Greyson Corporation

Greyson Corporation was formed in 1940 by three scientists from the Universityof California. The major purpose of the company was research and developmentfor advanced military weaponry. Following World War II, Greyson became aleader in the field of research and development. By the mid-1950s, Greyson employedover 200 scientists and engineers.The fact that Greyson handled only R&D contracts was advantageous. Firstof all, all of the scientists and engineers were dedicated to R&D activities, nothaving to share their loyalties with production programs. Second, a strong functionalorganization was established. The project management function was the responsibilityof the functional manager whose department would perform the majorityof the work. Working relationships between departments were excellent.By the late 1950s Greyson was under new management. Almost all R&Dprograms called for establishment of qualification and production planning aswell. As a result, Greyson decided to enter into the production of militaryweapons 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 major catastrophes.In 1964 Greyson entered into the aerospace market with the acquisition of asubcontract for the propulsion unit of the Hercules missile. The contract was projectedat $200 million over a five-year period, with excellent possibilities for follow-onwork. Between 1964 and 1968 Greyson developed a competent technical staff composed mainly of young, untested college graduates. The majority of theoriginal employees who were still there were in managerial positions. Greysonnever had any layoffs. In addition, Greyson had excellent career development programsfor almost all employees.Between 1967 and 1971 the Department of Defense procurement for newweapons systems was on the decline. Greyson relied heavily on their two majorproduction programs, Hercules and Condor II, both of which gave great promisefor continued procurement. Greyson also had some thirty smaller R&D contractsas well as two smaller production contracts for hand weapons.Because R&D money was becoming scarce, Greyson’s management decidedto phase out many of the R&D activities and replace them with lucrative productioncontracts. Greyson believed that they could compete with anyone in regardto low-cost production. Under this philosophy, the R&D community was reducedto minimum levels necessary to support in-house activities. The director of engineeringfroze all hiring except for job-shoppers with special talents. All nonessentialengineering personnel were transferred to production units.In 1972, Greyson entered into competition with Cameron AerospaceCorporation for development, qualification, and testing of the Navy’s newNeptune missile. The competition was an eight-motor shoot-off during the lastten months of 1973. Cameron Corporation won the contract owing to technicalmerit. Greyson Corporation, however, had gained valuable technical informationin rocket motor development and testing. The loss of the Neptune Program madeit clear to Greyson’s management that aerospace technology was changing toofast for Greyson to maintain a passive position. Even though funding was limited,Greyson increased the technical staff and soon found great success in winning researchand development contracts.By 1975, Greyson had developed a solid aerospace business base. Profits hadincreased by 30 percent. Greyson Corporation expanded from a company with200 employees in 1964 to 1,800 employees in 1975. The Hercules Program,which began in 1964, was providing yearly follow-on contracts. All indicationsprojected a continuation of the Hercules Program through 1982.Cameron Corporation, on the other hand, had found 1975 a difficult year. TheNeptune Program was the only major contract that Cameron Corporation maintained.The current production buy for the Neptune missile was scheduled for completionin August 1975 with no follow-on work earlier than January 1976. CameronCorporation 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 1975, the Navy asked Greyson Corporation if they would be interestedin submitting a sole-source bid for production and qualification of theNeptune missile. The Navy considered Cameron’s position as uncertain, andwanted to maintain a qualified vendor should Cameron Corporation decide to getout of the aerospace business.Greyson submitted a bid of $30 million for qualification and testing of thirtyNeptune motors over a thirty-month period beginning in January 1976. Currenttesting of the Neptune missile indicated that the minimum motor age life wouldextend through January 1979. This meant that production funds over the nextthirty months could be diverted toward requalification of a new vendor and stillmeet production requirements for 1979.In August 1975, on delivery of the last Neptune rocket to the Navy, CameronCorporation announced that without an immediate production contract forNeptune follow-on work it would close its doors and get out of the aerospacebusiness. Cameron Corporation invited Greyson Corporation to interview all oftheir key employees for possible work on the Neptune Requalification Program.Greyson hired thirty-five of Cameron’s key people to begin work in October1975. The key people would be assigned to ongoing Greyson programs to becomefamiliar with Greyson methods. Greyson’s lower-level management was very unhappyabout bringing in these thirty-five employees for fear that they would beplaced in slots that could have resulted in promotions for some of Greyson’s people.Management then decreed that these thirty-five people would work solely onthe Neptune Program, and other vacancies would be filled, as required, from theHercules and Condor II programs. Greyson estimated that the cost of employingthese thirty-five people was approximately $150,000 per month, almost all ofwhich was being absorbed through overhead. Without these thirty-five people,Greyson did not believe that they would have