The Arab Open University

The Arab Open University Business Studies.B202UNDERSTANDING BUSINESS FUNCTIONSAssignments Part 2TMA 04 8202 ASSIGNMENTS PART 2CONTENTSContentsTMA 04 cut-off date 28 OCT 2006

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Appendix 1 Whirlpool Europe

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Appendix 2 Exes! Spreadsheet

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TMAs 05, 06 and 07 will be sent to you in later mailings.Please note: An electronic copy of the spreadsheet in Appendix 2 will be available to download from the B202 eDesktop (under Course Resources) and the B202 First Class conference. You will need to reuse the Whirlpool Europe Case Study, included here as Appendix I, in order to complete TMA 05-

TMA 04 CUT-OFF DATE 28 OCT 2006 .B202 ASSIGNMENTS'PART: 2'TMA 04 Cut-off date This TMA draws on your study of the following: Blocks 3 and 4. In particular it draws on the work you have undertaken for Block 3 Section 2.2 'Functional information systems', Section 2.3 'Integrated information systems', Section 3-5 'Information in operations planning and control' and Chapter 6 of Galloway et at.

The reading by O'Brien, 'Business information systems'. Block 4 Section 3.2 'The accounting "economics" of innovation'. Chapter 10 of Atrill.and McLaney.You will need to use Microsoft Excel and to download a spreadsheet file from your eDesktop or FirstClass for your work on Questions 3 and 4- (Hard copy of that file is attached for information.)The questions and other instructions-below refer to the case study 'Whirlpool Europe1. Read the questions and instructions, then the case study, and study carefully the spreadsheet that accompanies it in Appendix 2 before answering questions 1 to 4-In terms"of the depth of knowledge that your tutor will expect you to demonstrate in your answers, your role Is that of a person with basic knowledge of the accounting and finance issues in the case study, typically a student of business studies. Your tutor will not be expecting the knowledge of an accountant or a student studying to be an accountant.Question 1Describe and explain the benefits which Whirlpool Corporation expected to gain from the proposed innovation, the introduction of an enterprise resource planning (ERP) system.(20 marks)Question 2Describe 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.(20 marks)' B202 ASSIGNMENTS PART 2TMA 04 CUT-OFF DATE 28 OCT 2006Question 3Referring 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 ER.P system? Explain how you have used the information in the spreadsheet model to arrive at your recommendation.(30 marks)Question 4Suppose that instead of the values incorporated in the spreadsheet, the ERP innovation was evaluated with amended values reflecting the following:(a) The cost of capital is expected to be 35%(b) The tax rate could well rise to 60%(c) A shorter time horizon is envisaged, reflecting the dynamics oftechnology: benefits and costs beyond 2004 should not be takeninto-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 incorporationof 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.(30 marks)Your answers to all four questions should not exceed 2,000 words altogether. Words used in the Excel spreadsheet and to complete the Skills Table need not be counted.

Skills development componentRather than having a separate question on skills, for this TMA up to 10 marks for your work as a whole will be awarded for demonstrating the skills described below. Evidence will be provided through your explanations of how you' have interpreted the quantitative and qualitative data in the case study and spreadsheet in order to arrive at recommendations for Whirlpool Corporation in this decision-making situation.. Credit will also be given for incorporating changes to the spreadsheet and submitting it to your tutor as required.Please produce a table like the one overleaf and complete it to indicate to your tutor some brief reflections on how this TMA has contributed to your development of these skills. (Your table doesTMA 04 CUT-OFF DATE 28 OCT 2006

8202 ASSIGNMENTS PART 21

not need to be the same size; by the time you have completed each cell the table may take up at least a page. The table is not included in the word count for the TMA.)Business graduate skills outcomeExample Of how work on this TMA has contributed to my skills developmentSelf-assessment of current level of skill - high/medium/low; any actions to be taken

Using examples and analysing case studies to enhance understanding, support conclusions and illustrate issues concerning business functions in organisational contexts

Problem solving and decision making

Understanding the way. in which numbers are used in the core business functions

Interpreting spreadsheets for managing numbers and quantitative analysis .

