Q. Do you agree with Boeings outsourcing strategy? Justify your answer.

Ans: We dont agree with Outsourcing strategy of Boeing. It can be observed that Boeing had
an excessive outsourcing strategy. This led to downward spiral resulting into, Boeing losing its
competitive edge and could not even operate without outsourcing.

When can a firm outsource?

Generally firms outsource for Cost cutting and downsizing.

Lets look an example of a prime manufacturer (say M0). Let C0, R0, P0, be the Cost incurred in
production, Revenue generated from production, Profit out of production.

Thus, profit for M0 will be: P0 = R0 - C0

Let S1, S2, S3 be the suppliers. R1, R2, R3 be the revenues generated through the outsourcing
contract by the supplier. C1, C2, C3 be the cost incurred to manufacture the parts. P1, P2, P3 .

Additional costs involved in outsourcing

o Cost of expert specification for the product

o Additional cost of support

Thus outsourcing would only be feasible to prime manufacturer if and only if,

C0 > R1 + R2 + R3 + Transportation Cost + Legal Overhead + Improvement Modification &

Correction cost + Additional costs

.. Equation 1

Thus, if any of the above cost increases, then the outsourcing may become expensive. Thus it
wont be beneficial to outsource if:

As long as the cost of in house manufacturing is less than the outsourcing cost.
Transportation cost overshoots.
For improvements and minor innovation would incur more legal contract cost.
Fixing the mistakes of the supplied parts also increases the cost.
Overhead costs increase with outsourcing.

Why did Boeing outsource to Japanese firms?

Foreign contracting with Japan came into existence in a quid pro quo for plane
purchases by a government owned Japanese airline.
 US JAPAN trade imbalance. U.S made offset deals with Japan to buy Japanese made
components.
Japan was more advances in manufacturing as compared to other Asian countries.
Exclusively open to U.S. companies
o Keep airbus away from the Japanese market
As major U.S. companies were shifting from manufacturing to service based company.
Boeing thought of the same and started outsourcing.

Reasons why we dont agree:

1. Open kimono policy: Boeing transferred its cutting edge aircraft manufacturing
technology to its contractors. Thus, transferring a technology developed using U.S.
taxpayers money to Japan
2. Reduced investment in R&D. Boeing invested 3.5% of its revenues as compared to
Airbus 9%. Investments in R&D stagnated because Boeing transferred all its know how
to Japan. Since, Boeing were not manufacturing parts on their own, they didnt have any
experimental data to correlate and proceed with further research. EUTHANIZED
Reluctance was observed from engineers on shifting to Computer Aided Design system.
They couldnt develop core competencies and had to outsource softwares to Dassault.
3. Lack of innovation if compared to Airbus. Foreign content in the manufacturing was
merely 2% in 1960s which rose to 30%.
4. If the innovation is going at the faster rate in a particular industry then outsourcing
would be effective. Because till the Boeing would invest into the innovation then that
technology would become obsolete. So, if the current technology is not with the Boeing
then the R and D would not happen.
5. Because of offset deals which increased Japanese alone share of total manufacturing to
70% from 15%.
6. With outsourcing of major manufacturing chunk, Boeing laid off 77000 jobs in span of 7
years. After reducing the workforce, the manufacturers market responsiveness
degraded.
Excessive downsizing can lead to an increase in costs, it can also reduce a company
below the critical mass of technology needed to develop future product to stay in
business.
It can also be far more profitable to add work to fully utilize existing facilities than to sell
off the facilities and out-source the work.
7. After sales service: suppliers were made the core after sales and service suppliers as
well. They were the ones to control the supply of spare parts. Hence loss of revenue in
this case as well.
8. Initially the wage cost at the offshore is less. Once the technology comes into the less
wage cost country then eventually the wage costs start increasing since, the people
develop skills. Thus this increases the cost of manufacturing at that place. Hence, one
has to shift its outsourcing base from that country to some new low wage cost country.
Thus, wage cost outsourcing becomes effective for short duration. But, In case of
aircraft manufacturing which is 50 years long service based industry then it would not
be effective.
9. To maximize profits the contractor may try to maximize revenue or reduce cost.
Contractor can bargain for higher price which would reduce the benefits of outsourcing
for manufacturer.
Supplier would compromise on the quality which would again reduce the benefits of
outsourcing.
10. Inappropriate cost accounting practices may make outsourcing lucrative. Reducing the
separate departmental costs instead of at the bigger level would make the outsourcing
lucrative.
RONA: Returns on net assets. It is the ratio of Returns over net assets. Thus, higher the
ratio higher is profit. Now, if assets are reduced and most of the manufacturing is done
via outsourcing, then this will surely result in high value of RONA. But, this doesnt mean
that company is going in profit by outsourcing. RONA has various implications and its
not the perfect ratio to analyses the firms output. Many firms do mistake on it and
outsource major manufacturing.