American LaFrance, a 175-year-old manufacturer of fire trucks and emergency vehicles, emerged from bankruptcy protection in May – a bankruptcy it blames in part on a botched ERP implementation. The company is now attempting to return to full production following a painful reorganization.
Here’s a look at the events leading up to the bankruptcy.
The first alarm bells began to sound at American LaFrance (ALF) in May of 2007. At the time the manufacturer of fire trucks and emergency vehicles was ready to “go live” with a new enterprise resource planning (ERP) system.
The new ERP installation was meant to form the foundation for a bright new future for the company. In December of 2005, Patriarch Partners, a private equity firm based in New York City, sealed a deal with DaimlerChrysler’s Freightliner unit to purchase the ALF business for an undisclosed sum.
As part of the sale, Patriarch negotiated a transition agreement with Freightliner under which Freightliner agreed to provide accounting, inventory, payroll and manufacturing processing services to American LaFrance (ALF) until June of 2007. At that time ALF would disengage from Freightliner’s support systems and begin to pilot its own course.
But the transition did not go as planned. In fact, problems with the ERP implementation brought production at ALF to a standstill. When added to other challenges the company was experiencing with a depressed market for emergency vehicles and a move into a new headquarters and manufacturing facility in Summerville, S.C., the net effect proved overwhelming.
On January 28 of this year, ALF was forced to seek bankruptcy protection, owing $85 million to its unsecured creditors.
ALF did not return CIOZone’s calls or emails seeking comment on the problems experienced with its ERP implementation. However, documents filed with the District of Delaware bankruptcy court paint a bleak picture.
“Almost immediately upon the changeover to the ERP system, ALF recognized serious deficiencies with the system that had a crippling impact on ALF’s operations,” company attorney Christopher Ward states in its filing. “Some of the problems that ALF encountered in implementing the ERP system included, among others: (I) inability to reconcile data between the Freightliner system and the ERP system; (II) incorrect or incomplete inventory, purchasing and customer data due to either problems with the Freightliner system or the conversion of the data to the ERP system; (III) inaccurate or incomplete vehicle configurations loaded in the ERP system; (IV) insufficient training on the ERP system; and (V) missing financial information, including accounts payable detail, incomplete or inaccurate accounts receivable data and inaccurate beginning general ledger balances.”
In its bankruptcy filings, ALF said it is considering taking legal action against both Freightliner, which previously owned ALF, as well as IBM, which headed up the project to disengage ALF from Freightliner’s systems and install an entirely new ERP infrastructure for the company.
“ALF is currently analyzing potential causes of action against IBM based upon services provided by IBM in connection with the problem-riddled transition to the ERP system,” the company stated in its court filings.
IBM, in turn, says it is not to blame. While the company would not provide further details on the work it performed for ALF, spokeswoman Jan Walbridge says it is prepared to fight any legal action. “We are aware of no legal or factual basis for the company’s claim,” Walbridge told CIOZone. “IBM will defend itself vigorously against any claims that are filed.”
It is not yet clear why the deployment at ALF went off the rails, or if IBM is to blame as the company claims. IBM has handled hundreds of similar implementations at large and mid-sized firms. But that doesn’t mean the work is low risk.
Despite the fact that ERP systems have been around for more than two decades, the ALF bankruptcy demonstrates that implementing the technology remains a daunting task. Bad management or oversight of a project – by the supplier or the customer – can have devastating consequences.
Aside from naming IBM as a chief consultant, ALF does not name other contractors or suppliers involved in the project in its court filings.
However, a press release issued in October of 2006 by eGroup, a computer consultancy based in Mt. Pleasant, S.C., does shed some light on the project. In the release, eGroup announces that it has been hired to design a “bumper-to-bumper” information network for ALF to support its new computer infrastructure. The network was to support a Microsoft Windows environment, as well as ALF’s new Oracle ERP system, running on the Redhat Linux 4 operating system and using VMWare ESX 3.0 virtualization software. The release goes on to state that the ERP network was to be supported by an EMC CX3-20 storage area network and Cisco 3750 series switches.
CIOZone contacted Oracle and eGroup for comment, but neither company responded.
