Whirlpool Europe Case Study
The investment in ERP which promises good benefits to the company in terms of better sales, better gross margin and other cost saving is justified by the positive Net Present Value (NPV) of about $ 380 million. The company should proceed with the project. Introduction: This paper seeks to analyze and discuss the case of Whirlpool Europe which is planning to acquire ERP whether it should proceed with the acquisition given the fact the fact that the proposal involves cost.
The main issue therefore in this paper whether the benefit of acquisition justifies the cost of acquisition or whether there is a net advantage of acquiring the ERP which is expected to generate additional revenue and additional gross margin. Analysis and Discussion Brief Description of the project: Case facts provide that the goal of the proposal was to design and implement an enterprise resource planning (ERP) system that would allow Whirlpool Europe to better serve its customers market for stand-alone appliances and contract market for built-in appliances and at the same time, reduce its inventory by 12 days of sales.
It addition, it was provided that these competing goals can be accomplished through an information system that would allow a country sales office to view product throughout the supply chain, thereby increasing the efficiency of the distribution process (Paraphrasing made) A project like this yields cash flows (Ruback, 1995; Brigham and Houston, 2002) which can be used to compute the net present value of the proposal.
To compute for the same information on the benefits and cost of the proposals were necessary and they are itemized below and were included part of the computation made in the spreadsheet (See Appending A). The benefits of increased efficiency The company is said to have 51 says of inventory (DSI) and from the 51 days, approximately eights says were reserved and allocated units, nine were in transit and three were obsolete.
The proposal is believed to enable Whirlpool to make its supply chain more transparent and efficient, thereby eliminating the reserved, allocated and obsolete units (Case facts, paraphrasing made). The benefits of increase of increased gross margin It is claimed that the primary goal of the ERP was to increase product availability by making the supply chain more visible and by integrating sales forecasting and inventory management and that the ERP system and processed would enable the company to increase unit sales equal to 25of the improvement in product availability (Case facts, Paraphrasing made).
The benefits of other cost saving It is believed that ERP was expected to substantially simplify the processing and management of customer orders and that an 18% reduction in the 79 order desk employees at an average of $ 40,000 per year per employee was expected once the system was implemented (Case facts, Paraphrasing made). The costs of yearly investments and expenses made Case facts provide that the company would need to spend $ 4. 3 million in 1999 for capital investment, $ 8. 6 million in 2000, $6.9 million in 2001 and $4. 1 million in 2002. In addition, it would cost $ 600,000 and $ 300,000or software licenses in 1999 and 2000 respectively.
Moreover, the implementation required extensive employee training, creation, testing and documentation of new business processes, and of course installation of ERP software and that beginning in 2003, when all the Wave implementation were completed, the cost to manage and maintain new information was forecasted to be ? 3 million annually (Paraphrasing made).
In order to arrive at the computation as per Appendix A, calculations were made on cash flows from improving inventory and understanding of the nature of a reduction in inventories as a difference in invested capital was necessary. Other calculations made included the after-tax cash flows from additional sales due to better product availability and understanding that these are persistent cash flows for the period 199-2007as well as cash flows from improved margins availability and understanding that these are persistent cash flows 1999-2007.
Further calculations were also made on the total cost of the investment year after year, including cost reductions in operating expenses as well as taxes. After which we determined the terminal value by assuming the net cash inflow in 2007 to continue perpetually at 2% per year and then we took the net present value of the same. Afterwards, we added the calculated NPV (Bruns,1997) of the cash flows from year 2000 to 2007 to the net present value of the earlier computed- terminal value to arrive at the final or total NPV and made the necessary recommendation on the adoption of the ERP system.
For the 2006 and 2007 cash flows, Revenues and COGS were held at the 2005 level. Some other case data such as depreciation and associated tax-shield were assumed to run until 2007, so does “other savings. ” We applied the following formula in determining the Terminal Value: “(C/k-g)” where k is the discount rate and g is the expected growth rate into perpetuity (Case facts are paraphrased). Conclusion: After performing the analysis whether to proceed with the acquisition of ERP Whirlpool Europe appear to have net benefit in pursuing with the investment.
Net Present values of the annual cash inflow was computed at $380.3 million (See Appendix A), which means that the company has a net advantage of proceeding with the investment. Not all investments will generate profits since an investment involves risk. In the case of Whirlpool Europe an objective study was prepare about the cost and the corresponding benefit of the project. Discounting the expected cash values as the discount rate of 9% which is the same as the opportunity cost or cost of capital for the company yielded positive net benefit in dollars, which also means that if the company will not do any anything in not deciding, it stands to lose the said amount of net benefit in dollars.
Appendix A- Computation of Net Present Value – See attached excel file.
References: Balachandran and Ruback (2003) Whirlpool Europe Case Study, Harvard Business School- Bruns, W. Jr. (1997) Basic Investment Analysis, Harvard Business School Publishing, Boston, USA Ruback (1995) A Note to Capital Cash Flow Calculation, Harvard Business School Publishing, Boston, USA Brigham and Houston (2002) Fundamental, Thompson South-Western, USASample Essay of PaperHelp