Case Assignment

S T E P H E N A . G R E Y S E R W I L L I A M E L L E T

DRW Technologies

DRW Technologies, a defense and aerospace company with 21 manufacturing plants in the U.S. Southeast, Midwest, and West Coast, made advanced electronic systems for the U.S. military and commercial aircraft manufacturers. The company had a reputation for innovation and was consistently profitable. However, an anticipated decline in the U.S. defense budget and increasing use of fixed-price contracts1 were forcing defense industry contractors to try to lower costs. In addition, some industry analysts were predicting a drop in demand in the commercial aviation market.

The corporate headquarters of DRW Technologies was responsible for strategy, human resources, corporate finance and accounting, marketing and sales, shareholder relations, legal services, and government and public relations. The plants operated with a high degree of autonomy: they had their own human resources and finance and accounting departments along with product development, procurement, and manufacturing. In addition to production contracted through corporate marketing and sales, the DRW plants produced rush or custom orders for high-priority customers such as the U.S. military’s Special Operations Command. These orders, which represented approximately 10% of annual sales and had been trending upward, typically were not profitable, but plant management regarded them as a way to maintain strong relationships with loyal customers.

In DRW Technologies’ decentralized organization, each plant prepared an annual budget that was approved by corporate and included a target for contribution to the firm’s profits. In the previous three years, several of the plants had missed their targets, in part because of costs the company had to absorb under fixed-price contracts. However, the general feeling among the plant executives was that temporary circumstances, predominantly external, had caused the shortfalls.

1 Fixed-price contracts typically gave bonuses to contractors that came in under budget and assessed penalty payments when contractors exceeded the budget.

HBS Professor Stephen A. Greyser, Richard P. Chapman Professor Emeritus, Harvard Business School, and William Ellet, adjunct professor, at Brandeis University, prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental.

Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

916-535 | DRW Technologies

Plant procurement managers were aware of increasing cost pressures and had informally started sharing information on vendors with each other. The latter led to a few deals with vendors to supply certain materials common to some or all of the plants.

Dagmar Hilgard, who had been the company’s CEO for two years, was the first woman in the position and the firm’s first CEO to have a primarily finance background. She was concerned about the need to cut costs. Among other areas, she thought there was an opportunity to save money in procurement. With the approval of the board of directors, she hired DRW Technologies’ first corporate vice president of procurement, Ed Claiborne. He had been a procurement executive for a profitable national defense subcontractor. That firm was hierarchical with a strict chain of command. Claiborne was interviewed by Hilgard and by the chief financial officer of DRW Technologies, Charles Suh, who expressed reservations to Hilgard about Claiborne’s ability to adapt to the DRW culture.

Claiborne’s appointment was announced through a press release on the DRW Technologies website and in an email sent by Corporate Human Resources to all corporate executives and plant general managers. The appointment was also announced in the company’s printed newsletter.

Later, on Claiborne’s first day, Hilgard stressed that his primary concern should be cutting costs and doing it as quickly as possible. To be his assistant, she assigned Debby Lopez, who had 14 years of experience at DRW. She had worked her way up from a position in the accounting department of the North Carolina plant and knew many plant employees throughout the company.

Claiborne studied the cost of materials in 10 plants for the previous year, information that Debby Lopez had obtained for him. He quickly determined that he could lower costs by reducing the number of suppliers and taking advantage of economies of scale for some materials used at multiple DRW plants. He projected potential cost savings of up to 50% over six years. It was an open question, however, whether national vendors could do a better job than local suppliers of delivering material on time to multiple DRW plants in different parts of the country.

Claiborne decided to put in place a policy requiring plant procurement managers to clear with him contracts of $250,000 or more two weeks before the contracts were to be signed. He set the dollar threshold to ensure that he would see most of the plants’ procurement dollar values but would not be overwhelmed by the daily volume of small contracts. He had a meeting with Hilgard to discuss the policy, and she approved it. She said she did not need to know the details of its implementation.

He considered how to inform the plant procurement managers of the new policy, and decided the most efficient method was by email. Claiborne then wrote a draft message and asked Lopez what she thought of it. She recommended that he visit some of the larger plants, meet the plant and procurement managers, and ask for feedback on the proposed policy. Lopez also told him that the plants would be extremely busy for the next four to six months because of a backlog of orders.

Claiborne frowned and shook his head. He said, “Debby, I don’t think visiting plants is necessary.

Besides, I don’t want to rack up high travel expenses when I’m trying to cut costs.” Claiborne's email message read:

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DRW Technologies | 916-535

To: Plant Procurement Managers

From: Edward Claiborne, Corporate Vice President of Procurement Subject: Prior Approval of Contracts

Effective immediately, you will send me all contracts valued at $250,000 or more at least two weeks before you are planning to sign them. I will then let you know how to proceed. There are no exceptions to this policy.

This policy has been approved by Dagmar Hilgard and is of utmost importance to our continued competitiveness. Our markets are changing rapidly and we need to respond quickly and effectively.

If you have any questions, contact my assistant, Debby Lopez. Sincerely,

Edward Claiborne

Corporate Vice President of Procurement

The email message was sent on a Monday morning and most of the procurement managers responded within the week with short messages. This email response was typical:

Dear Ed,

Congratulations on your new job. I look forward to meeting you. I am glad to see that procurement is now being represented at the corporate level. We will inform you of any contracts above the stated limit at least two weeks before we sign them. This seems like a step in the right direction.

However, over the next several weeks, no contracts were submitted. At lunch and in meetings, Claiborne overheard corporate executives discussing their recent visits to the plants. They mentioned that the plants were extremely busy and many had added extra shifts.

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