Polyproducts Incorporated
Polyproducts Incorporated, a major producer of rubber components, employs 800 people and is organized with a matrix structure. Exhibit I shows the salary structure for the company, and Exhibit II identifies the overhead rate projections for the next two years. Polyproducts has been very successful at maintaining its current business base with approximately 10 percent overtime. Both exempt and nonexempt employees are paid overtime at the rate of time and a half. All overtime overtime hours are burdened at an overhead rate of 30 percent. On April 16, Polyproducts received a request for proposal from Capital Corporation (see Exhibit III). Polyproducts had an established policy for competitive bidding. First, they would analyze the marketplace to see whether it would be advantageous for them to compete. This task was normally assigned to the marketing group (which operated on overhead). If the marketing group responded favorably, then Polyproducts would go through the necessary pricing procedures to determine a bid price. On April 24, the marketing group displayed a prospectus on the four companies that would most likely be competing with Polyproducts for the Capital contract. This is shown in Exhibit IV. 213
214
POLYPRODUCTS INCORPORATED
Exhibit I. Salary structure Pay Scale Grade
Hourly Rate
1 2 3 4 5 6 7 8 9
8.00 9.00 11.00 12.00 14.00 18.00 21.00 24.00 28.00
Number of Employees per Grade Department
R&D Design Project engineering Project management Cost accounting Contracts Publications Computers Manufacturing engineering Industrial engineering Facilities Quality control Production line Traffic Procurement Safety Inventory control
1
2
3
4
5
6
3
5 5
40 40
20 30
10 10 30
20 3
5 2
2
2
3 2 7
10
3 55 2 2
3 3 7 4 8 4 50 2 2
2
2
10 3 3 3 3 3 9 5 50 1 2 2 1
7
8
9
12 10 15 10 10 4 3 1 1 2 10 5 30
8 2 10 10 10 2
2 2 1
1 1
Total
5 5 10 1
1 1 7 2 10
1 1 5 1
100 100 60 30 60 10 20 10 20 10 35 20 200 5 10 5 10
At the same time, top management of Polyproducts made the following pro jections concerning the future business over the next eighteen months: 1. Salary increases would be given to all employees at the beginning of the thirteenth month. 2. If the Capital contract was won, then the overhead rates would go down 0.5 percent each quarter (assuming no strike by employees). 3. There was a possibility that the union would go out on strike if the salary increases were not satisfactory. Based on previous experience, the strike would last between one and two months. It was possible that, due to union demands, the overhead rates would increase by 1 percent per quarter for each quarter after the strike (due to increased fringe benefit packages).
215
Polyproducts Incorporated
Exhibit II. Overhead structure General Manager
Director Program Management Program Management
Director Engineering
Director Finance
Director Production
Cost Accounting Contracts Publications Computers
R&D Design Project Engineering
Manufacturing Engineering Industrial Engineering Facilities Quality Control Production Line Traffic Procurement Safety Inventory Control
Quarter Division Engineering Program management Finance Production Overhead rates per quarter, %.
1
2
3
4
5
6
7
8
75 100 50 175
75 100 50 176
76 100 50 177
76 100 52 177
76 100 54 177
76 100 54 178
77 100 55 178
78 100 55 178
4. With the current work force, the new project would probably have to be done on overtime. (At least 75 percent of all man-hours were estimated to be performed on overtime). The alternative would be to hire additional employees. 5. All materials could be obtained from one vendor. It can be assumed that raw materials cost $200/unit (without scrap factors) and that these raw materials are new to Polyproducts.
On May 1, Roger Henning was selected by Jim Grimm, the director of project management, to head the project. “Roger, we’ve got a problem on this one. When you determine your final bid, see if you can account for the fact that we may lose our union. I’m not sure exactly how that will impact our bid. I’ll leave that up to you. All I know is that a lot of our people are getting unhappy with the union. See what numbers you can generate.” Grimm:
216
POLYPRODUCTS INCORPORATED
Exhibit III. Request for proposal Capital Corporation is seeking bids for 10,000 rubber components that must be manufactured according to specifications supplied by the customer. The contractor will be given sufficient �exibility for material selection and testing provided that all testing include latest developments in technology. All material selection and testing must be within specifications. All vendors selected by the contractor must be (1) certified as a vendor for continuous procurement (follow-on contracts will not be considered until program completion), and (2) operating with a quality control program that is acceptable to both the customer and contractor. The following timetable must be adhered to: Month after Go-ahead
2 4 5 9 13 17 18
Description
R&D completed and preliminary design meeting held Qualification completed and final design review meeting held Production setup completed Delivery of 3,000 units Delivery of 3,500 units Delivery of 3,500 units Final report and cost summary
The contract will be firm-fixed-price and the contractor can develop his own work breakdown structure on final approval by the customer.
