396 Part Three Key System Applications for the Digital Age Summit Electric Lights Up with a New ERP System CASE STUDY S ummit Electric Supply is one of the top whole- sale distributors of industrial electrical equip- ment and supplies in the United States, with 500 employees and nearly $358 million in sales in 2011. Summit operates in four states and has a global export division based in Houston, a marine division based in New Orleans, and a sales office in Dubai. Summit distributes products that include motor controls, wire and cable, cords, lighting, conduit and fittings, wiring devices, support systems and fasten- ers, outlet boxes and enclosures, and transformers and power protection equipment. The company obtains finished goods from manufacturers and then sells them to electrical contractors working on proj- ects ranging from small construction jobs to sophis- ticated industrial projects. As a distributor, Summit Electric Supply is a "middle man on the supply chain, and must be able to rapidly handle a high vol- ume of transactions and swift inventory turnover. Since its founding in 1977 in Albuquerque, New Mexico, Summit has grown very quickly. Unfortunately, its homegrown legacy informa- tion systems built in the 1980s could not keep up with the business. One legacy system was for sales entries and purchase orders and another was for back-end reporting. Integration between the two systems was done manually in batches. The systems could only handle a fixed number of locations and limited the range of numbers that could be used on documents. This meant that Summit's information systems department had to use the same range of document numbers over again every few months. Once the company found it could no longer process its nightly inventory and financial updates in the amount of time that was available, the systems had reached their breaking point. A new solution was in order. Summit started looking for a new enterprise resource planning (ERP) system. This would prove to be challenging, because the company's legacy sys- tems were so old that the business had built many of its processes around them. A new system would require changes to business processes and the way people worked. Summit also found that most of the available ERP software on the market had been designed for manufacturing or retailing businesses, and did not address some of the unique processes and priori- ties of the distribution industry. Summit needed a system that could handle a very large number of SKUS (stock-keeping units, which are numbers or codes for identifying each unique product or item for sale) and transactions, very short lead times for order processing, inventory distributed in various models, products sold in one quantity that could be sold in another, and no-touch inventory. Summit handles some products that are shipped directly from the manufacturer to the customer's job site. Scalability and inventory visibility were Summit's top requirements. The company needed a system that would handle orders and inventory as it continued its rapid pace of growth. In the distribu- tion business, the lead times for fulfilling an order can be only minutes: a Summit customer might call to place an order while driving to pick up the order, so the company has to know immediately what product is available at what location. After extensively reviewing ERP vendors, Summit selected ERP software from SAP because of its functionality in sales and distribution, materials management, and financials, and its knowledge of the distribution business. Summit visited other electrical distributors using SAP, including some of its competitors, to make sure the software would work in its line of business. Summit was able to go live with its new ERP system across 19 locations in January 2007 Nevertheless, Summit still had to customize its SAP software to meet its unique business require- ments. Most SAP delivery and material scheduling functions were designed for overnight processing, because many industries have longer lead times for order fulfillment. Waiting for overnight inventory updates would significantly delay Summit's sales. Summit found it could solve this problem by run- ning smaller, more frequent updates for just the material received during the day, rather than run- ning big inventory updates less often. This provided more timely and accurate snapshots of what was actually available in inventory so that orders could be rapidly processed Wire and cable are one of Summit's most popular product categories. Summit buys these products by the reel in lengths up to 5,000 feet and then cuts them into various lengths to sell to customers. This Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 397 makes it difficult to determine how much of this contracted amount in order to make some profit on type of inventory has been sold and when it is time the deal. to replenish. To address this issue, Summit used a Processing chargebacks requires a very close batch management solution in SAP ERP materi- comparison of sales to contracts, and a distributor als management software that treats a wire reel as can have hundreds or thousands of different charge- a batch rather than as a single product. Every time back contracts. The distributor must not only be a customer buys a length of wire, the length can able to identify chargeback deals but also provide be entered into the system to track how much of the manufacturer with sufficient documentation the batch was sold. Summit is able to use this capa- of the specific chargeback contract that is being bility to find which other customers bought wire invoked. Chargeback management is a large part from the same reel and trace the wire back to the of any wholesale distributor's profit model, and manufacturer Summit was losing revenue opportunities because