The Case Study Report

On

De Havilland Inc.

Executive Summery

My decision is to recommend Marton to DeHavilland’s Source Selection Board (SSB) as

prospective vendor for selection provided that the results of the quality analysis of Marton’s

production, physical inspection of their facilities, and review of their financial statements are

satisfactory.

Based on the initial information from the normalized bids from all nine potential suppliers for

flap shrouds and equipment bay doors, the most cost effective alternative is Marton Enterprises

Inc. Their bid shows them to be 18% lower than their nearest competitor, and when comparing

pricing of specific components to the pricing by current providers they are between 54% and

75% less expensive.

However, beyond parts cost reduction we are also interested in establishing long-term co-

operative contracts with the vendor. So, apart from determining whether the best price offer, we

need to determine whether Marton is sufficiently stable to be relied upon in the long run.

So my strategic intention here is to negotiate an agreement with Marton Inc. that will be of the

greatest value possible to de Havilland keeping in mind our goal of longer-term agreements and
reducing the amount of vendors we deal with. A good decision from SSB will allow DeHavilland

to achieve this objective.

I. Process Elements /Table of Content

A. Executive Summary Page 1

B. Table of Contents Page 2

II. Issue with Impact Analysis Page 3

III. Environmental & Root Cause Analysis Page 4

IV. Alternatives and/or Options Page 5

V. Recommendation and Implementation Page 6

VI. Monitor & Control Page 8

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List o Issues with impact analysis:

As we have identified that our best option is to negotiate an agreement with Marton Inc., we now

should look at what are the potential issues as roadblocks in achieving this goal. There are many

potential parties that may be factors in coming to an agreement with Marton and all have their

own agendas. The most impactful parties to this agreement are internal. On the de Havilland

side, the Source Selection Board could cause this agreement to come apart. If forced to negotiate

price based on the model of establishing the three price points for negotiation, I expect Marton to

walk away. This is based on the fact that they have stated clearly in their bid that this price is not

up for negotiation, and the fact that their price is already extremely competitive. The other

concern is with the current purchasing cycle, Marton has put a 120 day acceptance period into

the bid, in my mind, the current process for purchasing can potentially be too much time

consuming. It is imperative that de Havilland find a way to make sure this agreement gets done

within the allotted timeframe.

Beyond de Havilland and Marton the two parties that could have the biggest impact are the

parent companies; Bombardier who owns the majority share of de Havilland, and Devon

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Holdings who owns Marton Inc. The reason they could have the most impact is simply that they

can potentially over-turn any decision made by either de Havilland or Marton at their discretion.

The reasons they could over-turn could be based on previously established relationships or

political reasons. A solidly developed, soundly made decision based on fact, should negate any

reason for either parent to become involved.

As a minority shareholder, the provincial government of Ontario doesn’t have any direct power

and could not directly effect the decision to negotiate with Marton, however they could

potentially put a negative spin on the fact that de Havilland is working with a U.S. supplier

instead of a Canadian supplier, which in turn could force Bombardier to step in and veto the

Marton negotiation. Bombardier has received many millions in loans, grants, and tax relief from

the federal government over the years. So therefore the federal government could become a

potential player in this as well.

Boeing who previously owned de Havilland is another potential party who could effect this

negotiation. Marton has an ongoing relationship with Boeing, in fact based on Marton’s own

numbers; Boeing represents more than 15% of their current business and expects it to grow to

almost 20% within the next couple years. If Boeing sees de Havilland as a competitor to any

part of their business, they may work to persuade Marton to walk away from any dealings with

de Havilland.

Beyond the parties who could have an effect on the agreement between de Havilland and Marton

there are other factors that could have an effect on the agreement. The first factor is the financial

stability of both parties. If either party is comfortable with the financial position of the other,

this agreement will come apart immediately. In this case, with the parent companies both being

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large corporations, not to mention de Havilland being partially owned by the Ontario

government, this should not be a factor.

