QP Industries-The Challenges of Integration

Adam Rodriguez, the vice president of supply chain man- agement for QP Industries, sat in his office, contemplat- ing what he had to tell the executive leadership team at tomorrow's meeting. During the last two years, lead times for transmitting orders between QP Industries' six strate- gic business units (SBUs) were getting longer and longer; while the number of incorrect orders, inventory levels, and stockouts were dramatically increasing. Six weeks ago, the CEO of QP Industries, Ellen Higgins, had asked Adam to form a task force to identify the underlying problems and to develop a plan to solve them.

QP Industries-Corporate Background

QP Industries develops and makes gears and related engi- neered components, mostly used as replacement parts in heavy equipment. With sales of over $7 billion per year, QP serves the aerospace, automotive, recreational vehicle, med- ical, military, off-road, and power generation markets. QP is organized into six SBUs serving each of these markets.

Since its founding, QP Industries has grown by expand- ing on its core strengths-innovative designs, high-quality engineering, and a strict, almost fanatical adherence to quality standards and delivery schedules. The company prides itself on being the most responsive in the industry and offers "the 12-hour guarantee." For most of its product line, QP promises to pick or produce if necessary, and ship products within 12 hours of receiving customer orders.

Six years ago, QP's executive leadership team sought to grow sales by expanding beyond North America. They tar- geted Vietnam, India, Indonesia, Brazil, Argentina, China, and South Africa as desirable markets, and rapidly expanded primarily through acquisitions. During this time, QP Indus- tries acquired over 30 different companies, many of which were leaders in their regional markets. With some 50,000 different stock keeping units (SKUs), there was a concern that the acquisitions caused unnecessary duplication of part numbers and SKUs. Subsequently, a corporate initiative identified and eliminated redundant or unnecessary SKUs (resulting in a 37 percent reduction in SKUs).

The 12-Hour Guarantee Problem

While expansion had given QP Industries 15 major distri- bution centers and a sales presence in 20 countries, increas- ingly QP was failing to meet its 12-hour guarantee. The standard was to have 95 percent of orders meet the 12-hour guarantee. Two years ago, only 83 percent of orders were shipped within 12 hours. Last year this rate had fallen to 71 percent, and year-to-date performance suggests that the downward trend will continue.

To address this problem, Adam formed a task force con- sisting of the supply chain directors for each division. Over a very intensive six-week period, the task force visited cus- tomers (especially key accounts), distribution centers, and manufacturing facilities. The task force made several key conclusions.

• QP Industries was using at least 22 different MRP sys- tems and four different DRP systems.

• Many of the acquired companies were still using legacy sales and billing systems, each with its own unique database.

• The different systems had difficulty in "talking" to each other. Often, communications were delayed and errors created as orders generated by one system were manually entered into the other system.

• Each group believed that it needed to maintain its own MRP/DRP system because its unique features were necessary.

• In many cases, the bills of materials were inaccurate, because engineering changes introduced by newly acquired companies had not been incorporated into the bills.

The Task Force's Recommendations

After consulting with some of the major MRP/ERP soft- ware providers (SAP, QAD, Oracle, and JDA), the task force recommended that the current systems be consoli- dated into one corporate-wide ERP system and that all databases be consolidated into one database. In conjunc- tion with this transition, core/critical processes were to be standardized and consolidated. It was estimated that this project would cost QP Industries around $25 million, but costs could run as high as $480 million (using 6.9% of total revenue as a proxy for the total cost of ownership). Imple- mentation might take anywhere from 14 to 24 months. As Adam prepared for the meeting, he could not help wonder- ing if these recommendations were sufficient and how they would be received by the executive team.

Questions

1. What are the benefits from implementing a single, companywide ERP system?

2. What challenges are likely to be encountered during implementation?

3. What additional recommendations would you make to Adam?