Greyson Corporation was formed in 1940 by three scientists from the University of California. The major purpose of the company was research and...

Greyson Corporation was formed in 1940 by three scientists from the University

of California. The major purpose of the company was research and development

for advanced military weaponry. Following World War II, Greyson became a

leader in the field of research and development. By the mid-1950s, Greyson employed

over 200 scientists and engineers.

The fact that Greyson handled only R&D contracts was advantageous. First

of all, all of the scientists and engineers were dedicated to R&D activities, not

having to share their loyalties with production programs. Second, a strong functional

organization was established. The project management function was the responsibility

of the functional manager whose department would perform the majority

of the work. Working relationships between departments were excellent.

By the late 1950s Greyson was under new management. Almost all R&D

programs called for establishment of qualification and production planning as

well. As a result, Greyson decided to enter into the production of military

weapons as well, and capture some of the windfall profits of the production market.

This required a major reorganization from a functional to a matrix structure.

Personnel problems occurred, but none that proved major catastrophes.

In 1964 Greyson entered into the aerospace market with the acquisition of a

subcontract for the propulsion unit of the Hercules missile. The contract was projected

at $200 million over a five-year period, with excellent possibilities for follow-on

work. Between 1964 and 1968 Greyson developed a competent technical staff composed mainly of young, untested college graduates. The majority of the

original employees who were still there were in managerial positions. Greyson

never had any layoffs. In addition, Greyson had excellent career development programs

for almost all employees.

Between 1967 and 1971 the Department of Defense procurement for new

weapons systems was on the decline. Greyson relied heavily on their two major

production programs, Hercules and Condor II, both of which gave great promise

for continued procurement. Greyson also had some thirty smaller R&D contracts

as well as two smaller production contracts for hand weapons.

Because R&D money was becoming scarce, Greyson's management decided

to phase out many of the R&D activities and replace them with lucrative production

contracts. Greyson believed that they could compete with anyone in regard

to low-cost production. Under this philosophy, the R&D community was reduced

to minimum levels necessary to support in-house activities. The director of engineering

froze all hiring except for job-shoppers with special talents. All nonessential

engineering personnel were transferred to production units.

In 1972, Greyson entered into competition with Cameron Aerospace

Corporation for development, qualification, and testing of the Navy's new

Neptune missile. The competition was an eight-motor shoot-off during the last

ten months of 1973. Cameron Corporation won the contract owing to technical

merit. Greyson Corporation, however, had gained valuable technical information

in rocket motor development and testing. The loss of the Neptune Program made

it clear to Greyson's management that aerospace technology was changing too

fast for Greyson to maintain a passive position. Even though funding was limited,

Greyson increased the technical staff and soon found great success in winning research

and development contracts.

By 1975, Greyson had developed a solid aerospace business base. Profits had

increased by 30 percent. Greyson Corporation expanded from a company with

200 employees in 1964 to 1,800 employees in 1975. The Hercules Program,

which began in 1964, was providing yearly follow-on contracts. All indications

projected a continuation of the Hercules Program through 1982.

Cameron Corporation, on the other hand, had found 1975 a difficult year. The

Neptune Program was the only major contract that Cameron Corporation maintained.

The current production buy for the Neptune missile was scheduled for completion

in August 1975 with no follow-on work earlier than January 1976. Cameron

Corporation anticipated that overhead rates would increase sharply prior to next buy.

The cost per motor would increase from $55,000 to $75,000 for a January procurement,

$85,000 for a March procurement, and $125,000 for an August procurement.

In February 1975, the Navy asked Greyson Corporation if they would be interested

in submitting a sole-source bid for production and qualification of the

Neptune missile. The Navy considered Cameron's position as uncertain, and

wanted to maintain a qualified vendor should Cameron Corporation decide to get

out of the aerospace business.

Greyson submitted a bid of $30 million for qualification and testing of thirty

Neptune motors over a thirty-month period beginning in January 1976. Current

testing of the Neptune missile indicated that the minimum motor age life would

extend through January 1979. This meant that production funds over the next

thirty months could be diverted toward requalification of a new vendor and still

meet production requirements for 1979.

In August 1975, on delivery of the last Neptune rocket to the Navy, Cameron

Corporation announced that without an immediate production contract for

Neptune follow-on work it would close its doors and get out of the aerospace

business. Cameron Corporation invited Greyson Corporation to interview all of

their key employees for possible work on the Neptune Requalification Program.

Greyson hired thirty-five of Cameron's key people to begin work in October

1975. The key people would be assigned to ongoing Greyson programs to become

familiar with Greyson methods. Greyson's lower-level management was very unhappy

about bringing in these thirty-five employees for fear that they would be

placed in slots that could have resulted in promotions for some of Greyson's people.

