Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Levi's profits drop 98% as new SAP system disrupts shipments and internal controls

by
22nd Jul 2008
Save content
Have you found this content useful? Use the button above to save it to your profile.

Iconic US jeans manufacturer Levi Strauss blamed a 98% drop in its second quarter profits to $701,000 on problems caused by its new SAP enterprise software system. John Stokdyk reports.

In its 10-Q filing with the US Securities and Exchange Commission for the quarter that ended on 25 May this year, Levi's said the $47m drop in profits from the equivalent period last year reflected its implementation of an enterprise resource planning (ERP) system at the beginning of the quarter.

Without naming the supplier, the company explained, "Order fulfillment issues and higher operating expenses related to the implementation and stabilization of the system negatively impacted our net revenue and operating income."

Levi's decision to implement SAP was widely trumpeted in trade reports in 2003, although more recently the CFO who spearheaded the implementation recently left the organisation with much less fanfare.

The 10-Q filing explains that the ERP system is being implemented in phases. Having installed it in several Asia Pacific subsidiaries the company began implementing SAP in the US during the second quarter of 2008.

One of the project's objectives, it explained, was to improve controls over certain financial reporting processes that were previously done manually.

But, subsequent to the U.S. implementation, "We encountered issues with the US ERP system which caused us to further revise our internal control process and procedures in order to correct and supplement our processing capabilities within the new system," the company said.

These changes materially affected the internal financial reporting controls at Levi Strauss during the quarter. In spite of the problems, Levi's said it would continue to implement the ERP system in the coming years, adding: "We continue to believe that the ERP system will simplify and strengthen our system of internal control over financial reporting."

During what it calls the ERP "stabilization period", the company had to suspend shipments to US customers, which decreased its revenues for the period and increased administration expenses. The company did not rule out further technology disruptions, that could have further effects on its operations.

The irreverent IT website The Register broke the story shortly after Levi Strauss filed its quarterly report and Michael Krigsman followed it up in his IT Project Failures blog on ZDNet.

The Levi's scenario was a classic case involving what Krigsman called "Devil’s triangle relationships" where responsibility can fall between the software vendor, the customer and a third-party implementation consultant - in this case Deloitte.

Tags:

Replies (1)

Please login or register to join the discussion.

John Stokdyk, AccountingWEB head of insight
By John Stokdyk
23rd Jul 2008 13:44

More insights online
Dennis Howlett published an item about Levi's around the same time I posted this one. He did a very interesting segmental analysis to conclde that Levi's had probably overcooked the impact of the ERP implementation on its overall Q2 performance.

There's also a couple of good comments from Francine McKenna's blog. She thinks the public comments about the ERP implementation (and the reasons for the "stabilisation") were a result of new auditor PwC, "bringing the hammer down" on control weaknesses within the new system.

John Stokdyk
Technology editor
AccountingWEB.co.uk

Thanks (0)