Environmental and Root Cause Analysis:

As regards Marton, it seems they have other customers for their products if they do not come to

an agreement with DeHavilland. Assuming that the projected increase in the share of Marton’s

sales to Boeing in 1992-1997 compared to 1991 is all due to a potential contract with

DeHavilland, Exhibit 1 shows that Marton’s annual total sales increase at a much larger rate than

that brought about by the contract with DeHavilland, suggesting that Marton do not lack

customers for their products. The projected increase in Marton’s total sales over the period 1992-

1997 is consistent with what happened in the past, and thus can be relied upon to make

inferences.

DeHavilland, one of the parties to the negotiation process, is interested in reducing the cost of

flap shrouds and equipment bay doors. As well, they aim to eliminate the costs associated with

frequent negotiations and monitoring of vendors not working under contract by having more

contracts signed on the basis of long-term, firm, fixed prices. Moreover, DeHavilland wants to

work with a smaller portfolio of vendors to allow each vendor to capture economies of scale and,

hopefully, pass these cost reductions along.

Apart from the 10 percent rate of profit on sales to DeHavilland, Marton, the other party to the

negotiation, are also interested in strengthening their reputation on the Canadian market.

If the two parties reach an agreement, a surplus equal to the difference between what

DeHavilland would have to pay for parts to their current vendor, Dollard Plastics, and the price

at which Marton is willing to sell the parts at – i.e., $2,810,174-$748,994=$2,061,180.[1]

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However, this value needs to be corrected for any potential difference in quality between the

parts offered by the two vendors. It is stated in the text that vendors have choices as regards the

material that can be used to produce the tools, and that the choice of material has important

implications for tool cost and durability. The question that naturally rises is: is Marton’s price

(cost) low because they use low quality materials or just because they are more efficient than the

other vendors? The non-recurring cost could be used as a signal of the quality of materials used

by Marton before the actual quality analysis takes place. However, Marton chose to allocate the

tooling cost across production rather than including it as a single non-recurring charge in their

bid and so we do not know whether or not they use high-quality materials.

As well, this value is lowered by the penalties that DeHavilland would have to pay its current

vendor, Dollard Plastics, to cancel the contract for flap shrouds that would expire at the end of

1993, should DeHavilland sign a contract with Marton to start August 1992.

Moreover, this value needs to be adjusted by the costs that DeHavilland incurs to select a new

vendor, Marton, rather than continue working with the current vendor.

Finally, this value increases by the amount of savings DeHavilland can achieve by signing long-

term, firm, fixed prices with suppliers, rather than purchasing from vendors with no contract in

place and thus having to conduct frequent negotiations and monitoring.

Strategic behavior is a potential obstacle to successful negotiation between DeHavilland and

Marton. Having at least two other vendors (Das Composites and Lakeside Industries) that made

bids close to that of Marton, DeHavilland could overplay their hands hoping that Marton would

lower their prices even more. However, this is unlikely to happen since DeHavilland always

proved sufficiently flexible to reach a mutually acceptable price and sign a contract with the first

selected vendor.

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Another obstacle may be the lack of trust that Marton’s refusal to provide DeHavilland with their

financial statements could cause. However, this should not be a big problem since Marton agrees

to make this data available when DeHavilland visits their facility.

The fact that DeHavilland received favorable bids from other vendors may increase their

bargaining power in the negotiation with Marton. However, Marton’s decision to set a deadline

of 120 days for DeHavilland to accept their proposal limits the possibility for DeHavilland to

conclude negotiations with those other vendors. Moreover, the gain to DeHavilland from this

negotiation (part cost reduction, lower transaction costs etc.) is expected to be larger than the

gain to Marton, which makes the former party to the negotiation to be more impatient than the

latter. As a result, the bargaining power of DeHavilland further decreases.

One ethical issue that may arise in the negotiations between DeHavilland and Marton is related

to the objective that DeHavilland’s negotiation team has compared to that of DeHavilland’s

shareholders (the Government of Ontario). While the negotiation team may aim to select the

vendor that maximizes the private value to DeHavilland, the Government of Ontario may prefer

the negotiation team to select a local vendor (e.g., Lakeside Industries based in Kingston,

Ontario) and maximize the sum of private benefits to DeHaviland and social benefits to

Ontario’s inhabitants.