After unplugging itself from the Freightliner infrastructure, ALF says it attempted to resolve problems with its new ERP system for the “next several months” but despite those efforts manufacturing was brought to a standstill. Among its troubles, ALF said in court filings that it was unable to account accurately for parts in inventory. The manufacture of fire trucks and ambulances requires a large variety of specialized equipment and each order is customized to meet the needs of the individual fire departments or communities ordering the vehicles. Without the ability to accurately know what parts were on hand, or what needed to be ordered, staff was hamstrung in their ability to proceed with vehicle construction.
In September of 2007, ALF president and chief executive John Stevenson issued a letter to suppliers attempting to explain problems with delays in orders and shipments:
“Dear Valued Supplier: As I’m sure that you are aware, American LaFrance is having severe issues in the launch of its new business systems which have impacted virtually every part of the business in a less than acceptable manner. In particular, those problems have made it difficult to fully launch production in our new assembly plant, which still has a strong backlog for future shipments. The result has been much lower production volumes and shipments than was originally anticipated and much higher inventory levels.”
The letter later goes on to say:
“Until American LaFrance returns to a normal production level, cash flow will continue to be an issue. We are asking that you be willing to ship on a pay as receive basis until normal production levels return and we can establish a formal plan with you. As production levels continue to increase everyone benefits and we can maintain our valued relationship.”
But those mutual benefits would be slow in coming. On October 17, just days before the company held a grand opening celebration for its new Summerville facility, ALF issued a brief statement saying Stevenson was stepping down as CEO and would instead act as a consultant on special projects. It announced Bill Hinz, a former Allied Signal executive with 40 years experience in manufacturing, would take over the post.
As suppliers were asked to show patience in waiting for payments, customers were being told their vehicle orders would take longer – much longer to be fulfilled. The City of Laurel, Miss., for one, was anxiously waiting to receive a new $288,440 pumper in January of 2008 to replace another pumper that had serious mechanical problems. After the delivery date came and went, the city’s mayor, Melvin Mack, was told construction of the pumper had not even begun. At best the unit could not be delivered until late 2008. The city council, alarmed that its ailing pumper might not last, had to issue an emergency order to purchase a new fire truck from another supplier, Pro-Fire Equipment.
Unable to deliver vehicles, cash flow dried up, creating a liquidity crisis. ALF filed for Chapter 11 bankruptcy protection on January 28 in the District of Delaware. William Snyder, a managing partner with CRG Partners Group, a Dallas-headquartered firm that specializes in helping companies with “operational and financial challenges,” was retained as chief restructuring officer. Prior to and following its bankruptcy filing, workers were furloughed at manufacturing plants and six of 10 facilities owned by the company have been closed as part of the reorganization plan.
In March, the company announced that it had hired a new president and CEO, Matthew Karmel, a veteran manufacturing executive who most recently served as president for Asia-Pacific for MAG Industrial Automation Systems. Hinz, who was brought in as CEO last October, is now serving as chairman.
While the company would not respond to CIOZone’s requests for a progress report, in updates provided by Hinz on the company’s Web site, it says that workers have been recalled and production is beginning to return to normal.
“We still face obstacles as it relates to the supplier base, but we are now able to make timely payments with our improved accounts payable system to keep component parts flowing,” Hinz said in an update on the company’s Web site on March 17.
In a subsequent update on April 17 Hinz says the company has been able to ship 20 finished trucks since it restarted production. “As we wrap up our legal proceedings, we turn our focus to the future, both near and long term,” Hinz says. “We’re ready to repair our relationships with our suppliers, dealers, and most importantly, our customers.”
It appears ALF will survive this episode and be able to build on its long history. But the experience serves as a clear reminder to CIOs of the dangers of failing to properly plan and execute an ERP changeover or deployment.
This is the second in a three-part blog on American LaFrance. The first part, can be seen at this link.
The next installment will take a look at how one CIO, Greg Winholt of Sunny Delight Beverages, has managed to balance the risks and rewards of implementing an ERP system from scratch.
Comments (1)
1. 06-23-2008 14:25
Distressed to learn the failure of an ERP implementation project. It appears that the project was badly managed by both the sides. Presently I am enegaged in managing a big SAP-ERP project in a major steel plant in India.
Guest
Only registered users can write comments. Please login or register.