Advice on how to .answerAlthough there are a lot of component parts to this TMA., they areclosely related, and build on each other." Adopt a systematic approachto reading and understanding the case study, highlighting theinformation that is relevant to the questions. When you haveidentified the potential benefits and costs of the innovation, for Questions 1 and 2, you will be in a strong position to analyse the implications of the capital investment appraisal. Remember to relate the information in the case and the spreadsheet to Whirlpool Corporation's objectives for the innovation.Don't forget what you have read in Block 3 about the challenges ox implementing new information systems, the general characteristics of innovation discussed in Sections 1 and 2 of Block 4, and the material in Section 3.2 of Block 4 about the non-rational and non-quantitative aspects of capital investment decision-making processes. However, your main task in this TM-A is to demonstrate your appreciation of how quantitative information can be used in such decision making.You can download the spreadsheet from the FirstClass conference or your B202 eDesktop. You will also find some notes there to help you with the basic functions of Excel if you are not very experienced in using this spreadsheet software. So that you receive credit for your own work, please ensure that you do not inadvertently put a copy of your revised spreadsheet back on the FirstClass conference.The word limit for this TMA is 2,000 words, so you should keep the descriptions and explanations required for Questions .1 and 2 succinct (they should summarise the relevant material in the case studyB202 ASSIGNMENTS PART 2TMA 04 CUT-OFF DATE 28 OCT 2006narrative and exhibits) and for Questions 3 and 4 you may need to refer to your answers to the earlier questions to avoid repetition. Remember that you need not count the words in the spreadsheet you submit, or in your table for the 'Skills development component^, in your word count.There are excellent opportunities in-the case study for conferring with your fellow students via the FirstClass conferences, etc., to clarify matters and improve your understanding and analytical abilities. Make sure, however, that what you submit for marking is your-own work and that you understand all the points and calculations you incorporate in it.'B202 ASSIGNMENTS PART 2' APPENDIX'! WHIRLPOOL EUROPEAppendix 1 Whirlpool EuropeHarvard Business School Case Study 9-202-017B)1 Sudhakar Balachandran and Richard RubackBy 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 backgroundIn 1989, Whirlpool Corporation entered the European market, paying $470 million to purchase a 53% stake in the appliance division ofDutch-based Philips Electronics. The companies formed a joint venture firm named Whirlpool International BV (WIBV) and, one year later, launched a dual-branding programme 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. By fiscal 1998, Whirlpool Europe was third in market share with $2.4 billion in sales.Whirlpool Europe manufactured products based on sales budgets or forecasts, and then held them as finished goods inventory. European manufacturing operated II 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 centres and then on to one of 12 regional distribution centres before reaching the customer.APPENDIX 1 WHIRLPOOL EUROPEB202 ASSIGNMENTS PART 2.Exhibit 1 Whirlpool Europes manufacturing sitesLocationProducts

Amiens FranceWashers and dryers

Norrkoping SwedenMicrowave ovens

" Poprad SlovakiaWashers

"Neunkirchen GermanyDishwashers

Schomdorf GermanyWashers

Gassinetta ItalyRefrigerators and cooking appliances

Naples ItalyWashers

Siena ItalyChest freezers

Trento ItalyRefrigerators and freezers

Isithebe South AfricaRefrigerators and freezers

Source: Company documentsIn each major European market, a country sales office - responsible for sales .generation and forecasting, order processing and fulfilment, billing and cash collection was the primary interface with customers. Whirlpool Europe operated many stand-alone information-systems that were developed by individual plants, distribution centres, 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 standalone appliances for their homes and contractors who purchased built-in appliances for new home constructions or kitchen remodelling.Success in the consumer market depended on product quality, price and availability . Whirlpool Europe estimated that its distribution

centres 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 remodelling 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 . . 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 contractors1 required delivery time.Project AtlanticDescriptionThe goal of Project Atlantic was to design and implement an enterprise resource planning (ERP) system char would allow Whirlpool Europe to better serve its consumer market for stand-aloneB202 ASSIGNMENTS PART 2APPENDIX 1 .WHIRLPOOL EUROPEappliances 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 should 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 selected 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 details the Wave groupings and implementation schedules.Exhibit 2A Project Atlantic implementation groupings11-Wave-

