Whirlpool Europe

Case Solution

Group AA2
Abhishek Purohit
Rohit Pandey
Shailesh Bansal
Srivatsan CR
Vaishnavi Chella

13502
13539
13545
13549
13556

Case objective:
Whirlpool entered European Appliance market in 1988 and experienced a 10 year growth.
So it now has to decide whether to invest in an ERP system or not by doing cost benefit analysis,
incremental cash flows and NPV.

To evaluate such a project NPV analysis would be appropriate. This may require the company to
invest for a series of years for its development and implementation Project Atlantic for
its implementation has advantages as well as disadvantages. The following are the benefits by the
project.
Reducing the Inventory:
One time and non-taxable inventory can be reduced to zero level, if cash flow turns zero. This
project would make the supply chain of the organization much more transparent and simpler, hence
reducing the 51 days sales of inventory to an inventory level of 29 days by forecasting to reduce 12
days of inventory in each wave.
Increase in Sales Units due to product availability:
This may be persistent as well as taxable. But for this to be true we shall assume that without
the implementation of ERP, the total number of units sold in the future would be constant, i.e., at
the same level.

Income Statement for the West Wave

Year
2000
a) Forecasts without the ERP system
Units
2271
Revenue
477784
COGS
418925
Margin
58859
Price per unit
210.38
COGS per unit
184.47
Margin per unit
25.92
Margin percentage
12.32%
DSI
45
Inventory
51648

b) Calculation of additional units

Pre-ERP units
Pre-ERP availability

2271
0.735

2001

2002

2003

2004

2005

2271
477784
418925
58859
210.38
184.47
25.92
12.32%
45
51648

2271
477784
418925
58859
210.38
184.47
25.92
12.32%
45
51648

2271
477784
418925
58859
210.38
184.47
25.92
12.32%
45
51648

2271
477784
418925
58859
210.38
184.47
25.92
12.32%
45
51648

2271
477784
418925
58859
210.38
184.47
25.92
12.32%
45
51648

2271
0.735

2271
0.735

2271
0.735

2271
0.735

2271
0.735

Target availability
Increase in availability
Additional sales
Percentage improvement
Additional units in year
Additional units

0.92
25%
25%
25%
36
36

0.92
25%
25%
40%
57
93

0.92
25%
25%
35%
50
143

0.92
25%
25%
0%
0
143

0.92
25%
25%
0%
0
143

0.92
25%
25%
0%
0
143

c) Calculation of reduction in DSI

Target DSI reduction
Percentage improvement
DSI reduction in year
DSI reduction

12
25%
3
3

12
40%
4.8
7.8

12
35%
4.2
12

12
0%
0
12

12
0%
0
12

12
0%
0
12

d) Impact of the ERP system

Additional units
Additional margin
DSI reduction
e) Forecasts with the ERP
system
Units
Revenue
COGS
Margin
Price per unit
COGS per unit
Margin per unit
Margin percentage
DSI
Inventory

36
0.06%
3

93
0.25%
8

143
0.25%
12

143
0.25%
12

143
0.25%
12

143
0.25%
12

2307
485632.4
8
425515.2
3
60117.25
210.53
184.47
26.06
12.38%
42
48963

2364
498748.0
7
436059.6
0
62688.47
210.99
184.47
26.52
12.57%
37
44442

2414
509300.7
8
445285.9
3
64014.86
210.99
184.47
26.52
12.57%
33
40259

2414
509300.7
8
445285.9
3
64014.86
210.99
184.47
26.52
12.57%
33
40259

2414
509300.7
8
445285.9
3
64014.86
210.99
184.47
26.52
12.57%
33
40259

2414
509300.7
8
445285.9
3
64014.86
210.99
184.47
26.52
12.57%
33
40259

Income Statement for the South Wave

Year
2000
a) Forecasts without the ERP system
Units
1416
Revenue
283549
COGS
237308
Margin
46241
Price per unit
200.25
COGS per unit
167.59
Margin per unit
32.66
Margin percentage
16.31%
DSI
51
Inventory
33158

2001

2002

2003

2004

2005

1416
283549
237308
46241
200.25
167.59
32.66
16.31%
51
33158

1416
283549
237308
46241
200.25
167.59
32.66
16.31%
51
33158

1416
283549
237308
46241
200.25
167.59
32.66
16.31%
51
33158

1416
283549
237308
46241
200.25
167.59
32.66
16.31%
51
33158

1416
283549
237308
46241
200.25
167.59
32.66
16.31%
51
33158

b) Calculation of additional units

Pre-ERP units
Pre-ERP availability
Target availability
Increase in availability
Additional sales
Percentage improvement
Additional units in year
Additional units

