CEO: SAP installation caused problems

An installation of SAP AG’s retail software completed last year by Inc. created problems that were “far more than we anticipated” and that continue to affect the pet-supply retailer’s business performance, according to Petsmart’s top executive.

Phoenix-based Petsmart recently released a warning that the financial results for its fiscal third quarter ended Oct. 29 will be below expectations due partly to lingering problems related to the SAP Retail installation.

In a follow-up interview, Phil Francis, Petsmart’s chairman, president and CEO, said difficulties stemming from the project “hurt us substantially.”

Francis wouldn’t comment on whether there were problems with the SAP applications themselves. But he said the most difficult part of the project involved getting SAP Retail to “play with other children” – meaning the process of integrating the SAP software with Petsmart’s other systems.

“I’d say we had problems with the connectivity to other software for about a year or so,” Francis said. “We were in pretty rough shape [on application integration].” As a result, he added, the company limped through 12 to 15 months of delays in implementing the SAP Retail applications.

After the system went live last year, Petsmart experienced higher-than-expected “shrink levels” – a reference to inventory losses due to shoplifting and damaged items. Petsmart said “residual effects” from the implementation problems contributed to above-normal shrink levels in the third quarter.

Petsmart, which said it expects a total of US$2.2 billion in revenue during its current fiscal year, is significantly larger than other U.S. retailers using SAP Retail, Francis said. At the time the decision was made to install the software, he noted, the firm needed to replace ageing systems that weren’t year 2000-compatible.

The company had the choice of buying older retail applications or going with more modern software like SAP Retail, Francis said.

He wouldn’t say whether, in hindsight, he would make the latter choice again. But Petsmart said recently that the SAP system “is now providing sound data.”

Petsmart was the second SAP Retail user to disclose in a matter of days that its earnings are being affected by an implementation of the software. Fabric retailer Jo-Ann Stores Inc. in Hudson, Ohio, recently said out-of-stock problems related to its use of SAP Retail played a role in reducing its third-quarter earnings.

A spokesperson at SAP America Inc. said neither Jo-Ann nor Petsmart has criticized the SAP Retail software itself. Instead, he said, both companies have praised its value. And the fact that numerous large retailers have chosen SAP Retail is proof that it works, he added.

Jim Shepherd, an analyst at AMR Research Inc. in Boston, said vendors of ERP software such as SAP Retail aren’t always blameless when users have problems. But delays in integrating ERP software with other applications are to be expected in big projects, he said.

Installations of ERP systems are complex projects that usually involve major changes to the internal business processes of users, Shepherd said.

“Most companies have not undertaken projects of this magnitude [previously],” Shepherd said. “They rarely have the skills required, and they always underestimate the time and effort required to do it.” Software installation hiccups can also be convenient excuses for poor business execution, he added.