-Wave-South

CentralBelgiumFranceNetherlandsPlus: WarehouseManagement and PhysicalDistribution

Italy PortugalSpain

CzechRepublicHungaryPolandSlovakia

DenmarkFinlandIrelandNorwaySwedenUnitedKingdomSource: Company documents 3Austria, Germany and Switzerland were not part of Project Atlantic.Exhibit 2B Wave implementation scheduleWestSouthCentralNorth

Start Date: End Date:MAY 1999 APR 2000MAY 2000 FEB 2001MAR 2001 DEC 2001JAW 2002 AUG 2002

Source: Company documents1 The company identified seven top level operational processes, of which 74 sub-processes were determined co be impacted .by ERP-APPENDIX 1 WHIRLPOOL EUROPE

B2Q2 ASSIGNMENTS PART ?BenefitsWorking capital reductionThe company had 51 days of inventory. 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. The Project Atlantic inventory savings would yield an aggregate inventory savings of $34-3 million. Exhibit 3 shows the inventory data for 1997 and the Days of Sales in Inventory reductions forecasted by Wave, along with the yearly percent DSI reduction by Wave.Exhibit 3 Inventory 1997 data and projected improvements1997 inventory data

Percentage improvements by year by Wave

Wave

CurrentDSI

Improvement DSI

Projected DSI

inventory Value perDay (0OOs US$)

2000

2001

2002

2003

2004 2Q05West SouthNorth

45 5155

121212

12

33 3943

1,221 653

25%

40% 35%

35% 40% -40%- 25% 40%

40% 20%Source: Company documentsRevenue and gross margin increaseA 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 safes" equal" to t5% of-the improvement in product availability. Those incremental sales would contribute to increasing the profitability of Whirlpool Europe. Exhibit 4 presents 1997 data" on product availability, units and margins by Wave as well as-data on the projected liming of the product availability improvements.DSI = (Ending Inventory) /' (Cost of Goods Sold/Days in Period)APPENDIX 1 WHIRLPOOL EURDPEExhibit 4 Product availability in 1997 and projected improvements by Wave1997Percentage improvements by year by Wave

ProduGi AvailabilityUnits SoldUnit Profit Margin (US?}.20002001200220D320042005

West South-Central Worth73.5% 83.1% 76.3% 83.2%2,271,139 1,415,949 977,665 1,443,15640 35 35 402540 3535 40 40" 25 40-4020 ;4020

Source: Company documentsThe 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 information on 1997 revenues and margins and the projected improvements by year and by Wave.Exhibit 5 Revenue and margins in 1997 and projected improvements-by Wave1997

Margin improvements by year by WaveRevenue (DOOs US$)

Margin(DQDs US$)

PercentageMargin

2QDD

20D1

2002

2003

2004

2005WestCentral North

477,784 283,543-185,625 280,901

58,859-rffi-Q,11-43,678 29,818

12%-IRQ/..24% 11%

0.06%

0.25%

0.25%-Sriu/o0.13%

0.25% n ?5%0.25% 0.13%

0.25% -0J-rt0.25% 0.25%

0.25%0.25% 0.25%Source: Company documentsOther cost savingsThe 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 ERP15% 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 metre of warehouse space. With the reduction in inventory from the implementation of the ERP system, warehouse space could "be reduced by 15% (7f200 square metres). Also, customers returned 3% of units they purchased, which cost Whirlpool about $30 per unit returned. ERP was expected to reduce the number of returned units by eliminating shipping errors. The ERP system was also forecast to reduce bad debt expense an4 information system expenses. Exhibit 6 details these anticipated savings.APPENDIX 1 WHIRLPOOL EUROPEExhibtt 6 Forecasted other expense savings by year (000s US$)2DGG20012DD2 '20D3200420D52D0620D7

