J ot Ace 64 32013) 21-52 Contents lists available at Sei 1 ScienceDirect J. of Acc. Ed. ELSEVIER Journal homepage: www.elsevier-comiloe efjaces Educational Case International Divider Walls ovr Anne-Marie Kruis*, Lineke Sneller’ Nyenrde Busnes very, PO Sox 150, 3520 AC Breule The Neheiands ARTICLE INFO ABSTRACT ‘eke bo ‘The subject of this teaching cas the Enterprise Resource Plan~ ‘valle on 19 February 2013 ring (ERP) sytem implementation at International Diver Wall the word market laderin design, production, and sales of cvicer Keowod: - twas The implementation inane of the divisions of tig ral Ffteroie Rear Manis (RP) —_, — -nationabcompanw had been sucessfl-and nowt ce inform ute pene fBecettrafestion in fansdeent Watenest fon fie (CO) ws asked oa baad eed nthe hen top in the woldwide eout of te ERP Syste. A choi had tobemade between a enally managed ERP opin. ata aoption in whieh each of the divisions setup sown ERP projet ‘Asasudent-yoU vl psi therle of theIO and presen to Ue Bost) recordation on he EAP ol but You wil have to com: jourthanratcal kode f the is strategic mar= fzement, management accountng and contol, and TF alignment Init te pata steps and ses pevaing to inple= ‘enting an ERP system Moreover, you wil ety out a qualitative fd quantitative ays of pubic a tera Manca an none Sanda data to cecally evaluate ow these data fect the ERP implementation (© 2013 Elsevier Led Allright reserved. 1. Introduction In May 2006, Chad Wollord was the Chief information Officer (C10) a international Divider Walls, Inc, (1D Walls), the world market leader in design, production, and sales of divider walls. He faced the following situation. Due to the many mergers and acquisitions in the 1990s, 1D Walls had a frag ‘mented IT infrastructure and application landscape, In 2001, Chad had developed a strategic IT plan for ID Walls in which he proposed to select and implement a global Enterprise Resource Planning Fonrerponding autor Tel: +90 24629131 fx: #21 245291250. mal arses: arsenyenroden (A. Kr) LsnellrBnyenrede (Sele * el 93t 348 295 855: fx “31 346291250. 0768-5751) see ont mater ©2013 sever Ld Al ight eeserved Ingpedel org T01016acceu2015.010032 ‘A fous L Snel of Ac E31 (2013) 51-52 (ERP) system. Now thatthe first step of the implementation of the ERP system inthe Americas division ‘of ID Walls had been completed successfully, he was asked to advise the board of directors on the next step in the worldwide roll out. He had to choose, present, and defend one of the two available alternatives To make a decision and come up with his advice, Chad had to take three steps. Frst,he had to com- Dine his theoretical knowledge of the fields of strategic management, management accounting and control, and IT alignment to identify and comprehend the important steps and issues pertaining to {implementing an ERP system at ID Walls. Second, ie had to carry out a thorough analysis of public and internal financial and non-financial data to be able to critically evaluate how these data would affect the ERP implementation, Finally, he had to present a compelling recommendation capable of convincing the members of the board of directors. 2. Introduction to the company 2.1. Divider walls and indoor sun screens 1D Walls was founded in 1968 in Atlanta, GA (USA) as a manufacturer of room dividers. In 1983, the ‘owners decided to raise additional capital for a worldwide expansion, Ever since, the company has ‘been listed on the NASDAQ, Many room divider manufacturers were acquired in the 1990s, and the ‘company diversified in related businesses like indoor and outdoor sun screens and installation ser- vices. In 2004 ID Walls was the worldwide leader in design, production, and sales of divider walls. Di- vider walls are used to separate rooms and office spaces into multiple parts. The organisation also had ’sttong presence in the-indoor sun screen marker, These indaor sun screens can be placed on a desk ot i frpp-of Window tg block direccsumlight-Mheyalsq tome ps rollef|skades-On Decemben31, 2003, 1D Walls employed approximately 5000 employees worldwide. The company marketed products in over 100 countries. Its prineipal geographic markets were/the ‘Americas, Europe, and Asia Pacific with sales of respectively 71%, 24%, and 5% of total net sales fr is- «al year 2003, ly fgcal 2003, 36% of the company's nét sales were ote the US/rimariy in Europe. 