The Arab Open University

Business Studies.
B202

UNDERSTANDING B U S I N E S S FUNCTIONS

Assignments Part 2
TMA 04

8202 ASSIGNMENTS PART 2

CONTENTS

Contents
TMA 04 cut-off date 28 OCT 2006

Appendix 1 Whirlpool Europe

Appendix 2 Exes! Spreadsheet

15

TMAs 05, 06 and 07 will be sent to you in later mailings.

Please note: An electronic copy of the spreadsheet in
Appendix 2 will be available to download from the
B202 eDesktop (under Course Resources) and the
B202 First Class conference. You will need to reuse the
Whirlpool Europe Case Study, included here as
Appendix I, in order to complete TMA 05-

TMA 04 CUT-OFF DATE 28 OCT 2006

ASSIGNMENTS'PART: 2'

____________ .

B202

TMA 04 C u t - o f f d a t e
This TMA draws on your study of the following:

Blocks 3 and 4. In particular it draws on the work you have

undertaken for Block 3 Section 2.2 'Functional information
systems', Section 2.3 'Integrated information systems', Section 3-5
'Information in operations planning and control' and Chapter 6 of
Galloway et at.

The reading by O'Brien, 'Business information

systems'.

Block 4 Section 3.2 'The accounting "economics" of

innovation'.

Chapter 10 of Atrill.and McLaney.

You will need to use Microsoft Excel and to download a spreadsheet

file from your eDesktop or FirstClass for your work on Questions 3
and 4- (Hard copy of that file is attached for information.)
The questions and other instructions-below refer to the case study
'Whirlpool Europe 1. Read the questions and instructions, then the
case study, and study carefully the spreadsheet that accompanies
it in Appendix 2 before answering questions 1 to 4In terms"of the depth of knowledge that your tutor will expect you to
demonstrate in your answers, your role Is that of a person with
basic knowledge of the accounting and finance issues in the case
study, typically a student of business studies. Your tutor will not be
expecting the knowledge of an accountant or a student studying to
be an accountant.

Question 1
Describe and explain the benefits which Whirlpool Corporation
expected to gain from the proposed innovation, the introduction of
an enterprise resource planning (ERP) system.
(20 marks)

Question 2
Describe and explain how Whirlpool Corporation expected
resources to be absorbed and costs to be incurred through the
implementation and maintenance of the new ERP system.
(20 marks)

' B202 ASSIGNMENTS PART 2

28 OCT 2006

TMA 04 CUT-OFF DATE

Question 3
Referring to the spreadsheet supplied with this TMA, explain how and why
-these needs for benefits and resources have been incorporated into the
spreadsheet model.
On the basis of your analysis, would you recommend Whirlpool Corporation to
proceed with the implementation of the proposed ER.P system? Explain how
you have used the information in the spreadsheet model to arrive at your
recommendation.
(30 marks)

Question 4
Suppose that instead of the values incorporated in the spreadsheet, the ERP
innovation was evaluated with amended values reflecting the following:
(a) The cost of capital is expected to be 35%
(b) The tax rate could well rise to 60%
(a) A shorter time horizon is envisaged, reflecting the dynamics of
technology: benefits and costs beyond 2004 should not be taken
into-account.
What would you recommend Whirlpool Corporation to do in these
circumstances? Following your revised spreadsheet analysis, explain how your
recommendation has been-influenced-by the revisions;
NB: You should make a copy of the spreadsheet and produce, print and submit
to your tutor a revised version showing the incorporation
of the changes described in (a), (b) and (c). You must add your name and
Personal Identifier within the printed area of your spreadsheet to ensure that
your own work can be identified.
(30 marks)
Your answers to all four questions should not exceed 2,000 words altogether.
Words used in the Excel spreadsheet and to complete the Skills Table need
not be counted.

Skills development component

Rather than having a separate question on skills, for this TMA up to 10 marks
for your work as a whole will be awarded for demonstrating the skills described
below. Evidence will be provided through your explanations of how you' have
interpreted the quantitative and qualitative data in the case study and
spreadsheet in order to arrive at recommendations for Whirlpool Corporation in
this decision-making situation.. Credit will also be given for incorporating
changes to the spreadsheet and submitting it to your tutor as required.
Please produce a table like the one overleaf and
complete it to indicate to your tutor some brief reflections
on how this TMA has contributed to your development of
these skills. (Your table does

TMA 04 CUT-OFF DATE 28 OCT 2006

8202 ASSIGNMENTS PART 21

not need to be the same size; by the time you have completed
each cell the table may take up at least a page. The table is not
included in the word count for the TMA.)
Business graduate skills
outcome

Example Of how work on this TMA

has contributed to my skills
development

Self-assessment of current level of

skill - high/medium/low; any actions
to be taken

Using examples and analysing

case studies to enhance
understanding, support
conclusions and illustrate issues
concerning business functions
in organisational contexts

Problem solving and decision

making
Understanding the way. in which
numbers are used in the core
business functions
Interpreting spreadsheets for
managing numbers and
quantitative analysis .

