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Polyproducts
Incorporated

Polyproducts Incorporated, a major producer of rubber components, employs 800

people and is organized with a matrix structure. Exhibit I shows the salary struc-
ture for the company, and Exhibit II identifies the overhead rate projections for
the next two years.
Polyproducts has been very successful at maintaining its current business
base with approximately 10 percent overtime. Both exempt and nonexempt
employees are paid overtime at the rate of time and a half. All overtime hours are
burdened at an overhead rate of 30 percent.
On April 16, Polyproducts received a request for proposal from Capital
Corporation (see Exhibit III). Polyproducts had an established policy for com-
petitive bidding. First, they would analyze the marketplace to see whether it
would be advantageous for them to compete. This task was normally assigned to
the marketing group (which operated on overhead). If the marketing group
responded favorably, then Polyproducts would go through the necessary pricing
procedures to determine a bid price.
On April 24, the marketing group displayed a prospectus on the four com-
panies that would most likely be competing with Polyproducts for the Capital
contract. This is shown in Exhibit IV.

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214 POLYPRODUCTS INCORPORATED

Exhibit I. Salary structure

Pay Scale

Grade Hourly Rate

1 8.00
2 9.00
3 11.00
4 12.00
5 14.00
6 18.00
7 21.00
8 24.00
9 28.00

Number of Employees per Grade

Department 1 2 3 4 5 6 7 8 9 Total

R&D 5 40 20 10 12 8 5 100
Design 3 5 40 30 10 10 2 100
Project engineering 30 15 10 5 60
Project management 10 10 10 30
Cost accounting 20 10 10 10 10 60
Contracts 3 4 2 1 10
Publications 3 5 3 3 3 3 20
Computers 2 3 3 1 1 10
Manufacturing engineering 2 7 7 3 1 20
Industrial engineering 4 3 2 1 10
Facilities 8 9 10 7 1 35
Quality control 3 4 5 5 2 1 20
Production line 55 50 50 30 10 5 200
Traffic 2 2 1 5
Procurement 2 2 2 2 1 1 10
Safety 2 2 1 5
Inventory control 2 2 2 2 1 1 10

At the same time, top management of Polyproducts made the following pro-
jections concerning the future business over the next eighteen months:
1. Salary increases would be given to all employees at the beginning of the thir-
teenth month.
2. If the Capital contract was won, then the overhead rates would go down 0.5
percent each quarter (assuming no strike by employees).
3. There was a possibility that the union would go out on strike if the salary in-
creases were not satisfactory. Based on previous experience, the strike would
last between one and two months. It was possible that, due to union demands,
the overhead rates would increase by 1 percent per quarter for each quarter af-
ter the strike (due to increased fringe benefit packages).
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Polyproducts Incorporated 215

Exhibit II. Overhead structure

General
Manager

Director
Director Director Director
Program
Engineering Finance Production
Management

Program R&D Cost Manufacturing

Management Design Accounting Engineering
Project Contracts Industrial Engineering
Engineering Publications Facilities
Computers Quality Control
Production Line
Traffic
Procurement
Safety
Inventory
Control

Quarter

Division 1 2 3 4 5 6 7 8

Engineering 75 75 76 76 76 76 77 78
Program management 100 100 100 100 100 100 100 100
Finance 50 50 50 52 54 54 55 55
Production 175 176 177 177 177 178 178 178
Overhead rates per quarter, %.

4. With the current work force, the new project would probably have to be done
on overtime. (At least 75 percent of all man-hours were estimated to be per-
formed on overtime). The alternative would be to hire additional employees.
5. All materials could be obtained from one vendor. It can be assumed that raw
materials cost $200/unit (without scrap factors) and that these raw materials
are new to Polyproducts.

On May 1, Roger Henning was selected by Jim Grimm, the director of

project management, to head the project.

Grimm: Roger, weve got a problem on this one. When you determine your final bid, see
if you can account for the fact that we may lose our union. Im not sure exactly how that
will impact our bid. Ill leave that up to you. All I know is that a lot of our people are get-
ting unhappy with the union. See what numbers you can generate.
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216 POLYPRODUCTS INCORPORATED

Exhibit III. Request for proposal

Capital Corporation is seeking bids for 10,000 rubber components that must be
manufactured according to specifications supplied by the customer. The contractor
will be given sufficient flexibility for material selection and testing provided that all
testing include latest developments in technology. All material selection and testing
must be within specifications. All vendors selected by the contractor must be (1)
certified as a vendor for continuous procurement (follow-on contracts will not be
considered until program completion), and (2) operating with a quality control program
that is acceptable to both the customer and contractor.

