A $67 million (£41 million) Oracle enterprise resource planning project, run by Deloitte and undertaken by Pennsylvania's Liquor Control Board has been marred by inflated costs, staffing woes and operational problems, according to a damning report by the state's auditor general.
The PLCB oversees the wholesale and retail sale of alcohol in Pennsylvania through a chain of state-run retail stores. While PLCB's sales rose from $1.41 billion to $1.51 billion between its fiscal 2008 and fiscal 2010, net profits from store operations dropped 47 percent to $68 million, the audit states. Problems with the ERP system "appear to be one of the primary causes for this major downturn in profits."
The audit report was flagged this week by a Pennsylvania think tank, the Commonwealth Foundation, which espouses free-market principles and believes the stores should be privatized.
"Unfortunately [the Oracle system] was a waste of taxpayer money that failed to do what it set out to do," said Jay Ostrich, director of public affairs for the group. "It exposed why government has no business in business. It's only a symptom of a much sicker patient and the PLCB overall."
There seems to be strong public sentiment toward privatizing retail liquor stores in Pennsylvania. A recent poll by Quinnipiac University found that 69 percent of residents surveyed were in favor of such a move, and a legislative bill that would privatize the industry has been introduced.
If and when alcohol sales go private in Pennsylvania, the Oracle system should be included in an auction of the PLCB's assets, Ostrich said.
The project stems to August 2007, when the PLCB signed a $25.8 million contract, according to the audit report. Subsequent amendments to the contract boosted the cost to $60.6 million in June 2009, and by another $6 million in June 2010, it adds.
A forecasting application within the system went live in September 2009, and by January 2010 managers learned something was going wrong, as inventory levels were dropping at distribution centers.
Managers determined the problem was tied to "a vendor's forecasting software in the inventory management module of the ERP system," which was supposed to order merchandise based on the aggregate of all store sales.
It was not immediately clear whether the forecasting software was supplied by Oracle or a third-party vendor, as the report does not name the company. An Oracle spokeswoman declined comment.
PLCB officials asked the vendor for the inventory forecasting formulas so the problem could be fixed, but were denied on grounds the information was proprietary, the report adds. "The vendor's rejection left the PLCB with no choice but to solve the problem on its own."
In March 2010, management at the PLCB's central office told purchasers to start ordering "excessive merchandise beyond what the system was telling them to order," the audit adds. But the strategy backfired, resulting in overflowing stocks at distribution centers, it adds.
Inventory at a Scranton, Pennsylvania, distribution center doubled to 600,000 cases, requiring the PLCB to add warehouse space.
A location in Pittsburgh saw inventory jump from about 300,000 cases to 575,000, the audit states. Managers ended up storing about 73,000 cases in "non-temperature-controlled trailers."
The problems were exacerbated by the fact that an employee who would have been in charge of managing inventory retired unexpectedly just as the system went live, according to the report.
However, the inventory glut had an overall minor effect on the bottom line, the PLCB said in a response to the audit. It led to an additional $500,000 in storage costs, but those were "relatively small in relation to the Board's almost $2 billion operation," it said. In addition, all of the products were eventually purchased by shoppers.
The PLCB is also "confident that such additional costs will be avoided in the future," it added.
Any ERP project goes beyond the software itself, as the organization implementing it "must have sufficient maturity to absorb the business process improvements," said Michael Krigsman, CEO of Asuret, a consulting firm that helps companies conduct successful IT projects. "In this case, PLCB did not possess adequate procurement experience, nor did they understand the impact of the new system on how the organization would conduct its operations."
The role of Deloitte, which served as a systems integrator on the project, should also be scrutinized, Krigsman said. "Where was Deloitte in helping guide the customer? The document raises more questions than it answers about the role of [Deloitte]."
Deloitte did not respond to a request for comment.
Oracle appears to have considered the project a relative success. Last year, it named the PLCB one of its Retail Excellence award winners. A page on Oracle's website features a photo of a Deloitte representative accepting the award on behalf of the PLCB.
The PLCB did not immediately respond to a request for comment.