Progressive Manufacturing Corporation (PMC) occupies a seventy-eight acre site about three miles from the Chrysler LLC assembly plant in Belvidere, Illinois. The company is just less than 50 percent owned by a domestic venture capital fund, with the balance of the stock publicly held and traded on the New York Stock Exchange. PMC's major business is the manufacture of rubber and plastic automobile parts (moldings, bushings, grommets and boots). While they supply many automobile manufacturers with assembly plants in the Midwest, their main customer is Chrysler LLC. PMC initially constructed the Illinois plant in the early 1970s and added capacity in the 1990's due to the increased demand for plastic components. PMC's workforce of some 2,750 hourly-paid workers is represented by local 34 of the Automobile Plastic Component Workers (APCW), a national union. The existing APCW national agreement expires at midnight on September 1, 2015. This contract had been negotiated during a transition period in the automobile business. While the APCW had not made the kind of concessions that were common in the industry, the union felt that its members had made a sacrifice to help PMC return to profitability. The union has the right to strike upon the expiration of the contract, and PMC is concerned that the threat of a strike by APCW will result in the loss of sales that would cost the company $6 million per week of lost sales. Last year, the APCW called a strike at another company as part of the negotiating process. While the contract was settled prior to the strike date, their OEM customers were convinced that a strike was imminent and had lined up alternate suppliers to mitigate risk. Ultimately, this cost the company 2 weeks of sales. Based on this past experience, PMC assumed that the threat of a strike would cost them two weeks of sales, and in the event of a strike, each week of strike would cost an additional week of sales. For example, a one week strike would result in three weeks of lost sales and a two week strike would result in four weeks of lost sales. There are other costs associated with a strike. PMC has worked very hard to develop employee goodwill with the union workers. Any strike would have a negative impact on this goodwill. PMC estimates that any strike would have a total "soft cost" of $1 million in goodwill in the year of the strike. In the event of a strike, the current contract allows either party to request binding arbitration, which PMC would do. The binding arbitration process calls for a conciliation officer, who is an independent consultant, to meet with both parties and attempt to effect a settlement. In the event a settlement is not reached in three weeks, the arbitrator would select either the union's final request or PMC's final offer as the contract. Therefore the maximum length of a strike would be three weeks. Given the union voting and back to work process, any strike would last at least one week, and would be complete weeks in length. Also, in the event of a strike, employees would not receive retroactive pay upon their return to work.
Part I - The initial contract offer Preliminary discussion with APCW had identified the union's position on wage and fringe benefit increases. In terms of pay rate, the APCW would like a 6% increase the first year followed by a 9% increase the second year. These increases would be relative to fiscal 2015 (the last year of the current contract) which PMC estimates APCW labor costs will be $141 million. The APCW would also like some changes to the fringe benefits package, mostly increases in medical and pension plan contributions. PMC has estimated the cost for these additional items at $9 million per year. One option for PMC is to offer these contract terms as a first offer in negotiations. PMC believes if they offered the above terms that the APCW would accept them and not strike.
However, due to the high cost of the APCW contract terms, PMC believes it would be wise to evaluate other potential first offers. To help guide the process, PMC has identified three additional packages to consider as their first formal offer. The APCW has clearly stated they do not want another three year contract, so each potential package is for two years. These increases would be relative to fiscal 2015, the last year of the current contract. The logic used to identify the three packages was to identify offers that PMC felt had a low (10%), moderate (50%) and high (90%) probability of being accepted.
Package 1: A wage increase averaging 4% per year for two years plus some fringe benefit changes, capped at $3 million annually. Low (10%) probability of acceptance.
Package 2: A wage increase of 5% per year for two years plus $3 million annually in extra fringe benefits. Moderate (50%) probability of acceptance.
Package 3: A wage increase of 6% per year for two years plus $6 million annually in extra fringe benefits. High (90%) probability of acceptance.
PMC adopts the following strategy. They will make one of the above four options (the union request and the three packages) as a first formal offer. If the APCW rejects the offer, PMC would not make another offer, at which point the union would go on strike and PMC would request binding arbitration. During the conciliation period, PMC would make the case that they have offered a fair contract at market conditions. PMC assumes the length of a strike would depend on the initial offer. If package 1 is offered and rejected, PMC assumes that the APCW would be offended by the low offer and would not settle during the conciliation period. If package 2 is offered and rejected, PMC would make a strong push in the media to highlight that they have offered a contract at the current market conditions. In the event of a strike, they believe that the union would be equally likely to accept this offer at the end of each of the three weeks of the potential strike period. If package 3 is offered and rejected, PMC would place reports in the media (through unidentified sources) that the APCW has rejected an offer that exceeds current market conditions. PMC believes that once the rank and file understands this offer better, they would accept it at the end of the first week of a strike. If an agreement between PMC and APCW is not reached during the three week conciliation, the decision will go to the arbitrator. Since the three potential PMC offers are near market conditions, PMC believes that the arbitrator would select their offer over the APCW request as the final contract.
a) Notice that the set of decisions are the four possible first offers (the union request and the three packages) and four possible future outcomes (no strike, 1 week strike, 2 week strike or 3 week strike). Find the probabilities for each combination of decision alternative and possible future outcome.
b) Determine the additional costs (i.e., incremental costs) - relative to fiscal 2015 - to PMC for each of the four initial offers.
c) Determine the cost associated with strikes of various lengths. Use PrecisionTree to construct and solve a decision tree for this problem. Based on this decision model, recommend an initial offer.