CASESTUDY:

Corwin Corporation By June 2003, Corwin Corporation had grown into a $950 million per year corpora- tion with an international reputation for manufacturing low-cost, high-quality rubber components. Corwin maintained more than a dozen different product lines, all of which were sold as off-the-shelf items in department stores, hardware stores, and automotive parts distributors. The name Corwin was now synonymous with "quality." This provided management with the luxury of having products that maintained extremely long life cycles. Organizationally, Corwin had maintained the same structure for more than fifteen years (see Exhibit D). The top management of Corwin Corporation was highly conservative and believed in using a marketing approach to find new mar- kets for existing product lines rather than exploring for new products. Under this philosophy, Corwin maintained a small R&D group whose mission was simply to evaluate state-of-the-art technology and its application to existing product lines. Corwin's reputation was so good that it continually received inquiries about the manufacturing of specialty products. Unfortunately, the conservative nature of Corwin's management created a "do not rock the boat" atmosphere opposed to tak- ing any type of risks. A management policy was established to evaluate all specialty- product requests. The policy required answering yes to the following questions: . Will the specialty product provide the same profit margin (20 percent) as existing product lines? Revised 2007.Exhibit I. Organizational chart for Corwin Corporation President VP Marketing VP Engineering Gene Frimel Dr. Royce VP Manufacturing Market Support Contracts Project R&D Engineering Management Dr. Reddy Support Dick Potts Dan West . What is the total projected profitability to the company in terms of follow- on contracts? . Can the specialty product be developed into a product line? . Can the specialty product be produced with minimum disruption to exist- ing product lines and manufacturing operations? These stringent requirements forced Corwin to no-bid more than 90 percent of all specialty-product inquiries. Corwin Corporation was a marketing-driven organization, although manu- facturing often had different ideas. Almost all decisions were made by marketing with the exception of product pricing and estimating, which was a joint under- taking between manufacturing and marketing. Engineering was considered as merely a support group to marketing and manufacturing. For specialty products, the project managers would always come out of mar- keting even during the R&D phase of development. The company's approach was that if the specialty product should mature into a full product line, then there should be a product line manager assigned right at the onset. THE PETERS COMPANY PROJECT In 2000, Corwin accepted a specialty-product assignment from Peters Company because of the potential for follow-on work. In 2001 and 2002, and again in 2003, profitable follow-on contracts were received, and a good working relationship developed, despite Peters' reputation for being a difficult customer to work with.On December 7, 2002, Gene Frimel, the vice president of marketing at Corwin, received a rather unusual phone call from Dr. Frank Delia, the market- ing vice president at Peters Company. Frank Delia: "Gene, I have a rather strange problem on my hands. Our R&D group has $250,000 committed for research toward development of a new rubber product material, and we simply do not have the available personnel or talent to undertake the project. We have to go outside. We'd like your company to do the work. Our testing and R&D facilities are already overburdened." Gene Frimel: "Well, as you know, Frank, we are not a research group even though we've done this once before for you. And furthermore, I would never be able to sell our management on such an undertaking. Let some other company do the R&D work and then we'll take over on the production end." Delia: "Let me explain our position on this. We've been burned several times in the past. Projects like this generate several patents, and the R&D company almost always requires that our contracts give them royalties or first refusal for manu- facturing rights." Frimel: "I understand your problem, but it's not within our capabilities. This project, if undertaken, could disrupt parts of our organization. We're already oper- ating lean in engineering." Delia: "Look, Gene! The bottom line is this: We have complete confidence in your manufacturing ability to such a point that we're willing to commit to a five-year pro- duction contract if the product can be developed. That makes it extremely profitable for you." Frimel: "You've just gotten me interested. What additional details can you give me?" Delia: "All I can give you is a rough set of performance specifications that we'd like to meet. Obviously, some trade-offs are possible." Frimel: "When can you get the specification sheet to me?" Delia: "You'll have it tomorrow moming. I'll ship it overnight express." Frimel: "Good! I'll have my people look at it, but we won't be able to get you an answer until after the first of the year. As you know, our plant is closed down for the last two weeks in December, and most of our people have already left for extended vacations." Delia: "That's not acceptable! My management wants a signed, sealed, and delivered contract by the end of this month. If this is not done, corporate willreduce our budget for 2003 by $250,000, thinking that we've bitten off more than we can chew. Actually, I need your answer within 48 hours so that I'll have some