4.Greyson Corporation

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 programs for almost all employees.

Between 1997 and 2001, the Department of Defence 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 contracts as well as two smaller production contracts for hand weapons.

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 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.

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 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. 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.

1. What are the critical issues in the case?

2. How would you resolve each issue?