Case #5

A Day in the Life of an Executive Decision Maker

Welcome to the fifth case of our Day in The Life of an Executive Decision Maker series. In this case, we remain at the defense contractor division that was first introduced in Case #1 and revisited in Case #4.

Case #5 involves decision-making on an Annual Operating Plan (AOP) with a high degree of uncertainty. You will be selecting the best alternative(s) to resolve a financial shortfall during the iterative process of building the AOP.

Description	Percent Shortfall to AOP
Orders	20
Sales	5
Operating Profit	7
Cash	5

Corporate has informed all divisions that it expects 8% growth over last years financials. The division has been through the first iteration of the build process and faces a shortfall in all of its numbers to the 8% growth goal, but particularly worrisome is a 20% shortfall in orders that would put its book-to-bill ratio at less than 1.0. The table below reflects the initial shortfall to the AOP for the coming year:

AOP Goal			Status After 1st Iteration
Orders	$1,295,000,000		Orders	$1,036,000,000
Sales	$1,288,800,000		Sales	$1,224,360,000
Operating Profit	$128,080,000		Operating Profit	$119,114,400
Cash	$108,870,000		Cash	$103,426,500

The first iteration of next years financial numbers is rarely satisfactory as the business area leaders are providing their most conservative estimates. This year, the projections for orders are much lower than anticipated. The division president and CFO will meet with the heads of the business areas (BA) and business development (BD) to review their lists of pursuits and programs that could be incorporated into the AOP.

The next day, the group gathered in the conference room knowing this would be a serious meeting. The division president was the last to enter and confirmed that everyone was present. He opened the meeting by saying, As you are all aware, it was announced earlier this month that our corporate Chief Operating Officer (COO) becomes the CEO at the end of this year. He has already made it clear that he expects everyone to elevate their efforts and it is not business-as-usual once he is in charge. Many of us, myself included, may not be here this time next year if we do not take action to improve this AOP. Does everyone understand and agree with that assessment? He looked at each of his leaders for affirmation and received it. After a lengthy discussion of the current AOP, he sent them away with direction to identify programs that could solve the shortfall. Well set up one or more group meetings to select which pursuits will be used in the final AOP.

A week passed and the group re-convened in the main conference room. The division president, CFO, and COO were all present. The COO was present to discuss personnel availability for the options presented and to identify any potential issues. BD and the three BA leaders were there to present options that might resolve the AOP shortfall.

Todays first presenter was the International Programs BA leader. His area had been the primary beneficiary of the recent Future Programs business area dissolution. The division president asked the BA leader to start with the legacy pursuit efforts that he had inherited from the dissolution.

The leader commenced with the Beta special purpose aircraft (SPA) line and its launch customer. He cited the progress in accelerating contracts with this customer and achieving early delivery of all green aircraft. The risk reduction engineering efforts were now complete and some modification efforts were being funded ahead of the customers original schedule. The potential contracts for those efforts were already identified in the AOP. He said that any additional funding was unlikely for this year.

The discussion turned to a second variant of the Beta SPA that the division was interested in selling to this customer. The BD leader said that there was strong interest but this customer had no funding in the near future the reason it had not been included in the AOP. This countrys other military service chiefs believed their counterpart (our customer) had been the beneficiary of generous funding and it was their services turn for upgrading their capabilities. The business area leader confirmed the information and said he was building a case with his customer based on real-world events but it would likely be beyond the three-year AOP period.

The group asked about other customers for the Beta SPA and where they stood with obtaining funds in their budgets. The BA leader said he had an international customer that was looking certain as their second customer. The division was currently leasing the country one turboprop aircraft that had been developed under R&D funds plus a maintenance team for the aircraft. The division agreed that they would deed the turboprop aircraft gratis to the country once they committed to purchase the Beta SPA. This country has coordinated with the Beta SPA launch customer to ensure they could use the Beta SPA configuration without any engineering changes. Preliminary discussions have already started and the countrys air force chief has indicated funds may be availabel in two years, or possibly as soon as next year since a sister service has a large shipbuilding project that had unspent funds.

The BA leader stated this effort was currently plugged into the second year of the AOP, identified as Project Bella. He said the chief had told him he was fairly certain he could get the other projects unspent funds and that could happen in the next 8 months. The contract would be a firm-fixed-price Foreign Military Sales (FMS) contract since the effort was non-developmental.

The BD leader stated that his lead capture person gave it a P_Go of 70% and a P_Win of 95%. P_Go is the probability that the Request For Proposal (RFP) will actually be released by the customer while P_Win is the probability that the division will win the contract. He added the first two contracts were for the green aircraft and long-lead parts. These would be awarded together and, if awarded in the coming year, would cover half the shortfall in Orders. The green aircraft would be available from the original equipment manufacturer (OEM) once they received their contract. The sales shortfall would become a 2% sales exceedance and the operating profit shortfall would be reduced to 1 %. The CFO asked how large was the year-end cash impact and the BA leader responded, Long-lead parts will tie up some cash but the green aircraft will offset half of that impact and that is why the cash shortfall only goes up 2%.

