Whirlpool Europe Harvard Case Solution & Analysis

Do the benefits and costs of the ERP investment seem reasonable? What assumptions would you question further?

The EPR project named Project Atlantic was designed specifically for the implementation of the ERP system at Whirlpool Europe with the objective that the company would be able to better serve its customers which included the consumer market and the contract market.

The implementation of ERP gives the following benefits, currently it takes the company 51 days to sale of inventory due to inefficient inventory system this will be reduced by 12 days and with continuous improvement it will be brought down to 29 days.

With the EPR the company will be able to increase its product availability to 92%, which would mean very few sales would be lost because of unavailability of the desired product of the customer and if so, then the product will be made available very quickly as the inventory system is efficiently managed, this will lead to a 25% increase in unit sales, it is also assumed that 0.25% gross margin will be increased by the company.

With a move towards software implementation and automation, there will be a reduction in staff at the company which will result in cost saving, not only that with effective inventory management the warehouse space can be optimally utilized which will also result in cost saving.

Whirlpool Europe Case Solution

Implementing an ERP is a very costly process, it will cost the company $20.7m in capital expenditure for equipment and software, but that is just the initializing process, the implementation is a continuous process which requires the current employees working with ERP consultants in learning the software and tailoring it to the needs of the company, the company will bear the cost of the employees and the cost of the consultants.

Alongside implementation there is the maintenance cost of the system which is an incremental cost reaching up to $3million per year.

On the basis of theoretical benefits that the company will be achieving through this implementation the cost seems reasonable.

What are the after-tax cash flows from the proposed ERP investment through 2007? What is the present value of those cash flows?

Whirlpool Europe - NPV Analysis

IN $ MILLION

1999

2000

2001

2002

2003

2004

TERMINAL VALUE

COSTS (in Millions)
Cap. Equipment

4.3

8.6

6.9

4.1

Software Licenses

0.6

0.3

Consulting Cost

3.5

1.7

1.3

0.7

Employee Cost (200 employees, Avg. salary=45K)

2.3

2.3

2.3

2.3

Task force cost

0.6

0.6

0.6

0.6

0.6

Maintenance Expense

0.6

1.2

1.8

2.4

3.0

3.0

License Maintenance Fee

0.1

0.2

0.3

0.4

0.4

TOTAL

11.3

14.7

13.0

10.4

4.0

4.0

68.7

NPV

10.3

12.4

10.1

7.4

2.6

2.4

37.6

NPV of COSTS

82.7

SAVINGS (in Millions)
Inventory Savings

3.7

8.6

10.1

6.7

3.8

Revenue and Margin Improvements

0.9

1.8

4.0

6.8

9.9

Other Expense Savings

0.6

1.7

2.5

3.3

3.4

TOTAL

0.0

5.2

12.1

16.7

16.8

17.1

293.4

NPV

0.0

4.4

9.4

11.8

10.9

10.2

160.5

NPV of BENEFITS

207.1

Cost of Capital

0.09

NET NPV (in Millions)

124.4

GROWTH RATE (ASSUMED)

3.00%

The NPV of the project stands at a positive $124.4m making it a viable choice for the company.

When valuing the proposed investment, should the value be included for possible cash flows that occur beyond the forecast period (2007)?

The NPV calculated for the appraisal for the project is conducted on cash flows from 1999 to 2004 but along with these specific year cash flow assumptions terminal value of the benefits and cost is also calculated on the bases of an assumption of 3% growth.

It is important to determine the terminal value of a project while conducting NPV analysis it provides the complete picture of the total value the project will be able to generate over its life, and since the life of the project cannot be determined with certainty the terminal value is used instead.

Would you recommend investing in the ERP system?

With the benefits the company is able to generate with this project not just the financial with increase in sales and revenue, profit, but with increasing availability, providing the customer his desired product without making him wait for it, not losing a sale is important, but to make him satisfied is even more important and with this system the company will be able to achieve that, it is strongly recommended for the company to implement an ERP system.....................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

This case presents the problem of capital budgeting. Whirlpool Europe assesses investments in enterprise resource planning (ERP) system, which is to reorganize the information flows in the company. Students withdraw funds from working capital, sales and other improvements along with the cost of investment. "Hide
by Richard S. Ruback, Sudhakar Balachandran, Aldo Sesia Source: Harvard Business School 7 pages. Publication Date: November 1, 2001. Prod. #: 202017-PDF-ENG

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