To accommodate large customers with long-term its chargeback process was flawed. job sites, Summit sets up temporary warehouses In the past, Summit's outdated legacy system was on-site to supply these customers with its electrical not able to handle the volume and complexity of the products. Summit still owns the inventory, but it's company's chargeback agreements, and reporting dedicated to these customers and can't be treated capabilities were limited. Processing chargebacks as standard inventory in the ERP system. SAP's ERP required a great deal of manual work, Summit software didn't support that way of doing business. employees had to pore through customer invoices Summit used some of the standard functionality in for specific manufacturers to identify which charge- the SAP software to change how it allocated materi- backs Summit could claim. They would then input als into temporary storage locations by creating a the data they had found manually into a Microsoft parent-child warehouse relationship. If, for instance, Excel spreadsheet. Gathering and reviewing invoices Summit's Houston office has several temporary sometimes took an entire month, and each month on-site warehouses, the warehouses are managed the paper copies of the invoices to give to Summit's as subparts of its main warehouse. That prevents vendors consumed an entire case of paper. By the someone from selling the consigned inventory in time Summit's vendors responded to the chargeback the warehouse. invoices, the invoices were two or three months old. Summit's old legacy systems used separate sys- This cumbersome process inevitably missed some tems for orders and financials, so the data could not chargebacks for which Summit was eligible, result- be easily combined for business intelligence report- ing in lost revenue opportunities. ing and analysis. To solve this problem, Summit As part of its ERP solution, Summit implemented implemented SAP's Net Weaver BW data warehouse the SAP Paybacks and Chargebacks application, and business intelligence solution to make better which was developed specifically for the distribution use of the data in its ERP system. These tools have industry. At the end of each business day, this appli- helped the company evaluate the profitability of its cation automatically reviews Summit's billing activ- sales channels, using what-if scenarios. For instance, ity for that day and compares it to all chargeback Summit is now able to analyze profitability by sales agreements loaded in the SAP system. (Summit's person, manufacturer, customer, or branch, Business system automatically keeps track of 35 vendors with intelligence findings have encouraged Summit to whom it has more than 6,600 chargeback agree- focus more attention to areas such as sales order ments.) Where there is a match, a chargeback can quotations and to supplier performance and deliv- be claimed, and the application creates a separate ery times. Management has much greater visibility chargeback document outside of the customer into how the organization is operating and is able to invoice. Depending on the type of vendor, the appli- make better decisions. cation consolidates identified chargebacks by vendor Summit's SAP software also produced a significant daily or monthly, and automatically submits the return on investment (ROI) from automating sales information to the vendor along with the chargeback tax processing and chargebacks. In the distribution document. The vendor can then approve the charge- industry, chargebacks occur when a supplier sells a back or make changes, which are reconciled against product at a higher wholesale price to the distribu- individual chargeback documents. tor than the price the distributor has set with a The new system processes chargebacks much retail customer. A chargeback agreement allows the more quickly and also makes it possible for Summit distributor to bill the manufacturer an additional to review them more frequently. Where vendors are 398 Part Three Key System Applications for the Digital Age January-March 2011; "Summit Electric Supply Drives Business Transformation Through SAP and ASUG, "SAP Insider (October- December 2010), and Neetin Datar, "Summit Electric Improves Chargehacks, "SAP.info, June 18, 2009. exchanging data with Summit electronically, Summit is able to make a chargeback claim and obtain vendor approval the same day. By fully automating the chargeback process, the company has increased its chargeback claims by 118 percent over its legacy systems, thereby boosting chargeback revenue as a percentage of sales. Summit is now able to see which vendors, customers, and products are produc- ing the most chargeback revenue. A key lesson from Summit's ERP implementa- tion was not to force the new system to look like the legacy system. Not only is such customization expensive to set up and maintain, it can perpetu- ate outdated ways of doing business. According to Summit's CIO David Wascom, "We've done a lot to maintain flexibility (for our users), but still run within a standard SAP business flow." Sources: "Summit Electric Supply Energizes Its ERP 6.0 Upgrade with Panaya," www.panayainc.com, accessed July 14, 2012, www. summit.com, accessed July 14, 2012, David Hannon, "Bringing More Revenue to the Table, "SAP Insider PROFILES, April-June 2011 and "Finding the Right ERP FI," SAP InsiderPROFILES, CASE STUDY QUESTIONS 1. Which business processes are the most important at Summit Electric Supply? Why? 2. What problems did Summit have with its old systems? What was the business impact of those problems? 3. How did Summit's ERP system improve operational efficiency and decision making? Give several examples. 4. Describe two ways in which Summit's customers benefit from the new ERP system. 5. Diagram Summit's old and new process for handling chargebacks