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.

Bob Evans, Contributor

August 31, 2010

7 Min Read

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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About the Author(s)

Bob Evans


Bob Evans is senior VP, communications, for Oracle Corp. He is a former InformationWeek editor.

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