By Naomi Grossman

It was the yak herders in China who inspired Steve Holt to start his own business.

But it was the installation of a completely new IT system based around SAP Business One that enabled Yak Pak to become the company he always envisioned.

Today, the maker of backpacks, messenger bags, handbags, and other luggage is on track to hit $50 million in retail sales this year -- while relocating its warehouse from an expensive, cramped location in Brooklyn, N.Y.; building a Web site that could quickly process orders; growing sales without adding costs; and outsourcing manufacturing and some sales to lower expenses.

An IT System That Needed to Be Fixed
Before, "technology was always working against us," says Holt, CEO of Yak Pak. "We had dreams, but we couldn't fulfill them." A series of meetings five years ago between Yak Pak's IT group and management -- which then consisted of Holt, CFO Rolando Cohen, and COO Richard Haugen -- made it clear that changes had to be made. "We talked about the fact that we weren't moving a system forward, we were keeping a jalopy moving," Haugen remembers.

Information technology was the last thing on Holt's mind in 1988 when as a junior in college on a year abroad in China, he plunked down $4,000 with a manufacturing company there to make 400 bags. The bags were eventually shipped to Holt's dorm room, and his then roommate, Rolando Cohen, realized his friend might be onto something. By the time the two graduated from Georgetown University in 1989 and moved to New York, Cohen had convinced Holt to take him on as a partner. "Neither of us had any experience, so it was a hands-on learning experience," Holt says.

Through trade shows and sales calls on store after store, by 1995 the company was doing $1.6 million in sales and had hired some 14 employees. It was all running on a FoxPro-based accounting system, AMAS, which was initially all Yak Pak needed.

"It did the job we asked it to do very well," says Haugen. But, as the company grew, it became "quickly apparent that the systems we were on wouldn't take us where we wanted to be."

Executives found it difficult to drill down and get reports to see what was selling and where. "We couldn't get information to make decisions," says Holt. "Who's buying it? What's selling? Frequency of orders?"

Moreover, any reports that they did get cost thousands of dollars because they had to be customized. "It had a crummy warehouse model, accounting system, and nothing was integrated," complains Holt. "Haugen had clever patches, but it was still a Rube Goldberg system."

For example, it took salespeople 40 minutes to manually enter each order and the system couldn't handle all "ship to" locations for the new customers they were landing. The Web site was running on Microsoft Commerce Server and as the company's Internet retail business grew, the system couldn't keep up. The EDI requirements of major retailers were cumbersome to manage, and the need to constantly move data from one system to another was time-consuming.

There was also no possibility of operating remotely, forcing the warehouse to remain in an old facility in an expensive section of Brooklyn. Similarly, as the company's sales improved, the cost of adding sales and customer service people became increasingly burdensome because of the company's New York City location. Also, the inability to outsource meant that small customers were being allocated the same resources as much larger ones. It was clear changes needed to be made. In desperation, Haugen called SAP. "I called the guy big guys use, and asked for something for a small guy."

Finally, SAP for Smaller Businesses
Haugen was initially told that SAP's smallest customer did $200 million in sales, but the woman he spoke to said that she heard "something was coming up that'll be for us." She was right. SAP was just coming out with its SAP Business One for smaller businesses and through SAP consultant, RSM McGladry, Yak Pak became one of the product's early adopters.

Ultimately, the company's IT investment -- which was "well under $500,000" according to Haugen -- involved deploying the full SAP Business One business management integration package. Haugen noted that he relied heavily on the SAP consultants, who encouraged Yak Pak to view SAP as a platform on which to integrate other products. He did.

"When we put in a system, we first analyzed all our business processes, and that saved us time and money," Haugen explains. "We also were willing to change our business processes, the order approval process. We streamlined and changed reports around. We really stripped out everything. It was like ripping out the engine and transmission while driving. It was a lot of work." But Haugen is convinced the effort was well worth it. "We saw a return on our investment within 11 months," he crows. Annual estimated savings with the new system run approximately $300,000.

Seamless Integration
The platform helped Yak Pak achieve "seamless integration" between its back end and its Web site, says Haugen. Among the applications integrated with Business One are CitiXsys Credit Card Module for credit card functionality, Altec Doc-link for document management, and Accellos Radio Beacon WMS for supply chain management.

Perhaps most significantly, the new system gave the company geographical independence. Yak Pak immediately moved its warehouse to a less expensive, more modern facility in Houston, Texas. As a bonus, the warehouse is now closer to El Salvador, where the company had begun to do some manufacturing. "We were the largest air freighter from El Salvador to New York," says Holt. "Now we ship from El Salvador to Texas and we save nearly $3,000 a week."

At the new Houston warehouse, Radio Beacon enables wireless warehouse management, and a much more efficient process was put into place so that an employee can scan a symbol on a box, confirm its quantity, print out a label, and, at the same time, create a "route" in the warehouse to easily direct others to that box. The box can be marked as shipped and delivery notes are automatically created in Business One. . "Before [our system] was WIFF, What I Find First, says Haugen.

The system has reduced "mis-picks" in the warehouse by 70 percent. "Now when a customer calls we can say which box number and what is supposed to be in the box," says Haugen, all on the phone in real time. The "ship-complete" ratio went to 98 percent from the mid 80s, he adds, and EDI requirements can now be easily fulfilled because the compliance labels are built into the system. Web customer service costs have fallen by 60 percent with one position completely eliminated. "We have a level of automation and technology that a lot of companies our size don't have," notes Haugen.

Yak Pak integrated SAP Business One Web tools, a Web-based e-Commerce and CRM platform for SAP Business One, into the platform so that users would have to enter information only once and the data be seen among all the systems. "Everyone looks at the same set of data," notes Haugen. "When we invoice we can settle credit card transactions in one process," he adds. "It saves us time and effort. We used to have two people who just processed credit card orders. One was looking up transactions wile the other was going in and closing out invoices. Now it's all automated. The receptionist just invoices the orders."

Saving On Staffing

The system also let Yak Pak put a sales and administrative office in El Salvador, where staffing is much less expensive. "Before, the thought of opening a bilingual office in another country was unthinkable," says Holt. "It opened up the world to us."

The new system has dramatically affected the company's staffing needs. "We have [20 percent] fewer people in accounting now than five years ago," says Haugen, and warehouse headcount has plunged 22 percent. "It enabled us to detach growth in the sales office from the back office," says Haugen. "A lot of small to midsize businesses have that problem when their administrative costs grow with the front office. We don't have to add department costs when we add salespeople," and sales reps now have 30 percent more time to sell.

The office in El Salvador employs 24 sales people and a dozen analysts, designers, and producers. Salaries in El Salvador are a third of their New York equivalents, and Holt says the "quality of work exceeded the expectations," partly due to Yak Pak's integrated database. "In our database, [salespeople] can see where a store is located. They can see the store is located near a park. They can check the [local] newspaper to see [stories] about the store. They can see the high school football team is playing in a game. They can use that in a sales pitch and offer customized orders in the high school football colors," Holt says, adding that "this is a Salvadorian person speaking in English to this person."

"When I talk to other people in leadership positions, technology is never seen as a positive tool," says Holt. "Others look at IT as being cost centers. We see it as an investment that paid itself off in a year. We could grow to three times our size and not need to change anything about our infrastructure."

Naomi Grossman is assistant editor of bMighty.com.