1D Walls manufactured Wall divides 3 fwo Iocations inthe US, atid at failtes in Germany, the UK, ‘Canada, Austrliaand Thala Theinternationa operations were subject tovariaus political and eco ‘nomic uncertainties, ineluding risks of changing politcal conditions, governmental regulations, or tax ation policies. The company received a substantial portion ofits reventes in currencies other than US dollars. This created risks inherent in foreign currency transactions, 2.2. State of affairs in 2004 The divider wall and indoor sun screen markets belong to the highly competitive commercial inte- riors industry. ID Walls had a market share of approximately 40% of the divider walls segment in the corporate office market. Its leading manufacturers from the indoor sun sereen group had market shares of approximately 50-60%. Although this industry had experienced significant consolidation in the past a large number of competitors remained. The multinational customers seek global supply relationships. Therefore the ability to reliably offer products and services worldwide at attractive prices is an important competitive advantage 1D Walls took over many organisations in the 1990s, Some of these acquisitions were successfl, ‘but others less so and those left the company with a high debt, Moreover, business was suffering from an economic downturn, The industry ID Walls operates in is strongly influenced by economic condi- tions. The construction and renovation of buildings drive the sales ofthe principal products. This activ ity is cyclical and had been affected by the general economy, prevailing interest rates and other factors that led to cost-control measures by potential customers. The recent adverse cycle had significantly lessened the overall demand for commercial interior products. Consequently, aver the past 3 years [ID Walls business had been experiencing a downturn unprecedented both in severity and duration, 7 he femation about D Wali ths seton stems fom the 203 anual ep.‘A sos Slo Ac E81 (2015) 31-52 A>) IAA) xhibie 12.10 Walls Balance Sheet 2003 and 2002 Source: iD Wels annual eper B» ‘A fous L Snel of Ac E31 (2013) 51-52 ‘These effects might continue ifthe global economy did not improve. The indoor sun screen market was also deteriorating for other reasons: alternatives like tinted glass had become more and mare popular since the 1990s and sun screens were becoming obsolete. Consequently, the 1D Walls sun ‘CONSOLIDATED INCOME STATEMENTS Fiscal Year Ended 20032002 {inthousands) Gross Profit on Sales Wa7788 248,328 | en seer ne Other Expense . Interest Expense } leg2se? 39.50 Other Expense 41203 750 Total Other Expense aaase Result from Continuing Operations, before Tax 35508 26,004 | Income Tax 9602-9311 Result from Continuing Operations A735 16,653 | Resuit from Continuing Operations, Net of Tax “5,661 -13,654 Resuit on Disposal of Discontinued Operations, Net of Tax 6296 - Cumulative Effect of a Change in Accounting Principles, Net of Tax — 52087 Net Result Sine saza0e | ‘exhibit 1, 1D Walls In Income Statement 2003 and 2002, Source: 1D Walls annul reper.‘A sous Sle AcE (2013) 31-52 % screen business started to make substantial net losses. In Exhibits 1a and 1, the company’s balance sheet and income statements for the years 2002 and 2003 are presented. 23, Restructuring and the way aheod ‘The company sought to increase revenues and profitability and free cashflow by captalising on ts competitive strengths (Le. product design and global make-to-otder capabilities). Its corporate strat- ‘ey included the expansion ofthe international business worldwide, Drawing upon the strong posi- tion with divider walls, the company was increasing its presence in other business-to-business and institutional segments, such as government, hospitality, and education. It had also begun to develop its business in the huge consumer market segment. The company furthermore aspired to return to its historical profit levels in the high-end, designer-oriented sector of the indoor sun screen market, However, ID Walls substantial indebtedness could have important negative consequences, It re- stricted 2dditional financing, which limited flexibility in reacting to changes in the business. Moreover ‘a substantial portion ofits eash flow had to be dedicated to interest payments. In order to improve its ‘cash position, ID Walls had implemented several strategic restructuring initiatives in the years 2001— 2008: + Consolidation of manufacturing faclities in the Indoor Sun Screens and Divider Walls Europe divisions, + Reduction in force of over 750 employees in the corporate research and development operation, and back-office operations. + Divestiture of non-core activites, such asthe service division and the exterior sun screen bysines, 1D, Wapls also impsejved the)capital sttuctue by éxtending the maturity of substantially all fits “debt and establishing a new asset-based revolving credit facility with Tess Testrictive terms thao the previous one. The restructuring initiatives enhanced the company’s ability to generate free cash flow, Capital expenditures were low maintenance, ang the strategic investments forglobal manufacturing capabilities abd make-to-order technques hd lneeh made. AS a result ip) 2004 the.company had the capacity to