Whirlpool Europe Erp Case
Whirlpool Europe Submitted by yovip16 on April 15, 2009 • Category: Business and Economics • Words: 1967 | Pages: 8 • Views: 237 • Report this Essay Whirlpool Europe Introduction Whirlpool Corporation is a worldwide leader in the home appliance industry. Its main products include microwave ovens, dishwashers, refrigerators, freezers etc. It has made its presence felt strong in the European market, offering 6900 different SKU’s, thus catering to a wide diversity of different European countries. This has resulted in Whirlpool owing a 13% European market share.Customers include consumers who purchase stand-alone appliances, and contractors who purchase built-in appliances.
Problem Whirlpool Europe is a very large organization that functions its operations in 11 plants, two central and 12 regional distribution centers, and a country sales office in each major European market. Currently, the company operates stand-alone information systems in each of these plants, distribution centers, and sales offices. So, information sharing across these functions or organizations becomes an obstacle and results in inconsistent information being shared.Whirlpool Europe is considering implementing Project Atlantic, an enterprise resource planning (ERP) system, to allow the smooth flow of information across the entire organization, thus improving operating effectiveness and efficiency in its overall operations. But before making any final decision, the company needs to evaluate the financial aspects of this significant investment plus take into account qualitative issues that can arise during and after its implementation. Project Analysis Appliances fall in the category of innovative products that change with the technological advancements in the industry.
It is essential to incorporate these technology changes in the products in order to remain competitive. As the company is frequently coming up with improved products, it is difficult to predict the demand pattern of such innovations, thus making it difficult to forecast demand. One of the key success factors in such market is product availability. In light of large number of SKU’s and high demand uncertainty, the company keeps its inventories high to avoid loss in sales due to stock-outs.The current information system does not allow integration of sales and manufacturing, which makes accurate sales forecasting difficult at manufacturing level. This leads to high unnecessary inventory, and in some cases, stock outs.
At the same time, as products are being manufactured in 11 different countries and distributed through 12 distributors, the absence integrated information system does not allow the sales people to see inventory at plant or distributor level, thus creating difficulty in committing and meeting delivery dates.Moreover, as the plants do not have information of inventory at distributor level, they may not be able to replenish inventory in time, which leads to product unavailability. This accentuates the need for an integrated information system. Project Atlantic aims to make the company more responsive to the demand uncertainty. ERP offers system integration and smooth flow of consistent information across the entire supply chain, thus ensuring better and accurate demand forecast. Accuracy in forecasting provides incentive to keep low inventories, thus reducing inventory carrying costs.
Moreover, reduction in inventories frees additional warehouse space that can be discarded or used for other purposes. The increase in inventory visibility helps to recognize bottlenecks in the system, which helps in increasing process efficiency, reducing costs and improving product delivery time. Another benefit is the improvement in supplier, manufacturer and customer relationship that integrates sales, forecasting and inventory management functions. This allows the company to taken on customized orders and reducing bad debt expense.Thus increase in product availability and cost reduction results in increased revenues and improved margins.
The company would have to incur certain costs in order to ensure proper implementation and functioning for the ERP system. They have appropriately accounted for costs regarding the capital expenditure, implementation and maintenance. Yet they may face certain other costs which they have not accounted for. One of these could be incurred because of the fact that the company is purchasing “of-the-shelf” system rather than developing their new system.Hence they might have to incur costs for customizing the software to suit their own needs.
The system has to be implemented over several processes across several countries, and therefore, customization might be required to integrate the system with every process. At the same time, during the transition phase, the processes might not be very effective, which might result in lost sales and increased costs. Moreover, the employees across countries might need to be trained in order to achieve the desired results. Capital BudgetingThe ERP investment is financially evaluated on the basis of after-tax cash flow estimations for the years 1999-2007. It is assumed the revenues and corresponding gross margins will remain stagnant in the status quo. Since the incremental revenues comes in the year 2000 (soon after the Wave West implementation), the revenues for 1997 are taken as base year and are assumed to remain the same for 1999.
It is also assumed that sales mix of units sold remains the same over the entire 9 years, which also means that per unit sales price remains unchanged.One of the key benefits of this project implementation is to increase the current product availability to 94% and reduce days sales of inventory (DSI) by 12 days. The project aims to achieve this is multiple stages. Thus for Wave West, the project will reduce its DSI to 42 days in 2000, 37 in 2001, 33 in 2002 and will remain consistent till 2007 (See Exhibit 1). As the product availability increases, the units sold increase and consequently revenues and gross margins rise. Moreover, the project also seeks to increase gross margins by a certain percentage once the implementation is successfully completed.
