Global CIO: SAP Stunner: ERP Deal Boosts Customer Profit $100M Per Year - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

IoT
IoT
Government // Enterprise Architecture
Commentary
8/31/2010
09:28 PM
Bob Evans
Bob Evans
Commentary
50%
50%

Global CIO: SAP Stunner: ERP Deal Boosts Customer Profit $100M Per Year

Airgas says its extensive SAP project will raise annual operating profits by at least $75 million and possibly more than $125 million. Here's how.

a) Sales Growth. From the Airgas document: "In anticipation of increasing sales during the implementation of the SAP platform, Airgas intends to outfit its national distribution centers with the most common assortments of welding hardgoods to support direct telesales customer fulfillment in the most cost-effective, efficient manner possible, while gases will continue to be fulfilled by the local branches. The distribution platform already exists to support this strategy and minimal infrastructure investment is required, as the Airgas national distribution centers were built with significant growth in mind. Actions are already underway to expand the telesales sales organization in anticipation of this initiative. Through existing account penetration and customer base expansion, the results of Airgas' pilots and studies indicate the expanded telesales platform should yield incremental annual run-rate operating income of $25 million to $50 million upon full SAP implementation."

b) Price Management. "Price management was identified in April 2008 as the single biggest area of economic benefit of an SAP implementation. A pilot pricing study conducted in one Airgas regional company by an independent consulting firm demonstrated that the variation in pricing performance across branches, customers, product lines, and sales representatives provides multiple improvement opportunities that could be achieved with SAP, including both tactical and strategic price optimization. The results of the pricing study indicated that a minimum of $5 million and a mid-point estimate of $8 million in operating income could be derived from within the single regional company in the test. . . . When extrapolated to Airgas' other regional companies, total price management benefits are expected to be in the range of $40 million to $60 million in annual operating income upon full SAP implementation."

c) Operating & Administrative Efficiencies. "Given the high level of customer service required to compete effectively in the U.S. packaged gas industry, Airgas has always believed that, in a daily sales business with over one million customers large and small, it is of utmost importance that key decisions are made as close to the customer as possible. . . . Airgas has long viewed SAP as a vehicle to enable effective consolidation of certain functions without losing the critical customer-facing elements of the Company's day-to-day decision-making. Based on these objectives, the Company plans to consolidate certain accounting, administrative and support functions from its twelve regional companies into four divisional support centers, with a fifth support center for Airgas' product line business units. . . . An in-depth analysis of savings from the rationalized structure, as well as SAP-enabled productivity enhancements, leads the Company to expect savings in the range of $8 million to $12 million in annual operating income upon full SAP implementation."

3) Early Successes Boosted Confidence. "In early July 2010, Airgas successfully converted its hardgoods supply chain infrastructure to SAP. The Airgas hardgoods supply chain includes more than 300,000 stock-keeping units (SKUs), six national distribution centers, four buying centers, and a safety products telesales organization, and serves as the hardgoods fulfillment source for over 875 regional company branches. As a result, the Airgas hardgoods supply chain touches nearly every area of the Company, and therefore its successful conversion to SAP is a significant indicator of the future success and timeline of this project. Based on the excellent results of that conversion, Airgas is very confident that the economic benefits of SAP will be substantial upon full implementation."

4) Additional Savings. "For example, in conjunction with the conversion of the Company's hardgoods infrastructure in July 2010, all six of Airgas' national distribution centers now use radio frequency (RF) devices to support and execute various operating activities such as receiving, shipping, auditing, and inventory control. These RF devices are secure mobile data entry terminals that help improve productivity within the distribution centers, and the expected economic benefits will reach $1 million annually after year one.

"Airgas has also maintained a strong focus on its high-growth Strategic Accounts program, where visibility into, and management of, a single customer's multiple locations across Airgas regional companies within a single data set is critical. Administration of this function to-date has required a team of back office personnel and a significant amount of manual data entry. A single SAP dataset will allow efficient viewing and reporting of multiple customer locations, dramatically simplifying the administration of Strategic Accounts – both for Airgas and for its customers. The Company expects the dramatic productivity improvements in this area to yield savings of over $1 million annually upon full SAP implementation.