Advice on how to .answer

Although there are a lot of component parts to this TMA., they are
closely related, and build on each other." Adopt a systematic approach
to reading and understanding the case study, highlighting the
information that is relevant to the questions. When you have
identified the potential benefits and costs of the innovation, for
Questions 1 and 2, you will be in a strong position to analyse the
implications of the capital investment appraisal. Remember to relate the
information in the case and the spreadsheet to Whirlpool Corporation's
objectives for the innovation.
Don't forget what you have read in Block 3 about the challenges ox
implementing new information systems, the general characteristics of
innovation discussed in Sections 1 and 2 of Block 4, and the material in
Section 3.2 of Block 4 about the non-rational and non-quantitative
aspects of capital investment decision-making processes. However, your
main task in this TM-A is to demonstrate your appreciation of how
quantitative information can be used in such decision making.
You can download the spreadsheet from the FirstClass conference or your
B202 eDesktop. You will also find some notes there to help you with the
basic functions of Excel if you are not very experienced in using this
spreadsheet software. So that you receive credit for your own work,
please ensure that you do not inadvertently put a copy of your revised
spreadsheet back on the FirstClass conference.
The word limit for this TMA is 2,000 words, so you should keep the
descriptions and explanations required for Questions .1 and 2 succinct
(they should summarise the relevant material in the case study

B202 ASSIGNMENTS PART 2

OCT 2006

narrative and exhibits) and for Questions 3 and 4 you

may need to refer to your answers to the earlier
questions to avoid repetition. Remember that you need
not count the words in the spreadsheet you submit, or in
your table for the 'Skills development component^, in your
word count.
There are excellent opportunities in-the case study for
conferring with your fellow students via the FirstClass
conferences, etc., to clarify matters and improve your
understanding and analytical abilities. Make sure,
however, that what you submit for marking is your-own
work and that you understand all the points and
calculations you incorporate in it.

TMA 04 CUT-OFF DATE 28

'B202 ASSIGNMENTS PART 2

WHIRLPOOL EUROPE

'

APPENDIX'!

Appendix 1 Whirlpool Europe

Harvard Business School Case Study 9-202-017

B)1 Sudhakar Balachandran and Richard Ruback

By the spring of 1999, Whirlpool Corporation (WHR:NYSE), the worldwide
leader in the home appliance industry, had nearly ten years experience selling
to the European market and had grown its European market share to a
sizeable 13%. Whirlpool Europe's chief financial officer and its vice president
of logistics were evaluating an investment-in-an enterprise-resource planning
(ERP.) -system. Named Project Atlantic, the system would re-organize the
information flow in all of Whirlpool Europe. If successful, the project would
improve operating effectiveness and efficiency in Whirlpool's sales and
marketing, operations and logistics, and finance areas. The cost of the project,
however, would be substantial, and would include the direct costs.of the
system and the personnel that would be required to complete the complex
implementation. Senior Management had quantified the costs and benefits,
and now needed to evaluate them.

Company background
In 1989, Whirlpool Corporation entered the European market, paying $470
million to purchase a 53% stake in the appliance division of
Dutch-based Philips Electronics. The companies formed a joint venture firm
named Whirlpool International BV (WIBV) and, one year later, launched a dualbranding programme which added the Whirlpool name to the Philips product
lines. In July 1991, Whirlpool purchased Philips' 47% stake for $600 million to
become the sole owner of WIBV. Over time, Whirlpool developed three panEuropean brands to differentiate its product line: Whirlpool, Bauknecht, and
Ignis. Other regional brands like Laden, sold exclusively in France, were also
created. By fiscal 1998, Whirlpool Europe was third in market share with $2.4
billion in sales.
Whirlpool Europe manufactured products based on sales budgets or forecasts,
and then held them as finished goods inventory. European manufacturing
operated II plants, ten located in, Europe and one in Africa. Each plant
produced a specific product line across all brands. Exhibit 1 provides a plant
listing. Unique country requirements, such as language, products attribute
preferences, and electrical specifications resulted in multiple stock-keeping units
(SKUs) for the same model. In total, Whirlpool Europe manufactured 6,900
SKUs. Orders moved from manufacturing to one of two central distribution
centres and then on to one of 12 regional distribution centres before reaching
the customer.