Besides another ethical considerations should be taken into account i.e. whether or not Marton is

submitting a truthful bid upfront or just throwing in a low figure to win the contract and jack it

back up after contract award and low pricing may not necessarily mean good quality product.

Alternatives or Options:

Although our best opportunity is to negotiate a deal with Marton, we need to look at our best

alternative to a negotiated agreement (BATNAs). If the negotiations were to fall apart what are

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the options that we need to consider, and what the cost would be if we were to walk away from

the Marton deal. We also need to understand what Marton’s BATNAs could be as well.

DeHavilland’s Best Alternative To a Negotiated Agreement (BATNA) with Marton would be to

select Lakeside Industries, try to negotiate a mutually acceptable price and sign a contract with

them. While Lakeside have the third bid, the difference between their bid ($901,596) and the

second bid ($889,816) is not large and may be compensated by the transaction costs associated

with starting working with a new supplier (DeHavilland currently work with Lakeside, under no

contract).

de Havilland’s BATNAs all revolve around other potential suppliers. If for whatever reason the

Morton deal were to fall through, the next two bids were 7% and 17% higher respectively, which

is still substantially lower than what they were paying before working with Dollard. The worst

of the BATNAs based on de Havilland strategy to reduce the number of vendors is to negotiate

deals with Marton, DAS composites, and Lakeside Industries for individual components. Based

on the normalized pricing in Exhibit 3, we could end up with even better pricing overall.

Marton’s BATNAs are even simpler, based on the information provided; they can walk away

from the de Havilland deal and look for another opportunity. At the very worst, they’d be in the

same position they were before. It is very easy to see based on their BATNAs that getting a deal

done between de Havilland and Marton is a Win – Win, and not getting a deal done is a Lose –

Lose, therefore the power relationship is pretty even.

Recommendation and Implementation:

Set up a post bid clarification meeting with Marton Enterprises to clarify the pricing of the

different components and ensure that they are realistic and firm and get a written commitment

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from them before final decision to award. Bid clarification meeting will include experts from the

Material, Finance, and Engineering and Quality Assurance teams of de Havilland.

My recommendations have less to do with the potential deal between de Havilland and Marton,

and more to do with the process that de Havilland is currently using to pick suppliers and

negotiate price. The time and money that de Havilland is spending negotiating price in their

current format is almost ensuring that the prices quoted through the RFQ process are not the

lowest based on the specifications provided. It is my recommendation that going forward, in

circumstances where an RFQ is the strategy of choice, that it be stipulated that there will be no

negotiation of price after bids are submitted. This should create a more competitive atmosphere

and ensure more competitive pricing, not to mention improve the reputation of the de Havilland

purchasing department. From an ethical standpoint sticking more closely to the true model of the

RFQ will also help de Havilland to improve their standing within the industry.

In regards to the Marton deal, de Havilland should have no reason to get this deal done in a

relatively short period of time.

Plan of Action

• Assess the penalties associated with cancelling the contract with Dollard Plastics

• If these penalties do not exceed the difference between the normalized price offered by

Lakeside Industries and that offered by Marton, then conduct quality analysis of Marton’s

production, physical inspection of their facilities, and review of their financial statements at

Marton’s facility

o If findings are satisfactory, then recommend Marton to DeHavilland’s Source Selection

Board

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 • If otherwise, recommend Lakeside Industries and negotiate with them to start the contract

when that with Dollard Plastics expires (since Lakeside is a current vendor, quality analysis and

physical inspection are not necessary)

Monitor and Control:

de Havilland will need to see what the results are of sticking more closely to the RFQ model

does to their cost structure for items that purchased that way. They will also need to look at their

costs related to their former procurement processes versus the standard RFQ. It shouldn’t take

too long for word to get around that de Havilland is sticking to the competitive bid process. The

key is to make sure that the specifications provided within the RFQ, are specific enough to

provide the desired finished product with the desired level of quality, but not too specific that it

becomes a product that can only be bid on by limited suppliers and reduce the competitive nature

of the bids.

Conclusion

Tomar’s recommendation was urgent. Despite the fact that current inventory levels of flap

shrouds and equipment bay doors would be sufficient for more than a year of production, the

time necessary to establish a new vendor was also long, which meant that a recommendation to

DeHavilland’s Source Selection Board had to be made as soon as possible.

