Question

“Frankly speaking, Jeff, I didn’t think we would stand a chance in winning this $20 million program. I was really surprised when they said that they’d like to accept our bid and begin negotiations. As Chief contract administrator, you will head up the negotiation team, “remarked Gus Bell, vice president and general manager of Cory Electric. “You have two weeks to prepare your data and line up your team. I want to see you when you’re ready to go”. Jeff Stokes was chief contract negotiator for Cory Electric, a $250- million-a year electrical components manufacturer serving virtually every major U.S industry. Cory Electric had a well-established matrix structure that had withstood fifteen years of testing. Job casting standards were well established, but did include some “fat” upon the discretion of the functional manager. Two weeks later, Jeff met with Gus Bell to discuss the negotiation process. Gus Bell: “Have you selected an appropriate team? You had better make sure that you’re covered on all sides” Jeff: “There will be four, plus myself, at the negotiating table; the programme manager, the chief engineer who developed the engineering labour packages; the chief manufacturing engineer who developed the production labour package; and a pricing specialist who has been on the proposal since the kick-off meeting. We have a strong team and should be able to handle any questions” Gus Bell: “Okay, I’II take your word for it. I have my own checklist for contract negotiations. I want you to come back with a guaranteed fee of $1.6 million for our stockholders. Have you worked out the possible situations based on the negotiated costs?” Jeff: “Yes! Our minimum position is $20 million plus an 8 percent profit. Of course, this profit percentage will vary depending on the negotiated cost. We can bid the programme at $15 million cost; that’s $5 million below our target cost and still book a 1.6 million profit by overrunning the cost-plus-fee contract. Here is a list of the possible cases. See Exhibit one below. Jeff: “I’ve read over all terms and conditions, and so have all the project office personnel as well as the key functional managers. The only major item is that the customer wants us to qualify some few vendors as sources for raw material procurement. We have included in the package the cost of qualifying two new raw material suppliers” Gus Bell: “Where are the weak points in our proposal? I’m sure we have some” Jeff: “Last month, the customer sent in a finding team to go over all of our labour justifications. The impression that I get from our people is that we’re covered all the way round. The only major problem might be where we’ll be performing on our learning curve. We put into the proposal 45 percent learning curve efficiency. The customer has indicated that we should be up around 50 to 55 percent efficiency based on our previous contracts with him. Unfortunately, those contracts the customer referred to were four years old. Several of the employees who worked on those programs have left the company. Others are assigned to on-going projects here at Cory. I estimate that we could put together about 10 percent of people we used previously. That learning curve percentage will be a big point for disagreements. We finished off the previous programs with the customer at 35 percent learning curve position. I don’t see how they can expect us to be smarter, given these circumstances.” Gus Bell: “If that’s the only weakness, then we’re in good shape. It sounds like we have a fool proof audit trail. That’s good! What’s your negotiation sequence going to be? Jeff: “I’d like to negotiate the bottom line only, but that’s a dream. We’ll probably negotiate the raw materials, the man-hours and the learning curve, the overhead rate, and finally the profit percentage. Hopefully, we can do it in that order.” Gus Bell: “Do you think that we’ll be able to negotiate a cost above our minimum position?” Jeff: “Our proposal was $22.2 million. I don’t foresee any problem that will prevent us from coming out ahead of the minimum position. The 5 percent change in learning curve efficiency amounts to approximately $ 1 million. We should be well covered. “The first move will be up to them. I expect that they’ll come in with an offer of $ 18 to $19 million. Using the binary chop procedure, that’ll give us our guaranteed minimum position. Gus Bell: “Do you know the guys who you’ll be negotiating with?” Jeff: “Yes, I’ve dealt with them before. The last time, the negotiations took three days. I think we both got what we wanted. I expect this one to go just smoothly” Gus Bell: “Okay, Jeff. I’m convinced we’re prepared for negotiations. Have a good trip” The negotiations began at 9:00 A .M on Monday morning. The customer countered the original proposal of $22.2 million with an offer of $15 million. After six solid hours of arguments, Jeff and his team adjourned. Jeff immediately called Gus Bell at Cory Electric. Jeff: “Their counteroffer to our bid is absurd. They’ve asked us to make a counteroffer to their offer. We can’t do that. The instant we give them a counter-offer, we are in fact giving credibility to their absurd bid. Now, they’re claiming that, if we don’t give them a counteroffer, then we’re not bargaining in good faith. I think we’re in trouble” Gus Bell: “Has the customer done their homework to justify their bid?” Jeff: “Yes, very well”. Tomorrow we’re going to discuss every element of the proposal, task by task. Unless something drastically changes in their position within the next day or two, contract negotiations will probably take up to a month” Gus Bell: “Perhaps this is one program that should be negotiated at the top levels of management. Find out if the person that you’re negotiating with reports to a vice president and general manager, as you do. If not, break off contract negotiations until the customer gives us someone at your level. We’ll negotiate this at my level, if necessary.”

