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Whirlpool Europe Case Solution

Solution Id Length Case Author Case Publisher
1000 1643 Words (6 Pages) Richard S. Ruback, Sudhakar Balachandran, Aldo Sesia Harvard Business School : 202017
This solution includes: A Word File A Word File and An Excel File An Excel File

Whirlpool is considering installing ERP software across all its manufacturing plants in Europe. This installation will provide numerous benefits to Whirlpool, in addition to huge starting, and maintenance costs. The whole process is carried out in 4 distinct phases for ease. However, Whirlpool is not sure of the potential financial outcomes of this installation. Upon carrying out the analysis and sorting out the incremental costs for this project, it is found that the NPV comes out to be $ 22,571,000. The internal rate of return is 34% which is way above than the required rate of return of the company. Therefore, Whirlpool should continue with the project. However, there is a need of finding the NPV by changing the key assumptions. This will help gauge the feasibility of the project in different scenarios.

Following questions are answered in this case study solution:

  1. What is the business case for Whirlpool Europe undertaking this possible investment in the ERP system?

  2. What are the sources of potential benefits of the system for Whirlpool? Should they have the same degree of confidence in each of sources?

  3. Why do you think they decided to start the system in with the West Wave first?

  4. What the sources and timing of costs they expect to incur with the implementation of the system? 

  5. Assume that the proposed system will be in use though 2007. Given the cost of capital and tax rate in the case, what is the NPV of this system? 

  6. If we relax the assumption that the system would be used though 2007, what cash flows should be included beyond this point?

  7. Would you recommend that they go ahead with this capital investment? Do you have any major concerns? If so, how might these have been addressed in your analysis?

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Whirlpool Europe Case Analysis

1. What is the business case for Whirlpool Europe undertaking this possible investment in the ERP system?

After entering into the European market, Whirlpool has been able to acquire a sizable portion of home appliance’s market share. For this purpose, Whirlpool also fully acquired the Dutch based company Philips electronics. The market of Europe was well diversified; therefore, in order to cater to the needs of different customers numerous stock keeping units were in place. All these SKUs were mostly running and operating their own information systems. This scenario is not good for a manufacturing firm as the information sharing is not possible due to the differences in software across different manufacturing units. Apart from the information sharing dilemma, the forecasting and budgeting was also very difficult to harmonize.

On the other hand, the market of home appliances was such that a product deficiency from one manufacturer will possibly be substituted with the product of any other firm. At the same time, the delivery deadline for kitchen remodeling products was also tight and required a handsome amount of clear and quick information sharing across different units. Therefore, it was vital for Whirlpool to install a uniform information system across different manufacturing units to satisfy the customer needs. This step was destined to enhance the market share of Whirlpool. Apart from this advantage, numerous incremental savings and costs were planned to be incurred. In short, the need of the hour is to find out the net benefit obtained.

2. What are the sources of potential benefits of the system for Whirlpool? Should they have the same degree of confidence in each of sources?

The sources of potential benefits are listed below:

i. Quick and Easy Information Sharing

After implementation of the system, Whirlpool will be able to standardize the manufacturing process. This will lead to quick information sharing across different manufacturing units.

ii. Refining the Supply Chain Process

The average DSI of Whirlpool is 51 days. By adapting to a uniform information system, Whirlpool will be able to distill its supply chain processes by decreasing the DSI (to 39 days) and obsolete inventory. As a result of this system, the inventory error management process will also be enhanced this will result in decreasing the number of returning units. Order taking process is also deemed to improve.

iii. Working Capital Reduction

The refined supply chain process will also result in decreasing the working capital requirements. The inventory holding/storage costs will be decreased, in addition to the reduction, in the in-transit time.

iv. Payroll Savings

This system will also allow Whirlpool to condense its workforce, which will result in decreasing the overall payroll of organization.

v. Revenue and Gross Margin Increase

The planned product availability resulting from this project is gauged to be 92%. 25% of the increase in sales can be attributed to this 92% increased availability. Therefore, the system would increase the overall profitability of the company.