Order Desk headcount0190411442474506537569

Finance'headcount81135216324405405405405

Warehouse space.. 1872155230274288288288

Bad debt expense102'5129221,0241,0241,0241,0241,024

Information Systems4208408401.2801.2801.2801.2801.280

621B 1,7.492,544 -3,3003,4573,503.3,5343,566

Source: Company documentsCostsCapital ExpendituresThe company would need to spend $4-3 million in 1999 for capital-equipment, $8.6-miIlion in 2000, $6.9 million in 2001, and $4-1. million in 2002. It would cost $6 million-and $3 million for software licenses in.1999 and 2000 respectively. The capital equipment would be depreciated in equal amounts over five years.implementationImplementation required extensive employee training; creation, testing-g, 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. According to forecast, the company would need 19 consultants-in 1999, nine in 2000, seven in 2001, and four in thefollowing 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 operationalBeginning 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-online at different time, costs .would begin .' early in the programme. Beginning in 1999, the company expected to incur $0.6 million in annual expense, increasing by an additional $0.6 million each subsequent year until reaching steady state in 2003.License maintenance fees were forecasted to begin in 2000 at a cost of $0.1 million and increase by an additional $0.1 million each year through 2003,-reaching $0.4 million annually. These costs would continue until the system was replaced.Cost of Capital and TaxesWhirlpool Europe used a 9% cost of capital to discount the ERP project and faced a 40% Appendix 2 Excel spreadsheetWHIRLPOOL EUROPEProject AtlanticName : J Smith

Incremental Cash Flows and Valuation (US$000sPI Number :P123456

Discount Rate9.00%

Profiles Tax Rate40.00%

Description199920002001200220032004200520062007

Capital Expenditure-4,900-8,900-6,900-4,100

Revenue 7,848 23,964 42,074 51,346 56,551 58,041 58,041 58,041

Cost of Goods sold-6,590-19,358-33,936-40,989-45,050-46,377-46,377-46,377

Operation Expenditures-6,361-4,892-1,395-3,745-700-243 103 134 166

Depreciation Expense-980-2,760-4,140-4,960-4,960-3,980-2,200-820

Taxable Earnings-6,361-4,614-2,549 253 4,697 6,298 7,787 9,598 11,010

Taxes-2,544-1,846-1,020 101 1,879 2,519 3,115 3,839 4,404

Earnings after Taxes-3,817-2,768-1,529 152 2,818 3,779 4,672 5,759 6,606

add back Depreciation 980 2,760 4,140 4,960 4,960 3,980 2,200 820

Cash Flow from Operation-3,817-1,788 1,231 4,292 7,778 8,739 8,652 7,959 7,426

Reduction in need for Inventory 2,685 6,967 8,429 6,218 3,765 1,529

Cash Flow-8,717-8,003 1,298 9,621 13,996 12,504 10,181 7,959 7,426

3,727 0.5019

4,354 0.5470

6,071 0.5963

8,127 0.6499

9,915 0.7084

6,657 0.7722

1,092 0.8417

- 7,343 0.9174

34.78% 23,883 - 8,717 1.0000

Rate at which Sum of Discounted Cash Flows would be ZeroSum of Discounted Cash FlowsDiscounted Cash FlowDiscount Factor

Notes

The method of estimation the incremental cash flow from operations has been to compile two simplified income statements for each wave, one with and the other without the ERP investment, and then take the differences, and aggregate these across the waves.

Acknowledgement

The above table has been adapted from Ruback, R.S. (2002) . Teaching Note: Whirlpool Europe. Boston, MA : Harvard Business School Publishing

Wave North

Wave West

Central

67

55

389

594

40%

Central