Whirlpool entered Europe in the late 1980s as a marketing arm of Whirlpool USA, the leader in the home appliance industry and grew the European market to 13% of its business. The company entered Europe in 1989 through a majority (53%) stake purchase in the appliance division of an existing European company Philips (Netherlands) Electronics. This was followed by opening a JV Whirlpool International (BV), followed a year later by a dual branding program where Whirlpool Europe (WE) name was added to Philips product lines. This was followed subsequently by purchase of the remaining 47% in Philips by WE in 1991, and thus entered Europe as a 100 % owned unit of Whirlpool Corporation. The 100% WE developed three Pan European brands to differentiate its product lines from that of its erstwhile aren’t Philips (BV). WE also created regional brands in Europe
WE like any manufacturing company, manufactured products based on sales budgets / forecasts and held them in inventory for onward transfer to the distribution chain and ultimately to the customers. WE operated through 11 plants, 10 located in Europe and one in Africa, with each plant producing a specific product line across all brands. Unique country requirements, such as language, products attribute preferences, and electrical specifications resulted in multiple stock-keeping units (SKUs) for the same model. WE manufactured a staggering 6900 Stock keeping units (clearly identifiable items of inventory)
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. Sales and marketing function (end to end) starting from forecasting, order generation, order processing and fulfillment, billing and collection were handled by a country sales office in each major market and interfaced directly with customers
WE’s main problem was inherited from the individual IT systems developed for each function and each geography or department within WE, over time. They were all standalone systems and had their own versions of the data on any aspect, with problems of sharing across functions/departments, and irreconcilable. The database and IT systems, apparently, merely replicated the erstwhile manual system, and had to content with 13 versions of inventory across the supply chain and not knowing which is accurate, current and to be used for what purpose
The three key ingredients of success in the kitchen appliance business are product quality, price and availability. WE estimated that its distribution units had the ability to meet customers need 79% of time. Lack of ready availability of product resulted in delays in supply or the customer switching brands and lost sales. Current inventory and information systems are identified to be the road blocks to achieving its 100% order fulfillment objective on delivery schedule
The objective of Project Atlantic (PA) was to streamline the information flow and decision making in WE, in order to improve the operating effectiveness and efficiency in whirlpool’s sales, marketing, operations, logistics and finance areas. The objective included to enhance efficiency of its sales operations, meet customer demand and reduce inventory by 12 days of sales, apparently conflicting objectives; through an Information System, for better and consistent visibility of information throughout the supply chain.
The project is a major organizational streamlining and transformation exercise for operational efficiency improvement, for improved customer service, reduced inventory, reduced costs of replacement and exchange, keep track of orders, fulfillment, customer interface, and in the process, improve the revenues and the bottom line of WE. The project is an Information Technology intervention with elements of HW, SW development / implementation, training, maintenance and in the process carries out a technology driven organizational transformation
ERP Plan was to implement in North America, Brazil, and select Central European countries in a phased manner, use a COTS (Commercial Off The Shelf software) product and hence need to change internal systems and gain employee acceptance. PA to cover other European countries. Post PA WIBV will retire all stand alone systems and use the integrated ERP for all of Europe. Project managed under country groupings called waves.
- Review Questions
- What is the business case for Whirlpool Europe undertaking this possible investment in the ERP system?
WE (operating in multiple markets and geographies) consumer durables domestic appliances business, is primarily driven by cost, quality and availability of the product, when required by the consumer. Due to competition in the domestic appliances market, non availability of a product of a particular brand, as desired by the consumer, when the consumer walks in, can result in dissatisfied consumer and lost business immediately, and in the long run. WE business model is based on assessing market demand for its wide range of products manufactured from more than 10 production facilities, manufacture and stock finished goods at various points in the distribution chain, and sell to consumer. Whirlpool had to strike a balance between maintaining high inventory and satisfying each consumer, both (cost of stocking and cost of no stock) carrying a cost.
Whirlpool was operating through several standalone IT driven systems, set up by each unit and department for their internal use, over a period of time. This resulted in poor standardization, non interoperability, data integrity and consistency and access to all users. Such a system resulted in poor communication, higher inventory of goods in the chain, poor customer handling and lost business. Whirlpool realized that one of the ways to improve operational efficiency was to enable seamless communication along the whole chain from demand estimation, manufacturing, logistics, distribution and marketing, and also remove data inconsistency across the chain on product inventory, that resulted in higher inventory as well as lost sales, due to lack of a single page view of inventory, and seamless communication. The specific objectives were to reduce no. of inventory days, faster response in the chain, single view, seamless communication that would improve product availability, reduce inventory costs, better customer response and handling, and timely information for decisions. The ERP is also expected to reduce manpower needs in the chain and thereby result in direct savings too.
The business case is that, on analysis of all estimated costs and benefits that one can derive from the project on a net present value basis over the project life cycle (1999-2005/06), the net benefit that will accrue to Whirlpools is $ 3168522.