APPENDIX 1 WHIRLPOOL EUROPE

B202 ASSIGNMENTS PART 2.

Exhibit 1

Whirlpool Europes manufacturing sites

Location

Products

Amiens France

Washers and dryers

Norrkoping Sweden
" Poprad Slovakia
"Neunkirchen Germany
Schomdorf Germany
Gassinetta Italy
Naples Italy
Siena Italy
Trento Italy
Isithebe South Africa

Microwave ovens
Washers
Dishwashers
Washers
Refrigerators and cooking appliances
Washers
Chest freezers
Refrigerators and freezers
Refrigerators and freezers

Source: Company
documents

In each major European market, a country sales office - responsible for sales
.generation and forecasting, order processing and fulfilment, billing and cash
collection was the primary interface with customers. Whirlpool Europe operated
many stand-alone information-systems that were developed by individual plants,
distribution centres, or sales offices 'specifically to meet their own business
requirements. Information could not be easily shared across functions or
organizations, and was often inconsistent and irreconcilable. The sales
organization, for example, had to access as many as 13 independent inventory
systems to view inventory across the supply chain.
There were two types of customers: consumers who purchased standalone
appliances for their homes and contractors who purchased built-in appliances for
new home constructions or kitchen remodelling.
Success in the consumer market depended on product quality, price and
availability . Whirlpool Europe estimated that its distribution
centres had the product that matched the customer's demand 79% of the time.
If the product was unavailable, the customer had to either wait or switch .to
another product. Often, the lack of immediate availability resulted in lost sales.
Kitchen remodelling in Europe generally involved the installation of new
cabinets along with built-in appliances. Installation often occurred only a few
weeks after the kitchen was ordered by the homeowner. Whirlpool estimated
that this segment of the market would grow to about 25% of kitchen appliance
sales. To supply the built in appliances to this market . . its appliances within ten
days of being ordered by the contractor. Under its current inventory and
information systems, Whirlpool was unable to reliably satisfy the contractors 1
required delivery time.

Project A t l a n t i c
Description
The goal of Project Atlantic was to design and implement an enterprise resource
planning (ERP) system char would allow Whirlpool Europe to better serve its
consumer market for stand-alone

B202 ASSIGNMENTS PART 2

APPENDIX 1 .WHIRLPOOL EUROPE

appliances and contract market for built-in appliances and, at the same time, reduce
its inventory by 12 days of sales. These competing goals would 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. Project Atlantic was expected to provide some integration with suppliers
and to increase inventory visibility across the supply chain. This would enable the
company to improve product availability and have a substantially lower inventory
level. In addition, the ERP system should allow Whirlpool to build products to specific
orders from contractors.
Whirlpool Corporation took a phased approach to implementation of its ERP systems,
beginning in North America, Brazil, and selected central European countries. Project
Atlantic would focus on the remaining European countries. With ERP, Whirlpool
Europe's disparate information systems would be retired and replaced with a single
computing architecture for all of Europe. The company planned to install a standard or
so-called 'off-the-shelf ERP system, without any modifications, requiring the company
to change many of its operating processes.
Employee acceptance of change was
therefore critical for success.
The project would be managed under country groupings called Waves. Exhibits 2A and
2B details the Wave groupings and implementation schedules.
Exhibit 2A

Project Atlantic implementation groupings11

Wave West

Belgium

France
Netherlands
Plus: Warehouse
Management and Physical
Distribution

Wave North

-Wave-

-Wave-

South

Central

Italy
Portugal
Spain

Czech
Republic
Hungary
Poland

Slovakia

Denmark
Finland
Ireland
Norway
Sweden
United
Kingdom

Source:
Company documents Austria, Germany and Switzerland were not
3

part of Project Atlantic.

Exhibit 2B

Wave implementation schedule

West

Start Date:
End Date:

MAY 1999
APR 2000

South
MAY 2000
FEB 2001

Central
MAR 2001
DEC 2001

North
JAW 2002
AUG 2002

Source: Company documents

The company identified seven top level operational

processes, of which 74 sub-processes were determined co
be impacted .by ERPAPPENDIX 1 WHIRLPOOL EUROPE

B2Q2 ASSIGNMENTS PART ?

