Review of the Make-or-Buy Decision for Aircraft Essay Example

cumulative cash outflows are higher in the purchase scenario. Other considerations Aside from my quantitative analysis, I have also considered many qualitative factors in developing my final recommendation.

From my education I have learned that firms should make products or inputs that reinforce or are in-line with their core competencies. Over the past 10 years, our engineers have been very successful in developing strong but ultra-light composite materials used in the production of our aircrafts. This I believe to be an important core competency within our organization.When we abandon this aptitude, we give up much the control over production by relying too much on the supplier to provide us with what we need.

Now keep in mind that we have only one supplier that will provide us with the body sections that meet our engineering standards. Losing this competency we will have nothing to fall back on in case the quality of this one supplier’s product decreases or the supplier becomes less reliable. If this does happen, the cost of developing this knowledge again will be very costly. There are a numerous other considerations.

Key factors are briefly summarized below. In Support of In-house Production: Centralized Production The construction of components away from the main factory would also seem unusual at a time when Boeing’s main competitor is currently centralizing production. Airbus has been criticized for having a complex and inefficient manufacturing process – parts are made in a number of different countries. This has caused production delays and resulted in costly restructuring. Labor Relations Labor relations will always be better if production is kept in the US.Although not as material a factor in this case because production

is not labor intensive.

However, some jobs will be lost. Military Contracts We have had bad press recently in regards to our acquisition of US military contracts. In the event that the 878 is ever considered to be used by the military, it will be more fitting and give the military a better piece of mind that all parts were made in the US. In Support of Outsourcing: Marketing It may be easier to sell the plane to non-US customers if the marketing can highlight the contribution made by Japanese companies.

This will surely be of benefit when selling to the Japanese airline industry. Does the outcome make sense? Before performing the calculations, I would have thought that a specialist producer of parts, in this case the Japanese company, would, before transport costs are considered, be able to produce the components at a cost less than ourselves. The product is not particularly labor intensive to build. If it was, we would be looking to outsource production to a country with a lower cost of labor. The principle cost of production is materials cost.

A specialty producer should be able to purchase materials at a cheaper price than Boeing as they are presumably making more products for other customers. Further, they should already have equipment in place and have a labor force that does not need to go through the leaning curve to become efficient. The fact that my calculations show it is cheaper to manufacture here suggest that the price quote by the Japanese supplier is too high and they should be able to reduce this and still make a profit.I have calculated that the price of each

body section would have to decrease to about $410,000. 00 for there to be any consideration of outsourcing (based on only quantitative results). Mr. Frame, this concludes the summary of my analysis, but before finalizing the decision, I suggest you consider the following:

• Did the purchasing department make sure that there are no other suppliers that will make the body sections to our engineering specifications?
• If there are more suppliers in the market, consideration should be made in setting up a competitive bidding process to lower our purchasing costs.
• If there are no more suppliers available in the market, consideration should be made in negotiating with the one Japanese supplier explaining that the price needs to fall to at least $410,000000 for each body section for us to consider giving them the contract.
• If you have any further questions or need any clarifications with respect to my calculations please do not hesitate to reach me.