaskey says his team has identified all projects that relate to the change agenda and says the delivery and integration of the supply chain will cause change in manufacturing and marketing areas.
“NZMP has created four phase programme that is running in high profile throughout the organisation. The first two phases are related to supply chain strategy and what we are going to get the supply chain to do. The third enta