time to find another source." Frimel: "You know, Frank, today is December 7, Pearl Harbor Day. Why do I feel as though the sky is about to fall in?" Delia: "Don't worry, Gene! I'm not going to drop any bombs on you. Just remember, all that we have available is $250,000, and the contract must be a firm- fixed-price effort. We anticipate a six-month project with $125,000 paid on con- tract signing and the balance at project termination." Frimel: "I still have that ominous feeling, but I'll talk to my people. You'll hear from us with a go or no-go decision within 48 hours. I'm scheduled to go on a cruise in the Caribbean, and my wife and I are leaving this evening. One of my people will get back to you on this matter." Gene Frimel had a problem. All bid and no-bid decisions were made by a four-man committee composed of the president and the three vice presidents. The president and the vice president for manufacturing were on vacation. Frimel met with Dr. Royce, the vice president of engineering, and explained the situation. Royce: "You know, Gene, I totally support projects like this because it would help our technical people grow intellectually. Unfortunately, my vote never appears to carry any weight." Frimel: "The profitability potential as well as the development of good customer relations makes this attractive, but I'm not sure we want to accept such a risk. A failure could easily destroy our good working relationship with Peters Company." Royce: "I'd have to look at the specification sheets before assessing the risks, but I would like to give it a shot." Frimel: "I'll try to reach our president by phone." By late afternoon, Frimel was fortunate enough to be able to contact the pres- ident and received a reluctant authorization to proceed. The problem now was how to prepare a proposal within the next two or three days and be prepared to make an oral presentation to Peters Company. Frimel: "The Boss gave his blessing, Royce, and the ball is in your hands. I'm leaving for vacation, and you'll have total responsibility for the proposal and pre- sentation. Delia wants the presentation this weekend. You should have his speci- fication sheets tomorrow morning."Royce: "Our R&D director, Dr. Reddy, left for vacation this moming. I wish he were here to help me price out the work and select the project manager. I assume that, in this case, the project manager will come out of engineering rather than marketing." Frimel: "Yes, I agree. Marketing should not have any role in this effort. It's your baby all the way. And as for the pricing effort, you know our bid will be for $250,000. Just work backwards to justify the numbers. I'll assign one of our con- tracting people to assist you in the pricing. I hope I can find someone who has experience in this type of effort. I'll call Delia and tell him we'll bid it with an unsolicited proposal." Royce selected Dan West, one of the R&D scientists, to act as the project leader. Royce had severe reservations about doing this without the R&D director, Dr. Reddy, being actively involved. With Reddy on vacation, Royce had to make an immediate decision. On the following morning, the specification sheets arrived and Royce, West, and Dick Potts, a contracts man, began preparing the proposal. West prepared the direct labor man-hours, and Royce provided the costing data and pricing rates. Potts, being completely unfamiliar with this type of effort, simply acted as an observer and provided legal advice when necessary. Potts allowed Royce to make all decisions even though the contracts man was considered the official represen- tative of the president. Finally completed two days later, the proposal was actually a ten-page letter that simply contained the cost summaries (see Exhibit II) and the engineering intent. West estimated that 30 tests would be required. The test matrix described the test conditions only for the first five tests. The remaining 25 test conditions would be determined at a later date, jointly by Peters and Corwin personnel. On Sunday morning, a meeting was held at Peters Company, and the pro- posal was accepted. Delia gave Royce a letter of intent authorizing Corwin Exhibit II. Proposal cost summaries Direct labor and support $ 30.000 Testing (30 tests at $2,000 cach) 60.000 Overhead at 100% 90.000 Materials 30.000 G&A (general and administrative, 10%) 21.000 Total $231.000 Profit 19.000 Total $250.000Corporation to begin working on the project immediately. The final contract would not be available for signing until late January, and the letter of intent sim- ply stated that Peters Company would assume all costs until such time that the contract was signed or the effort terminated. West was truly excited about being selected as the project manager and being able to interface with the customer, a luxury that was usually given only to the marketing personnel. Although Corwin Corporation was closed for two weeks over Christmas, West still went into the office to prepare the project schedules and to identify the support he would need in the other areas, thinking that if he pre- sented this information to management on the first day back to work, they would be convinced that he had everything under control. THE WORK BEGINS On the first working day in January 2003, a meeting was held with the three vice presidents and Dr. Reddy to discuss the support needed for the project. (West was not in attendance at this meeting, although all participants had a copy of his memo.) Reddy: "I think we're heading for trouble in accepting this project. I've worked with Peters Company previously on R&D efforts, and they're tough to get