Tutorial – Cost Control – Case Study

A LARGE DRUG WHOLESALER FAILED LARGE IMPLEMENTATION OF

ENTERPRISE RESOURCE PLANNING (ERP)

In the early 90s, FoxMeyer, a healthcare service company, was the fifth largest drug
wholesaler in the United States, with $5 billion in annual sales and around 500,000 items
shipped daily. Because of fierce competition, FoxMeyer needed a solution that would make
complex supply chain decisions while facing the cost pressure. FoxMeyer decided that an
ERP would offer the best solution to get real-time information, automate, and integrate
inventory systems into a unique system. The company expected to eliminate unnecessary or
redundant activities, set up appropriate inventory levels, and implement more responsive
customer services.

This IT system, a multi-million-dollar project, was the first of its kind launched in the
pharmaceutical industry. The implementation cost for Systems Applications and Products in
Data Processing (SAP) was budgeted at RM1 million, and the ERP system was projected to
save FoxMeyer about RM 4 million per year.

The Planned Value (PV) includes:

 RM500,000 client/server computer system from HP
 RM300,000 for the software
 RM50,000 for consulting fees
 RM100,000 for a new 340,000-square-foot computerized warehouse

This failure was the result of poor planning and implementation as detailed below:
Planning: Implementation:
Insufficient testing
No consideration of consultants’ advice Dominance of IT specialists’ own interest
No end user involvement Lack of end-user cooperation
Poor selection of the ERP No restructuring of the business process
Lack of contingency planning Overly ambitious project scope
Poor management support

Unfortunately for FoxMeyer, the project was a total disaster with a final bill that exceeded the
budget for the implementation of the ERP. FoxMeyer only saved half of the projected amount, and
the company had to file for bankruptcy a few months later.

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Question 1

“Unfortunately for FoxMeyer, the project was a total disaster with a final bill that exceeded
the implementation cost of the ERP” - This quote implies that the ERP project lacked proper
cost control in managing the project within budget. Assuming the performance report shows
an Actual Cost (AC) of RM550,000 and an Earned Value (EV) of RM400,000; calculate the
Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and
Estimate at Completion (EAC) for the project. Elaborate the purpose and interpretation of
the values as well as possible solutions with justifications to complete the project successfully
within the budget and timeline.
(20 Marks)