In conclusion, implementing the ERP system on the Whirlpool Company is a great progress and will create a lot of benefits related to process, quality and customer satisfaction, such as:
1- They would serve their customers better, which attract more customers.
2- The time was spending in transit will reduce, so they can serve their customers faster.
3- The flow of information between the branches in the 12 countries will be smoother and they can present the accurate information to the suppliers, customers, managers and other branches in a very limited time.
4- The company could make some improvements on its products and they could increases the quality and the efficiently of their products.
5- The company could offers the requirements of the customers at the right time, which mean that they would sell all their products if they offered it on the time of orders.
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.
The costs of implementation
I think implementing the ERP System will lead to a tremendous cost to obtain the whole related software. For example, the cost in year 1999 was $ 4.3 million, and in year 2000 it was $ 8,6 million, and in year 2001 it became $ 6,9 million and in year 2002 it was $4,1 million.
The company also has to pay for the software licenses, they paid $ 6 million in 1999 and they paid $ 3 million in 2000.
Also, the company has to put a great budget to succeed in implementing the enterprise resource planning software. They need to spend to train their employees to be able to use the new software efficiently and profitability. Using this new system needs to create, test and document a new business process. Furthermore, the installation of the enterprise resource planning will cost them a lot of money.
Using this new system will cost them an average of 50 current Whirlpool employees working with as consultants. The company needs 19 consultants in 1999, and needs nine in 2000, and seven in 2001 and four in the 2002. So, this is a capital expenditure for the company, which I will summarize it in the table below:
To complete the implementation of the enterprise resource planning successfully, the management of the company planned to form a task force team consist of three persons in place beginning in July 2000 through June 2004, at an annual cost of $ 600,000.
After implementing the new system in all waves (in the beginning of 2003), the company spent $ 3 million to maintain working efficiently and to manage this system annually. Again in the beginning of 1999 whirlpool thinks that this project will gains $ 0.6 million in annual expense, which increased to $ 0.6 million each following year until 2003, in this year the project reached a steady state.
There are supplementary costs the company has to pay as: license maintenance fees, which costs the company $ 0.1 million at 2000 and that costs increased $ 0.1 million every year until it reaching $ 0.4 million through 2003.
Factors about saving costs and benefits
One of the most important benefits of ERP system is reducing about 18 % of a total of 79 desk employees with an average cost of $ 40,000n per year per employee.
Also it would simplify the accounting function and result in reducing a 15 employees out of 60 finance employees, so the cost saving was $ 45,000 per year for each employee that was eliminated.
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 ERP system? Explain how you have used the information in the spreadsheet model to arrive at your recommendation.
With a 9% cost of capital used to discount the ERP project and a 40 % tax rate faced, Whirlpool Europe introduced a predicted (Incremental Cash Flows and Valuation) in case of implementing “Project Atlantic” with the following components:
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Capital Expenditure: this part is concerned with cash payments made to acquire additional fixed assets and with cash receipts from the disposal of fixed assets (in this case equipments and software license for the new system). For Whirlpool Europe, $ 4.9 millions would be needed to spend for capital equipment in 1999, rise to $ 8.9 millions in 2000, and then decreased to $ 6.9 millions in 2001(the real start for the project) and $ 4.1 millions in 2002. The cost for software licenses would be $ 6 and $ 3 millions in 1999 and 2000. The capital equipment would be depreciated in equal amounts over five years, figure below shows changes happened to capital expenditure.
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Cash Flow: ERP system and process changes would enable the company to realize an increase of units sales equal to 25% of the implementation in product availability, those incremental sales were predicted to contribute to increasing the profitability of Whirlpool Europe, the company forecasted a 0.25 % gross margin increase by the second year after implementation. ERP system was expected to simplify the management of customer orders. An 18 % reduction in the 79 desk employees at an average cost of $ 40.00 per year per employee was expected to once the system was implemented; it would also simplify the Accounting functions and result in a 15 reduction in the 60 finance employees. As we can notice from the spreadsheet; cash flow value was minus (-8,717 and –8,003) in the first two years 1999 and 2000, becoming positive (+1,298) in 2001, then increased until it reached the peak in 2003 with $ 13,996 millions.
For Whirlpool Europe, cash flow from operations have been changed several times during implementation of ERP system, in the first two years (1999 and 2000) the value was minus (-3,817 and – 1.788) because the total costs of the implementation exceed revenues. The following equation helps us to estimate cash flow of “Project Atlantic” each year: -
Cash flow = Capital expenditure + Cash flow from operations + Reduction in need for inventory
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Discount Rate: one major value in the spreadsheet, it is the result of discount rate on the NPV calculation the effects decision, changing the discount rate value affect all other components specially the NPV, that is if the discount rate increase the NPV will decrease as a result of the correspond relation between them. In the spreadsheet NPV value was 9%, so recommendations are to accept the project and start the implementation of ERP system.
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Sum of Discounted Cash Flows or (NPV) of Whirlpool: this value has major effects on all other values incorporated in the spreadsheet, the relation between them is clear since we can’t calculate the net benefit (that is NPV) without finding total costs and revenues, this in turn will help us in decision making process, to calculate NPV the following equation is used: -
PV (of a year n) = FV/ (1+ r) ^n
If the NPV value was positive, the project should be considered for a “go” decision, if it was negative, recommendations are surely not to implement this project. The following schedule calculates the NPV for ERP system:
In conclusion, it appears from the calculation that the Net Present Value is positive (23883), thus I think the project is going to be succeeded and recommend to be implemented. This will benefit the corporation meaning it will provide annual profit.
Internal rate of return IRR is the discount rate that, when applied to the future cash flows of a project, will produce an NPV of zero. In the spreadsheet IRR value is 34.78%, the following calculates IRR: -
IRR = r % (when PV = 0)
Question 4:
Suppose that instead of the values incorporated in the spreadsheet, the ERP innovation was evaluated with amended values reflecting the following:
- The cost of capital is expected to be 15%
- The tax rate could well rise to 50%
- 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.
By increasing the cost of capital from 9% to 15%, raising the tax rate up to 50% instead of 40%, many values were modified accordingly reflecting those changes as the table below.
One major change happened to original NPV value; it was 23.88 and become 5.824, which mean that there is a relation that can be seen as the follow: where the discount rate is zero, the NPV will be the sum of the net cash flows; no account is taken of the time value of money. However, as the discount rate increase there is a corresponding decrease in the NPV of the project. Other values were also amended such as taxes, earnings after taxes and cash flow from operations .The following table and figures shows NPV before and after changing discount rate and tax rate:
Figure 1.1: Discount Rate (9.00%), Profits Tax Rate (40.00%)
Figure 1.2: Discount Rate (15.00%), Profits Tax Rate (50.00%)
From the previous discussion, figure 1.2 shows that although the net present value in both cases is positive (that means the implementation of ERP on Whirlpool Europe will be successful) but at a longer period of time (beyond 2003) NPV will decreased (from 23883 to 14588), recommendations for this company to implement ERP system as it will result in more profits.
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References:
- http://www.whirlpoolcorp.com/
- Whirlpool case study, Block 3 and 4 and Reading: (O'Brien)
- Atrill & Mclaney Ch 5, 10 and Whirlpool Europe case study