Mason Instrument Inc. became an additional source for the electronics guidance system of a Navy missile. The decision of the case study includes bidding in the third-round competition.
E. Raymond Corey
Harvard Business Review (587040-PDF-ENG)
July 08, 1986
Case questions answered:
- What was Mason Instrument, Inc.’s strategy in the Round 1 and Round 2 bidding? What do you think of it?
- As a member of the MPD staff, what factors are important for you to consider in the Round 3 bidding?
- What should the Round 3 bid be?
Not the questions you were looking for? Submit your own questions & get answers.
Mason Instrument, Inc. 1986 (A): Electronics Guidance System for the Cherokee Missile Case Answers
This case solution includes an Excel file with calculations.
What was Mason Instrument, Inc.’s strategy in the Round 1 and Round 2 bidding? What do you think of it?
First round’s bid
Mason Instrument, Inc. proved that it was able to produce both the quality and the quantity required for this job, fortified during the company tour to the Navy team.
Mason showed its strong interest in the opportunity by bidding even below cost level and by making considerable investments in tooling (splitting the tooling costs almost by a 2 to 1 ratio).
Mason enabled the government to cut costs, which they achieved with a price per unit well below an important psychological barrier for the Navy.
Additionally, Mason Instrument, Inc. was able to further drive down costs by utilizing its Value Engineering team for continuous design improvements and building the seeker, a core component of the avionics system.
Overall, one can say that this contract has set the foundation for fruitful collaboration in the future. The company’s Military Products Divison (MPD) has clearly shown that it had understood the Navy’s interests.
One could evaluate the approach as quite risky when thinking about the project’s future development and implications on the cost development of Mason’s suppliers.
Second round’s bid
In the second round, the focus remained on the price. However, by the time of the bid, Mason was successfully supporting vendors to cope with requested design changes from NavSea, lowering overhead rates and cutting costs.
Mason Instrument, Inc. utilized the new auctioning process by packaging the unit price with the split of the tooling investment quite smartly. By following that path, Mason could reduce the cost for the Navy while getting the higher volume order, which subsequently drives down average cost.
Additionally, Mason tried to improve the payment terms. Testing the waters in these matters has been a good signal to the Navy. Mason showed the importance of the matter, thereby broadened the leeway for discussion.
However, realizing that an incentive-type contract had led to Eldridge’s rough waters should show Mason that this matter is a rather difficult subject for the Navy.
Overall I am convinced that the chosen strategy is consistent with the first bid, enabling Mason to strengthen the relationship with the Navy and proving that Mason is the right choice.
As a member of the Mason Instrument MPD staff, what factors are important for you to consider in the Round 3 bidding?
Pricing development & competition
Firstly, price competition is expected to be keen on the final bid as Eldridge’s “management was seriously interested in once again becoming the major supplier on this missile”.
As Mason Instrument, Inc. has realized that testing and engineering costs per unit were far higher than originally expected, measures such as changing the payment terms or the risk-sharing implied by the deal should be handled with care. The profit margin could easily be terminated if the situation would become even worse.
Secondly, both suppliers have already invested serious amounts into the production of the first 50 units. Hence both companies should have a strong interest in getting the deal. Although some flaws with past bids of Eldridge, Mason has to expect that Eldridge has learned from these mistakes.
Payment terms of the deal
Thirdly, Mason should take the second bidding round into account. Bidding too high on low quantities and competitively on high quantities emitted bad signals to the Navy and deteriorated Eldridge’s situation. Hence changing the payment structure might not be a good idea since it had become a delicate matter in the past.
Fourthly, one has to be aware that Mason Instrument, Inc. already bought the parts for the additional 200 units. In terms of working capital employed, Mason should get the deal.
Fifthly, one has to take into account that the contracting officer has changed. Hence, it is of utter importance to do research on personal preferences and educate him on the relationship’s past development.
What should the Round 3 bid be?
The suggested bid structure takes the following three assumptions into account:
Firstly, one can assume that testing costs will remain variable costs since it is not to be expected that the issues are to be resolved in the near future. Hence testing has still to be executed piece by piece.
Secondly, one can also assume that frequently revised product requirements, which puts a burden (and costs) on engineering. Additionally, sharing expenses in this matter might not be realistic as well.
Thirdly, a profit margin of 12% seems realistic.
I suggest the following bid (please find the complete calculation in the attached excel file):
Excel Spreadsheet. Download here.