ineréase production levels and handle Significantly higher demand forts products, 3. The divisional organisation and the people 31. Corporate Since the original founder retired in 1993, Josh Steward had been the CEO of ID Walls. He fostered ‘the entrepreneurial spirit inthe company and stimulated the international expansion. He designed the ‘organisation in such a way that it reflected the autonomy of the various divisions. The divisions coulA ‘operate freely in their respective businesses as long as they achieved the agreed upon profit and loss objectives. A simplified version of the corporate organisation chart is depicted in Exhibit 2. ‘The entvepreneutial sprit of the company and its drive towards expansion did not always bring success. The many acquisitions had left the company with a large debt. Advised by the CPO Larissa Jones, the company had sold, rationalised, and divested many of the acquisitions of the 1990s over the past 3 years. Moreover, Larissa had renegotiated credit agreements with the company’s banks in order to keep the interest expenses within acceptable ranges. The financial highlights per division are presented in Exhibit 3 Looking ahead to the next few years, Larissa knew that tight control ofthe company’s financial pro- cesses was vital for its continuity. First, the company's cash position was fragile and compliance with the requirements of the credit agreements was monitored closely by the company’s banks. Second, after the accounting scandals of 2001 new legislation known as Sarbanes Oxiey (SOX) became appli- ‘able to the company, which required both the CEO and the CFO ta sign off the annual financial state~ ments. Under SOX, errors in the financial statements might lead to severe penalties and even imprisonment of the CEO and CFO. Larissa believed that better IT support from an integrated ERP6 ‘A fous L Snel of Ac E31 (2013) 51-52 Eshibi 20Sinpliied Orzapiaion Chay system was indispensable for improving the financial control and for the preparation of higher-quality ‘consolidated financial statements 12.2, Division Divider Wells—Americas The Divider Walls—Americas division was ID Walls largest division both in sales and in operating, income. It accounted for around 50x of the company's sales, In 2002, Annette Gomez-Dias, the pres ident of the division, changed the strategic focus to the high end of the corporate office market seq ment. Ths strategy had led to a substantial growth in sales of around 10% in 2003, which in the middle of an economic downturn was a great achievement. ‘Although Annette was satisfied withthe growth, there was a downside to it that needed to be ad- ‘dressed in 2004. The new demand was mainly in high-priced, made-to-order divider walls that were‘A sous Sle AcE (2013) 31-52 ” ‘complex to manufacture, The costs of making these complex products grew more than proportionally in 2003, because the factories had experienced difficulties in planning the large number of small o- ders and had been obliged to outsource some of the work. Even then they had not been able t produce the full customer demand. and customers were threatening to cancel their orders because of late or non-delivery. In order to improve the profitability ofthe division. capacity planning needed to be im- proved significantly ‘Annette expected that the new ERP system that had been implemented in 2003 could resolve the capacity planning issue, The ERP system was live, but the complicated planning of orders was still done in spreadsheets and not in the advanced planning module ofthe ERP system, Annette had asked Lucas Wilson, the divisional 1 Director, to fully focus on getting the capacity planning issues resolved before the endl of 2004 in order to reap the full benefits of the ERP investment 33, Divider Walls—Europe and Asia Pacific ‘The Divider Walls—Europe and Asia Pacific division was ID Walls’ second largest division. In 2003, sales declined by around 10% in USS: in local currency. the decrease was more than 20%, but the weak USS worked out favourably for the division. Bernhard Schmid, the president of the division, was glad that he had anticipated the economic downturn and already started a cost saving program in 2001 The restructuring of the back-office functions and the rationalisation of factories had been painful, but had reduced fixed cost significantly, Bernhard was proud thatthe operating income as a percent age of sales of his division was now the highest in the company Production capacity in 2003 had been underutilised, so now it was vital to increase demané. Trad tionally, the division had always heen strang in producing large batches of standardized divider walls forexport io more tha fity countries. Bernhard saw opportunities in emerging markets lend, East- ‘er Europe, and China. Given the exchange rate exposure and the Complex (ax