Mason Instruments Inc

Group 6
Prashant Shukla [21]
Yashvardhan Naudiyal [35]
Siddharth Prasad [29]
Abishek Rajan [3]
 Context
 Mason Instruments Inc, a large producer of Industrial and Military products, is currently
engaged in preparing a bid on Navy production contracts for the Elect. Guidance system for
cherookee guidance missile.
 The company has successfully competed in first two rounds and was in production of these
systems.
 The cherookee avionics has been developed by Eldridge company and has the experience
of producing 1000 such systems. However the US Navy Sea System Command (Navsea),
responsible for R&D and administering production of Cherookee Missile, wants to develop a
new supplier for avionics component.
 1984 1st Round Bidding :- The Military Product Division (MPD) of Mason Instruments Inc,
was awarded, Based on Firm Fixed Prices, a familiarization contract to produce 50 units, build
capacity & develop suppliers. ( Spl purpose Equipment to be paid for by the government).
 2nd Round Bidding:- Based on the experience gained in the 1st rd, the company aggressively
bade for all the three categories (33%, 67%, 50% of the contract) keeping a 10% margin in all
three and charging $ 6 and $5.625 Mn in 67% and 50% category respectively, which was not
charged at all in the 1st rd. Based on the lower prices the 67% of the contract was awarded to
them.
 Production Experience
 Till June 1986 the company had Produced 50 1st rd units and 40 2nd rd units had been
assembled and parts purchased for 200 units.
1st rd cost experience revealed significant cost escalations, for Fabrication (5.51%),
Testing (230%), Dir lab O/H (11%), Engg cost (53.7%) and Total cost overran by (25.17%).
(reasons: Extra testing, Design & Development work, training and supervision work)
 Faulty Blueprints by Elridge
 Higher testing costs
 higher costs for suppliers.
Time Delays
 Frequent design changes by navy.
 Time delays
Cost ovrerruns (however were offset by renegotiating contracts)
No progress towards automated production
 Seeker units delivered to navy did not meet specs- led to reworking with suppliers
resulting in further time delays.
All the above mentioned contingencies led to MDP not focusing on reducing supplier
costs.
Total 1st rd loss, resulting due to “Accommodative Negotiation Strategy” and (Not
charging profits and forgoing tooling cost) the above mentioned reasons = $2.376 Mn.
 Problem Identification
Since, price competition is expected to be very Keen in third
round , MPD executives need to come up with a quote that
would allow them to be compititive and yet earn some profit
Alternatives
1. Follow Elridge’s 1st rd pricing strategy of biding low for 67
% Order (based on 2nd rd bids – Efficiency gained in 2nd
round), and high for 33%.
2. Charge Standard 10% profit on all 3 categories and place
all bids by applying learning curves on 2 nd rd bids i.e. 2nd
round bids - Efficiency gained in 2nd round.
3. Collaborate with Elridge on negotiating with Navy on
dropping the clause of “Firm Fixed price based” contract for
a “target incentive type contract” with navy.
 Option I – Bid Low For Higher Quantities And
High For Lower Quantities
• This Strategy failed for Elridge in 1st round and was not liked by
Navy.
• The Strategy is likely to cover for contingencies for higher bid
but, on the other hand allows no protection for the bigger
contract as the probability of bigger contract going for below $
135000 mark is high.
• Contingencies in 1st round, like faulty blue prints, Components
not meeting the specs, are not expected to repeat themselves in
the 3rd round.
• Significant cost improvements can be seen in 2nd rd revised
estimates in Fabrication (-69%). Cost situation can be further
improved to profitable levels in the 2nd rd provided
improvements can be made in in Testing.
 Option II– Bid Low For both Higher & Lower
Quantities
• This strategy Worked for Mason Instruments Inc, in 1 st round and
was appreciated by Navy.
• The probability of bigger contract going for below $ 135000 mark is
high.
• Contingencies in 1st round, like faulty blue prints and Components
not meeting the specs, are not expected to repeat themselves in the
3rd round hence, the Learning rate for 3rd round is expected to be
significantly higher.
• Cost situation can be further improved to profitable levels in the 2 nd
rd provided improvements can be made in in Testing.
• Improvements in testing can be made through renewed emphasis in
vendor management system.
• 2nd rd and 3rd rd, will allow for automated production as opposed
to the 1st rd .
Option III– Collaborate With Elridge On Negotiating For
Adopting “Target Incentive Type Contract” With Navy.

• Such proposal has already been rejected by Navy.

• Elridge may not be keen on such a collaboration as

it may be in a better position to cut costs, since it will
not be facing the contingencies confronted by Mason
inc. in 1st round.
 Recommendation
• We recommend to follow option – II ie biding low for both
high and low quantities
• Elridge management is seriously interested in making a
comeback.
• The option I has been rejected by navy
• Cost improvements are possible by laying maore emphasis
on procurements and vendor management.
• Significant investments has been made in 1st and 2nd round
which can not be covered by high bids in 3rd round
• Collaboration with Elridge may not be feasible as navy is not
likely to accept the Idea of Target Incentive Type pricing.