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. Does the NPV warrant the investment in the ERP system?

Things to consider (methodology):

1. Construct an income statement for each wave, including before and after the ERP system. I will provide a framework for these statements to help get you started.

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.

2. Aggregate your incremental pre-tax cash flows (include all 4 waves) for each year (2000-2005).

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

3. Calculate capital expenditures (equipment and software) and depreciation (4 assets) for each year.
4. Calculate the incremental operating expenses (see page 4).
5. Construct the pro forma income statements for all years.
6. Calculate the NPV.

Whirlpool Europe 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 dual- branding program 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 pan-European brands to differentiate its product line: Whirlpool, Bauknecht, and Ignis. Other regional brands like Laden, sold exclusively in France, were also created Whirlpool Europe manufactured products based on sales budgets or forecasts, and then held them as finished goods inventory. European manufacturing operated 11 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 centers and then on to one of 12 regional distribution centers before reaching the customer. In each major European market, a country sales office-responsible for sales generation and forecasting, order processing and fulfillment, billing and cash collectionwas the primary interface with customers. Whirlpool Europe operated many stand-alone information systems that were developed by individual plants, distribution centers, 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 stand-alone appliances for their homes and contractors who purchased built-in appliances for new home construction or kitchen remodeling Success in the consumer market depended on product quality, price, and availability. Whirlpool Europe estimated that its distribution centers 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 remodeling 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, Whirlpool would have to deliver 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' required delivery time. Project Atlantic Description The goal of Project Atlantic was to design and implement an enterprise resource planning (ERP) system that would allow Whirlpool Europe to better serve its consumer market for stand-alone 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 would 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 select 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 detail the Wave groupings and implementation schedules. Benefits Working Capital Reduction The company had 51 days sales of inventory (DSI). 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. Exhibit 3 shows data for 1997 including DSI by Wave. Exhibit 4 details the yearly percent DSI reduction in DSI by Wave. 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 sales equal to 25% of the improvement in product availability. Those incremental sales would contribute to increasing the profitability of Whirlpool Europe. Exhibit 3 includes 1997 data on product availability, units, revenue and margins by Wave. Exhibit 4 details the projected timing of the product availability improvements. 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 the projected improvements by year and by wave. 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 system would also simplify the accounting function and result in a 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 meter of warehouse space. With the reduction in inventory from the implementation of the ERP system, warehouse space could be reduced by 15% (7,200 square meters). 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 and information system expenses. Exhibit 6 details these anticipated savings. Costs Capital Expenditures The company would need to spend $4.3 million in 1999 for capital equipment, $8.6 million in 2000, $6.9 million in 2001, and $4.1 million in 2002. It would cost $600,000 and $300,000 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, 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 at an expected cost of $45,000 for each employee. 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 on-line at a different time, costs would begin early in the program. Beginning in 1999, the company expected to incur $600,000 in annual expense, which would increase by an additional $600,000 each subsequent year through 2003, reaching $3,000,000 annually. License maintenance fees were forecasted to begin in 2000 at a cost of $100,000 and increase an additional $100,000 each year through 2003, reaching $400,000 annually. These costs would continue until the system was replaced. Cost of Capital and Taxes Whirlpool Europe used a 9% cost of capital to discount the ERP project and faced a 40% tax rate. Exhibit 1 Whirpool Europe's Manufacturing Sites Location Amiens France Norrkoping Sweden Poprad Slovakia Neunkirchen Germany Schorndorf Germany Cassinetta Italy Naples Italy Siena Italy Trento Italy Isithebe South Africa Source: Company documents. Products Washers and Dryers Microwave Ovens Washers Dishwashers Washers Refrigerators and Cooking Appliances Washers Chest Freezers Refrigerators and Freezers Refrigerators and Freezers Exhibit 2A Project Atlantic Implementation Groupings Wave West Belgium France Netherlands Plus: Warehouse Mgt and Physical Dist. Wave South Italy Portugal Spain Wave Central Czech Republic Hungary Poland Slovakia Wave North Denmark Finland Ireland Norway Sweden United Kingdom Source: Company documents. a Austria, Germany, and Switzerland were not part of Project Atlantic Exhibit 2B Wave Implementation Schedule Start Date: End Date: West MAY 1999 APR 2000 South MAY 2000 FEB 2001 Central MAR 2001 DEC 2001 North JAN 2002 AUG 2002 Source: Company documents. Exhibit 3 1997 Data for Whirlpool Europe Wave DSI Product Availability Units Sold West South Central North 45 51 67 55 73.5% 83.1% 76.8% 83.2% 2,271,139 1,415,949 977,665 1,443,156 Revenue (000s US$) 477,784 283,549 185,625 280,901 Margin (000s US$) 58,859 46,241 43,678 29,818 Source: Company documents. Exhibit 4 Improvements in DSI and Availability by Year and Wave 2004 2005 2000 25% Wave West South Central North 2001 40% 35% Improvements by Year by Wave 2002 2003 35% 40% 25% 40% 40% 40% 20% 40% 20% Source: Company documents. Exhibit 5 Margin Improvements by Year by Wave 2000 0.06% Wave West South Central North 2001 0.25% 0.10% Cumulative Margin Improvements by Year by Wave 2002 2003 0.25% 0.25% 0.25% 0.25% 0.13% 0.25% 0.13% 2004 0.25% 0.25% 0.25% 0.25% 2005 0.25% 0.25% 0.25% 0.25% Source: Company documents. Exhibit 6 Forecasted Other Expense Savings by Year (000s