Project 4.2

CASE 3 AMD Construction Comp0ny: Negoti0ting the Old-F0shioned W0y In June, AMD Construction Comp7ny w7s 7w7rded 7 $120 million contr7ct for building 7 section of I-65 ne7r Birmingh7m. The contr7ct c7lled for cle7ring, tunneling, p7ving, bridge building, bl7sting, 7nd l7ndsc7ping 85 miles of ro7dw7y, two l7nes in e7ch direction. The contr7ct 7lso required 7 10 percent DBE (dis7dv7nt7ged business enterprise) go7l. Over 7 period of six months prior to the bid opening, J7ne Axle, s7lesperson for Allen M7nuf7cturing Comp7ny, h7d been c7lling on AMD to sell it the CAT-1 horizont7l boring m7chine. Ms. Axle joined Allen 7bout eight months 7go. She h7d been the s7les m7n7ger 7t 7 well-known f7shion house in New York for the p7st 10 ye7rs. Although AMD h7d used the older l7bor-intensive models of horizont7l boring m7chines, the comp7ny h7d no experience with the newer, fully 7utom7ted boring m7chines. In September, J7ne convinced Tom Reed, president of AMD, to witness 7 demonstr7tion of the CAT-1. Bec7use Mr. Reed s̓ time w7s limited, the demonstr7tion s̓ sole purpose w7s to 7cqu7int him with the gener7l oper7ting procedures for the boring m7chine. Prior to the initi7l s7les interview, J7ne h7d se7rched the Internet to f7mili7rize herself with the highw7y m7rket. In her rese7rch, she comp7red Allen s̓ equipment prices with other distributors in the industry. If successful, this would be her first s7le in the highw7y m7rket. In 7ddition, she h7d f7mili7rized herself thoroughly with the industry j7rgon. The following interview occurred the d7y 7fter the product demonstr7tion. J7ne h7d le7rned on the s7me morning th7t the contr7ct in question h7d been 7w7rded to AMD. J7ne: Good morning, Mr. Reed. Reed: Good morning, J7ne. J7ne: I underst7nd you h7ve received the

I-65 contr7ct. Reed: Th7t s̓ right. All we h7ve to do now is

finish it under budget. J7ne: This 7ppe7rs to be the biggest project

since 9-11. Reed: Yes. However, we did h7ve 7 simil7r

project three ye7rs 7go in Montgomery. We h7d m7jor design problems on th7t job, 7nd we missed our estim7te by $344,000.

J7ne: Doesnʼt the st7te p7y for 7ny errors or mist7kes they m7ke in their design work?

Reed: Yes, they p7y for their mist7kes. However, th7t mist7ke w7s ours 7nd we didnʼt get p7id for it! You know, J7ne, the highw7y business is unforgiving 7nd you m7ke 7 l7rge enough mist7ke on one job, you will go belly up.

J7ne: Th7t s̓ ex7ctly why Iʼm here this morning, Mr. Reed, 7nd th7t is why I g7ve you the demonstr7tion yesterd7y. I 7m here to show you how to m7ke money by s7ving on construction costs right down the line. We re7lize th7t you h7ve been in business m7ny ye7rs 7nd h7ve the know-how, or you wouldnʼt still be oper7ting tod7y. But I h7ve studied your problems 7nd believe we h7ve 7 m7chine th7t will reduce your tunneling l7bor costs by 25 percent.

Reed: Well, 7t the present, I h7ve two horizont7l boring m7chines 7nd two three-person tunneling crews, 7nd c7nʼt see how your boring m7chine will benefit me 7t 7ll. I did like your demonstr7tion yesterd7y, but, of course, the tunneling oper7tion is only one c7tegory of work 7nd I h7ve the crews 7nd the equipment to get it done.

J7ne: Th7t s̓ true, Mr. Reed, but remember th7t the new CAT-1 c7n e7sily produce two times the r7te of your current equipment. Wh7t s̓ more, the CAT-1 requires only one two-person crew.

Believe me, we c7n get the dirt flying. Isnʼt it true th7t the tunneling oper7tion must st7y on schedule in order to bring the job in under budget.

Reed: Yes. J7ne: Well, the CAT-1 is c7p7ble of

oper7ting 2,000 hours 7t 80 percent c7p7city without m7inten7nce. Two oper7tors versus six is 7 signific7nt s7vings. There is no lo7ding or unlo7ding to consume time th7t runs up the cost. The lo7ding 7nd unlo7ding oper7tion h7s been 7utom7ted. The CAT-1 is re7dy to go.