5) The Happy CEO! From Airgas CEO Peter McCausland, here's the type of IT-afterglow in which every CIO would love to bask: "In response to Air Products' offer to acquire Airgas, we have consistently stated that it is all about value, and we believe the substantial economic benefits of our robust, customized SAP system should be reflected in any valuation of the company. We expect this system to further optimize the power of the Airgas platform, and are excited about the game-changing potential of this enhancement to our business."

6) The Promise of Raising Operating Profits by $100 Million per Year. Here's the math, which Airgas billed as "incremental annualized operating income upon full implementation": from accelerated sales growth, between $25 million and $50 million per year; from price management, between $40 million and $60 million per year; and from administrative and operating efficiencies, between $10 million and $15 million per year. Add 'em up and that comes out to between $75 million and $125 million in additional operating profits per year for Airgas.

Lest there by any doubt about Airgas's confidence in the ROI on this SAP deal, here's one more comment that underscores the company's unwavering optimism and conviction: "Airgas is highly confident that by the end of calendar 2013, the benefits detailed in this announcement will be achieved and will constitute a minimum of $75 million in aggregate annual run-rate benefits in operating income, with a strong likelihood that these benefits will reach or exceed $125 million in the aggregate."

These overall results remind us once again that conventional wisdom often turns out to be unconventional hooey, and that the future is not written: rather, it is ours to create.

RECOMMENDED READING:

Global CIO: The CEO Of The Year Is SAP's Bill McDermott

Global CIO: How SAP Is Leading The Mobile-Enterprise Revolution

Global CIO: SAP's Top 10 Priorities To Become Undisputed #1

Global CIO: Oracle's Larry Ellison Declares War On IBM And SAP

Global CIO: In Oracle Vs. SAP, IBM Could Tip Balance

Global CIO: Larry Ellison's Acquisition List: Who's #1?

Global CIO: Microsoft Joins Oracle & IBM In Rise Of The Machines

Global CIO: Oracle Reveals Strategy & Customers For White-Hot Exadata

Global CIO: Larry Ellison's Hardware Boasts Are Nonsense, Says IBM

Global CIO: Larry Ellison's IBM-Slayer Is Oracle Exadata Machine

Global CIO: Why Oracle's Earnings Will Improve With Sun

Global CIO: IBM Claims Hardware Supremacy And Calls Out HP's Hurd

Global CIO: Oracle Needs More Than Talk To Beat IBM's Systems

Global CIO: Oracle CEO Larry Ellison's Top 10 Reasons For Buying Sun

Global CIO: Oracle CEO Larry Ellison On The Future Of IT

IBM CEO Sam Palmisano Talks With Global CIO

Global CIO: An Open Letter To Oracle CEO Larry Ellison

Global CIO: Sam Palmisano's Grand Strategy For IBM

GlobalCIO Bob Evans is senior VP and director of InformationWeek's Global CIO unit.

To find out more about Bob Evans, please visit his page.

For more Global CIO perspectives, check out Global CIO,
or write to Bob at [email protected].

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Previous
2 of 2
Next
Comment  | 
Print  | 
More Insights
News
The State of Chatbots: Pandemic Edition
Jessica Davis, Senior Editor, Enterprise Apps,  9/10/2020
Commentary
Deloitte on Cloud, the Edge, and Enterprise Expectations
Joao-Pierre S. Ruth, Senior Writer,  9/14/2020
Slideshows
Data Science: How the Pandemic Has Affected 10 Popular Jobs
Cynthia Harvey, Freelance Journalist, InformationWeek,  9/9/2020
White Papers
Register for InformationWeek Newsletters
Video
Current Issue
IT Automation Transforms Network Management
In this special report we will examine the layers of automation and orchestration in IT operations, and how they can provide high availability and greater scale for modern applications and business demands.
Slideshows
Flash Poll