Supply Chain: Hershey’s Bittersweet Lesson

“Hershey’s information systems are providing the necessary data to support the transformation of the organization and business processes. The successful upgrade to SAP R/3 4.6 was a critical element of our strategy.”

-Hershey Foods VP and CIO George David in an Aug. 29, 2002, news release

Hiding problems in your business can land you in jail, but revealing them, even if there’s no deliberate malfeasance afoot, can get you in a lot of trouble too. Especially if the problems have some connection with software and aren’t well understood.

When candy giant Hershey Foods former CEO and Chairman Kenneth L. Wolfe told Wall Street analysts during a conference call in September 1999 that the company was having problems with its new order-taking and distribution computer system?a $112 million combination of software from ERP maker SAP, CRM provider Siebel and supply chain software from Manugistics?he didn’t offer any details. He did say, however, that the problems were going to keep Hershey from delivering $100 million worth of Kisses and Jolly Ranchers for Halloween that year. (Hershey said in August that Accenture and SAP helped its IT teams complete an R/3 implementation.)

Back in 1999, of course, it was a terrifying new prospect for investors to consider: Could a failed computer project take down a Fortune 500 company? Hershey’s stock price fell more than 8 percent on that September day, and the computer system mystery made the front page of The Wall Street Journal. Analysts didn’t fully trust Hershey’s ability to deliver candy until the following fall, when things had long been back to normal.

It was the beginning of the dark ages for enterprise software, in which every press story about enterprise software mentioned Hershey’s mysterious affliction. Hershey was the first confirmed case that terrified everyone into thinking that anyone who touched enterprise software was doomed to the same fate.

Even in 1999, however, enough details about the difficulties of other enterprise software implementations had leaked out that analysts could have seen that Hershey’s only real failure was its timing?the system went live right about the time when orders were pouring in for Halloween, and they couldn’t be fulfilled. Other than that, Hershey’s experience was pretty average. Studies have shown that most companies that install enterprise software are late, their business processes suffer temporarily, and their revenue can take a hit for as long as six months.

Today, Wall Street analysts don’t bother about Hershey’s computer systems. “We were hypersensitive to the system problem back then, but now it’s a nonissue,” says Richard Joy, senior investment officer for Standard and Poors, a New York City-based research company. He thinks Hershey now may even be a little better at delivering candy than it was back then.

So when Hershey issued a press release in August saying that it had completed a successful upgrade of its SAP ERP system, we figured the company might want to end the 3-year-old mystery. But we couldn’t get an interview.

Here’s what former CEO Wolfe (he retired in 2001) should have said in 1999: Enterprise software is hard. It takes a long time. It’s hard to get people to change the ways they work so that the system will function correctly. But they eventually adapt. And you will have problems in your business at first because enterprise software isn’t just software. It requires changing the way you do business.

More and more, CEOs are going to have to talk intelligently about their computer systems during quarterly conference calls with Wall Street?if they can’t do it well, investors, analysts and the press will bash their companies, probably harder than they deserve. Most companies hide their problems with computer systems from public scrutiny. “I tell my clients never to talk about the problems,” says Jim Shepard, senior vice president for AMR Research in Boston. “The thing Hershey can be faulted for was to announce that they had blown ERP as justification for missing earnings.”

But it’s getting harder to hide computer systems from Wall Street. Software systems run the business now. And if problems are hidden they can fester and explode in an even bigger mess. If there is a lesson in the Hershey soap opera, it’s not that companies should hide their computer system problems; it’s that CIOs have to help their CEOs do a better job of explaining the problems and outlining the solutions.