Whirlpool Europe

An ERP Investment Decision

What should be the process of an investment decision, such as ERP in Whirlpool Europe, has?

• 1. Is it an inevitable investment? • 2. What are the obvious benefits? What

are the obvious costs for the project?• 3. Are there any benefits? Or costs not

mentioned in the case for the project?• 4. Discount cash flows evaluation• 5. What are the evaluation criteria

appropriate for the investment decision?

Is it an inevitable investment?

• Is there any concern that the firm would not go ahead with the plan?

• Would it be possible that the firm give up the project because of negative NPV?

• What factors in addition to benefit/cost would affect decision?

Should all projects be evaluated by using NPV rule?• Do we need another set of rules when

evaluating an inevitable investment on equipments?

• For example– Environmental protection equipments.– Water preservation dam.

What are the sources of (obvious) benefit for adopting the ERP?

• Inventory reduction (one-time, non-taxable): – when you reduce inventory; it is similar to sell off some of

inventory for cash, and brings the firm cash inflow. (but it is a one-time event; cash flow will turn to zero when inventory reduces to its target level)

• Additional sales units due to product availability. (persistent and taxable)

• Increased margin. (persistent and taxable)• Cost savings due to reduced size of staff (order

desk, finance, warehouse space, bad debt expense, and information systems)

What are the costs associated with the implementation for the ERP?

• Capital expenditure (equipments and software license)

• Implementation cost – 50 Whirlpool employees @$45,000 a year– Consultants (19 in 1999, 9 in 2000, 7 in 2001, 4 in

2002) @ $15,400 per month– Three-person task force begins July 2000 to June

2004. at $600,000 per year

• On going operational– On going operational– License maintenance

What potential benefits and costs are not mentioned in the case?• Benefits not mentioned in the case–

basically qualitative factors…– Better decision and more flexibility in future

• Costs not mentioned in the case–– Training costs for using new system (the real

participating personnel will be way over 50)– Cost of releasing (or relocating) the reduced

staffs that resulted from installation of ERP.

What are the benefits mostly likely to happen as expected? (what may not?)

• Inventory reduction

• Additional sales units due to product availability.

• Increased margin.

• Cost savings due to reduced size of staff

What are the cost mostly likely to overrun than that expected ?

• Capital expenditure (equipment and software license)

• Implementation cost – Employees– Consultants– Task forces

• On going operational– On going operational– License maintenance

How to formulate uncertainty?

• Sensitivity analysis. Ask what-if questions.

• What if some of the benefits or costs do not incur?

• Formulate different scenarios, and redo the valuation.

What were not considered but should be positive for adding ERP?• Better information generating process, that

means better decision.

• More flexible expansion strategies, for example, channel business, in future. (real option)

• Others?

Discount cash flow valuation on the ERP investment decision

• Consider the Interactions among the inventory improvement, additional sales, and margin improvement.

• To forecast a simplified income statement with and without the ERP investment and estimate the incremental cash flows from the difference between the simplified income statements.

• To forecast the simplified income statements by wave and aggregate across the waves to compute the incremental cash flows.

Simplified Income Statement for the Central Wave

Simplified Income Statement for the Central Wave

Simplified Income Statement for the Central Wave