along with. West is a good man, but I would never have assigned him as the pro- ject leader. His expertise is in managing internal rather than external projects. But, no matter what happens, I'll support West the best I can." Royce: "You're too pessimistic. You have good people in your group and I'm sure you'll be able to give him the support he needs. I'll try to look in on the project every so often. West will still be reporting to you for this project. Try not to burden him too much with other work. This project is important to the company." West spent the first few days after vacation soliciting the support that he needed from the other line groups. Many of the other groups were upset that they had not been informed earlier and were unsure as to what support they could pro- vide. West met with Reddy to discuss the final schedules. Reddy: "Your schedules look pretty good, Dan. I think you have a good grasp on the problem. You won't need very much help from me. I have a lot of work to do on other activities, so I'm just going to be in the background on this project. Just drop me a note every once in a while telling me what's going on. I don't need anything formal. Just a paragraph or two will suffice."By the end of the third week, all of the raw materials had been purchased, and initial formulations and testing were ready to begin. In addition, the contract was ready for signature. The contract contained a clause specifying that Peters Company had the right to send an in-house representative into Corwin Corporation for the duration of the project. Peters Company informed Corwin that Patrick Ray would be the in-house representative, reporting to Delia, and would assume his responsibilities on or about February 15. By the time Pat Ray appeared at Corwin Corporation, West had completed the first three tests. The results were not what was expected, but gave promise that Corwin was heading in the right direction. Pat Ray's interpretation of the tests was completely opposite to that of West. Ray thought that Corwin was "way off base," and that redirection was needed. Pat Ray: "Look, Dan! We have only six months to do this effort and we shouldn't waste our time on marginally acceptable data. These are the next five tests I'd like to see performed." Dan West: "Let me look over your request and review it with my people. That will take a couple of days, and, in the meanwhile, I'm going to run the other two tests as planned." Ray's arrogant attitude bothered West. However, West decided that the project was too important to "knock heads" with Ray and simply decided to cater to Ray the best he could. This was not exactly the working relationship that West expected to have with the in-house representative. West reviewed the test data and the new test matrix with engineering personnel, who felt that the test data was inconclusive as yet and preferred to withhold their opinion until the results of the fourth and fifth tests were made available. Although this displeased Ray, he agreed to wait a few more days if it meant getting Corwin Corporation on the right track. The fourth and fifth tests appeared to be marginally acceptable just as the first three had been. Corwin's engineering people analyzed the data and made their recommendations. West: "Pat, my people feel that we're going in the right direction and that our path has greater promise than your test matrix." Ray: "As long as we're paying the bills, we're going to have a say in what tests are conducted. Your proposal stated that we would work together in developing the other test conditions. Let's go with my test matrix. I've already reported back to my boss that the first five tests were failures and that we're changing the direction of the project."West: "I've already purchased $30,000 worth of raw materials. Your matrix uses other materials and will require additional expenditures of $12,000." Ray: "That's your problem. Perhaps you shouldn't have purchased all of the raw materials until we agreed on the complete test matrix." During the month of February, West conducted 15 tests, all under Ray's direc- tion. The tests were scattered over such a wide range that no valid conclusions could be drawn. Ray continued sending reports back to Delia confirming that Corwin was not producing beneficial results and there was no indication that the situation would reverse itself. Delia ordered Ray to take any steps necessary to ensure a successful completion of the project. Ray and West met again as they had done for each of the past 45 days to dis- cuss the status and direction of the project. Ray: "Dan, my boss is putting tremendous pressure on me for results, and thus far I've given him nothing. I'm up for promotion in a couple of months and I can't let this project stand in my way. It's time to completely redirect the project." West: "Your redirection of the activities is playing havoc with my scheduling. I have people in other departments who just cannot commit to this continual rescheduling. They blame me for not communicating with them when, in fact, I'm embarrassed to." Ray: "Everybody has their problems. We'll get this problem solved. I spent this morning working with some of your lab people in designing the next 15 tests. Here are the test conditions." West: "I certainly would have liked to be involved with this. After all, I thought I was the project manager. Shouldn't I have been at the meeting?" Ray: "Look, Dan! I really like you, but I'm not sure that you can handle this project. We need some good results immediately, or my neck will be stuck out for the next four months. I don't want that. Just have your lab