and import duty rules in ‘emeraiig markeis;Bernharet knewthat financial and tax Fisk management Was vital-Moreover, he was convinced that the current financial department was not very effcient and needed to be restrictured Elke Singer, the divisional IT Director, managed an applicatio:landscape consisting of three main applications: 4 godds-Row application developed if-ouse Torthe divides wall business, an outdated financial application, and a warehouse Fanagement application for the Substantial stocks. These three applications were used throughout the division and were hosted centrally n Germany. Elke was con- vinced that an integrated ERP system could make the division more efficient, especially in finance and in stock management. Bernhard did agree thatthe investment could make finance and stock manage- ‘ment more efficient, but he di not want IT costs ta increase 3.4. Indoor sun screens In the 1990s, 1D Walls acquired more than 20 indoor sun screen businesses worldwide, in the ‘expectation that synergies could be attained and a large worldwide market for indoor sun screens could be created. However, since that time, the market for sun screens had deteriorated as alternatives, like tinted glass started to make sun screens obsolete. Early 2002, CEO Josh Steward decided to group all sun screen activities into one division. He appointed Robert Hickman asthe president ofthe Indoor Sun Screen division, and gave him the target to bring the business back to net profitability by consol- ‘dation of factories, cast reduction, and minimal investment. Once the division was profitable again the task would be to either milk of sell it Eerly 2004 it became clear that this strategy was not working. Sales were declining faster than costs, and in 2008 operating income had become negative. Robert Hickman stil intended to sell the division in parts or as a whole, but he knew that buyers for a loss-making business are hard to find, Fe also was not sure of the true vale of the division, A large proportion a ts book vale was in stocks ‘of raw materials and finished products that might be obsolete. As each of the original businesses had ‘their own warehouse management application, he also worried about whether the stocks recorded in ‘these applications were actually available in the warehouses. He intended to further reduce costs and investments, but he feared that by the end of the year the decision would have to be made to divest the division28 ‘A fous L Snel of Ac Ed 3 (2013) 51-52 ‘Adrian Campbell. IT Director of the division, knew that with the dispersed warehouse management application Tandscape, recorded stock levels might be unreliable. He was a great supporter of inte- ‘grated ERP systems, and according to him the implementation of an ERP system was indispensible {or the division. t was generally known that the division had litte zoom for investment, so he would have liked to use the ERP system already implemented in Americas Divider Walls in his division, 4. Information technology strategy and direction, 4.1, General information Information technology was of growing importance to ID Walls. The order-to-cash-processes were automated in each ofthe divisions, and no order would leave the factory doors i the IT applications ‘Were down. More and more orders were coming in via Electonic Data Interchange, of via the Internet. The financial processes were heavily dependent on aswell: adherence tothe monthly closing cycle with very strict deadlines was essential fr the company’s timely reporting to the stock matkets 1D Wall bad a fragmented IT infrastructure and application landscape. Asa result. € was hard to set good insight into sales to global customers and purchases from global suppliers. Moreover it had ‘made the Millennium compliance very costly. 2001, Chad had developed a strategic IF plan for 1D Walls in which he proposed to select and implement a global ERP system, With an ERP system, data in 1D Walls would be integrated, meaning that they had to be entered once and could then be used and Shared throughout the company, Moreover, the best practices in the ERP system could support ID ‘Walls business: manufacturing could benefit ftom advanced planning and scheduling. and finance ftom the many iternaional tax and other rules and regulations tha were embedded inthe system The Walls board had-accepteg ERP asthe strates dvgtion for [Pin 200 Ip-2002cehrs pf ‘ove of the leading ERD yendos had been puchased rd te FRP implementation state nthe ApS kas division. Now, in’ May 2004, the implementation of ERP in the Americas division had Been com® pleted succesfully and it was time to take the next ste. On behalf of Chad Wolford, an independent ‘external consultant had catred out a beachmack of IT costs in°2003. The total IT costs in 2002 amounted to 2.3% afta reyenie hich was slighlly below the Indstty befchmsekot 2.5% of rev- ‘ene, In Exhibit 4the benchmark outéoines per diision ats presented? 