New Manufacturing Facility in China At its January 15 meeting, the board of dire

Question

New Manufacturing Facility in China

At its January 15 meeting, the board of directors of Omega Consolidated Industries made a decision to build a new manufacturing facility in China and

approved funding up to $180 million for construction and start-up activities. It

wants the new facility completed within two years from the date that a contractor is selected to design and build the facility. Omega is a worldwide corporation

with its headquarters in London.

The board asked I. M. Uno, Omega’s president, to assign a team to develop a

request for proposal (RFP) and solicit proposals from contractors to design and

build the facility, including installation of all production equipment, offices, and

an integrated information system. The team would also be responsible for monitoring the performance of the selected contractor to ensure the contractor fulfills

all contractual requirements and performance specifications.

Ms. Uno selected four members of her management team:

•Alysha Robinson, who will be the plant manager of the new facility

•Jim Stewart, Chief Financial Officer

•Olga Frederick, Vice President of Engineering

•Willie Hackett, Procurement Manager

The team chose Alysha as their team leader. By April 30, they developed a

comprehensive RFP that included:

•A statement of work describing the major tasks that the contractor must

complete, as well as the performance specifications for the production

capacity of the facility

•A requirement that the contractor complete the project within 24 months

after a contract is signed

•Criteria by which the team would evaluate proposals:

Related experience 30 points

Cost 30 points

Schedule 30 points

Innovative design 30 points

•That the contract would be a fixed-price contract

than June 30.

On June 30, the Omega team received three proposals:

1. J&J, Inc. an American firm, submitted a proposal for $150 million. However,

the proposal stated that they would require 30 months to complete the

project.

2. ROBETH Construction Company of Ireland submitted a proposal for $175

million. They had built several other facilities for Omega in the past, and its

officers felt they had a good relationship with Ms. Uno, Jim Stewart, and

Olga Frederick’s predecessor, who recently left Omega to become president

of one of Omega’s competitors, which is also considering building a facility

in China.

3. Kangaroo Architects and Engineers of Australia submitted a proposal for

$200 million. Although Kangaroo has never done a project for Omega, they

are one of the largest contractors in the world, have designed and built many

and various types of facilities, and have a great reputation for innovative

concepts, such as“green”environmentally friendly designs, and for building

award-winning showcase facilities. They had built facilities for several of

Omega’s competitors.

The team was disappointed that they received only three proposals; they had

expected at least eight.

On July 5, a fourth proposal was received from Asia General Contractors, a

company based in China. The proposal was for $160 million. They had built

many facilities in China for other global corporations and stated that they have

good knowledge of many credible trade subcontractors in China that would be

needed to build the facility. The proposal also stated that they could complete the

project in 20 months.

The team scheduled a meeting for July 15 to discuss the proposals and, as a

team, to score each of the proposals with respect to the evaluation criteria. That

provided the team members with two weeks to individually read the proposals

and develop their individual comments about each proposal, but they agreed

not to individually score the proposals prior to the July 15 meeting.

At the July 15 meeting, Alysha opened the meeting and stated,“I like the proposal from Kangaroo because it would provide a showcase state-of-the-art facility.”

Jim interrupted her, saying,“Their proposal is for more than the board has

allocated for this project, I don’t think we should consider them any further. In

my mind, they are out.”

Alysha responded,“Even though it would require some additional funding

beyond what the board originally approved, I feel confident that I can persuade

I. M. and the board to approve the additional amount required.”

Jim said,“I like the proposal from ROBETH. We have worked with them in

the past during my 30 years here at Omega, and their proposal cost is just about

what the board has allocated. I know a lot of the people at ROBETH.”

Olga mentioned,“I have only been here at Omega for less than a year, but I

took it upon myself to review the final reports of the previous projects that

ROBETH did for Omega and found that ROBETH missed their proposed schedules on most of the projects or that some of the production systems never met

all the performance specifications.”She continued,“I am also concerned about

ROBETH’s continuing relationship with my predecessor who is now president at

one of our major competitors and the potential conflict of interest if they would

also be the contractor selected by our competitor to build the plant they are considering in China. They might use some of our proprietary processes in their

design for our competitor’s facility. I think it would be too risky to use them.”

She continued,“I think the proposal from Asia General Contractors should be

seriously considered, even though it arrived a few days after the required due date.”

Willie spoke up.“I strongly disagree. It would be unfair to the other three

contractors.”

Olga replied,“I think it is our job to select the contractor that will provide the

best value and not be concerned about some silly rules about being a few days late;

who cares? Besides, they state that they can complete the project in 20 months,

which means we will get the facility fully operational sooner than with any of the

other contractors. And that means more products out the door sooner, more revenues and cash flow earlier, and a better return on our investment.”

After everyone’s initial comments, Alysha stated,“Okay, I guess we have to

score these four proposals against the evaluation criteria.”

Jim interrupted,“You mean three proposals.”

Olga spoke up loudly,“I think she said the four proposals, not three. Let’s not

get bogged down in bureaucratic games; we have an important decision to make.”

I. M. Uno is expecting the team to recommend a contractor to her by July 31

so that she can review it and present it to the board of directors at their August

15 meeting.

1. Is there anything the team should have done when they received only three proposals by June 30?

2. Should the team consider the proposal from Asia General Contractors? Why or why not?

3. After sharing their individual comments at the start of the July 15 meeting, how should the team proceed with the rest of the meeting and any follow-up?

4. How could the selection process have been improved? Is there anything the board, I. M. Uno, Alysha, or the team could have done differently?