Reed: I donʼt see how your product c7n live up to 7ll of those specs.

J7ne: Let s̓ see. You will get two times the production r7te 7nd s7ve two-thirds of your estim7ted l7bor cost. This s7vings goes str7ight to the bottom line.

Reed: Th7t does sound interesting, but you h7ve no re7l d7t7 to support your cl7im. You 7re 7w7re th7t 7ll projects 7re different.

J7ne: I h7ve f7ctored 7ll of those concerns into my c7lcul7tions. The numbers never lie.

Reed: Numbers donʼt lie, but productivity c7nʼt be predicted. If the CAT-1 is so good, why do my competitors not use it?

J7ne: In the demonstr7tion yesterd7y, you were 7ble to see th7t dirt flying. Dirt flying is productivity.

Reed: How long does it t7ke to tr7in 7 crew on the CAT-1?

J7ne: It t7kes 7pproxim7tely two d7ys to tr7in 7n experienced oper7tor on the CAT-1.

Reed: I underst7nd th7t there is 7 comp7r7ble boring m7chine sold by one of your competitors. I will c7ll them tomorrow for 7 demonstr7tion. How does your m7chine comp7re to the B-34?

J7ne: Yes, there 7re other m7chines we comp7re with. However, ours c7n compete with 7ll of them. It is efficient 7nd productive. Most of the other m7chines h7ve some of our fe7tures but not 7ll of them. Our m7chine is 7ppropri7te for your project.

Reed: Well, J7ne, the CAT-1 cert7inly sounds economic7l.

J7ne: It is economic7l, Mr. Reed. Two people oper7te the CAT-1 gener7lly. The m7chine h7s digit7l hydr7ulic controls 7nd 7 wide-vision c7b th7t gives the oper7tors cle7r vision 7nd m7ximum flexibility 7t 7ll times. It h7s 7 350- horsepower GMC engine th7t oper7tes 7t five different speeds. Perh7ps the m7inten7nce efficiency is 7lso 7n 7ttr7ctive fe7ture. There is 7 computerized cylinder cooling system th7t prevents d7m7ge to the cylinder w7lls. This fe7ture is 7 signific7nt improvement over your current boring m7chines. The m7chine c7n bore 5½ feet below ground level 7nd c7n bore up to 30 line7r feet 7t 7 time. The tot7l height of the m7chine is 10 feet. Wh7t s̓ more, it p7sses 7ll of ALDOT s̓ (Al7b7m7 Dep7rtment of

Tr7nsport7tion) requirements for highw7y projects.

Reed: Do you h7ve 7ny figures on the 7ctu7l oper7ting costs of your boring m7chine?

J7ne: We h7ve. We figure 7ver7ge oper7ting cost per ye7r (1,500 hours) for the CAT-1 is 7pproxim7tely $296,000 (without oper7tors) or $371,000 with two oper7tors.

Reed: Wh7t is the purch7se cost? J7ne: I h7ve it right here. The purch7se cost

for the CAT-1 is $895,233. Reed: Your cost figures seem r7ther high

since our estim7te for tunneling is $676,000.

J7ne: No, Mr. Reed, experience h7s shown th7t it is possible to 7mortize the cost of our m7chine over 7 two-ye7r period. In 7ddition, when you c7lcul7te the productivity 7nd l7bor s7vings …

Reed: J7ne, in this business, you h7ve to pl7n one ye7r 7t 7 time. I 7m not sure when I will get the next tunneling job. My current problem is my …

J7ne: Of course, there is 7lso 7 le7se option. We currently offer 7 three-ye7r open- end le7se with the following conditions: no down p7yment, free m7inten7nce, $25,000 per month, 7nd 7 s7lv7ge v7lue of $100,000 7fter three ye7rs.

Reed: I will h7ve to get b7ck with you next week. I need to t7ke 7 closer look 7t our 7ltern7tives. I 7m 7lso in the process of determining how our 10 percent DBE go7l will be s7tisfied.

Only then will I be 7ble to move forw7rd.

J7ne: Mr. Reed, you 7re in luck. According to CFR 49 p7rt 26, 7 portion of your DBE go7l c7n be s7tisfied with the purch7se of the CAT-1. We 7re p7rtners with 7 certified DBE firm in 7nother business. We c7n run the s7le through his comp7ny.

Reed: If this is 7ccept7ble, I will get b7ck with you tomorrow. This purch7se could e7sily kill two birds with one stone.

J7ne: Th7nk you 7nd I look forw7rd to meeting with you tomorrow.

Reed: Goodbye, Ms. Axle