A strategic platform: Chemical maker finds ERP fully supports its growth-through-acquisition strategy

Vertellus Specialties, a $450-million-a-year manufacturer of chemicals, could be the subject of two business-school case studies. One would explore the reasons behind the company's history of mergers & acquisitions. The other would document why the company settled on a single ERP system to support the business through those transitions.

11/01/2008


Vertellus Specialties , a $450-million-a-year manufacturer of chemicals, could be the subject of two business-school case studies. One would explore the reasons behind the company's history of mergers & acquisitions. The other would document why the company settled on a single ERP system to support the business through those transitions.

The second case study also would reveal how 15 years after ERP first started gaining traction in America's boardrooms—and 10 years after Y2K concerns sparked a mass rush to adopt it—companies like Vertellus are discovering that ERP still has strategic relevance. No longer is ERP about delivering competitive advantage through mere adoption. These days, when a manufacturer of almost any size already uses ERP, the playing field is level.

Today ERP's strategic relevance is around leveraging common processes, templates, and infrastructure across multiple businesses to create value through economies of scale.

“ERP has matured,” agrees Jaisankar Venkat, VP of Infosys Technologies ' enterprise solutions group. “It's not just about delivering standard, defined processes—but processes and templates that are proven best-in-class, and complemented by industry-specific add-ons such as business intelligence and analytics.”

That's exactly what SAP 's mySAP ERP suite has delivered for Vertellus, says its VP and CIO, Michael Boster. Vertellus, based in Indianapolis, was formed in 2006 via the merger of two chemical companies, and Boster says that union proved a success—already yielding more than $14 million in annual savings, and well on the way to creating an additional $10 million in yearly cost reductions.

“Statistically, a high proportion of mergers fail to deliver,” says Boster, who attributes Vertellus' odds-defying feat to its standardization on the mySAP suite.

“We've got 'one version of the truth' with a single instance of ERP, rather than separate instances,” Boster explains. “We also have standard best-practice workflows across the company. Instead of making the same decisions in duplicate, we're making them once—and not just making them faster, but saving money in the process.”

The Vertellus migration to mySAP began before the company was officially formed. Boster had been retained by Arsenal Venture Partners to manage the spin-off of a company called Rutherford Chemicals from its previous corporate parent and found himself needing to replace a 10-year-old ERP system that no longer had vendor support.

Risk avoidance

Before a replacement system was selected, however, Arsenal had purchased another company called Reilly Industries that it wanted to merge with Rutherford to form Vertellus. Reilly also had its own aging ERP system.

“I wouldn't have risked the business on either of those systems without an upgrade,” Boster recalls.

Ultimately, Vertellus moved to an upgraded version of the system Reilly Industries had been running, which was the 3.1i release of SAP's ERP suite. Boster says the newer version—mySAP ERP 2004—won out over other systems considered because its offerings were broader, deeper, and pre-configured with industry-specific templates.

In terms of business strategy, Vertellus wanted to shift from a company that made products it thought would sell to those that customers actually were demanding. Boster says the mySAP suite appeared to be the best choice for supporting a demand-driven business model.

SAP's data integration tools also gained votes. “With SAP, the tools for taking data out of one system and inserting it in the other were much better,” he recalls. “It looked like I could pull out five years of sales history, plus all the product information, customer information, and vendor information—everything we needed, in fact.”

Logically, then, the starting point was to upgrade the Reilly's elderly SAP 3.1i release to the more current mySAP ERP 2004.

SAP offers a standard version of its package for chemical companies, but Vertellus wanted additional custom functionality. It purchased the SAP Best Practices for Chemicals library, along with the SAP ARIS Toolset, a process design application developed by business process management specialist IDS Scheer . The ARIS Toolset, explains Frank Kochendoerfer, director of SAP's chemicals industry business unit, “is a graphical business process design application that looks a little like [ Microsoft 's drawing tool] Visio: you design the process flows you want, and behind the scenes the required links and process integration happen automatically.”

But time was of the essence. Partnering with Hitachi Consulting offered a way of not only achieving an ambitious schedule, but achieving it with reduced risk, thanks to Hitachi's 'Hi-Pace' rapid implementation methodology.

A 16-week timetable was agreed upon, with Hitachi also assuming responsibility for training the Vertellus implementation team on the new version of mySAP—a system that was 10 years ahead of the version of SAP in place at Reilly Industries.

Taming distractions

The 16-week time table was unusually ambitious, recalls Hitachi Consulting VP Nick Lagen, yet actually served to reduce risk.

“Staying focused on the end goal and not experimenting with excessive customization kept the project on track,” notes Lagen.