US$) 2000 2001 2002 2003 2004 2005 2006 2007 Order Desk Headcount 0 190 411 442 474 506 537 569 Finance Headcount 81 135 216 324 405 405 405 405 Warehouse Space 18 72 155 230 274 288 288 288 Bad Debt Expense 102 512 922 1,024 1,024 1,024 1,024 1,024 Information Systems 420 840 840 1.280 1,280 1.280 1.280 1.280 621 1,749 2,544 3,300 3,457 3,503 3,534 3,566 Source: Company documents. Whirlpool Europe 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 dual- branding program 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 pan-European brands to differentiate its product line: Whirlpool, Bauknecht, and Ignis. Other regional brands like Laden, sold exclusively in France, were also created Whirlpool Europe manufactured products based on sales budgets or forecasts, and then held them as finished goods inventory. European manufacturing operated 11 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 centers and then on to one of 12 regional distribution centers before reaching the customer. In each major European market, a country sales office-responsible for sales generation and forecasting, order processing and fulfillment, billing and cash collectionwas the primary interface with customers. Whirlpool Europe operated many stand-alone information systems that were developed by individual plants, distribution centers, 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 stand-alone appliances for their homes and contractors who purchased built-in appliances for new home construction or kitchen remodeling Success in the consumer market depended on product quality, price, and availability. Whirlpool Europe estimated that its distribution centers 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 remodeling 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, Whirlpool would have to deliver 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' required delivery time. Project Atlantic Description The goal of Project Atlantic was to design and implement an enterprise resource planning (ERP) system that would allow Whirlpool Europe to better serve its consumer market for stand-alone 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 would 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 select 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 detail the Wave groupings and implementation schedules. Benefits Working Capital Reduction The company had 51 days sales of inventory (DSI). 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. Exhibit 3 shows data for 1997 including DSI by Wave. Exhibit 4 details the yearly percent DSI reduction in DSI by Wave. 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 sales equal to 25% of the improvement in product availability. Those incremental sales would contribute to increasing the profitability of Whirlpool Europe. Exhibit 3 includes 1997 data on product availability, units, revenue and margins by Wave. Exhibit 4 details the projected timing of the product availability improvements. 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 the projected improvements by year and by wave. 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 system would also simplify the accounting function and result in a 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 meter of warehouse space. With the reduction in inventory from the implementation of the ERP system, warehouse space could be reduced by 15% (7,200 square meters). 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 and information system expenses. Exhibit 6 details these anticipated savings. Costs Capital Expenditures The company would need to spend $4.3 million in 1999 for capital equipment, $8.6 million in 2000, $6.9 million in 2001, and $4.1 million in 2002. It would cost $600,000 and $300,000 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, 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 at an expected cost of $45,000 for each employee. 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 on-line at a different time, costs would begin early in the program. Beginning in 1999, the company expected to incur $600,000 in annual expense, which would increase by an additional $600,000 each subsequent year through 2003, reaching $3,000,000 annually. License maintenance fees were forecasted to begin in 2000 at a cost of $100,000 and increase an additional $100,000 each year through 2003, reaching $400,000 annually. These costs would continue until the system was replaced. Cost of Capital and Taxes Whirlpool Europe used a 9% cost of capital to discount the ERP project and faced a 40% tax rate. Exhibit 1 Whirpool Europe's Manufacturing Sites Location Amiens France Norrkoping Sweden Poprad Slovakia Neunkirchen Germany Schorndorf Germany Cassinetta Italy Naples Italy Siena Italy Trento Italy Isithebe South Africa Source: Company documents. Products Washers and Dryers Microwave Ovens Washers Dishwashers Washers Refrigerators and Cooking Appliances Washers Chest Freezers Refrigerators and Freezers Refrigerators and Freezers Exhibit 2A Project Atlantic Implementation Groupings Wave West Belgium France Netherlands Plus: Warehouse Mgt and Physical Dist. Wave South Italy Portugal Spain Wave Central Czech Republic Hungary Poland Slovakia Wave North Denmark Finland Ireland Norway Sweden United Kingdom Source: Company documents. a Austria, Germany, and Switzerland were not part of Project Atlantic Exhibit 2B Wave Implementation Schedule Start Date: End Date: West MAY 1999 APR 2000 South MAY 2000 FEB 2001 Central MAR 2001 DEC 2001 North JAN 2002 AUG 2002 Source: Company documents. Exhibit 3 1997 Data for Whirlpool Europe Wave DSI Product Availability Units Sold West South Central North 45 51 67 55 73.5% 83.1% 76.8% 83.2% 2,271,139 1,415,949 977,665 1,443,156 Revenue (000s US$) 477,784 283,549 185,625 280,901 Margin (000s US$) 58,859 46,241 43,678 29,818 Source: Company documents. Exhibit 4 Improvements in DSI and Availability by Year and Wave 2004 2005 2000 25% Wave West South Central North 2001 40% 35% Improvements by Year by Wave 2002 2003 35% 40% 25% 40% 40% 40% 20% 40% 20% Source: Company documents. Exhibit 5 Margin Improvements by Year by Wave 2000 0.06% Wave West South Central North 2001 0.25% 0.10% Cumulative Margin Improvements by Year by Wave 2002 2003 0.25% 0.25% 0.25% 0.25% 0.13% 0.25% 0.13% 2004 0.25% 0.25% 0.25% 0.25% 2005 0.25% 0.25% 0.25% 0.25% Source: Company documents. Exhibit 6 Forecasted Other Expense Savings by Year (000s US$) 2000 2001 2002 2003 2004 2005 2006 2007 Order Desk Headcount 0 190 411 442 474 506 537 569 Finance Headcount 81 135 216 324 405 405 405 405 Warehouse Space 18 72 155 230 274 288 288 288 Bad Debt Expense 102 512 922 1,024 1,024 1,024 1,024 1,024 Information Systems 420 840 840 1.280 1,280 1.280 1.280 1.280 621 1,749 2,544 3,300 3,457 3,503 3,534 3,566 Source: Company documents