Levi Strauss blames profit drop on SAP enterprise software system

In its 10-Q filing with the Securities and Exchange Commission for the quarter that ended on May 25 this year, Levi Strauss said the $47 million 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. Our sister site, AccountingWEB.co.uk filed this report.

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."

The jeans maker'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 organization 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 U.S. during the second quarter of 2008.

One of the project's objectives, the company 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 U.S. 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 Strauss 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 U.S. customers, which decreased company revenues for the period and increased administration expenses. The company did not rule out further technology disruptions that could have additional monetary effects on operations.

The irreverent IT Web site, 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 Strauss 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.

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