42, ERP ~ Some background information ‘Adopting and implementing an ERP system involves several phases, from the very fist idea to fully reaping the benefits ofthe implemented system, Markus and Tanis (2000) distinguish four phases that Panel A | | ow ‘ 2 2 Exhibit 4.1 benchmark‘A sous Snel o Ac E81 (2013) 31-52 3s TAU CTS EY CVC mile 4 (continued) organisations that implement ERP experience. The first phase is called project chartering, and consists fof decisions that define the business case and lead to the funding of the ERP implementation. The sec ‘ond phase is called project configuration & roll our, and aims at getting the system and end users up and running, In the third phase, the shakedown, the organisation stats using the system: itis in this phase ‘that stabilization is achieved, and errors are resolved. Inthe last phase, onward and upward, the ERP system is maintained, the use of the system is optimized, and the organisation should see the expected results, ‘A multisite ERP implementation incorporates specific challenges both in a technical and a manage- rial sense (Markus, Tanis, & Van Fenema, 2000). An example of a technical aspect is the type of configuration (single/multiple fnancialfoperational) The management aspects considered stem from ‘more orless centralization, Markus etal. (2000) mention possible conflicts when changing the author- ity of business unit managers when opting fora centralized approach. They also explain how decen- tralization might deter possibilities for integration of data and processes. Within ID Walls, different people have different needs in terms of required (accounting) information. The divisions require infor~ ‘mation to make good decisions for their own business (eg. planning), whereas corporate needs the information to compare and assess the divisions (ie. for control purposes).0 ‘A fous L Snel of Ac E31 (2013) 51-52 43, ERP—The next step ‘To take the next step inthe ERP roll out, two alternatives were available. With alternative 1, a cen- ualized global project would be set up for the full ERP implementation in all divisions. The project ‘would include a standardization of customer, vendor, product and finance naming conventions and processes, After the implementation, the ERP infrastructure would be hosted and managed centrally ‘This option was called the one-instance option. With alternative 2, each division would set up its own project. Moreover, to allow easy and fast financial consolidation a global project would be set up for standardization of financial naming conventions. Each division would host and manage its own ERP infrastructure, This option was called the multple-instance option, Chad had hired a consultant to estimate the costs of both options. According to this consultant the ‘one-instance option would cost USS 4 million for the implementation projec, would take 2 years, and after the implementation an annual saving of USS 1 million on global IT costs should be possible. For ‘the multiple-instance option, the consultant estimated that the implementation project would cost US$ 2.5 million for the two remaining divisions, it would take 1 yeat, and the global IT costs after the project would be soughly unchanged. “The IT directors of the divisions did not share the consultant’ view. They thought the estimated USS 1 million annual saving was highly unlikely. Elke Singer especially was worried that the one-in- stance option would not meet the 24/7 availability that was essential for the Europe & Asia-Pacific ‘operation, Chad decided to organise reference calls with two companies that were using the ERP sys- Daw Nae STOO Se Ov Wit Chris Bell, System Administ of C fi TD Walls auchatcés. aaa Wilton las Wits, ena Sn, Addr Campa 450 million company operating inthe consumer packaged goods. It isa subsidiagy of a 35 billion company. The company sslected its ERP syste four years ago to replace 8 or 9 other ERP systems of different vendors, The system has around 750 users in Asa, North America and Europe “The company has selected grasul implementation strategy. Businesses are integrated one by one, ane ‘wil tke another four ye: 2st bring on the whole company in the ERP system. The implementation is -managed centrally, with a strong figurehead project manager who has mandate to decide and impose templates on the various divisions “The systern is sed via single infrastructure setup ina global datacentre. There i one singe instance production database. A maintenance window of fous houts of downtime is scheduled ance a week.‘A sous Snel of AcE (2013) 31-52 a ‘tem that ID Walls intended to implement worldwide. Minutes ofthe reference calls are available in Exhibi 5. 