The following timetable must be adhered to:

Month after Go-ahead Description

2 R&D completed and preliminary design meeting held

4 Qualification completed and final design review meeting held
5 Production setup completed
9 Delivery of 3,000 units
13 Delivery of 3,500 units
17 Delivery of 3,500 units
18 Final report and cost summary

The contract will be firm-fixed-price and the contractor can develop his own work
breakdown structure on final approval by the customer.

Henning: Ive read the RFP and have a question about inventory control. Should I
look at quantity discount buying for raw materials?

Grimm: Yes. But be careful about your assumptions. I want to know all of the as-
sumptions you make.

Henning: How stable is our business base over the next eighteen months?

Grimm: You had better consider both an increase and a decrease of 10 percent. Get
me the costs for all cases. Incidentally, the grapevine says that there might be follow-
on contracts if we perform well. You know what that means.

Henning: Okay. I get the costs for each case and then well determine what our
best bid will be.

On May 15, Roger Henning received a memo from the pricing department
summing up the base case man-hour estimates. (This is shown in Exhibits V and
VI.) Now Roger Henning wondered what people he could obtain from the func-
tional departments and what would be a reasonable bid to make.
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Exhibit IV. Prospectus

Growth
Rate
Business Last
Base $ Year Profit R&D Contracts Number of Overtime Personnel
Company Million (%) % Personnel In-House Employees (%) Turnover (%)

Alpha 10 10 5 Below avg. 6 30 5 1.0

Beta 20 10 7 Above avg. 15 250 30 0.25
Gamma 50 10 15 Avg. 4 550 20 0.50
Polyproducts 100 15 10 Avg. 30 800 10 1.0

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218 POLYPRODUCTS INCORPORATED

Exhibit V

To: Roger Henning

From: Pricing Department
Subject: Rubber Components Production

1. All man-hours in the Exhibit (1412) are based upon performance standards for a
grade-7 employee. For each grade below 7, add 10 percent of the grade-7 standard
and subtract 10 percent of the grade standard for each employee above grade 7.
This applies to all departments as long as they are direct labor hours (i.e., not
administrative support as in project 1).
2. Time duration is fixed at 18 months.
3. Each production run normally requires four months. The company has enough raw
materials on hand for R&D, but must allow two months lead time for purchases
that would be needed for a production run. Unfortunately, the vendors cannot com-
mit large purchases, but will commit to monthly deliveries up to a maximum of
1,000 units of raw materials per month. Furthermore, the vendors will guarantee a
fixed cost of $200 per raw material unit during the first 12 months of the project
only. Material escalation factors are expected at month 13 due to renegotiation of
the United Rubber Workers contracts.
4. Use the following work breakdown structure:

Program: Rubber Components Production

Project 1: Support
TASK 1: Project office
TASK 2: Functional support
Project 2: Preproduction
TASK 1: R&D
TASK 2: Qualification
Project 3: Production
TASK 1: Setup
TASK 2: Production
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Exhibit VI. Program: Rubber components production

Month

Project Task Department 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 1 Proj. Mgt. 480 480 480 480 480 480 480 480 480 480 480 480 480 480 480 480 480 480

1 2 R&D 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16
Proj. Eng. 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320
Cost Acct. 80 80 80 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320
Contracts 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320
Manu. Eng. 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320 320
Quality Cont. 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160
Production 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160 160
Procurement 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80
Publications 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80
Invent. Cont. 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80
2 1 R&D 480 480
Proj. Eng. 160 160
Manu. Eng. 160 160
2 2 R&D 80 80
Proj. Eng. 160 160
Manu. Eng. 160 160
Ind. Eng. 40 40
Facilities 20 20
Quality Cont. 160 160
Production 600 600
Safety 20 20
3 1 Proj. Eng. 160
Manu. Eng. 160
Facilities 80
Quality Cont. 160
Production 320
3 2 Proj. Eng. 160 160 160 160 160 160 160 160 160 160 160 160 160
Manu. Eng. 320 320 320 320 320 320 320 320 320 320 320 320 320
Quality Cont. 320 320 320 320 320 320 320 320 320 320 320 320 320
Production 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600
Safety 20 20 20 20 20 20 20 20 20 20 20 20 20

219