Management then decreed that these thirty-five people would work solely on

the Neptune Program, and other vacancies would be filled, as required, from the

Hercules and Condor II programs. Greyson estimated that the cost of employing

these thirty-five people was approximately $150,000 per month, almost all of

which was being absorbed through overhead. Without these thirty-five people,

Greyson did not believe that they would have won the contract as sole-source procurement.

Other competitors could have "grabbed" these key people and forced

an open-bidding situation.

Because of the increased overhead rate, Greyson maintained a minimum staff

to prepare for contract negotiations and document preparation. To minimize costs,

the directors of engineering and program management gave the Neptune program

office the authority to make decisions for departments and divisions that were

without representation in the program office. Top management had complete confidence

in the program office personnel because of their past performances on

other programs and years of experience.

In December 1975, the Department of Defense announced that spending was

being curtailed sharply and that funding limitations made it impossible to begin the

qualification program before July 1976. To make matters worse, consideration was

being made for a compression of the requalification program to twenty-five motors

in a twenty-month period. However, long-lead funding for raw materials would be

available.

After lengthy consideration, Greyson decided to maintain its present position

and retain the thirty-five Cameron employees by assigning them to in-house programs.

The Neptune program office was still maintained for preparations to support

contract negotiations, rescheduling of activities for a shorter program, and

long-lead procurement.

In May 1976, contract negotiations began between the Navy and Greyson. At

the beginning of contract negotiations, the Navy stated the three key elements for

negotiations:

1. Maximum funding was limited to the 1975 quote for a thirty-motor/thirty-month

program.

2. The amount of money available for the last six months of 1976 was limited

to $3.7 million.

3. The contract would be cost plus incentive fee (CPIF).

After three weeks of negotiations there appeared a stalemate. The Navy contended

that the production man-hours in the proposal were at the wrong level on

the learning curves. It was further argued that Greyson should be a lot "smarter"

now because of the thirty-five Cameron employees and because of experience

learned during the 1971 shoot-off with Cameron Corporation during the initial

stages of the Neptune Program.

Since the negotiation teams could not agree, top-level management of the

Navy and Greyson Corporation met to iron out the differences. An agreement was

finally reached on a figure of $28.5 million. This was $1.5 million below

Greyson's original estimate to do the work. Management, however, felt that, by

"tightening our belts," the work could be accomplished within budget.

The program began on July 1, 1976, with the distribution of the department

budgets by the program office. Almost all of the department managers were furious.

Not only were the budgets below their original estimates, but the thirty-five

Cameron employees were earning salaries above the department mean salary,

thus reducing total man-hours even further. Almost all department managers asserted

that cost overruns would be the responsibility of the program office and not

the individual departments.

By November 1976, Greyson was in trouble. The Neptune Program was on

target for cost but 35 percent behind for work completion. Department managers

refused to take responsibility for certain tasks that were usually considered to be

joint department responsibilities. Poor communication between program office

and department managers provided additional discouragement. Department managers

refused to have their employees work on Sunday.

Even with all this, program management felt that catch-up was still possible.

The thirty-five former Cameron employees were performing commendable work

equal to their counterparts on other programs. Management considered that the

potential cost overrun situation was not in the critical stage, and that more time

should be permitted before considering corporate funding.

In December 1976, the Department of Defense announced that there would

be no further buys of the Hercules missile. This announcement was a severe blow

to Greyson's management. Not only were they in danger of having to lay off 500

employees, but overhead rates would rise considerably. There was an indication

last year that there would be no further buys, but management did not consider

the indications positive enough to require corporate strategy changes.

Although Greyson was not unionized, there was a possibility of a massive

strike if Greyson career employees were not given seniority over the thirty-five

former Cameron employees in the case of layoffs.

By February 1977, the cost situation was clear:

1. The higher overhead rates threatened to increase total program costs by

$1 million on the Neptune Program.

2. Because the activities were behind schedule, the catch-up phases would

have to be made in a higher salary and overhead rate quarter, thus increasing

total costs further.

3. Inventory costs were increasing. Items purchased during long-lead funding

were approaching shelf-life limits. Cost impact might be as high as

$1 million.

The vice president and general manager considered the Neptune Program critical

to the success and survival of Greyson Corporation. The directors and division

heads were ordered to take charge of the program. The following options were

considered:

1. Perform overtime work to get back on schedule.

2. Delay program activities in hopes that the Navy can come up with additional

funding.

3. Review current material specifications in order to increase material shelf

life, thus lowering inventory and procurement costs.

4. Begin laying off noncritical employees.

5. Purchase additional tooling and equipment (at corporate expense) so that

schedule requirements can be met on target.

On March 1, 1977, Greyson gave merit salary increases to the key employees on

all in-house programs. At the same time, Greyson laid off 700 employees, some

of whom were seasoned veterans. By March 15, Greyson employees formed a

union and went out on a strike.

1. What is the case all about?

2. What s the structure of Greyson?

3. What are the problems encountered by Greyson? How do you think this can be solved?