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Airgas says its extensive SAP project will raise annual operating profits by at least $75 million and possibly more than $125 million. Here's how.

In a strikingly detailed and rare peek inside a huge ERP deal, Airgas Inc. has disclosed that its highly customized enterprisewide SAP implementation carrying a price tag of about $85 million should begin generating significantly more than that investment in annual incremental operating profit by 2013.

Begun about 2-1/2 years ago, early and mid-stage phases of the project have proven to be so successful for the distributor of industrial, medical, and specialty gases that it recently committed to an accelerated schedule with SAP that calls for completion by the end of 2012.

While the project will have a positive impact on operating income before 2013, Airgas said, the company expects that in that first full year after completion, SAP's impact in just three specific operational areas—sales growth, price management, and administrative and operating efficiencies—should "yield an aggregate of $75 to $125 million in incremental operating income on an annual run-rate basis."

My mother always told me—and still tells me, God bless her—that the world is full of surprises. So just as we had all been led to believe that big ERP deals are a relics of the past, that they'll never happen again, that they don't work, and that they inevitably blow up in the faces of the customer, the software vendor, and the integrator, here we have one of life's surprises: a big, multi-year, many-moving-parts ERP implementation that by all accounts is succeeding beyond everyone's wildest expectations.

Let's take a look at how this all came about:

1) The Cost. In April 2008, the Airgas board of directors approved the SAP project. In June of 2010, by which time Airgas had "invested" about 70% of its total SAP project budget of $85 million, the company decided to accelerate the final phases of the implementation "based on the early success of system conversions and the substantial benefits to be realized," the company said in its press release detailing the adventure.

Airgas expects the additional implementation costs of the accelerated schedule to be approximately $20 million, which will be more than offset by the economic benefits that will begin to accrue during the conversion process," the statement continues. "These additional costs do not impact any previously issued earnings guidance given by the Company. Specifically, the additional SAP implementation costs incurred during calendar 2012 will be more than offset by SAP benefits, and the Company reiterates its CY2012 EPS goal of $4.20+ per share."

2) The Impact. The Airgas document says that while it is possible that additional benefits will be generated by the overall project, it is basing its projected annual increases in operating income on the three areas mentioned above: sales growth, price management, and administrative and operating efficiencies. Here's a look at each: a) Sales Growth. From the Airgas document: "In anticipation of increasing sales during the implementation of the SAP platform, Airgas intends to outfit its national distribution centers with the most common assortments of welding hardgoods to support direct telesales customer fulfillment in the most cost-effective, efficient manner possible, while gases will continue to be fulfilled by the local branches. The distribution platform already exists to support this strategy and minimal infrastructure investment is required, as the Airgas national distribution centers were built with significant growth in mind. Actions are already underway to expand the telesales sales organization in anticipation of this initiative. Through existing account penetration and customer base expansion, the results of Airgas' pilots and studies indicate the expanded telesales platform should yield incremental annual run-rate operating income of $25 million to $50 million upon full SAP implementation."

b) Price Management. "Price management was identified in April 2008 as the single biggest area of economic benefit of an SAP implementation. A pilot pricing study conducted in one Airgas regional company by an independent consulting firm demonstrated that the variation in pricing performance across branches, customers, product lines, and sales representatives provides multiple improvement opportunities that could be achieved with SAP, including both tactical and strategic price optimization. The results of the pricing study indicated that a minimum of $5 million and a mid-point estimate of $8 million in operating income could be derived from within the single regional company in the test. . . . When extrapolated to Airgas' other regional companies, total price management benefits are expected to be in the range of $40 million to $60 million in annual operating income upon full SAP implementation."

c) Operating & Administrative Efficiencies. "Given the high level of customer service required to compete effectively in the U.S. packaged gas industry, Airgas has always believed that, in a daily sales business with over one million customers large and small, it is of utmost importance that key decisions are made as close to the customer as possible. . . . Airgas has long viewed SAP as a vehicle to enable effective consolidation of certain functions without losing the critical customer-facing elements of the Company's day-to-day decision-making. Based on these objectives, the Company plans to consolidate certain accounting, administrative and support functions from its twelve regional companies into four divisional support centers, with a fifth support center for Airgas' product line business units. . . . An in-depth analysis of savings from the rationalized structure, as well as SAP-enabled productivity enhancements, leads the Company to expect savings in the range of $8 million to $12 million in annual operating income upon full SAP implementation."

3) Early Successes Boosted Confidence. "In early July 2010, Airgas successfully converted its hardgoods supply chain infrastructure to SAP. The Airgas hardgoods supply chain includes more than 300,000 stock-keeping units (SKUs), six national distribution centers, four buying centers, and a safety products telesales organization, and serves as the hardgoods fulfillment source for over 875 regional company branches. As a result, the Airgas hardgoods supply chain touches nearly every area of the Company, and therefore its successful conversion to SAP is a significant indicator of the future success and timeline of this project. Based on the excellent results of that conversion, Airgas is very confident that the economic benefits of SAP will be substantial upon full implementation."

4) Additional Savings. "For example, in conjunction with the conversion of the Company's hardgoods infrastructure in July 2010, all six of Airgas' national distribution centers now use radio frequency (RF) devices to support and execute various operating activities such as receiving, shipping, auditing, and inventory control. These RF devices are secure mobile data entry terminals that help improve productivity within the distribution centers, and the expected economic benefits will reach $1 million annually after year one.

"Airgas has also maintained a strong focus on its high-growth Strategic Accounts program, where visibility into, and management of, a single customer's multiple locations across Airgas regional companies within a single data set is critical. Administration of this function to-date has required a team of back office personnel and a significant amount of manual data entry. A single SAP dataset will allow efficient viewing and reporting of multiple customer locations, dramatically simplifying the administration of Strategic Accounts – both for Airgas and for its customers. The Company expects the dramatic productivity improvements in this area to yield savings of over $1 million annually upon full SAP implementation.

5) The Happy CEO! From Airgas CEO Peter McCausland, here's the type of IT-afterglow in which every CIO would love to bask: "In response to Air Products' offer to acquire Airgas, we have consistently stated that it is all about value, and we believe the substantial economic benefits of our robust, customized SAP system should be reflected in any valuation of the company. We expect this system to further optimize the power of the Airgas platform, and are excited about the game-changing potential of this enhancement to our business."

6) The Promise of Raising Operating Profits by $100 Million per Year. Here's the math, which Airgas billed as "incremental annualized operating income upon full implementation": from accelerated sales growth, between $25 million and $50 million per year; from price management, between $40 million and $60 million per year; and from administrative and operating efficiencies, between $10 million and $15 million per year. Add 'em up and that comes out to between $75 million and $125 million in additional operating profits per year for Airgas.

Lest there by any doubt about Airgas's confidence in the ROI on this SAP deal, here's one more comment that underscores the company's unwavering optimism and conviction: "Airgas is highly confident that by the end of calendar 2013, the benefits detailed in this announcement will be achieved and will constitute a minimum of $75 million in aggregate annual run-rate benefits in operating income, with a strong likelihood that these benefits will reach or exceed $125 million in the aggregate."

These overall results remind us once again that conventional wisdom often turns out to be unconventional hooey, and that the future is not written: rather, it is ours to create.

 

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Vijay Nachimuthu

By Vijay Nachimuthu

Vijay Nachimuthu is a Managing Principal of AltaFlux. His blogs mainly focuses on latest cloud technology trends and its impact on enterprises.