won the contract as sole-source procurement.Other competitors could have “grabbed” these key people and forcedan open-bidding situation.Because of the increased overhead rate, Greyson maintained a minimum staffto prepare for contract negotiations and document preparation. To minimize costs,the directors of engineering and program management gave the Neptune programoffice the authority to make decisions for departments and divisions that werewithout representation in the program office. Top management had complete confidencein the program office personnel because of their past performances onother programs and years of experience.In December 1975, the Department of Defense announced that spending wasbeing curtailed sharply and that funding limitations made it impossible to begin thequalification program before July 1976. To make matters worse, consideration wasbeing made for a compression of the requalification program to twenty-five motorsin a twenty-month period. However, long-lead funding for raw materials would beavailable.After lengthy consideration, Greyson decided to maintain its present positionand retain the thirty-five Cameron employees by assigning them to in-house programs.The Neptune program office was still maintained for preparations to supportcontract negotiations, rescheduling of activities for a shorter program, andlong-lead procurement.In May 1976, contract negotiations began between the Navy and Greyson. Atthe beginning of contract negotiations, the Navy stated the three key elements fornegotiations:1. Maximum funding was limited to the 1975 quote for a thirty-motor/thirty-monthprogram.2. The amount of money available for the last six months of 1976 was limitedto $3.7 million.3. The contract would be cost plus incentive fee (CPIF).After three weeks of negotiations there appeared a stalemate. The Navy contendedthat the production man-hours in the proposal were at the wrong level onthe learning curves. It was further argued that Greyson should be a lot “smarter”now because of the thirty-five Cameron employees and because of experiencelearned during the 1971 shoot-off with Cameron Corporation during the initialstages of the Neptune Program.Since the negotiation teams could not agree, top-level management of theNavy and Greyson Corporation met to iron out the differences. An agreement wasfinally reached on a figure of $28.5 million. This was $1.5 million belowGreyson’s original estimate to do the work. Management, however, felt that, by”tightening our belts,” the work could be accomplished within budget.The program began on July 1, 1976, with the distribution of the departmentbudgets by the program office. Almost all of the department managers were furious.Not only were the budgets below their original estimates, but the thirty-fiveCameron employees were earning salaries above the department mean salary,thus reducing total man-hours even further. Almost all department managers assertedthat cost overruns would be the responsibility of the program office and notthe individual departments.By November 1976, Greyson was in trouble. The Neptune Program was ontarget for cost but 35 percent behind for work completion. Department managersrefused to take responsibility for certain tasks that were usually considered to bejoint department responsibilities. Poor communication between program officeand department managers provided additional discouragement. Department managersrefused to have their employees work on Sunday.Even with all this, program management felt that catch-up was still possible.The thirty-five former Cameron employees were performing commendable workequal to their counterparts on other programs. Management considered that thepotential cost overrun situation was not in the critical stage, and that more timeshould be permitted before considering corporate funding.In December 1976, the Department of Defense announced that there wouldbe no further buys of the Hercules missile. This announcement was a severe blowto Greyson’s management. Not only were they in danger of having to lay off 500employees, but overhead rates would rise considerably. There was an indicationlast year that there would be no further buys, but management did not considerthe indications positive enough to require corporate strategy changes.Although Greyson was not unionized, there was a possibility of a massivestrike if Greyson career employees were not given seniority over the thirty-fiveformer Cameron employees in the case of layoffs.By February 1977, 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 wouldhave to be made in a higher salary and overhead rate quarter, thus increasingtotal costs further.3. Inventory costs were increasing. Items purchased during long-lead fundingwere approaching shelf-life limits. Cost impact might be as high as$1 million.The vice president and general manager considered the Neptune Program criticalto the success and survival of Greyson Corporation. The directors and divisionheads were ordered to take charge of the program. The following options wereconsidered:1. Perform overtime work to get back on schedule.2. Delay program activities in hopes that the Navy can come up with additionalfunding.3. Review current material specifications in order to increase material shelflife, thus lowering inventory and procurement costs.4. Begin laying off noncritical employees.5. Purchase additional tooling and equipment (at corporate expense) so thatschedule requirements can be met on target.On March 1, 1977, Greyson gave merit salary increases to the key employees onall in-house programs. At the same time, Greyson laid off 700 employees, someof whom were seasoned veterans. By March 15, Greyson employees formed aunion and went out on a strike.1. What is the case all about?2. What s the structure of Greyson?3. What are the problems encountered by Greyson? How do you think this can be solved?

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