The Subcontractor

Sam Banfield was upset as he walked back to his office. As a brand-new VP- Finance for Magicant International, he had been busy these past three months learning his job. He had joined Magicant after a long stint at Major Motors Canada Inc., where he had picked up the details of the automotive parts supply business from the customer's side. After a period of years at an intermediate management position, he had received an offer from Magnicant that seemed like the answers to his prayers. As a professional accountant, he was given a senior management position, a healthy increase in salary, and some wonderful perks. The job relocation had required him to move, but his family was quite happy with their new upscale home, and the increase in salary permitted him to place his eldest son in a private school that catered particularly to learning disabilities. Sam was convinced that this school would finally address the problems his son was having.

Sam's confusion resulted from the second bid preparation meeting in which he had been an active participant. The bid was in response to an invitation to bid from Major Motors Canada. It was for a very large sum of money; in fact, if Magicant International got the business, it would increase their own business by 50%. He had been very happy when the invitation to bid had finally been received. He had worked the phones diligently, calling his contacts in Purchasing at Major Motors, and the result was the bid opportunity now in front of the firm. This would definitely cement his position with his new firm and Jim Hennikin, CEO and a minority shareholder in the firm, had publicly commended him for his work.

The first bid meeting had been attended by Jim, Sam, Brenda (the Director of Sales), and Fred Jacobs, VP of Manufacturing. It was clear that the bid was going to cause some problems because of the size of the order and the technology that would be needed to produce the parts. MM's specifications were certainly world-class requirements and, although Magicant was QSO 9000 certified, it was clear that Fred was concerned that the company would not be able to produce the goods on time, according to specifications and at the right cost.

The discussion had been heated:

Jim: "What do you mean we shouldn't bid on this one, Fred? Of course, we should. This is how I built this company..... by taking risks!"

Fred: "There's just no way we can handle it. We will have to hire an additional 150 workers, purchase, install and learn how to operate some pretty sophisticated equipment. With the first delivery of product only 10 months away, I can't believe that we can do it."

Jim: "But this is the only chance we will get to bid on this. If we let it slip away, MM will award it to CD &D, our Swedish competition. Since they have built their North American plant in Thamesville, they have been growing much faster than we have, and they seem ready to take on all sorts of challenges. Perhaps it's because they have some really sharp engineering people on their manufacturing staff."

Fred: "I resent that! I've been with you for 25 years and helped you to build this company. I've been the one to carry the ball every time that we have made a move forward and .......I've bailed you out of some pretty tough situations...." He sputtered to a halt.

Brenda: "I think that Jim is right, Fred. You just need to hire a young, hot-shot engineer from the University of Waterloo to handle your manufacturing problems. It'll be OK. However, I think that I have a more difficult problem. I understand that CD & D are planning to put in a very low-ball bid. We're going to have very sharp pencils to catch this one. What do your insiders say at MM, Sam?"

Sam: "Well, they've been very quiet recently. Seems like the head of Purchasing got his neck on the block because of leaks on the last competition. One of the people in purchasing was tipping off a firm as to the competition. However, they never discovered who it was. On the other hand, I know that they have been taking a lot of heat since MM's management council discovered that Ford's supply costs were approximately 1% below MM."

Jim: "I think that we need more information on this situation. Sam, could you keep up the good work and continue to do your intelligence gathering at MM? Don't forget, there's the company Skydome box, our chalet up north, and my jet is available if you need any help with gathering information. We'll meet in a week's time, and Fred, I think that you and I need to lay out a better strategy for how we can pull this off. There is no question that we've got to go forward on this! Our shareholders will put our stock in the dumper if we blow it. Since the press announcement last month, our stock has risen about 25% - putting all of our options in the money. If we don't get the contract, I'll bet it falls faster than Niagara."

Eight days later, the meeting reconvened. However, intervening events had convinced Sam that Magicant was not able to meet the specifications as indicated in the invitation to bid.

Jim: "As you are aware, Fred has decided to take early retirement. I tried to talk him out of it, but he's a stubborn man. We're going to look for a replacement as quickly as we can and, in the meantime, I'm filling in for him."

Brenda: "I wouldn't really want to say this to old Fred, Jim, but it really is a wise decision. He's just a little old to take risk and, well, I think that you can see the big picture which sometimes eluded Fred."

Jim: "Thank you, Brenda. I know that I haven't done the manufacturing engineering recently, but things don't really change in 10 years. When you've got it, you've got it. It's just like riding a bicycle. However, down to business. Sam, what have you discovered?"

Sam: "I had some difficulty getting the scoop on this one. I had to promise to take my contact at MM with me the next time we do the company management Orlando meetings. He wanted a trip to Disney with his kids, and when I told him that the company jet would be available, he was willing to let me know what was up. It sounds like it will be a very difficult bid to prepare. According to my sources, MM is anticipating the winning bid to be approximately $125 a unit. My estimates, based upon information that Fred gave me concerning our current technology, is that our variable costs of manufacturing will be at least $115 and our full costs will be $145. If we have any markup at all, we're right out of the action. I think we should bow out gracefully."

Jim: "I don't see a problem with the costs of manufacturing, Sam. You accounting guys are always so cautious. I think that we can get that new technology out of Austria that Daimler was using and I think, based upon what the salesman told me, that we can produce for something like $105. That'll give us a bid price of $125 right on the money. Even if we can't make the target cost, this project will last for 4-5 years, long enough for us to learn how to make the technology work."

Sam: "I know this was originally my project, Jim, but I'm really concerned about this one now. It seems like such a long-shot to take. The technology from Austria is untried in a North American setting and, well, Fred said that you'd be very, very lucky to get anything close to $105 a unit in the first year. His estimate was closer to $130. Besides, this involves millions of parts."

Jim: "That's the solution, Sam. If you lose on any item, you can make it up on volume. Heh, heh, a little accounting humor there!"

Sam: "Are you aware, Jim, that MM will be setting annual price reductions of 1-2% on this part over the long haul? Fred thinks that we could be setting ourselves up for a major disaster. I hear he exercised his options and sold his shares, he was so convinced."

Jim: "He was always a worry-wart. I built this company because I took risks. If we can't deliver to MM, we'll have to go back and renegotiate the contract. Once they're into their new model year, they'll have to bail us out with either more money or with engineering support staff so either way, we're in the driver's seat. But in the short run, we've got to get the contract by bidding the right price."

Sam: "But what about meeting the other specifications that MM requires? Won't they do a capability assessment?"

Jim: "No problem there. The guys at MM are good friends of mine. We'll have enough of a show to convince them that we can pull it off.......but they won't need much convincing. Besides, your name is going to be front and center of our proposal. They know you and trust you, Sam. You're our secret weapon!"

If you were Sam, what would you do?