1416
0.831
0.92
11%
25%
0%
0
0

1416
0.831
0.92
11%
25%
35%
13
13

1416
0.831
0.92
11%
25%
40%
15
28

1416
0.831
0.92
11%
25%
25%
9
38

1416
0.831
0.92
11%
25%
0%
0
38

1416
0.831
0.92
11%
25%
0%
0
38

c) Calculation of reduction in DSI

Target DSI reduction
Percentage improvement
DSI reduction in year
DSI reduction

12
0%
0
0

12
35%
4.2
4.2

12
40%
4.8
9

12
25%
3
12

12
0%
0
12

12
0%
0
12

d) Impact of the ERP system

Additional units
Additional margin
DSI reduction
e) Forecasts with the ERP
system
Units
Revenue
COGS
Margin
Price per unit
COGS per unit
Margin per unit
Margin percentage
DSI

0
0.00%
0

13
0.10%
4

28
0.25%
9

38
0.25%
12

38
0.25%
12

38
0.25%
12

1416
283549.00
237308.00
46241.00
200.25
167.59
32.66
16.31%
51

1429
286548.59
239531.87
47016.72
200.49
167.59
32.90
16.41%
47

1444
290109.61
242073.44
48036.17
200.85
167.59
33.26
16.56%
42

1454
292013.30
243661.91
48351.39
200.85
167.59
33.26
16.56%
39

1454
292013.30
243661.91
48351.39
200.85
167.59
33.26
16.56%
39

1454
292013.30
243661.91
48351.39
200.85
167.59
33.26
16.56%
39

Income Statement for the Central Wave

Year
2000
2001
2002
2003
2004
a) Forecasts without the ERP system
Units
978
978
978
978
978
Revenue
185625
185625
185625
185625
185625
COGS
141947
141947
141947
141947
141947
Margin
43678
43678
43678
43678
43678
Price per unit
189.80
189.80
189.80
189.80
189.80
COGS per unit
145.14
145.14
145.14
145.14
145.14
Margin per unit
44.66
44.66
44.66
44.66
44.66
Margin percentage
23.53%
23.53%
23.53%
23.53%
23.53%
DSI
67
67
67
67
67
Inventory
26056
26056
26056
26056
26056
Inventory
33158
30713
27855
26035

2005
978
185625
141947
43678
189.80
145.14
44.66
23.53%
67
26056
26035

26035

b) Calculation of additional units

Pre-ERP units
Pre-ERP availability
Target availability
Increase in availability
Additional sales
Percentage improvement
Additional units in year
Additional units

978
0.768
0.92
20%
25%
0%
0
0

978
0.768
0.92
20%
25%
0%
0
0

978
0.768
0.92
20%
25%
40%
19
19

978
0.768
0.92
20%
25%
40%
19
39

978
0.768
0.92
20%
25%
20%
10
48

978
0.768
0.92
20%
25%
0%
0
48

c) Calculation of reduction in DSI

Target DSI reduction
Percentage improvement
DSI reduction in year

12
0%
0

12
0%
0

12
40%
4.8

12
40%
4.8

12
20%
2.4

12
0%
0

d) Impact of the ERP system

Additional units
Additional margin
DSI reduction
e) Forecasts with the ERP system
Units
Revenue
COGS
Margin
Price per unit
COGS per unit
Margin per unit
Margin percentage
DSI
Inventory

0
0.00%
0.0

0
0.00%
0.0

19
0.13%
4.8

39
0.25%
9.6

48
0.25%
12.0

48
0.25%
12.0

978
185625
141947
43678
189.80
145.14
44.66
23.53%
67
26056

978
185625
141947
43678
189.80
145.14
44.66
23.53%
67
26056

997
189621.19
144756.37
44864.82
190.12
145.14
44.98
23.66%
62
24668

1017
193605.6
147565.74
46039.869
190.42
145.14
45.28
23.78%
57
23206

1026
195448.54
148970.42
46478.124
190.42
145.14
45.28
23.78%
55
22448

1026
195448.54
148970.42
46478.124
190.42
145.14
45.28
23.78%
55
22448

Income Statement for the North Wave

Year
2000
a) Forecasts without the ERP system
Units
1443
Revenue
280901
COGS
251083
Margin
29818
Price per unit
194.66
COGS per unit
174.00
Margin per unit
20.66
Margin percentage
10.62%
DSI
55

2001

2002

2003

2004

2005

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55

Inventory

37834

37834

37834

37834

37834

37834

b) Calculation of additional units

Pre-ERP units
Pre-ERP availability
Target availability
Increase in availability
Additional sales
Percentage improvement
Additional units in year
Additional units

1443
0.832
0.92
11%
25%
0%
0
0

1443
0.832
0.92
11%
25%
0%
0
0

1443
0.832
0.92
11%
25%
0%
0
0

1443
0.832
0.92
11%
25%
40%
15
15

1443
0.832
0.92
11%
25%
40%
15
31

1443
0.832
0.92
11%
25%
20%
8
38

c) Calculation of reduction in DSI

Target DSI reduction
Percentage improvement
DSI reduction in year
DSI reduction

12
0%
0
0

12
0%
0
0

12
0%
0
0

12
40%
4.8
4.8

12
40%
4.8
9.6

12
20%
2.4
12

d) Impact of the ERP system

Additional units
Additional margin
DSI reduction
e) Forecasts with the ERP system
Units
Revenue
COGS
Margin
Price per unit
COGS per unit
Margin per unit
Margin percentage
DSI
Inventory