- What are the sources of potential benefits of the system for Whirlpool? Should they have the same degree of confidence in each of sources?
Potential benefits include a single view of data for all in the chain on material availability, where available, nature and quantum of inventory in the whole chain, data on customer interface including returns, complaints, demand pattern, inventory holding costs, obsolescence leading to possible strategy on discount schemes and so on. The ERP system will provide real time information for timely action on surpluses and shortages, demand, production planning, quality, returns, enable fix responsibility and eradicating inconsistency.
The benefits are based on assumptions on factors such as the ease with which the organization and personnel will accept and move seamlessly to the new system. This is fundamentally an organization and business transformation initiative, and need the active understanding, involvement, cooperation and use of the new system by all in the chain, and there are certain risks in such an assumption. The estimated time lines for benefits to be realized may get stretched, and benefits may result partially and/or with a delay. There could be unanticipated costs of employee separation and retraining, which are apparently not taken in the case. It is assumed that the benefit from reduced manpower will occur without any cost. There are also risks of the elapsed times assumed for transition getting stretched.
- Why do you think they decided to start the system in with the West Wave first?
West wave has the highest sale with 39% of revenue, 37 % of units sold but only 33% of the margin. Also, though West wave has the lowest DSI, it has also the lowest product availability. These facts point to high potential for improvement. Also 42% of the total benefits from the project is estimated to come from West Wave (refer ERP cost benefit analysis sheet in the Excel file). This further reinforces the assumption of maximum benefit from West Wave, and hence it was chosen first, to also demonstrate to other units, that ERP implementation is beneficial. It is easier to demonstrate improvement in situations that are farther from what is expected. In any IT implementation, acceptance and demonstrating the benefits are key for sustainability.
This will also enhance the sense of value derived from this initiative to the management and the employees which will generate a positive perception and encourage the teams to actively participate in the transformation process. As an incentive for participation, if the management decides to incentivize the teams on the realized benefits it is most visible in a Wave where the benefits are maximum. The word will also spread around on the value and the other Waves will wholeheartedly accept replication of the same in their own units.
- What the sources and timing of costs they expect to incur with the implementation of the system?
The costs elements are
- Onetime costs during and up till implementation
- Initial study and drawing up a road map for the transition
- Internal organizational communication and preparation for the change
- Implementation consultant costs
- Hardware costs
- Software costs
- internal staff training costs along with implementation
- internal staff costs during implementation to work with implementation consultant
- Costs of possible slowing down of business during the transition phase
- Post implementation operational phase costs
- Software and hardware upgrades
- Software maintenance and support
- Enhancement and next stage transformation costs
As is clear from this, in any IT driven participation there are not only onetime costs but also recurring costs and management should be conscious of the when they embark on any such initiative. Recognition of all costs will help seeking appropriate budgetary sanctions for the future, which alone will make it an enduring sustainable project. Otherwise, a well started initiative will stall after the initial attempt.
- Assume that the proposed system will be in use though 2007. Given the cost of capital and tax rate in the case, what is the NPV of this system?
The NPV of the system for the period of the study is $3168522 based on wave-wise analysis up to 2005 and project costs up to 2006. Please see Excel working files for details. However the PV of future cash flows will get discounted higher due to longer discounting periods, as will add only lesser value as we advance the periods. Moreover, the longer the periods in the future the uncertainty also increases and hence one should attach lesser significance to future returns. This is also due to the changing cost of capital deployed in the future as these expenses will be at future periods.
- If we relax the assumption that the system would be used though 2007, what cash flows should be included beyond this point?
Cash flows arising from the net difference of increased revenues and costs for the period for all waves, Software license maintenance and inventory carrying costs are recurring benefits need to be included. Depreciation is not to be counted, as the HW is completely depreciated during the five years. There may be cost of up gradation of HW and software and attendant maintenance, training of staff.
It is to be noted that the cash flows that occur farther in time are less valued and their impact on project benefits diminish.
- Would you recommend that they go ahead with this capital investment? Do you have any major concerns? If so, how might these have been addressed in your analysis?
Whirlpool should go ahead with the project, as the benefits outweigh the costs on a long term project life cycle (up to 2005/06). It will only improve if we take a longer period, as the only additional cost is for Software maintenance of $400000, whereas the benefits even from the lowest return North wave is ($1597143 for 2005), which is more than 4 times this amount (see analysis north wave for year 2005).
Some of the factors to be taken into account are, at present, WE have only taken up the ERP primarily for internal streamlining and efficiency improvement. There are multitudes of developments taking place in the IT space, such E commerce, web based services, CRM, SCM, on demand services, Cloud computing and so on. Ultimately the internal systems should interoperate with such future initiatives and care should be taken to ensure that pitfalls of current initiatives do not get repeated, when WE wants to enhance IT deployment to take advantage of futuristic technology and practices. Most of the time his is achieved through using widely used packages and from established companies so that provision is made for future growth.