“I’ve read the RFP and have a question about inventory control. Should I look at quantity discount buying for raw materials?”
Henning:
“Yes. But be careful about your assumptions. I want to know all of the assumptions you make.” Grimm:
Henning:
“How stable is our business base over the next eighteen months?”
“You had better consider both an increase and a decrease of 10 percent. Get me the costs for all cases. Incidentally, the grapevine says that there might be followon contracts if we perform well. You know what that means.” Grimm:
“Okay. I get the costs for each case and then we’ll determine what our best bid will be.”
Henning:
On May 15, Roger Henning received a memo from the pricing department summing up the base case man-hour estimates. (This is shown in Exhibits V and VI.) Now Roger Henning wondered what people he could obtain from the functional departments and what would be a reasonable bid to make.
Exhibit IV. Prospectus
Company
Business Base $ Million
Growth Rate Last Year (%)
Profit %
R&D Personnel
Contracts In-House
Number of Employees
Overtime (%)
Personnel Turnover (%)
Alpha Beta Gamma Polyproducts
10 20 50 100
10 10 10 15
5 7 15 10
Below avg. Above avg. Avg. Avg.
6 15 4 30
30 250 550 800
5 30 20 10
1.0 0.25 0.50 1.0
217
218
POLYPRODUCTS INCORPORATED
Exhibit V To: Roger Henning From: Pricing Department Subject: Rubber Components Production
1. All man-hours in the Exhibit (14–12) are based upon performance standards for a grade-7 employee. For each grade below 7, add 10 percent of the grade-7 standard and subtract 10 percent of the grade standard for each employee above grade 7. This applies to all departments as long as they are direct labor hours (i.e., not administrative support as in project 1). 2. Time duration is fixed at 18 months. 3. Each production run normally requires four months. The company has enough raw materials on hand for R&D, but must allow two months lead time for purchases that would be needed for a production run. Unfortunately, the vendors cannot commit large purchases, but will commit to monthly deliveries up to a maximum of 1,000 units of raw materials per month. Furthermore, the vendors will guarantee a fixed cost of $200 per raw material unit during the first 12 months of the project only. Material escalation factors are expected at month 13 due to renegotiation of the United Rubber Workers contracts. 4. Use the following work breakdown structure: Program: Rubber Components Production Project 1: Support TASK 1: Project office TASK 2: Functional support Project 2: Preproduction TASK 1: R&D TASK 2: Qualification Project 3: Production TASK 1: Setup TASK 2: Production
Exhibit VI. Program: Rubber components production Month
Project Task
Department
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1
1
Proj. Mgt.
480
480
480
480
480
480
480
480
480
480
480
480
480
480
480
480
1
2
16 320 80 320 320 160 160 80 80 80 480 160 160
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
16 320 320 320 320 160 160 80 80 80
1
16 320 80 320 320 160 160 80 80 80 480 160 160
16 320 80 320 320 160 160 80 80 80
2
2
2
80 160 160 40 20 160 600 20
80 160 160 40 20 160 600 20
3
1
3
2
R&D Proj. Eng. Cost Acct. Contracts Manu. Eng. Quality Cont. Production Procurement Publications Invent. Cont. R&D Proj. Eng. Manu. Eng. R&D Proj. Eng. Manu. Eng. Ind. Eng. Facilities Quality Cont. Production Safety Proj. Eng. Manu. Eng. Facilities Quality Cont. Production Proj. Eng. Manu. Eng. Quality Cont. Production
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
160 320 320 1600
20
20
20
20
20
20
20
20
20
20
Safety
17
18
480
480
16 16 320 320 320 3 20 320 320 320 320 160 160 160 1 60 80 80 80 80 80 80
16 320 320 320 320 160 160 80 80 80
160 160 80 160 320 160 1 60 160 320 320 320 320 320 320 1600 1600 1600
20
20
219
20
