Case Report: de Havilland Inc.

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Module 3, Session 3

Case Report: De Havilland Inc.

January 22, 2010

Executive Summary
My decision is to allow Marton Enterprises to the next stage of the purchasing cycle and pass them onwards to the Source Selection Board (SSB). Marton has surpassed the 25% cost reduction required from our parent Boeing. In fact the costs have been reduced by more than half. Furthermore Marton is able to manufacture and supply us with both the flap shrouds and the single equipment bay door therefore also meeting our mandate of moving to a smaller base of vendors, realizing long-term firm fixed pricing, and of course a contract. It is noteworthy that we will need to tread carefully during the SSB stage and negotiate the audit of their financial records for this division of Devon Holdings, assess their BATNAs; interest and priorities, to determine if they are buying the contract; if so why, and determine how this could impact a negotiated contract. It is difficult to pass on this deal and that is why we should move to the next stage of negotiations. At the same time we should also continue discussions with our original supplier, Dollard Plastics to determine if there has been some misinformation that has left them priced so high in comparison with all other bids. Key Assumptions

* The labour rate produced by Marton is historically stable and sound in fact a labour contract is in place to cover the term of the five year contract proposal. * The tool cost to remain the same throughout the contract period as we assume the most durable material is being used. * Dollard Plastic has created value for themselves and de Havilland. The product is of quality and smooth on time delivery has been in place without interruption. Statement of Issues

The first issue is that Marton may not be realistic in their bid as they appear to be “buying” the contract with such a low bid. Clearly this could lead to a variety of implications for our firm including; Marton being unable to viably produce the flap shrouds and doors throughout the term of the contract, and revisiting the contract costing once production has started possibly costing us more in the end-run. Another possible issue is whether added cost to products will be added by Marton. Areas such as delivery terms, indirect cost allocations can impose significant added costs. In recapping the normalized bid quote, Marton’s calculation of the ship set is questionable. In fact it appears they have understated the cost through a simple mathematical error. The financial statements are not being made available so we can determine the long-term viability of the Marton division of Devon Holdings. Though Devon Holdings is a large conglomerate each division would be expected to remain profitable or eventually be restructured, sold or closed. Any of these results would negatively impact production of the plane. With respects to Dollard Plastics, it is apparent that the talks were only in the “preliminary stage” and the move to the Bidder Selection Board (BSB) may be slightly premature. We have had a solid history with them yet have come to an impasse quite quickly. Certainly there must be some discrepancy that can show us how they are so off with their pricing; perhaps a design miscalculation. We can work with them to help with understanding their processes better and make recommendations to solve any issues. Criteria

A good decision in determining a preferred vendor would be for us to realize our BATNA’s; a minimum 25 % reduction in costs, utilizing less vendors and therefore having them achieve economies of scale and us eventually reducing our cost even further, long term contract with stable pricing, allow access to their financial data, have the data audited to determine if they are financially secure, and finally to determine if they have a desire for long term relationship as a preferred vendor. Analysis

It is apparent that there is a probability that Marton is using a penetration...
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