The level of confidence will be different across different sources as some of the probable benefits are encompassing the factor of predictability and assumptions. The level of confidence in revenue enhancement will be less than that of supply chain refinement and quick information sharing.

3. Why do you think they decided to start the system in with the West Wave first?

Most of the times, before adapting any project on full scale a manufacturing entity undertake it as a test or pilot project. Whirlpool has similar intentions. If you take a close look at the manufacturing statistics of Whirlpool, the west wave contains only one manufacturing site in France. This is a subtle step that is taken by Whirlpool. After testing and running this information system on one manufacturing site, Whirlpool will be able to decide its operational effectiveness and efficiency. If the project is feasible and it runs without any difficulties, Whirlpool will be able to adapt it on a large scale. That is why the next wave contains Italy, which houses 4 manufacturing sites in Europe and it will increase revenues by the most in comparison to the other two waves.

4. What the sources and timing of costs they expect to incur with the implementation of the system?  

The implementation of the information system will produce the following costs:

i. Capital Expenditure

The capital expenditure schedule for this project is listed below:

For capital investment, the expected costs are:

  • $ 4.3 Million in 1999

  • $ 8.6 Million in 2000

  • $ 6.9 Million in 2001

  • $4.1 Million in 2002

For software license, the expected costs are:

  • $ 60000 in 1999

  • $ 300000 in 2000

ii. Implementation Costs

The three person special task force will require $ 600000 annually from 2000 to 2004. A total of 200 employees will work with external consultants with an incremental cost of $45000 per person per year. The cost of hiring consultants can be summarized as:

  • In 1999: $15400*19*12= 3511200

  • In 2000: $15400*9*12= 1663200

  • In 2001: $15400*7*12= 1293600

  • In 2002: $15400*4*12= 739200

iii. Operational Expenses

The company is expecting to incur an incremental cost of $600000 in year 1999. This cost will increase by the same amount every year after reaching $ 3000000 in 2003. License management costs will also start in 2000 from $10000. It will increase by the same amount every year after leveling at $400000 in 2004.

5. Assume that the proposed system will be in use though 2007. Given the cost of capital and tax rate in the case, what is the NPV of this system? 

The required rate of return is 9% while the tax rate to be used is 40%. The following table depicts the calculations pertaining to NPV calculations.

Table 1: Free Cash Flows and NPV Analysis

Free Cash Flows and NPV Analysis

 

1999

2000

2001

2002

2003

2004

2005

2006

2007

Revenue

0

7,808

23,732

41,677

50,831

55,993

57,482

57,482

57,482

COGS

0

6,590

19,358

33,936

40,989

45,050

46,377

46,377

46,377

Operating Expenses

6361.2

4892.2

4394.6

3745.2

700

243

-103

-134

-166

Depreciation

 

980

2760

4140

4960

4960

3980

2200

820

EBIT

-6,361

-4,655

-2,781

-144

4,182

5,740

7,228

9,039

10,451

Less: Taxes

-2544.48

-1861.97

-1112.37

-57.7275

1672.701

2296.144

2891.11

3615.51

4180.31

NOPAT

-3,817

-2,793

-1,669

-87

2,509

3,444

4,337

5,423

6,270

Plus: Depreciation

0

980

2760

4140

4960

4960

3980

2200

820

Minus: Capex

4900

8900

6900

4100

0

0

0

0

0

Minus: Change in net working Capital

 

-2,685

-6,967

-8,429

-6,218

-3,765

-1,529

 

 

FREE CASH FLOW

-8,717

-8,028

1,158

8,382

13,687

12,169

9,846

7,623

7,090

NPV

22,571.00

 

 

 

 

 

 

 

 

IRR

33.7%

 

 

 

 

 

 

 

 

The most important point is the analysis of the logic behind the calculation of NPV and IRR. All the waves had different specifications and different margin improvement ratios. Therefore, it was very difficult to analyze all of the waves at one time. Hence, the effect of each wave was separately studied and at the end consolidated to depict the overall scenario.

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