Explanation / Answer

1. Is there anything the team should have done when they received only threeproposals by June 30?

If they honestly expected to receive at least eight proposals, then the first thing they should do is examine why they didn’t. Compare this RFP process to previous ones conducted by Omega and examine the competitive climate and corporate situation in which the contractor will execute the project. Why might contractors have chosen not to bid? Did the team have specific contractors in mind, and if so, did they reach out to them directly? Did the team announce the RFP in the correct publications such that most of the appropriate contractors found it? Does Omega have a bad history or reputation among contractors? (Olga says they’ve had problems with ROBETH in the past, but did Omega handle them correctly, or has Omega developed a poor reputation?) Have they framed a project that is too risky for most contractors to take at a fixedprice? This doesn’t appear to be a risky project on its face, but that’s a possibility if this plant is one of the first of its kind in China, either for Omega or in general. Additionally, some of their processes might be difficult/novel to implement correctly, if Olga is concerned about confidentiality in design.

The other issue is corrective action. First, they need to consider the firm deadlines in their timetable. It looks like the August 15 and likely July 31 are hard stops unless they’re willing to push back the contract signing. This is unlikely, especially since at least Olga is speaking in ‘race to market’ terms. Also, they gave contractors a month and a half to prepare proposals. In combination, this means that extending the deadline on June 30, say to July 15, would likely result in a small number of a) late submissions, b) new hastily prepared proposals, or c) nothing. In any case, a late or hasty proposal isn’t exactly a good start to a sponsor-contractor relationship.

The best case scenario would have been to keep better track of how many contractors were interested in bidding, for instance by holding a bidders’ meeting(s) in early June. They would have seen how many firms were interested in the RFP and may have been able to identify the mismatch between their expectations and the turnout. Had they realized this in early June, they could have remedied it and extended the deadline into July with potentially better results.

2. Should the team consider the proposal from Asia General Contractors? Whyor why not?

I am not familiar with Omega’s official and actual practices for RFPs. Willie seems to object on ethical grounds, but Olga counters on bureaucratic ones, implying that there is a policy against it of some strength. There is something to be said for fairness. At the very least, the extra time should be noted when reviewing AGC’s proposal. There’s also something to be said for policy and the reasons for its existence; Omega wouldn’t benefit from setting a precedent like this.

In the end, I think those arguments are moot. Consider it if you wish, but if a company can’t turn a proposal in on time, I have no reason to believe that they can finish a massive construction project four months ahead of schedule.

3. After sharing their individual comments at the start of the July 15 meeting,how should the team proceed with the rest of the meeting and any follow-up?

They should evaluate the proposals based on the criteria they developed. That said, the criteria they describe in the case are not on their own specific enough to facilitate discussion and evaluation. I would first set aside the proposals and elaborate on the criteria and their intent (as should have been done in April). For instance, what are they looking to get out of ‘related experience’? Are the biggest risks for this plant in having a contractor that doesn’t know their technical processes, doesn’t work well within their organization, or doesn’t know Chinese manufacturing well enough? (Hint: China can be a very… different place to manufacture.)

In terms of cost and schedule, what are they worried about? Stop talking in generics about ‘more produces sooner’ and start talking about critical dates vis-à-vis competitors. What does this market race look like? Are they looking for first-mover advantage in something? Or are they just looking to expand capacity in general? If the latter, are there other value-adds they might want out of the plant in this competitive environment? Depending on their business and clientele, being an innovative manufacturer or a ‘green’ firm might be a serious competitive advantage or marketing hook.

The discussion of value-adds rolls into innovative design. Why, from a strategic vision perspective, does Omega want innovation? Innovation in what? Are they looking to be known for iconic buildings? Do they want to revolutionize plant building in China? Or are they just trying to fill barrels with a commodity?

Once they’ve hashed out these questions, I would recommend that they break for the week and reconsider the proposals. (Also, the debate over whether or not to consider AGC should end; Alysha had that final decision.)

At their meet in the week of July 22, the team can begin by sharing again sharing individual thoughts, but they should be informed and conveyed in the language of the elaborated criteria and the strategic vision of the firm. And that, they can begin to examine which proposal and contractor best fits into their strategic and operational vision. This dialogue should guide the scoring of each proposal across their four labeled criteria.

In the end, each team member should be able and willing to discuss the chosen contractor in terms of the firm’s strategic and operational goals. They don’t have to agree with the choice completely, but they should understand and support the rationale. They should use the time before July 31 to crystalize this into a cogent recommendation for Uno to review.

4. How could the selection process have been improved? Is there anything theboard, I. M. Uno, Alysha, or the team could have done differently?

As discussed throughout this response, there are several places for improvement within this RFP process. First, Uno and/or the board may not have properly conveyed the purpose and goals of the new facility to the management team. Alternatively, the team could have known but failed to include this more specifically in the evaluation criteria. Or this is in the criteria but not in the case study, in which case the failure is in the structure of the discussion on July 15. It’s not clear form the case where the failure point(s) are, but in any case the Uno and/or Alysha hasn’t gotten the team to consider and discuss the specific strategic and operational goals for this project, much less what they mean relative to the bidders. As mentioned in response 2, the way to improve this would have been to discuss the criteria and their intentions back in April and answer the questions above.

Additionally, the management team could have monitored the RFP process more closely, for instance by holding a bidders’ meeting(s). This would have improved the selection process by giving the team an advanced indication that few contractors were interested. They then should have considered why that is (see response 1) and addressed the issue, potentially by extending the deadline early enough to be useful.

The team also could have decided beforehand how to handle certain proposal situations, including late submissions and over budget offers. These decisions would allow them to avoid biased based on the content of AGC’s and Kangaroo’s proposals. This isn’t to say that the contents shouldn’t matter in decision-making, just that the significant of the issues should be discussed beforehand, as with the other evaluation criteria. Finally, they could have set the specific schedule for evaluating the proposals (discussed in response 2). These steps would have improved the focus and efficiency of the selection process.

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