Benefits
Working capital reduction
The company had 51 days of inventory. Of the 51 days, approximately eight
days were reserved and allocated units, nine were in transit, and three were
obsolete. The ERP system would enable Whirlpool to make its supply
chain more transparent and efficient, thereby eliminating the reserved,
allocated, and obsolete units, and reducing the in-transit time. After a
statistical study of its inventory, Whirlpool Europe developed a theoretical
model target inventory level of 29 days. Project Atlantic was forecasted to
reduce 12 days of inventory in each Wave over half of the difference
between its actual inventory and the theoretical model inventory. The
Project Atlantic inventory savings would yield an aggregate inventory
savings of $34-3 million. Exhibit 3 shows the inventory data for 1997 and
the Days of Sales in Inventory reductions forecasted by Wave, along with
the yearly percent DSI reduction by Wave.
Exhibit 3

Inventory 1997 data and projected improvements

1997 inventory data

Wave

Current
DSI

Improvement
DSI

Percentage improvements by year by Wave

Projected
DSI

67
West
South

Central
North

45
51
55

12
12
12

33
39

12

43

Central

inventory
Value per
Day
55 US$)
(0OOs

2000

1,221
653

25%
594

2001

2002

2003

2004
2Q05

389
40%
35%

35%
40%
-40%-

40%
25%
40%

40%
20%

Source: Company
documents

Revenue and gross margin increase

A primary goal of the ERP system was to increase product availability by
making the supply chain more visible and by integrating sales forecasting
and inventory management. The company's targeted product availability
was 92%. The projections assumed that the ERP system and process
changes would enable the company to realize an increase in unit safes"
equal" TO t5% of-the improvement in product availability. Those incremental
sales would contribute to increasing the profitability of Whirlpool Europe.
Exhibit 4 presents 1997 data" on product availability, units and margins
by Wave as well as-data on the projected liming of the product
availability improvements.
DSI = (Ending Inventory) /' (Cost of Goods Sold/Days in Period)

APPENDIX 1 WHIRLPOOL EURDPE

Exhibit 4

Product availability in 1997 and projected improvements by Wave

1997

West
SouthCentral
Worth

Percentage improvements by year by Wave

ProduGi
Availability

Units Sold

Unit Profit
Margin (US?}

.2000

2001

2002

73.5%
83.1%
76.3%
83.2%

2,271,139
1,415,949
977,665
1,443,156

40
35
35
40

25

40
35

35
40
40

20D3

2004

2005

" 25 4040

20 ;
40

20

Source: Company documents

The company's ability to evaluate profitability at a product line, account, or order level was
hindered by the lack of an integrated information system. Decisions on prices, for example,
were sometimes made with Incomplete or dated information. By installing ERP, the
company forecasted a 0.25% gross margin increase by the second year after
implementation. To forecast-the impact, the company used 1997 revenue as the baseline
to apply the gross margin increase for each year of cash flow projections. Exhibit 5
presents information on 1997 revenues and margins and the projected improvements by
year and by Wave.
Exhibit 5

Revenue and margins in 1997 and projected improvements-by Wave

1997
Revenue
(DOOs US$)

West
Central
North

477,784
283,54 3-

185,625
280,901

Margin
(DQDs US$)

Margin improvements by year by Wave

Percentage

2QDD

20D1

2002

2003

2004

2005

0.06%

0.25%

0.25%
-Sri

0.25%
n ?5%
0.25%
0.13%

0.25% -0

0.25%

Margin

58,859

12%

-rffi-Q,11-

-IRQ/..

43,678
29,818

24%
11%

u/o

0.13%

J-rt

0.25%
0.25%

0.25%
0.25%

Source: Company documents

Other cost savings

The ERP system was expected to substantially simplify the processing and
management of customer orders. An 18% reduction in the 79 order desk
employees at an average cost of $40,000 per year per employee was expected
once the system was implemented. The ERP
15% reduction in the 60 finance employees. The expected cost saving was
$45,000 per year for each employee that was eliminated.
The ERP system was also anticipated to generate other cost savings- Whirlpool
paid about $40 annually for each square metre of warehouse space. With the
reduction in inventory from the implementation of the ERP system, warehouse
space could "be reduced by 15% (7f200 square metres). Also, customers returned
3% of units they purchased, which cost Whirlpool about $30 per unit returned.
ERP was expected to reduce the number of returned units by eliminating
shipping errors. The ERP system was also forecast to reduce bad debt expense
an4 information system expenses. Exhibit 6 details these anticipated savings.

