Information Hybrid

Dec. 21, 2004
A farming giant and a consulting firm set up a joint venture to make technology pay off.

Few companies have gone to the lengths that Farmland Industries Inc. has in trying to ensure that its information technology remains on track to support the giant agribusiness' goals. In fact, Farmland, a $9 billion regional cooperative headquartered in Kansas City, has set up a joint venture with consulting firm Ernst & Young to do just that. "We had a clear need to get IS and the business functions out ahead of the changes taking place in the business units," says Kent Nunn, CIO at Farmland. "The joint venture will provide a strategic tool to accomplish the transformation of Farmland and throughout the cooperative systems." Farmland, which is owned by 1,400 local co-ops representing half a million farmers, has an ambitious plan to reengineer its entire business and supply-chain network so that it will remain a leader in the agriculture and foods industries well into the next century. A key to that transformation, as Nunn likes to call it, is IT. "As we evolve from a commodity company to a food company, we are going to need to track products such as genetically engineered animals back through the supply chain to reward their producers." Farmland also expects to reap impressive gains through centralized management of various activities that benefit the retail-oriented co-ops. For instance, the company expects to cut millions of dollars off its current $100 million bill for fertilizer storage. By installing SAP AG's R/3 enterprise-integration software, a project that Farmland began last year, the company will be able to manage and maintain ownership of such inventories down to the local co-op level. SAP's sales and distribution modules in particular will enable merchandise to be placed there for sale on something resembling a consignment basis, with the local cooperative responsible only for covering costs associated with selling the materials to farmers and managing receivables. "We'll be reducing our storage costs significantly," says Dick Weaver, service-delivery manager at OneSystem Group LLC, the Farmland/Ernst & Young joint venture based in Kansas City. "Secondly, we're moving product closer to the end user or customer, and therefore we're going to be able to provide him with better service. So we'll probably improve our market share." OneSystem Group's role is to implement the SAP solution and to handle all of Farmland's other technical and reengineering initiatives for at least the next 15 years. Future links between SAP and other Farmland systems should further boost the company's efforts to grow from a commodity supplier into a food producer whose efforts are driven by the needs of its customers, both external and internal. One such system is a proprietary prototype software package called AgInfo. Honored for technical innovation by the Smithsonian Institution in 1996, this program by the year 2000 is expected to have the capability of telling SAP exactly how much fertilizer is being used by the members of a given local co-op so that automatic-replenishment orders can be generated. Similar tie-ins to commercially available delivery-route-optimization software will save Farmland's crop-inputs manufacturing and distribution division an estimated $5 million annually. And once R/3 is up and running across Farmland's enterprise, it is expected to streamline the corporation's attempts not only to match three- to six-month sales forecasts with expected inventories, but also to provide participants with real-time information about what products are most profitable at any moment. Such considerations could scarcely have been imagined when Farmland got its start as a petroleum-refining initiative in 1929. Since then, however, the organization has blossomed into the largest farmer-owned cooperative in North America, with a total of 16,000 direct employees in 185 locations worldwide. Most of this growth has occurred under the direction of H.D. (Harry) Cleberg, Farmland's president and CEO since 1991. He believes that in order for the co-op to compete, the company needs critical mass both to drive down per-unit costs and to help it attract the brightest personnel available. Because of its cooperative structure, however, Farmland lacks open access to traditional capital markets that other companies might use to pursue their expansion goals. To work around this obstacle, the company has been pursuing an aggressive schedule of acquisitions. These include the 1992 purchase of an Enid, Okla.-based grain co-op called Union Equity Corp. and the subsequent purchase of National Beef, Liberal, Kans. The latter transaction has helped Farmland to attain its current ranking as the fourth-largest beef producer in the U.S. Along the way, Farmland's revenues have risen from $3 billion at the start of the decade to nearly $12 billion in 1997 (this figure includes some $2.6 billion from Farmland's share of the third-party sales of its joint-venture businesses and a grain-marketing subsidiary). However, the organization's IT challenges also have mushroomed. By the mid-1990s, Farmland was using 137 mainframe applications, 86 different databases, and seven hardware platforms in order to support 10 business units operating in industries ranging from fertilizer and animal-feed production to petroleum refining and pork and beef processing. "We, like a lot of large diversified companies, found ourselves faced with disparate systems that were fairly autonomous," says CIO Nunn, who also serves as president and CEO of OneSystem Group. "The databases in many cases were redundant and contained conflicting information. Any time you have an environment like that, you create a lot of inefficiencies internally from a process perspective, and you also have a difficult time providing really good customer service." This problem is exacerbated by the fact that a single Farmland customer might purchase goods from every one of the organization's business units. One result of this situation is that a purchase transaction might be handed off as many as 13 times within the organization as it proceeds from data entry to approval and fulfillment functions. In contrast, SAP's integrated environment will allow information such as customer orders to be entered once and then automatically passed through the system to whoever needs the data, whenever it's needed. Farmland expects such capabilities not only to streamline its customer-service functions, but also to provide a