0
0.00%
0

0
0.00%
0

0
0.00%
0

15
0.13%
5

31
0.25%
10

38
0.25%
12

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55
37834

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55
37834

1443
280901
251083
29818
194.66
174.00
20.66
10.62%
55
37834

1458
284285.53
253738.69
30546.843
194.95
174.00
20.95
10.75%
50
34898

1474
287647.66
256394.37
31253.285
195.21
174.00
21.21
10.87%
45
31891

1481
289137.36
257722.21
31415.143
195.21
174.00
21.21
10.87%
43
30362

Incremental Pre-Tax Cash flows:

Units = No of additional units that can be sold due to the implementation of ERP system in
all the four waves (West, South, Central and North).
Revenue = Additional revenue due to implementation of ERP system
COGS = Additional cost of goods sold due to implementation of ERP system
Inventory = Reduction in inventory (working capital) cost due to implementation of ERP
System.
Inventory investment = Difference between current year and previous year inventory cost
i.e. Working Capital changes

Incremental Pre-Tax Cash Flows

2000

2001

2002

2003

2004

2005

36

106

191

235

260

267

7848.48

23963.66

42073.58

51346.22

56551.28

58040.99

6590.232

19358.47

33935.73

40989.26

45049.63

46377.47

1258.25

4605.19

8137.85

10356.96

11501.65

11663.51

Inventory

-2685

-9652

-18081

-24299

-28064

-29594

Inventory Investment

-2685

-6967

-8429

-6218

-3765

-1529

Units
Revenue
COGS
Margin

Capital Expenditure and Depreciation

Year
Capital equipment
Software licenses
Capital expenditure
Depreciation
1999 Assets
2000 Assets
2001 Assets
2002 Assets
Total Dep.

1999
4300
600
4900

2000
8600
300
8900

2001
6900

2002
4100

2003

2004

2005

2006

2007

6900

4100

980

980
1780

980
1780
1380

980
1780
1380
820
4960

980
1780
1380
820
4960

1780
1380
820
3980

1380
820
2200

820
820

980

2760

4140

Incremental operating expenses

Year
Employees
Consultants
Ongoing operations
License maintenance
Task force
Implementation cost
Other Expense savings
Incremental Op.exp

1999
2250
3511
600

6361.2
6361.2

2000
2250
1663
1200
100
300
5513.2
621
4892.2

2001
2250
1294
1800
200
600
6143.6
1749
4394.6

2002
2250
739
2400
300
600
6289.2
2544
3745.2

2003

2004

2005

2006

2007

3000
400
600
4000
3300
700

3000
400
300
3700
3457
243

3000
400

3000
400

3000
400

3400
3503
-103

3400
3534
-134

3400
3566
-166

Incremental Cash Flow and Valuation

Year
Revenue
COGS
Operation expenses
Depreciation
PBT
Tax @ 40%
PAT

1999

2000

2001

2002

33936
3745
4140

2003
5134
6
4098
9
700
4960

2004
5655
1
4505
0
243
4960

2005
5804
1
4637
7
-103
3980

2006
5804
1
4637
7
-134
2200

7848

23964

42074

0
6361
0

6590
4892
980

19358
4395
2760

-6361
-2544
-3817

-4614
-1846
-2768

-2549
-1020
-1530

253
101
152

4697
1879
2818

6299
2519
3779

7787
3115
4672

9598
3839
5759

2007
5804
1
4637
7
-166
820
1101
0
4404
6606

Cash Flow Adjustment

(+)Depreciation
(-)CAPX
(-)Working capital Inventory

4900

Cash Flow
Discount Factor @9%
Discounted Cash Flow

-8717
1.000
-8717

NPV

980
8900

2760
6900

4140
4100

4960
0

4960
0

3980
0

2200
0

820
0

-2685

-6967

-8429

-6218

-3765

-1529

-8003
0.917
-7343

1297
0.842
1092

8621
0.772
6657

1399
7
0.708
9916

1250
4
0.650
8127

1018
1
0.596
6071

7959
0.547
4354

7426
0.502
3727

2388
3

Case questions:
1. Are all of the benefits of the ERP investment reasonable? Are the costs reasonable?
Yes all of the three benefits of the ERP investment are reasonable. The cost incurred to
achieve the three benefits are also reasonable. Because the benefits outperformed cost.
2. What are the after-tax cash flows for the proposed ERP investment from 1999 to 2007?
$45625
3. When valuing the proposed investment, should value be included for possible cash flows
that occur beyond 2007?
Cash flows can be calculated only till 2007 with the available case data.
4. Would you recommend the ERP investment?
The NPV for Project Atlantic i.e. investment in ERP system is calculated to be $23883 (000).
Project Atlantic is highly favourable and Whirlpool should invest in ERP as the NPV is highly
positive.