APPENDIX 1 WHIRLPOOL EUROPE

Exhibtt 6

Forecasted other expense savings by year (000s US$)

2DGG

Order Desk headcount

Finance'headcount
Warehouse space
Bad debt expense
Information Systems

2001

190

81
.. 18
102'
420
621

135
72
512
840
B 1,7.49

2DD2 '

20D3

2004

20D5

2D06

20D7

411

442

474

506

537

569

324
230
1,024
1.280
3,300

405
274
1,024
1.280
3,457

405
288
1,024
1.280
3,503

405
288
1,024
1.280
.3,534

405
288
1,024
1.280
3,566

216
155
922
840
2,544 -

Source: Company
documents

Costs
Capital Expenditures
The company would need to spend $4-3 million in 1999 for capitalequipment, $8.6-miIlion in 2000, $6.9 million in 2001, and $4-1. million in
2002. It would cost $6 million-and $3 million for software licenses in.1999
and 2000 respectively. The capital equipment would be depreciated in
equal amounts over five years.

implementation
Implementation required extensive employee training; creation, testing-g,
and documentation of new business processes; and, of course, installation
of the ERP software. Implementation of each "Wave would require an
average of 50 current Whirlpool employees working with external
consultants. According to forecast, the company would need 19
consultants-in 1999, nine in 2000, seven in 2001, and four in the
following year, at an average monthly cost per consultant of $15,400.
To ensure compliance with the project plan, the company planned to
put a three-person task force in place beginning in July 2000 through
June 2004, at an annual cost of $600,000.

On-going operational
Beginning in 2003, when all Wave implementations were completed, the
cost to manage and maintain the new information systems was
forecasted to be $3 million annually. However, because each Wave
.was-.scheduled-to...go-online at different time, costs .would begin .' early in
the programme. Beginning in 1999, the company expected to incur $0.6
million in annual expense, increasing by an additional $0.6 million each
subsequent year until reaching steady state in 2003.
License maintenance fees were forecasted to begin in 2000 at a cost of
$0.1 million and increase by an additional $0.1 million each year through
2003,-reaching $0.4 million annually. These costs would continue until the
system was replaced.

Cost of Capital and Taxes

Whirlpool Europe used a 9% cost of capital to discount the ERP project
and faced a 40%

3,727

A p p e n d i x 2 Excel s p r e a d s h e e t
Flows

8,717 -

1.0000

Cash Flow from Operation

7,848
-6,590
-4,892

23,964
19,358
-1,395

42,074
33,936
-3,745

51,346
40,989
-700

-980

-2,760

-4,140

-4,960

-6,361

-4,614

-2,549
253

4,697

-2,544

-1,846

-1,020
101

1,879

-3,817

-2,768

-1,529
152

2,818

2,760

4,140

4,960

1,231

4,292

7,778

8,429

6,218

9,621

13,996

-3,817

980
-1,788

2,685

6,967

-8,003

Rate at which Sum of

Discounted Cash Flows would
be Zero

-8,717
Discounted Cash Flow

Discount Factor

Cash Flow

Sum of Discounted Cash Flows

Reduction in need for

Inventory

-4,100

1,298

2004

2005

2006

2007

58,041
46,377

58,041
-46,377

58,041
46,377

-4,960

103
-3,980

134
-2,200

166
-820

6,298

7,787

9,598

11,010

2,519

3,115

3,839

4,404

3,779

4,672

5,759

6,606

4,960

3,980

2,200

820

8,739

8,652

7,959

7,426

3,765

1,529

12,504

10,181

7,959

7,426

56,551
45,050
-243

The above table has been adapted from Ruback, R.S. (2002) . Teaching Note: Whirlpool Europe. Boston,
MA : Harvard Business School Publishing

6,657
1,092

add back Depreciation

-6,900

7,343

0.9174

Earnings after Taxes

2003

Acknowledgement

4,354

0.7722

Taxable Earnings
Taxes

-8,900

-6,361

0.8417

Operation Expenditures
Depreciation Expense

2002

-4,900

2000

The method of estimation the incremental cash flow from operations has been to compile two simplified
income statements for each wave, one with and the other without the ERP investment, and then take the
differences, and aggregate these across the waves.

Cost of Goods sold

2001

Notes

0.7084

Revenue

1999

34.78%

0.6499

Capital Expenditure

40.00%

23,883

0.5963

Description

6,071

Profiles Tax Rate

Name : J Smith
PI
Number
:P123456

and
9.00%

8,127

0.5470

Incremental Cash
Valuation (US$000s
Discount Rate

Project Atlantic

9,915

0.5019

WHIRLPOOL EUROPE