For the case study above, Create a PERT schedule with the key activities for the $20 million contract negotiation project. There should be between 6 to 10 activities identified from the case study. Additional relevant activities may be included. Create an AON network diagram and find the critical path using slack once estimated activity time is established.

Answer 1

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For the case study above, Create a PERT schedule with the key activities for the $20 million contract negotiation project. There should be between 6 to 10 activities identified from the case study. Additional relevant activities may be included. Create an AON network diagram and find the critical path using slack once estimated activity time is established.

After identifying the activities from the case study, all the activities were tabulated in sequence with all their expected activity durations based on previous negotiation experience the predecessors were also tabulated where the predecessors are the activities that must be completed before the next activity begins. The expected durations which is in the last column is then calculated utilizing the PERT formula which calculates the best time duration for each activity. Where (te) is the expected completion time, (a) is the optimistic time, (m) the most probable time and (b) the pessimistic time, the formula is applied for each activity to determine the expected completion time.

Expected Time = (Optimistic + 4 x Most Likely + Pessimistic) / 6

The information in table is then utilized to create an activity of node (AON) network diagram which will be a graphical representation of the activities in logical order with the duration also shown.

Once the activity on node network diagram is created, we then are able to work out and develop the critical path. The figure 3 below shows the configuration of the activity on node method for working out the critical path there are various processes and formulas that need to be applied. The durations which were calculated using PERT are now used to calculate the start and finish times of each activity using the forward and backward pass method to determine the earliest start, earliest finish, latest finish and latest start.

Early Start (ES)		Early Finish (EF)
	Activity	Duration
Late Start (LS)	Float	Late Finish (LF)

The forward pass is used to calculate the early start and early finish time on each activity and the backward pass calculates the late finish and late start. By applying the following rules below, we can determine these activity times for each activity.

Forward Pass Rules	Backward Pass Rules
Activity on Start node – Early start time ES=0	For the last activity the following applies: Late Finish (LF) = Early Finish (EF)
Early start time is the Maximum Time of predecessor’s ES = Max (Early finish time)	LF time is the Minimum Time of predecessor’s LF = Min Late start (LS of predecessors)
EF time is calculated by using the following formula (EF = ES + Duration)	LS time is calculated by using the following formula (LS=LF - Duration)

Table: Forward and Backward Pass application rules

The forward and backward pass is then carried out on each activity on the network diagram to determine all the activities durations on the activity that is completed. Once the network diagram has been drawn with the durations estimated using the PERT method, and the ES, EF, LS and LF durations have been worked out by using the forward and backward pass the critical path of the negotiation process can be worked out.

The critical path can be calculated by using two ways. The first way is by adding all the durations on simple pathways which can mostly be used on simple network diagrams, the pathway with the longest network will become the critical path. The second way is by calculating the slack from the network diagram which we use a simple formula which is the slack is equal to the last start (LS) minus the early start (ES) or the late finish (LF) minus the early finish (EF).

To calculate the critical path both methods will be done to determine the correctness of the critical path.

Method 1: longest path method

Path 1: A-B-C-F-H-J-K          Length = 0+1+2+2+3+3+0 = 11 days

Path 2: A-B-D-F-H-J-K          Length = 0+1+1+2+3+3+0 = 10 days

Path 3: A-B-E-G-I-J-K           Length = 0+1+1+1+2+3+0 = 8 days

Method 2: Calculating slack on each activity

The slack is calculated for each activity and is shown in red under the float on the network diagram below.

Fig 2: AON network diagram showing critical path

By using both methods it is proven that the critical path is path 1 which is A-B-C-F-H-J-K.

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