Northem Drilling Case

Northem Drilling Inc

Peter Bremner, from Northem Drilling Inc., has 3 weeks to decide whether or not to send a proposal to Mond Nickel Company in response to their request for proposal for 2 exploration jobs. If he decides to send a proposal, he also has to decide on the price of the contract.

This contract is very important for the company’s growth because it would more than double current revenues, and because the company would establish itself as one of the most technically competent driller contractor, leading to other high margin contracts. Of course there is always the risk of underperformance that would have the opposite effect. The higher risk is that ND won’t be able to find enough qualified workers, as this is a problem in the industry as a whole. However, the facts that it is a long-term contract and that ND has a very good reputation on treating employees should ease the situation. Bremner has 3 weeks to put together a team of 24 drillers, and bind them by contract in case ND wins the bidding. If he can’t do that, he can’t even bid on the contract.

On working on how to set the price to make the job(s) profitable, we have 2 scenarios:

1. Not renegotiating with Noranda and buying all machines necessary. This could compromise the project’s profitability.

2. Renegotiating with Noranda and buying only half of the machines.

The second scenario opens other levels of criteria to be considered: First, Bremner prides himself on building lasting relationships and doesn’t want to affect any other clients while growing the company. Second, if the relationship with Noranda is badly managed, the loss of this client would seriously hurt the company’s finances (they have been responsible for 60% of revenues, and even with the new contract they would still hold 25% of ND’s revenues), and potentially drive away potential customers since the companies talk to each other.

The alternatives for this problem are:

1. Not bidding

2. Bidding for both...