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