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Exhibit 1. Marton’s Annual Total Sales and Boeing Portion

|Year |Boeing Share |Abs Δ (base 1991) |Total Sales |%Δ (base

1991) |

|1988 |8 | |29.2 | |

|1989 |8 | |29.5 | |

|1990 |13.7 | |32.3 | |

|1991 |15 | |37.2 | |

|1992 |16.5 |1.50 |40 |7.53 |

|1993 |17 |2.00 |42 |12.90 |

|1994 |17 |2.00 |44 |18.28 |

|1995 |17 |2.00 |46 |23.66 |

|1996 |17 |2.00 |48 |29.03 |

|1997 |17 |2.00 |50 |34.41 |

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[1] Calculation based on the normalized bids values presented in Exhibit 3.

Analysis

One possible BATNA for de Havilland, other than merely requesting Marton to further lower

their costs, or switching to another vendor is to explore the possibility of incorporating other

product mixes and /or product lines into Martos’ proposal offer. That way, de Havilland achieves

more cost savings on a bigger package. For instance if Martos Enterprise submitted quote of

$75,000 for only flap shrouds, de Havilland can propose that they throw in equipment bay doors

in that quotes as well. For Marton Enterprises, a possible BATNA can also be incorporating

other product lines to the offer and negotiating better transportation, supply, support services and

quality performance terms with de Havilland. For example Marton can offer to provide free

training and technical assistant to de Havilland for a one year period after product supply.

The parties involved in this bid evaluation of Marton Enterprises include the expertise of the

Material, Finance, and Engineering and Quality Assurance teams of de Havilland. Their overall

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analysis of Marton’s skills and capabilities will play a vital role in the award of the contract to

Marton Enterprises. Their interest and objectives is to make sure that Marton Enterprises is

sufficiently stable to be relied upon in the long run and for long term business relationships.

Their review and verification procedures will include review of Marton’s financial statements,

audits and company visits and inspections. These parties should be convinced that Martin

Enterprises is not just quoting a low price just to “buy” the contract. Once these parties are

convinced beyond reasonable doubts potential value will be created for both parties in that buyer

will be confident to receive quality and reliable work while supplier will win the good will of a

business client, thereby creating a long term mutually beneficial relationship.

A major potential barrier to success is the possibility that Marton proposes low price just to win

contract and then submits indiscriminate changes and deviations that result in high cost impacts

after contract award and during contract execution. This of course will hinder the smooth flow

and success of the project and will definitely truncate the business relationship between de

Havilland and Marton Enterprises. Another barrier to success is the fact that Marton did not

include the financial statement of the Marton in its bid. This can trigger some doubts and

suspicion in Marton’s financial strength to see the project through completion. That is why Kim

Tomar went to through external sources to ensure the accurate financial status of Marton

Enterprises was submitted and access. Although the financial statement was incomplete and

segmented, it provided significant information of Marton’s financial status. These barriers can

be overcome if Marton provides a realistic quote to de Havilland upfront and not merely for the

sake of winning the contract to avoid any unpleasant surprises post award. As well, complete

financial statements of bidders should be submitted with bids to avoid doubts.

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From my assessment, the power relations that exists between de Havilland and Marton

Enterprises is almost at par because de Havilland is concerned about getting reliable and quality

parts from Marton based on the lowest bidder, while Marton is concerned about winning the

contract. Therefore, both parties seem to be at this same level of risk. However, if hard pressed,

de Havilland still wields more power as it has the popular BATNA of reverting to an alternate

supplier while Marton loses the work.

Some possible ethical considerations in this case whether or not Marton is submitting a truthful

bid upfront or just throwing in a low figure to win the contract and jack it back up after contract

award. Another ethical consideration on de Havilland is whether or not its selection is strictly

based on economic pressure or cost saving measures. Has de Havilland been fair in its bid

evaluation process? Does it consider the quality of the other eight bidders in comparison to that

of Marton’s and finds it to be fair? Is low pricing a greater yardstick of bid evaluation than

quality of products? Does low pricing necessarily mean good quality product?

Recommendation/Plan of Action

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