There are two types of gross margins that are of interest in these projections. One is the gain that comes from increase in percentage margin (as a result of successful ERP implementation) on the old revenues. Other type of margins is earned on incremental revenues, which are current gross margins plus any incremental percentage margin that comes from ERP implementation. The accounting principles require that depreciation expense is recognized with sales generation. So for each country group, depreciation expense for its capital equipment is charged soon after ERP is successfully implemented for that country group i. .
from implementation end date. Furthermore, it is assumed that any sales increase that comes from reducing returned orders is already incorporated in the incremental revenues. Since it is not given that how much to the extent will the returned units reduce, so it is assumed that percentage returned units will remain fixed at 3%, thus taking a conservative approach towards project evaluation. As seen in the graph (see Exhibit 2), as the project is implemented in incremental phases and requires heavy capital expenditure in each phase, the net cash flows remain negative for the period 1999-2001.Afterwards, the net cash flow begins to increase, reaches its maximum and observes a declining trend from there onward.
The reason for this declining trend is that project has promised to increase product availability and reduce DSI inventory upto a certain limit. So, when that limit is achieved, revenue and gross margins growth become stagnant and there is no incremental cost reduction. The net present value (NPV) is $ 19. 25 million (See Exhibit 3). The internal rate of return (IRR) comes out to be 33.
44%, which is way above the 9% cost of capital.The results of NPV and IRR strongly suggests in favor of this investment. Cash Flows Beyond 2007 The decision to include the cash flows that occur beyond 2007 depends on certain factors. The most obvious factor would be the continuation of the project Atlantic beyond the year 2007. The cash flows related to this project would only occur beyond 2007, if the company does not plan to abandon the project in favor of some other advanced system which might be available at that point in time. Moreover, the company may incorporate major changes in the ERP system itself which may require significant investment.
In such a case, the cash flows beyond 2007 would not be attributable to project Atlantic, and the company will have to make separate cash flow projections. Hence, the project status after 2007 is a major determinant in this decision. The accuracy with which the cash flows after 2007 can be forecasted will also influence the decision to incorporate these cash flows in the analysis. As we move further in time, the accuracy of forecasts decreases. In the short-term, the company can expect the existing business conditions to prevail, or the company has the information to predict the hanges in business environment. Hence these predictions could be incorporated in the forecasts.
In the long-term, it gets harder to predict the changes in both the internal and the external environment. These changes could be in technology, competition, or economies which make the accuracy of the forecasts doubtful. Therefore, it is advisable to restrict our analysis to the years for which we sufficient knowledge to authentically forecast cash flows. So, the incorporation of cash flows beyond 2007 depends upon the accuracy with which these cash flows can be forecasted.Considering the industry which Whirlpool is in, it would be recommended not to include the cash flows beyond 2007. The reason is that it is relatively harder to predict the business environment of the appliance industry in the long run.
The cash flows of the company in this industry are highly dependent on the technological developments and the ability of the company to incorporate these developments in their products. As this prediction is difficult in the long-run, the cash flows beyond 2007 might not be predicted accurately. RecommendationOn the basis of the analysis, it is recommended that Whirlpool Europe should invest in project Atlantic. The major purpose of any business is to maximize shareholder’s wealth. For this project, the NPV is positive and IRR is greater than the cost of capital as well, providing evidence that the project is profitable and would increase the firm’s equity, hence adding to shareholders’ wealth.
The share price of the company would increase and thus the value of shareholder’s investment would grow. The payback period for the project is 3. 8 years and considering the financial strength of a company as big as Whirlpool, this period would not cause liquidity concerns for the company. As mentioned earlier, the project would help the company to be more responsive to the demand through improved information flow which would significantly reduce the inventory as well as stock-out costs, hence increasing the profitability of the company. At the same time integrated information flow both internally and with external suppliers would assist in the implementation of more projects in the future, for e. g.
Just in Time (JIT) manufacturing which requires efficient information exchange with suppliers. Such benefits would further improve the company profitability and thus make a strong case in favor of ERP system. At the same, few concerns also exist regarding the implementation of project Atlantic. A major concern is regarding the accuracy of the forecasts. These forecasts would certainly be affected by the technological advancements in the industry, and as such innovations are unpredictable to a certain degree, the actual results might differ from projections.Moreover, the project would require changes in several processes across 11 countries, which creates doubts as to whether the company would be able to effectively integrate the new system across all the processes and thus meet the projections.
The company might have to customize this “off-the-shelf” system according to the needs of the different processes, which would further add to the costs. At the same time, the employees may resist the change as they have to acquire new skills and might consider their own position in danger.The firing of employees would further fuel the threat of job loss, causing de-motivation and resulting in hindrance in the way of successful implementation. This would in turn, affect the cash flow projections for the project. Although these concerns do exist, yet the NPV and IRR are significantly high, thus providing a substantial margin of safety. Even if the actual results slightly differ from the projections, project Atlantic would still remain profitable, hence the investment is recommended.
