Management case study

Read the AMD Construction case study and answer the following questions in a 2-4 page, APA formatted paper. 

· Discuss the various steps in the capital equipment acquisition process.

· Develop a comprehensive analysis of the negotiations between Jane Axle and Tom Reed. (Provide a chart to show financial impacts.)

· What is your assessment of the negotiations process, given what you have studied?  What are your recommendations for Mr. Reed? 

You must justify your conclusions.

 ~Suggestion of format for analysis:

	Current Machine	CAT-1 machine-purchase	CAT-1 machine - Lease
Operating cost (without operators)
Direct Labor
Depreciation (straight line) 4 months
Lease Expense 4 Months
Interest expense at 8% for 4 months
Salvage Value after 3 years
Unexpected Costs
Totals

Carefully review the  Grading Rubric  for the criteria that will be used to evaluate your assignment

AMD Construction Company: Negotiating the Old-Fashioned Way1

In June, AMD Construction Company was awarded a $120 million contract for building a section of I-65 near Birmingham. The contract called for clearing, tun- neling, paving, bridge building, blasting, and landscaping 85 miles of roadway, two lanes in each direction. The contract also required a 10 percent DBE (disadvan- taged business enterprise) goal.

Over a period of six months prior to the bid opening, Jane Axle, salesperson for Allen Manufacturing Company, had been calling on AMD to sell it the CAT-1 hor- izontal boring machine. Ms. Axle joined Allen about eight months ago. She had been the sales manager at a well-known fashion house in New York for the past 10 years. Although AMD had used the older labor-intensive models of horizontal boring machines, the company had no experience with the newer, fully automated boring machines. In September, Jane convinced Tom Reed, president of AMD, to witness a demonstration of the CAT-1. Because Mr. Reed’s time was limited, the demonstration’s sole purpose was to acquaint him with the general operating pro-cedures for the boring machine.

Prior to the initial sales interview, Jane had searched the Internet to familiarize herself with the highway market. In her research, she compared Allen’s equipment prices with other distributors in the industry. If successful, this would be her first sale in the highway market. In addition, she had familiarized herself thoroughly with the industry jargon.

The following interview occurred the day after the product demonstration. Jane had learned on the same morning that the contract in question had been awarded to AMD.

Good morning, Mr. Reed.

Good morning, Jane. I understand you have received the I-65 contract. That’s right. All we have to do now is finish it under budget. This appears to be the biggest project since 9-11. Yes. However, we did have a similar project three years ago in Montgomery. We had major design problems on that job, and we missed our estimate by $344,000. Doesn’t the state pay for any errors or mistakes they make in their design work? Yes, they pay for their mistakes. However, that mistake was ours and we didn’t get paid for it! You know, Jane, the highway business is unforgiving and you make a large enough mistake on one job, you will go belly up. That’s exactly why I’m here this morning, Mr. Reed, and that is why I gave you the demonstration yesterday. I am here to show you how to make money by saving on construction costs right down the line. We realize that you have been in business many years and have the know-how, or you wouldn’t still be operating today. But I have studied your problems and believe we have a machine that will reduce your tunneling labor costs by 25 percent. Well, at the present, I have two horizontal boring machines and two three- person tunneling crews, and can’t see how your boring machine will benefit me at all. I did like your demonstration yesterday, but, of course, the tunneling operation is only one category of work and I have the crews and the equipment to get it done.

That’s true, Mr. Reed, but remember that the new CAT-1 can easily produce two times the rate of your current equipment. What’s more, the CAT-1 requires only one two-person crew. Believe me, we can get the dirt flying. Isn’t it true that the tunneling operation must stay on schedule in order to bring the job in under budget. Yes. Well, the CAT-1 is capable of operating 2,000 hours at 80 percent capacity without maintenance. Two operators versus six is a significant savings. There is no loading or unloading to consume time that runs up the cost. The loading and unloading operation has been automated. The CAT-1 is ready to go. I don’t see how your product can live up to all of those specs. Let’s see. You will get two times the production rate and save two-thirds of your estimated labor cost. This savings goes straight to the bottom line. That does sound interesting, but you have no real data to support your claim. You are aware that all projects are different. I have factored all of those concerns into my calculations. The numbers never lie claim. You are aware that all projects are different. I have factored all of those concerns into my calculations. The numbers never lie. Numbers don’t lie, but productivity can’t be predicted. If the CAT-1 is so good, why do my competitors not use it? In the demonstration yesterday, you were able to see that dirt flying. Dirt flying is productivity. How long does it take to train a crew on the CAT-1? It takes approximately two days to train an experienced operator on the CAT-1. I understand that there is a comparable boring machine sold by one of your competitors. I will call them tomorrow for a demonstration. How does your machine compare to the B-34? Yes, there are other machines we compare with. However, ours can compete with all of them. It is efficient and productive. Most of the other machines have some of our features but not all of them. Our machine is appropriate for your project. Well, Jane, the CAT-1 certainly sounds economical. It is economical, Mr. Reed. Two people operate the CAT-1 generally. The machine has digital hydraulic controls and a wide-vision cab that gives the operators clear vision and maximum flexibility at all times. It has a 350-horsepower GMC engine that operates at five different speeds. Perhaps the maintenance efficiency is also an attractive feature. There is a computerized cylinder cooling system that prevents damage to the cylinder walls. This feature is a significant improvement over your current boring machines. The machine can bore 51⁄2 feet below ground level and can bore up to 30 linear feet at a time. The total height of the machine is 10 feet. What’s more, it passes all of ALDOT’s (Alabama Department of Transportation) requirements for highway projects. Do you have any figures on the actual operating costs of your boring machine?

We have. We figure average operating cost per year (1,500 hours) for the CAT-1 is approximately $296,000 (without operators) or $371,000 with two operators. What is the purchase cost?

I have it right here. The purchase cost for the CAT-1 is $895,233.

Your cost figures seem rather high since our estimate for tunneling is $676,000.

No, Mr. Reed, experience has shown that it is possible to amortize the cost of our machine over a two-year period. In addition, when you calculatethe productivity and labor savings . . . Jane, in this business, you have to plan one year at a time. I am not sure when I will get the next tunneling job. My current problem is my . . .

Of course, there is also a lease option. We currently offer a three-year open-end lease with the following conditions: no down payment, free maintenance, $25,000 per month, and a salvage value of $100,000 after three years.

I will have to get back with you next week. I need to take a closer look at our alternatives. I am also in the process of determining how our 10 percent DBE goal will be satisfied. Only then will I be able to move forward.

Mr. Reed, you are in luck. According to CFR 49 part 26, a portion of your DBE goal can be satisfied with the purchase of the CAT-1. We are partners with a certified DBE firm in another business. We can run the sale through his company.

If this is acceptable, I will get back with you tomorrow. This purchase could easily kill two birds with one stone.