With Big Software Projects, Firms Find Haste Makes Waste

SAN FRANCISCO —  When Nike Inc. recently saw that it was going to have a terrible quarter, the apparel giant seemed to disavow its famous “Just do it” marketing slogan. Instead, Nike just blamed its software.

The dramatic earnings shortfall was largely due to the failure of its costly new “supply chain” software, the company said.

When it works, such software comprehensively manages orders, manufacturing and inventory, and sends the final product to market. It tracks raw materials and communicates with suppliers with ever-increasing efficiency, often eliminating hundreds of steps in the traditional process.

But Nike’s move to upgrade such processes has been a nightmare. Too many slow-selling styles went to the wrong places; the company produced 5 million pairs of spring shoe styles for which it had no orders. Meanwhile, popular models like Air Force One were in short supply or delivered late to impatient retailers.

Pointing the finger at the software’s maker, Dallas-based I2 Technologies Inc., Nike Chief Executive Phil Knight reportedly quipped to analysts, “This is what we get for $400 million?”

Both Nike and I2 declined to specify what went wrong. But, in general terms, their experience provides a valuable lesson in e-business: Moving too fast and throwing caution aside can overwhelm even the best technology.

Nike was willing to invest such a large sum on supply chain software because the potential for savings is so huge. Networking equipment maker Cisco Systems claims annual savings of nearly $700 million after an investment of $170 million over five years. Much of the savings derives from shorter time to market for Cisco products.

Nike’s recent missteps made the company more determined than ever to implement the sophisticated supply chain software system it had envisioned.

But Knight acknowledged last month that the Beaverton, Ore.-based company has a long way to go.

“I’ve sat here several times over the last three or four years trying to answer the question, ‘Is that light at the end of the tunnel?’ ” he said. “Actually, the end of the tunnel is an oncoming freight train, and we’re sort of there again today.”

The Nike episode may have sounded familiar to candy maker Hershey Foods Corp. The company pushed to finish a four-year software project in 30 months, resulting in disastrous product delays just before--you guessed it--Halloween. Profit dropped correspondingly.

Who’s to blame for such debacles? Such situations are so complex, said analyst Eric Upin of the investment bank Robertson Stephens, that “it’s like trying to analyze how a marriage failed.”

Public disputes between a software vendor and a large client are rare. But just as divorce hits as many as half of all marriages, serious problems in the implementation of supply chain software are typical.

“As many as 50% of all major [large-company] software programs have major problems--they’re either significantly delayed, significantly over budget or have significant functional problems; they operate too slowly or don’t do what they are supposed to do,” Upin said.

And those are the ones that ultimately work.

“My guess is about half of these projects fail. Corporations scrap the software and start over,” said Charles Phillips, an analyst with Morgan Stanley Dean Witter.

Nike began its project a year ago and recently acknowledged that it will take three more years to come to fruition. Like Hershey, the shoe giant apparently fell into the trap of pushing too much complexity too quickly--before its personnel or factories or shippers were ready for the change.

Why such a phenomenal failure rate--intolerable for most other business productivity efforts? Start with buggy software.

Supply chain applications for major corporations normally start at $1 million, plus customization, hardware and maintenance fees that can push the total into the stratosphere, as Nike painfully discovered. It would stand to reason that such huge sums would buy fail-safe reliability.

Yet the opposite is often true. Complexity breeds mistakes, according to Eric J. Bowden, editor of BugNet, an online publication that tracks software errors.

“It’s absolutely impossible to write a piece of code that doesn’t have a bug in it,” he said. BugNet estimates that on average, for every thousand lines of source code--the digital instructions that constitute every software program--there is one bug. Supply chain software has millions of lines of code.

That means thousands of bugs. All it takes is one to divert 150,000 pairs of Air Garnetts to Indiana when Hoosier teens wanted Air Jordans.

And those programs tend to be far buggier than a typical personal computing application. Part of the reason is that they interact with a range of other software programs--from accounting to ordering to database tools--all of which have their own bugs. The interactive effects can cause calamitous errors and incompatibilities, Bowden said.

“How many Nintendo 64 games do you see crash?” he asked. Such games are extraordinarily reliable because they operate a single device and don’t interact with other software programs. That device is in millions of homes, so when a bug arises, a multitude of users are likely to run across it and report it.

Supply chain products are the exact opposite: Each is customized, and only a handful of users may encounter a given bug. When they do, it can shut down their operation.

And even well-designed programs work only when they are supplied with the right data--a challenge when dealing with the wide range of computers and software that most corporations have come to rely on over decades. “Garbage in, garbage out,” the saying goes.

Yet the benefits of doing things right can be so compelling that most companies forge ahead despite such pitfalls.

Cisco operates one of the most sophisticated supply chain operations, analysts say. In the last few years it has radically slashed production cycles and product inventory--a move the company credits as a key factor in its rapid growth. Cisco’s software also allows the company to remotely monitor contract manufacturers’ production lines.

“We can essentially test products to our specifications and requirements without . . . having employees on-site,” said Franklin Grosvenor, Cisco’s director of supply chain strategy.

The savings to Cisco: more than $100 million annually--just for the testing portion of their supply chain costs.

Experts also point to Dell Computer Corp. as a master of the supply chain. Notwithstanding Nike’s problems, the company happily uses I2 software. By closely linking suppliers to its factories, Dell has reduced PC inventories to less than five days and says it will gain a 500% return on its investment in supply chain technology over the next three years.

“In our factories we measure [inventory] in hours; our latest factory doesn’t have a warehouse in it,” said Dick Hunter, Dell’s vice president for supply chain management. Goods are delivered straight to production lines every two hours.

Such success stories usually follow bitter experience based on the misguided belief that technology will solve problems overnight. As Nike and Hershey discovered to their dismay, pushing the system too fast can spell disaster.

And without strong managers who present a very clear mission for the software, every department tries to add new features.

“The project becomes building Rome in a day,” Upin said.

Because such software packages generally involve investments of many millions of dollars, the buyers are senior executives who lack the firsthand technical expertise to evaluate a vendor’s claims. Operating in a highly competitive marketplace, they often fall prey to overconfident software representatives eager to make a lucrative sale. Phillips compares the process to a multimillion dollar used-car sale.

And companies may neglect the human challenges that even the best technology creates.

“System implementation is very painful because it often changes the way people work and it often changes the power between departments,” Upin said. He likened the process to necessary surgery often performed without anesthesia.

Dell’s Hunter agrees.

His company responds with “a maniacal focus on re-engineering processes.”

“We spent a lot of time on what we call ‘change management.’ We start training people way in advance of the actual go-live date,” Hunter said.

For its part, Nike said it has found buyers for 84% of its software-induced overstock. And it’s pushing forward as rapidly as possible to smooth out the problems.

Managed well or poorly, no modern company can avoid automating the old processes for long, analysts say. Corporations seem to agree. The supply chain software market will hit $7.8 billion this year, according to AMR Research, a market research company.

This would suggest that companies have come to view complex supply chain software in the same light as the old saw about democracy--the worst system, excluding all the others that have been tried.