personnel start on these tests, and we'll get along fine. Also, I'm planning on spending a great deal of time in your lab area. I want to observe the testing personally and talk to your lab personnel." West: "We've already conducted 20 tests, and you're scheduling another 15 tests. I priced out only 30 tests in the proposal. We're heading for a cost overrun condition." Ray: "Our contract is a firm-fixed-price effort. Therefore, the cost overrun is your problem." West met with Dr. Reddy to discuss the new direction of the project and potential cost overruns. West brought along a memo projecting the costs through the end of the third month of the project (see Exhibit III).Exhibit Ill. Projected cost summary at the end of the third month Original Proposal Cost Total Project Costs Summary for Six- Projected at End of Month Project Third Month Direct labor/support $ 30.000 $ 15,000 Testing 60,000 (30 tests) 70,000 (35 tests) Overhead 90,000 (100%) 92,000 (120%%)* Materials 30.000 50.000 G&A 21,000 (10%%) 22,700 (10%%) Totals $231,000 $249,700 *Total engineering overhead was estimated at 100 percent, whereas the R&D overhead was 120 percent. Reddy: "I'm already overburdened on other projects and won't be able to help you out. Royce picked you to be the project manager because he felt that you could do the job. Now, don't let him down. Send me a brief memo next month explaining the situation, and I'll see what I can do. Perhaps the situation will cor- rect itself." During the month of March, the third month of the project, West received almost daily phone calls from the people in the lab stating that Pat Ray was inter- fering with their job. In fact, one phone call stated that Ray had changed the test conditions from what was agreed on in the latest test matrix. When West con- fronted Ray on his meddling, Ray asserted that Corwin personnel were very unprofessional in their attitude and that he thought this was being carried down to the testing as well. Furthermore, Ray demanded that one of the functional employees be removed immediately from the project because of incompetence. West stated that he would talk to the employee's department manager. Ray, how- ever, felt that this would be useless and said, "Remove him or else!" The func- tional employee was removed from the project. By the end of the third month, most Corwin employees were becoming dis- enchanted with the project and were looking for other assignments. West attrib uted this to Ray's harassment of the employees. To aggravate the situation even further, Ray met with Royce and Reddy, and demanded that West be removed and a new project manager be assigned. Royce refused to remove West as project manager, and ordered Reddy to take charge and help West get the project back on track. Reddy: "You've kept me in the dark concerning this project, West. If you want me to help you, as Royce requested, I'll need all the information tomorrow, espe- cially the cost data. I'll expect you in my office tomorrow morning at 8:00 A.M. I'll bail you out of this mess."West prepared the projected cost data for the remainder of the work and presented the results to Dr. Reddy (see Exhibit IV). Both West and Reddy agreed that the project was now out of control, and severe measures would be required to correct the situation, in addition to more than $250,000 in corporate funding. Reddy: "Dan, I've called a meeting for 10:00 A.M. with several of our R&D peo- ple to completely construct a new test matrix. This is what we should have done right from the start." West: "Shouldn't we invite Ray to attend this meeting? I'm sure he'd want to be involved in designing the new test matrix." Reddy: "I'm running this show now, not Ray! Tell Ray that I'm instituting new policies and procedures for in-house representatives. He's no longer authorized to visit the labs at his own discretion. He must be accompanied by either you or me. If he doesn't like these rules, he can get out. I'm not going to allow that guy to disrupt our organization. We're spending our money now, not his." West met with Ray and informed him of the new test matrix as well as the new policies and procedures for in-house representatives. Ray was furious over the new turn of events and stated that he was returning to Peters Company for a meeting with Delia. On the following Monday, Frimel received a letter from Delia stating that Peters Company was officially canceling the contract. The reasons given by Delia were as follows: 1. Corwin had produced absolutely no data that looked promising. 2. Corwin continually changed the direction of the project and did not appear to have a systematic plan of attack. 3. Corwin did not provide a project manager capable of handling such a project. Exhibit IV. Estimate of total project completion costs Direct labor/support $ 47.000* Testing (60 tests) 120.000 Overhead (120%%) 200.000 Materials 103.000 G&A 47.000 $517.000 Peters contract 250.000 Overrun $267.000 *Includes Dr. Reddy.4. Corwin did not provide sufficient support for the in-house representative. 5. Corwin's top management did not appear to be sincerely interested in the project and did not provide sufficient executive-level support. Royce and Frimel met to decide on a course of action in order to sustain good working relations with Peters Company. Frimel wrote a strong letter refuting all of the accusations in the Peters letter, but to no avail. Even the fact that Corwin was willing to spend $250,000 of their own funds had no bearing on Delia's deci- sion. The damage was done. Frimel was now thoroughly convinced that a con- tract should not be accepted on "Pearl Harbor Day."