CASE: GREYSON CORPORATION Greyson Corporation was formed in 1970 by three scientists from the University of California. The major purpose of the company was research and development for advanced military weaponry. Following World War II, Greyson became a leader in the field of research and development. By the mid-1980s, Greyson employed over 200 scientists and engineers. The fact that Greyson handled only research and development (R&D) contracts was advantageous. First of all, all of the scientists and engineers were dedicated to R&D activities; they did not have to share their loyalties with production programs. Second, a strong functional organization was established. The project management function was the responsibility of the functional manager whose department would perform the majority of the work. Working relationships between departments were excellent. By the late 1980s, Greyson was under new management. Almost all R&D programs called for establishment of qualification and production planning. As a result, Greyson decided to enter into the production of military weapons as well and capture some of the windfall profits of the production market. This required a major reorganization from a functional to a matrix structure. Personnel problems occurred, but none that proved a major catastrophe. In 1994, Greyson entered into the aerospace market with the acquisition of a subcontract for the propulsion unit of the Hercules missile. The contract was projected at $200 million over a five-year period, with excellent possibilities for follow-on work. Between 1994 and 1998, Greyson developed a competent technical staff composed mainly of young, untested college graduates. The majority of the original employees who were still there were in managerial positions. Greyson never had any layoffs. In addition, Greyson had excellent career development pro- grams for almost all employees. Between 1997 and 2001, the Department of Dfense procurement for new weapons systems was on the decline. Greyson relied heavily on their two major production programs, Hercules and Condor II, both of which gave great promise for continued procurement. Greyson also had some 30hirty smaller R&D con- tracts as well as two smaller production contracts for hand weapons. Because R&D money was becoming scarce, Greyson's management decided to phase out many of the R&D activities and replace them with lucrative production contracts. Greyson believed that it could compete with anyone in regard to low- cost production. Under this philosophy, the R&D community was reduced to minimum levels necessary to support in-house activities. The director of engineering froze all hiring except for job shoppers with special talents. All nonessential engineering personnel were transferred to production units. In 2002, Greyson entered into competition with Cameron Aerospace Corporation for development, qualification, and testing of the navy's new neptune missile. The competition was an eight-motor shoot-off during the last 10 months of 2003. Cameron Corporation won the contract owing to technical merit. Greyson Corporation, however, had gained valuable technical information in rocket motor development and testing. The loss of the Neptune Program made it clear to Greyson's management that aerospace technology was changing too fast for Greyson to maintain a passive position. Even though funding was limited, Greyson increased its technical staff and soon found great success in winning R&D contracts. By 2005, Greyson had developed a solid aerospace business base. Profits had increased by 30 percent. Greyson Corporation expanded from a company with 200 employees in 1994 to 1,800 employees in 2005. The Hercules Program, which began in 1994, was providing yearly follow-on contracts. All indications projected a continuation of the Hercules Program through 2002. Cameron Corporation, in contrast, had found 2005 a difficult year. The Neptune Program was the only major contract that it maintained. The current production buy for the Neptune missile was scheduled for completion in August 2005 with no follow- on work earlier than January 2006. Cameron Corporation anticipated that overhead rates would increase sharply prior to next buy. The cost per motor would increase from $55,000 to $75,000 for a January procurement, $85,000 for a March procurement, and $125,000 for an August procurement. In February 2005, the navy asked Greyson Corporation if it would be interested in submitting a sole-source bid for production and qualification of the Neptune missile. The navy considered Cameron's position uncertain and wanted to maintain a qualified vendor should Cameron Corporation decide to get out of the aerospace business. Greyson submitted a bid of $30 million for qualification and testing of 30 Neptune motors over a 30-month period beginning in January 2006. Current testing of the Neptune missile indicated that the minimum motor age life would extend through January 2009. This meant that production funds over the next 30 months could be diverted toward requalification of a new vendor, and production requirements for 2009 still could be met. In August 2005, on delivery of the last Neptune rocket to the navy, Cameron Corporation announced that without an immediate production contract for nep- tune follow-on work, it would close its doors and get out of the aerospace business. Cameron invited Greyson Corporation to interview all of its key employees for possible work on the Neptune Requalification Program. Greyson hired 35 of Cameron's key people to begin work in October 2005. The key people would be assigned to ongoing Greyson programs to become familiar with Greyson methods. Greyson's lower-level management was very unhappy about bringing in these employees for fear that they would be placed in slots that could have resulted in promotions for some of Greyson's people. Management then decreed that these 35 people would work solely on the Neptune Program, and other vacancies would be filled, as required, from the Hercules and Condor II programs. Greyson estimated that the cost of employing these 35 people was approximately $150,000 