Just one week after the upgrade was completed in July 2006, Arsenal went public with its plan to merge Rutherford Chemicals and Reilly Industries—thus Vertellus was born. The game plan was to convert Rutherford plants and divisions onto mySAP, delivering cost savings and operational efficiencies in the process.

The first chunk of savings materialized just nine weeks later, with the conversion of a Rutherford division onto SAP, and its business merged with the former Reilly operations.

The logic was clear, explains Boster. “Take two plants that weren't fully utilized—and one with aging assets and low productivity rates—move all production to a single plant, and then shut down the other one,” says Boster. “The benefit drops straight to the bottom line.”

So it did—all $4 million of it, in an early vindication that the strategy would work. And by merging the two operations, machine maintenance and changeovers—as well as logistics—all became more efficient.

It was the start of a process that saw savings climb as the former Reilly and Rutherford businesses merged—an integration culminating with the switch-over of Rutherford's European division, comprising plants in Middlesborough, U.K., and Antwerp, Belgium, in May 2007.

All told, Vertellus is realizing $14 million-plus in savings annually through a strategy of downsizing operations, merging plants, and sharing loads—on top of an $800,000 reduction in direct IT spend achieved by decommissioning Rutherford's legacy system, together with the associated termination of software license and hardware lease agreements.

Supporting ambition

And the new enterprisewide IT platform provided—for the first time—a single coherent view of the entire business. Consequently, no fewer than 200 synergy-seeking consolidation projects have been kicked off with what Boster describes as a conservative goal of delivering $10 million in annual savings. This is in addition to the $14 million that already hit the bottom line.

The new SAP functionality, made possible through the adoption of a more modern enterprise platform, should create even further savings. By implementing SAP's NetWeaver Business Intelligence component, for example, and using it to analyze plant operations, Vertellus expects to make significant cuts to its asset maintenance budget, says Boster. And exploiting the third–party logistics functionality of mySAP should save another $1 million annually, he adds.

Poster credits the move to mySAP with helping Vertellus become efficient enough to attract the attention of another private equity investment firm: Wind Point Partners , which recently purchased the company from Arsenal.

Wind Point's strategy centers on acquiring midmarket businesses with growth potential. Boster says Wind Point wanted Vertellus “because we were on a stable platform. They could take us and grow us,” he says. “If we had still been on a 10-year-old platform without a solid base, it would have discounted the value.”

Boster says the platform demonstrated its stability through this latest purchase. Instead of closing out the accounts and beginning life under Wind Point at the end of a month—as would have almost certainly have been the case with the previous systems, Vertellus could make the switch at any point, confident that there wouldn't be a misstep. In fact, the change in ownership took effect on the 12th of a month without any disruption to the business.

And Wind Point's growth strategy is nothing if not ambitious. The plan, says Boster, is to very quickly nearly triple the size of the business through a combination of further acquisitions and the construction of new manufacturing facilities in a number of fast-growing Asia Pacific economies.

“We're very close to announcing one or more acquisitions right now,” he enthuses. “We've leveraged our investment in SAP ERP, built and acquired best-practice templates, and now we are in a position to show what an impact that can make.”



Flextronics relies on Baan ERP to create flexible business processes

As a world-reknowned electronics manufacturing service provider, Flextronics is known for devising and executing programs that meet all of its customers' precise needs. So it's not surprising that Flextronics requires an easily adaptable ERP system.

That system is the Baan ERP suite, now owned and supported by Infor. Steve Gearhart, VP of global solutions management for Flextronics, says the Baan package easily accommodates every change Flextronics makes in it business—including the acquisition of new companies.

When Flextronics buys a new company, as it has done frequently over the years, Gearhart says, the new entity can quickly be placed on the Baan system and absorbed into the Flextronics ecosystem.

“We can do it in-house, without requiring outside experts,” Gearhart says. “A large site can take a year, but a typical implementation time would be four months. At a small site, we can deploy in eight weeks.”

Flextronics has customized Baan to cater to the peculiarities of the electronics manufacturing services market.

“We're not dealing with our own bills of material,” Gearhart explains. “We're handling multiple customers' bills of material, with the need to carefully segregate them. If we tried to do that [with the top-tier] ERP solutions, it would take years—and cost millions of dollars.”

Roughly 70 in-house developers and implementation experts support Flextronics' efforts in these areas, notes Gearhart, who is responsible for the company's ERP, HR, finance, and CRM systems. Over the years, Flextronics has developed a set of company-specific tools and add-ons that are closely integrated with the core Baan deployment.

“Not only are operating units getting ERP, but they're getting workflow, purchase price variance management tools, and our in-house financial data warehouse,” Gearhart explains. “When we walk away from a site, we're leaving behind a set of consistent, companywide, Baan-based processes that everyone in the business understands.”



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