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ERP case study: Implementing ERP to manage growth, fix legacy issues

When growth at Peet's Coffee & Tea started to cripple its tangle of IT systems, its CIO led the charge for ERP. Here's how and why Peet's chose ERP and Microsoft Dynamics AX.

When Tom Cullen mapped out the integrations across the IT systems at Peet's Coffee & Tea Inc. to decide if the time was right for implementing ERP, he uncovered a flow chart that made the spaghetti-like diagrams CIOs often encounter at older companies seem simple.

"A member of the IT staff said to me, 'What we have is more like two saplings whose root bulbs have grown together. Good luck trying to pull it apart,'" said Cullen, who was brought in as CIO in 2006 to revamp an IT infrastructure that was starting to show fractures under the weight of Peet's business expansion.

Fast forward 20 months, and the $300 million Peet's has retired nearly all of those systems. Instead, after revisiting business processes, selling management on a systems overhaul and planning a big-bang cutover for everything except manufacturing, Cullen and Peet's now boast an enterprise resource planning (ERP) system that they hope will take them far into the future. Indeed, since 2006, Peet's number of retail stores has grown from 113 to 195, a growth rate of 73%. And that's just one of its channels.

Our two-part ERP case study on why and how Peet's chose its ERP system and executed the implementation in less than two years begins here with its story of fast-paced growth, creaking legacy systems and a bakeoff in which a system with a familiar interface, supported by an integrator with extensive food and beverage experience, won out.

The breaking point

In 2006, Peet's revenue had increased 23% over the year before. Peet's had opened 20 new locations, bringing the total to 113 retail stores.

Its multiple sales channels also spanned a call center, a website, licensed partners, corporate offices and 1,500 grocery stores with a fleet of delivery trucks -- each with a different homegrown or off-the-shelf system that handled order inputs differently.

Add to that a layer of outdated systems running core business functions such as financials, order management, inventory management, fulfillment (running on a Pick system so old and deeply customized it was not upgradeable) procurement and manufacturing with integrations running in and among those systems. Those integrations were connected to integrations in and among the sales channel systems, and from that you get an idea of the root system Cullen was taxed with untangling … or continuing to patch if he chose to go down that path.

"Our financial system was Great Plains, the fulfillment system was a heavily customized version of an old Pick system and the order aggregation/manufacturing/planning system was a big ball of code," Cullen said.

But it was the older systems' increasing inability to keep up with the demands placed on them that finally pushed the business to send out a request for proposal (RFP) to ERP system vendors. During a holiday season it became apparent that the systems were not scalable or stable enough to support Peet's build-as-you-go fulfillment model, in which the company starts roasting the coffee for all of the day's orders at 3 a.m. (it then ships later that day). As primary systems failed at critical times, the lack of visibility across the supply chain became painfully obvious without central inventory management in place.

Getting the business on board

So Cullen decided to start fresh, to really get the systems on par with Peet's current business needs and expected growth.

The plan was to have most of the core business functions migrated to a new ERP system by this August and complete the ERP implementation by October, before Peet's peak holiday season hit the business and its IT systems. Order volume peaks in November, although orders are shipped throughout the year.

The first step was to convince the management team -- which historically cringed at the thought of how an ERP project would disrupt day-to-day business operations -- that in the long run, implementing ERP was its only choice.

Cullen's sales-pitch slides touted the typical benefits of an ERP implementation, until three slides into his presentation one sentence was emblazoned alone on a page: "70% of all ERP implementations fail."

"I really wanted to put a little fear into everyone to say that they were signing up for a project that a company of our size had never been through and it would be business-changing," Cullen said. "I wanted to make sure that everyone signed up and was ready for the pain of this but also show them where it could take us so they would be psyched up for the discovery and design phase."

Cullen didn't go in trumpeting an ERP system as a way to speed up business processes by eliminating the ever-growing burden of patching and customizing Peet's systems. He focused instead on the lack of visibility across the supply chain, including the fact that without a central platform the company could not see the true state of its inventory, work orders or costing information. With an ERP system, business processes could be handled from order to cash on one platform with visibility all the way across the business lifecycle.

Management approved the project, which it estimated would cost $2.5 million in 2009 for design and development and $6 million in total, according to Peet's 2008 10-K filed with the Securities and Exchange Commission.

Process mapping begins

The discovery phase then kicked in with Cullen asking each business group to map out its current state of business and where it wanted to go. "I didn't have them focus on every process -- that would take too long and is too painstaking a process," he said. "We focused instead on the core processes: order management, fulfillment, inventory management, procurement and manufacturing."

And within those processes, business units and Cullen worked together to choose the "core of core" focus areas that needed to be scaled or re-evaluated for efficiency.

The result was a big binder filled with multidimensional process flows and mega-processes such as order-to-cash and key sub processes. "Things change during the project and people may not remember what the original scope was or change their minds, so it's good to be able to pull out a document and say 'This is what we agreed on.' If you don't do that, the ERP project will turn into a continuous change management process," said Cullen, who previously managed enterprise and global application architectures at $3.5 billion video gaming company Electronic Arts Inc.

Peet's spent a year out of the 20-month ERP project on the discovery and design phase. Original plans called for implementation in month 17, but Cullen pulled back and extended the testing and training phase. "There were some delays because of testing, development and business readiness," he said. "So we delayed it for a quarter because if you release [an ERP system] before you are 90% to 100% ready, the pain of getting there while you are live is much greater."

Add in an infrastructure overhaul

The ERP planning phase included an IT infrastructure design overhaul, which resulted in a standard integration interface using Microsoft BizTalk and a new virtualized production testing environment for integration that would take place between back-end systems and the new ERP system. Peet's conducted the planning and overhaul and Junction Solutions LLC, an Englewood, Colo.-based systems integrator with expertise in designing systems for the food and beverage industry and for companies with multiple sales channels, helped with the design phase and implementation of the new ERP system.

Cullen sent RFPs to three contenders: Microsoft, SAP AG and Oracle Corp. During this phase, he asked each vendor to choose its top implementation partners. Cullen ended up choosing Microsoft Dynamics AX, in part because the software vendor's partner,  Junction Solutions, had industry and sales channel expertise, but also because the integrator knew Dynamics inside and out.

It also didn't hurt that Peet's is a Microsoft shop, which, when it comes to ERP systems at least, tends to sway companies to Dynamics for its ease of use and familiarity, said Robert Anderson, an analyst at Gartner Inc.

"Because Dynamics looks like [Microsoft] Office, which is a de facto standard business productivity app, it takes a lot of fear and uncertainty related to ERP out of the picture for users," Anderson said.

But it was Cullen's approach to the ERP implementation that gave Peet's the ability to complete the first release phase within 20 months. Learn how in the second part of our ERP case study next week.

Let us know what you think about the story; email Christina Torode, Senior News Writer.

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