per month, almost all of which was being absorbed through overhead. Without these 35 people, Greyson did not believe that it would have won the contract as sole- source procurement. other competitors could have grabbed these key people and forced an open-bidding situation. Because of the increased overhead rate, Greyson maintained a minimum staff to prepare for contract negotiations and document preparation. To minimize costs, the directors of engineering and program management gave the Neptune program office the authority to make decisions for departments and divisions that were without representation in the program office. Top management had complete confidence in the program office personnel because of their past performance on other programs and years of experience. In December 2005, the Department of Dfense announced that spending was being curtailed sharply and that funding limitations made it impossible to begin the qualification program before July 2006. To make matters worse, consideration was being made for a compression of the requalification program to 25 motors in a 20- month period. However, long-lead funding for raw materials would be available. After lengthy consideration, Greyson decided to maintain its current position and retain the 35 Cameron employees by assigning them to in-house programs. The Neptune program office was still maintained for preparations to support con- tract negotiations, rescheduling of activities for a shorter program, and long-lead procurement. In May 2006, contract negotiations began between the navy and Greyson. At the beginning of contract negotiations, the navy stated the three key elements for negotiations: 1. Maximum funding was limited to the 2005 quote for a 30-motor/30- month program. 2. The amount of money available for the last six months of 2006 was limited to $3.7 million. 3. The contract would be cost plus incentive fee. After three weeks of negotiations there appeared a stalemate. The navy con- tended that the production man-hours in the proposal were at the wrong level on the learning curves. It was further argued that Greyson should be a lot "smarter" now because of the 35 Cameron employees and because of experience learned during the 2001 shoot-off with Cameron Corporation during the initial stages of the Neptune Program. Since the negotiation teams could not agree, top-level management of the navy and Greyson Corporation met to iron out the differences. An agreement was finally reached on a figure of $28.5 million. This was $1.5 million below Greyson's original estimate to do the work. Management, however, felt that, by tightening their belts, the work could be accomplished within budget. The program began on July 1, 2006, with the distribution of the department budgets by the program office. Almost all of the department managers were furious. not only were the budgets below their original estimates, but the 35 Cameron employees were earning salaries above the department mean salary, thus reducing total man- hours even further. Almost all department managers asserted that cost overruns would be the responsibility of the program office and not the individual departments. By November 2006, Greyson was in trouble. The Neptune Program was on target for cost but 35 percent behind for work completion. Department managers refused to take responsibility for certain tasks that were usually considered to be joint department responsibilities. Poor communication between program office and department managers provided additional discouragement. Department man- agers refused to have their employees work on Sunday. Even with all this, program management felt that catch-up was still possible. The 35 former Cameron employees were performing commendable work equal to their counterparts on other programs. Management considered that the potential cost overrun situation was not in the critical stage and that more time should be permitted before considering corporate funding. In December 2006, the Department of Dfense announced that there would be no further buys of the Hercules missile. This announcement was a severe blow to Greyson's management. not only was the company in danger of having to lay off 500 employees, but overhead rates would rise considerably. There was an indication last year that there would be no further buys, but management did not consider the indications positive enough to require corporate strategy changes. Although Greyson was not unionized, there was a possibility of a massive strike if Greyson career employees were not given seniority over the 35 former Cameron employees in the case of layoffs. By February 2007, the cost situation was clear: 1. The higher overhead rates threatened to increase total program costs by $1 million on the Neptune Program. 2. Because the activities were behind schedule, the catch-up phases would have to be made in a higher salary and overhead rate quarter, thus in- creasing total costs further. 3. Inventory costs were increasing. Items purchased during long-lead funding were approaching shelf-life limits. Cost impact might be as high as $1 million. The vice president and general manager considered the Neptune Program critical to the success and survival of Greyson Corporation. The directors and division heads were ordered to take charge of the program. The following options were considered: 1. Perform overtime work to get back on schedule. 2. Delay program activities in hopes that the navy can come up with additional funding. 3. Review current material specifications in order to increase material shelf life, thus lowering inventory and procurement costs. 4. Begin laying off noncritical employees. 5. Purchase additional tooling and equipment (at corporate expense) so that schedule requirements could be met on target. On March 1, 2007, Greyson gave merit salary increases to the key employees on all in-house programs. At the same time, Greyson laid off 700 employees, some of whom were seasoned veterans. By March 15, Greyson employees formed a union and went out on strike. QUESTIONS 1. What are the critical issues in the case? 2. How would you resolve each issue