Reference no: EM133037078

The Boeing Company is one of the two premier manufacturers of commercial jet aircraft in the world. Despite its market share, over the last few years Boeing has found it tough going. The company's problems are two-fold. First, Boeing faces an aggressivecompetitor in Europe's Airbus Industrie. Second, the airline business is quite cyclical, and airlines sharply reduce orders for new aircraft when their own business is in adownturn.

During downturns, which can last for a long time, intense price war often occurs between Airbus and Boeing as they struggle to maintain market share and order volumein the face of falling demand. Given these pricing pressure, the only way that Boeing can maintain its profitability is to reduce its own manufacturing costs. With this in mind,Boeing is constantly studying make-or-buy decisions. The objective is to identify activities that can be outsourced to subcontractors, both in the United States andabroad, to reduce production costs.

When making outsourcing decisions, Boeing applies a number of criteria. First, it looks at the basic economics. The central issue is whether an activity could be performedmore cost-effectively by an outside manufacturer or by Boeing. Second, it considers the strategic risk associated with outsourcing as an activity. Boeing has decided it will notoutsource any activity deemed to be part of its long-term competitive advantage, particularly design work and final integration and assembly. Third, Boeing looks at theoperational risk associated with outsourcing an activity. The basic objective is to make sure Boeing does not become too dependent on a single outside supplier for criticalcomponents. Boeing's philosophy is to hedge operational risk by purchasing from two or more suppliers. Finally, Boeing considers whether it makes sense to outsourcecertain activities to a supplier in a given country may help secure orders for commercial jet aircraft from that country. This practice is known as offsetting. For example, Boeingdecided to outsource the production of certain components to China. This decision was influenced by forecasts suggesting that China will purchase USD100 billion worth ofcommercial jets over the next 20 years. Boeing hopes that by pushing some subcontracting work to China will help it gain more market share in China than Airbus.

Boeing has decided to focus its efforts on design, final manufacturing integration andassembly, and marketing and sales. Every other activity can be potentially outsourced.

Boeing out-sourced substantially more work than ever when making its latest 787 widebodyjet.

(a) Evaluate the factors that Boeing takes into consideration when it intends to outsource certain activities.