The president asked how early would they get a contract if the air force chief could get the other projects unspent funds? The BA leader responded that he thought it would be early third quarter since it was FMS. He elaborated by saying the green aircraft would immediately deliver in place. The OEM would bill and be paid that same quarter. Long-lead parts would be ordered but not deliver until third quarter of the following year. The COO said he did not see any impact to his organization since there wasnt any actual work to do beyond ordering the long-lead parts.

The group then covered the remaining pursuits in the International Programs area. There was one other opportunity identified.

Project Barong was an international maritime pursuit that the division had pursued for 5-plus years and would be a firm-fixed-price direct commercial sale. The RFP had been re-scheduled two times previously and was now scheduled for release early next year with an award in the third quarter. BD put the P_Go at 35% with a P_Win of 50%. The 20% orders shortfall would become a 3% orders exceedance. The 5% sales shortfall would be reduced to a 3% sales shortfall. The 7% profit shortfall would be reduced to a 4% profit shortfall. The 5% cash shortfall would balloon to a 42% cash shortfall with the aircraft and equipment being placed on order. The CFO would need to apprise corporate of this situation and obtain their concurrence. The COO pointed out that this would put a strain on their aeronautical engineers but he thought they could send some of this work to a smaller division if he sent a few engineers there to keep tabs on them.

Next, the Domestic Programs A business leader discussed his AOP contributions. His area was already providing over 50% of the divisions orders and sales in the current, preliminary AOP.

Again, the group went over the programs and pursuits transferred from the former Future Programs area. They had received an existing program for a domestic customer with the dissolution. It used the Beta airframe but was a different external configuration that the division had designated Cheek-E.

The initial AOP had not yet been updated to reflect Congress providing additional funds, with certain qualifying conditions, to accelerate the program. The customer had told them it would be the end of the year or probably next year before they saw any of those funds. The BA would put it in the AOP in the first quarter since it was more likely to be next year before they received the contracts. He said it was easy to give this one a P_Go of 99% and a P_Win of 99%. The BA leader said that this funding was for two green aircraft from the OEM.

There was separate Congressional funding for their associate co-contractor that was producing the mission system. The two companies had already agreed that aircraft harnesses, interphone, and mission communications equipment would be done by this division via subcontract from the mission system integrator so there would be additional funding for that order. The green aircraft would be available once they received their contract the OEM had reserved two slots for them in the second quarter next year. Likewise, the subcontract was expected in the second quarter next year.

Together, these orders by themselves would just cover the orders shortfall in the AOP. Sales shortfall of 5% would become a sales exceedance of 19.5%. Profit shortfall would decrease from 7% to 4.5%. Cash shortfall would decrease from 5% down to just 2%. The COO volunteered that the shops could use the work and would not cause any issues on his end

Finally, Domestic Programs Bs business area leader went through the programs and pursuits in her area. She told the group that she had nothing pending that would completely offset the orders shortfall. She would be willing to take a blue sky challenge that could offset 10% of the orders shortfall. Her customer routinely identified underperforming programs and arranged to spend their funds for them with subsequent re-payment from his funding. These funds were usually nearing their expiration date so she would have to agree to totally spend them before they expired. He had told her that he had his eye on some funds that he could give her if she would assure him that she had qualified engineers available to spend them. She had already spoken with the COO and he had assured her that he not only had the engineers but that they were exactly the right ones. They all had previous experience on her program and the current program they were working had been either unable or unwilling to get them under contract. He went on to say that he had been beefing up his engineering staff based on her customers promise to keep them funded.

It would be a a cost-plus fixed fee contract so the profit percentage was relatively small but it would end in the same year that it started. She said it would reduce the sales shortfall by 40% so that it would only be a 3% sales shortfall. It would reduce the profit shortfall to 6% and the cash shortfall to 3.6%. When the division president asked if she was confident the customer would get additional funds, she replied that he hadnt failed to find money for the three years that she had been in the position. If you want that in P_Go and P_Win, Id say 70% and 100% respectively.

She went on to say that her fixed-price modification contracts had sufficient risk reserves to cover the profit shortfall without putting the division at risk. She added that the modification contracts would have passed their schedule milestones that would allow program managers to release those risk reserves.

The division president thanked everyone for their effort. He asked the BD and BA leaders to go re-verify the facts for the identified efforts and that they would reconvene as a group in three days to review their options.

Student Questions:

1. What are the alternatives and what process(es) will you employ to make a recommendation for solving the shortfalls?

2. What evaluation criteria will you use for your assessment of the alternatives?

3. Does your recommendation satisfy all numerical shortfalls and ratios (book-to-bill, ROS)?

4. If the solution does not satisfy all of them, which ones remain and do you have a recommendation for satisfying those that are unsatisfied?

5. How will you achieve agreement from all concerned?