foundation for the eventual addition of Manugistics Inc. and Numetrix Inc. route-optimization software. Scheduled to be interfaced to Farmland's crop-inputs business unit this year, these packages will help the company maximize the efficiency of truck routing between Farmland and its local cooperatives. Under Farmland's current manual routing methods, "If we had to refigure an entire delivery schedule for a week, it would take days to do it," reports Mike Green, lead Ernst & Young partner on the Farmland installation and reengineering project (and a member of OneSystem Group's board). But in the future, he states, "It would take a few minutes using computers. In order to do that, it requires the whole system, because you have to have the discipline of putting the order in when you're supposed to and shipping it when it's supposed to be shipped." Once such disciplines are in place, Farmland likewise expects its livestock unit to better match its forward sales activities with future production of inventory, including hogs. Currently, says Jerry Lehenbauer, director of Farmland's America's Best Pork program, sales forecasting for such products is "done on an as-needed basis. We don't have the links in place where we can know or track by product line, at least in any user-friendly fashion, what our forward sales are and what we need to do on a production basis to meet them." (The America's Best Pork program is an initiative designed to help farmers respond to consumer demands by supplying them with everything from genetically engineered breeds of livestock to advice on what to feed their animals for the most efficient weight gains.) For now, Farmland is generally able to fill orders based on the knowledge that the quality of hogs entering its plants can be roughly estimated with a standard bell-shaped curve. However, Lehenbauer says, "We are forming more partnership relationships with our retail and food-service accounts. And they are demanding products with more specific characteristics and quality attributes [such as a higher percentage of lean meat]. That's where I can see that having an information system in place to vertically link this kind of information together would be of great value to us." At the same time, having access to integrated sales information available from SAP will allow Farmland's farmers to make more informed decisions about how to apply their resources. In this area, Ernst & Young's Green says, "We're turning [the supply chain] into a consumer-driven process" that ultimately will be able to provide real-time tallies that should help farmers figure out whether they can earn more by producing leaner pigs, for instance. Today, such decisions are left largely to chance, with farmers using everything from almanacs to the Internet to predict what will happen with demand and other trends in the next year. Marketplace changes are leaving less room for guesswork in the entire agricultural industry. "We've seen the demands of the consuming public move more toward prescription' foods," whose every component can be traced virtually from a farmer's field to a consumer's table, says Nunn. This is impossible to accomplish under the traditional agricultural business model. That's partly because, despite the use of a six-level grading system for corn, two grades of this commodity typically are mixed together to achieve whatever blend will fetch the highest price, with all growers involved receiving equal compensation. Such a scenario is changing quickly, however, thanks to genetic advances such as those that allow farmers to raise corn that possesses higher-than-average amounts of oil. As long as the identity of such products can be preserved throughout the processing cycle (a capability that SAP's lot-tracking functionality is expected to help provide), Farmland can help farmers to command premiums such as those enjoyed by name-brand products. "It may be just pennies per bushel," Nunn says. "But when you think of the millions and millions of bushels of grain that we handle a year, that translates into significant dollars." Divvying up these dollars, however, is a fairly complex proposition. "What's unique about the business we're involved in is that we have multiple levels of actual ownership," Cleberg explains. He says the company's corporate competitors can afford to be relatively lax about assigning every penny of value added or cost incurred to a specific link in a supply chain, because they tend to own most or all of that chain. But Farmland tries to return profits to participants in direct proportion to their contributions. This will be accomplished in part by linking company-wide sales figures tracked by SAP to a "bolt-on" member-equity package now under development. It will replace a spreadsheet-laden method that the company currently uses for computing what sort of rebates or rewards to return to local co-ops based on the purchases and sales that their members have made through Farmland. Ernst & Young's Green says the new method ultimately "will be faster. There will be much more online information and a single point of entry across all business units." So if a local co-op buys something from each of the company's petroleum, fertilizer, and grain units, he says, "We'll have all that information together. That way, we'll be able to determine how important each customer is." Granted, these enhancements have yet to prove themselves in the field, as do systems and procedures that Farmland hopes one day will enable it to establish contract prices for grain and livestock with producers before a single seed is planted or animal bred. (Currently, growers do not begin these negotiations until their products are ready for sale.) On the other hand, Farmland's 70-site crop-production product division, which manufactures fertilizer and agricultural chemicals, has been up and running on R/3 since last September. Already, the new software has enhanced operations. When a truck leaves one of Farmland's fertilizer facilities, for example, information regarding its contents is keyed into the system's sales-and-distribution module rather than being punched in at headquarters from handwritten documents. Other SAP modules being used to support Farmland's crop-inputs business are those designed for financial and control-related functions, materials management, production planning, and plant maintenance. Thanks to these modules and business-process improvements that have accompanied them, the system appears well on its way to meeting Farmland's financial