5. Assignment Josh Steward put the ERP strategy on the agenda of the next board meeting. Ifyou were Chad Wol- ford, what would you recommend to the board? Assume the role of Chad and prepare your recommen dation for the ERP roll out at 1D Walls in the following way: > Answer the following questions to analyse the ID Walls situation: Daw “pri 2008 With “Terry Higgins, IT director of V ID Walls avendees: Chad Wolford, Lucas Wilson, Elke Singer, Adrian Campbell a mulkoational company in the packaging indssty with several divisions all over the world, The company uses a vaety of ERP systems. It has to instances of the ERP system that we intend to use, Inthe US, the ERP implementation started aroung:12 years ago, Tag, xpssion currently in use is no loge sued ihe eft Gh LG Hendler the G10 plans on the stem hs couk pote gro to 46 plans. nthe US, hey have concen wer ding the week ime, nd 200 concutent ses inthe weekend Te TT deprtnent has scheled downtime minutes, New releases and patches ae rolled outin a monthly release schedule, In order to wse the rolled out enhancements users have to lg out and og in Jn Asia, a newer version of the ERP system is wsed, ‘The nstem has been implemented ovt ofthe box, without eahancerens. eis managed separately, not by "Tes deparnent. Whe Tey was asked ‘wether she company would conde creating one instince for he US and Asan busines, the snewer ‘was "sooner of ace we wil de one instance, bot forthe ime hing we wl cetinly work wth te Exhibit 5. (conse)2 ‘A fous L Snel of Ac E31 (2013) 51-52 1. Describe the company’s strategy. its organisational structure, and its culture. Use your theoret- ical knowledge and literature of the fields of strategic management, management accounting and consol, and IT alignment to support your analysis. The following literature may be helpful for your analysis Ghemawat, P. (2001). Strategy and the busines landscape, Uppet Saddle River, NI: Prentice Hall Sumner, M. (2005). Enterprise resource planning. Upper Saddle River, NJ: Pearson Prentice Hall Zimmerman, J, | (2011). Accounting for decision making and contrl seventh edition, New York: McGraw-Hill (Chapter 4, p. 135-169 and Chapter 5 part A, pp. 170-184). 2. What isthe current financial situation of the company? What are the implications for the ERP implementation? Support your analysis with data, The following literature may be helpful: Hawawini, G. & Ville, C, (2011), Finance for executivesManaging for value creation (4th ed), Mason, OF: South-Western Cengage Learning (Chapters 1, 2 and 3). 3. Analyse the need for and use of IT by each division, Which division uses IT most effectively and ‘which éivision uses IT least effectively? Support your analysis with both qualitative and quan titative data. The following literature may be helpful: Markus. M.L, & Tanis, C (2000). The enterprise system experience: from adoption to success. n: R. W. Zmud, & M. F. Price (Eds.), Framing the domains of If management: projecting the future through the past. Pinnaflex Educational Resources, Inc, Ohio, 173-207 Markus, M.L, Tanis,C. & Van Fenema,P.C. (2000), Multisite ERP implementations. Communica tions of the ACM, 4214), 4246, ‘Weill. (2004). Don’t just lead, govern: how top-performing firms govern IT. MIS Quarterly Exec- tive 301, 1-17, 4_ Based an your analyses of paints 1~3 above. choose one af the rwo rll-aut options and proyide a ‘ationale or set of arguments for your choice. > Be: prepared to-presené your antwvers in-one ofthe following ways; Your-instuctor Will inaigate ‘which one is applicable, e 1. Active paticlbarion duriig be classroom discussion ofthieesse Your instractorwill manage the classrooin discussion of the case using the questions mentioned above as a uideline. 2. Boardroom simulation: a 4S-min presentation to the board of 1D Walls. Your instructor will divide yout class into groups of three or four students, In this assignment, each group assumes the role of Chad Wolford and has to prepare and give an in-class presentation, based on the case data provided. The presentation will be given to the board of ID Walls, which is represented by another group, Each individual member of the audience has to prepare and deliver constructive feedback to the presentation of a group, ‘The following literature may be helpful in preparing your presentation’ Reynolds, G. (2008), PresentationZen-—Simple Ideas on Presentation Design and Delivery. Berkeley. CCA: Pearson Education, 3. A term paper in which you present your analysis and recommended option > Your contribution will be graded on the basis of the following criteria: 1. Application of your theoretical knowledge and analytical sill in answering the questions Usage of the relevant qualitative and quantitative data available in the case description and the exhibits 3. Quality and persuasiveness of your recommendation and associated arguments/rationale