goals. "I think conservatively over the next three years we will deliver in excess of $100 million in value to Farmland as a result of the investments that have been made [in OneSystem Group as a whole]," Nunn says. "However, our goals are much more aggressive than that." Equally important to Farmland is the shift in decision-making power that SAP is helping to deliver. "In many businesses in the past," says Cleberg, "information frequently has been used as a power base [with managers distributing it in a manner that was] probably more comfortable to them than adaptable to the end user." In contrast, the SAP-enabled solution provides workers in processing plants or anywhere in Farmland's crop-products organization with instantaneous access to information about their performance and what can be done to improve it on the fly. "In a production facility," Cleberg says, "this is really unique because the people who push the buttons or turn the knobs are the ones who actually optimize efficiency. But frequently, they didn't know what their results were until their supervisor or their supervisor's supervisor told them about it the next day or at the end of the week or month." Despite its advantages, the project also has delivered some hard lessons. When it came to teaching workers how to enter data into the new system, for example, Cleberg reveals, "I would say that they needed 50% more training than we had anticipated." One result was that employees who had grown used to correcting order-entry errors halfway through the transaction process could no longer do so in SAP without affecting inventory counts. Likewise, workers who unload raw materials such as phosphate ore can no longer rely on others in the processing chain to handle the required bookkeeping. As such, workers sometimes need help adjusting to Farmland's reengineering program. When Farmland brought the first of its manufacturing facilities online, for example, operating personnel there initially complained that the SAP package slowed down their processes and made them more prone to inaccuracies. Cleberg says, "That's when you have to go back in there and say, We recognize this. This is part of the learning experience. We understand that there can be some temporary productivity setbacks as this is implemented, but over the long haul it's going to offer opportunities to be much more efficient and much more able to compete in [our] industry.'"

Partnering For Growth
Farmland realized it didn't have enough expertise for a typical reengineering effort. The seeds of Farmland's SAP implementation actually went into the ground in 1992. That's the year the company began benchmarking to see how other agricultural firms, as well as those outside its industry, were dealing with similar business and IT challenges. Before long, the company decided to embark on a massive reengineering effort. The program's goal was and is to help Farmland evolve from a disjointed collection of business units into a single integrated entity that uses common business processes wherever possible. Farmland calls this program its OneCompany initiative. Next, Farmland selected Ernst & Young as its systems-implementation planner for the OneCompany effort and SAP as its enabling software platform. Farmland's next move was to spend about six months charting the scope and cost of the installation and reengineering effort, and assembling a team to address issues such as Farmland's IT infrastructure. Eventually, 75 full-time staffers from various Farmland business units were added to the OneCompany team to help it devise common processes that could be used throughout the organization and to form a global SAP template that would guide future installation efforts. By late 1996, however, Farmland realized that it lacked the in-house expertise to manage its project on a typical client-consultant basis. To overcome this limitation, Farmland considered extending its traditional approach (which involved headquarters staffers interacting with counterparts stationed in its business units) and the complete outsourcing of the job. "But neither of those was palatable," states Kent Nunn, Farmland CIO. Staffing up to keep the OneCompany project in-house would have been cost-prohibitive, he explains, while Farmland was uncomfortable with the notion of turning its technological future over to an outside entity. Therefore, the idea of handling Farmland's reengineering efforts through a joint venture with Ernst & Young began to take root. However, the prospect of partnering with another firm on a task as critical as the OneCompany effort also carried potential pitfalls. Farmland CEO Harry Cleberg says, "The downside was, Would this joint venture be as sensitive and responsive to the needs of the operating people as it would be if we had full and complete control, especially when problems arose?'" After addressing these concerns with Ernst & Young, Farmland and the consulting firm last April announced the formation of OneSystem Group LLC, with Nunn as president and CEO. It is a partnership whose responsibilities include the completion of the OneCompany project, along with all other technological and reengineering initiatives related to it. These include links between SAP and some half dozen stand-alone programs now being used in various business units, plus the linking of Farmland's corporate facilities to those of its local cooperatives. In setting up the new organization, both Farmland and Ernst & Young felt it would be crucial to agree up front on performance standards such as a 99% system-availability requirement for the SAP installation. Also, OneSystem employees are compensated based on how effective they are at helping Farmland to achieve such goals. Lucky for them, the venture packs built-in efficiencies. "Since we own the new company together," says Mike Green, lead Ernst & Young partner on the project, "the delay between us providing advice and Farmland considering and acting upon it is gone." This has allowed Farmland to cut the estimated time for implementation by three to five months. At the same time, the OneSystem venture is helping to minimize personnel woes that typically plague major IT projects. Specifically, OneSystem Group has allowed restless Farmland staffers to take on new challenges without really leaving the fold while helping Ernst & Young to retain approximately 12 consultants who might have left the company if not for the chance to spend two to four years in one location.

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