Aerospace Outsourcing

The term outsourcing is frequently used to describe a movement away from vertical integration - moving an activity outside the firm that formally was done within the firm. The term outsourcing also is used to describe an ongoing arrangement where a firm obtains a part or service from an external firm .

Outsourcing is not a new concept, for hundreds of years businesses have outsourced their needs; however, during the industrial evolution the US economy begun to acquire a greater need for outsourcing as costs of manufacturing became a concern, this move begun in the 1950’s and continued aggressively to the 1980’s and 1990’s as global competition placed a greater strain on the economic growth. Outsourcing was not formally identified as a business strategy until 1989 (Mullin, 1996).

In the beginning of this acclaimed activity, firms outsourced what was deemed essential; however, as the evolution of outsourcing occured - fueled by the need to ‘cut-cost’ continued, other functions which were important but not relative to the core competencies of the firm begun to be outsource as well. From an economic perspective outsourcing is an industry in itself which can be viewed from a micro-economic and macro-economic perspective, this indicates its demand and supply curve moves in respective directions as the need for it grows or diminishes just as any other markets within an economy.

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In saying this it can be a very broad subject and can carry large discussions; this paper will deviate towards outsourcing’s role in the commercial aerospace manufacturing industry which begun in 1954 with Boeing and remained dominated by Boeing, Airbus and Bombardier since 1986. Barriers to entry Barriers to entry are one of the key incentives of the monopoly and oligopoly industry. The Aerospace industry, which is dominated by three main players, Boeing, Airbus and Bombardier is considered to be an oligopoly industry, because of the “Market Power” that is held by these firms.

The industry has high fixed cost and is excessively capital intensive and time consuming, which serves as the key restriction not to be attractive for competition. In order to create value and share risk, the industry has fostered the idea of outsourcing. Outsourcing is using the facilities and services of a third party to supply good that would otherwise be created by the organization. Figure 1 details the major difference between a market with perfect competition and one that does not.

Types of Outsourcing

The outsourcing framework begins with the decision to ‘make or buy,’ which would lead to ‘insourcing’ (make) or outsourcing (buy). Outsourcing has two major components, ‘inshoring’ (in-land) or ‘offshoring’ (distant land). Offshoring has three major components, ‘nearshore_’which indicates the work is outsourced to a nearby country to the parent company as opposed to for shoring; whereas, ‘captive centers’ are overseas subsidiaries set-up to serve the parent company  .

The framework of outsourcing can be very complex and arriving at the decisions can cause a material change in the supply curve of a manufacturing firm as the process of outsourcing is very costly and burdensome, if done improperly it can have a an unfavorable ROI. Jobs outsourced Job functions outsourced fall in two major categories, Information Technology (IT) and Business Process Outsourcing (BPO). Under BPO, essential components or parts are being outsourced where it once was manufactured in-house.

In the Commercial Aerospace manufacturing industry, it became more prevalent that manufacturing all parts of a commercial airplane was time consuming and costly, this brought about the demand for outsourcing. The demand of outsourcing Outsourcing is an exponential concept in business that has an impact on both the provider and consumer. When this aspect is viewed through the business lenses, the focus is on value creation. The intrinsic benefit of outsourcing is twofold, in that, the consumer gets to reap the benefit of economies of scale, where-as the provider get’s to charge for the product supplied.

The exchange of these transactions create value for the parties involved as well as contribute to the participants gross domestic product (GDP). Offshoring of the general maintenance as well as parts for assembling new airplanes has heightened, which seems to have a negating effect of the domestic manufacturing industry. As airlines have rushed to slash costs, aircraft maintenance outsourcing has increased significantly from 37% of maintenance expenditures for major U. S. airlines in 1996 to 64% in 2007 ( At-A-Glance. 2008 December).

The law of demand states that consumer will increase their consumption once there is a benefit to be gained. The increase in demand for outsourcing will result in a downward sloping demand curve, as outsourcing of maintenance continues to decimate the highly skilled aircraft labor force which will eventually have adverse economic effect - reduction in the wetware of the industry. The law of demand – Quantity demanded increases as price reduced {draw:frame} Technical knowledge is being shared with the players of the industry, thereby leading to increase competition in the near future. Boeing's partners in Japan and Italy will be building composite structures that include sophisticated sub-systems that are already certified, tested and ready for final assembly. (Manufacturing and Technology News, Feb 2007). There are benefits to be gained from the new phenomenon, “Outsourcing”. In the business arena benefits are offset by weaknesses, which need to be evaluated and planned for accordingly. S. W. O. T analysis of outsourcing has economic and financial benefits for the end user.

S. W. O. T Analysis of Outsourcing

The consumer perspective Financial Benefits No major capital outflow Contractual cost are treated as sunk cost – assist in decision making Less wear and tear on assets – longer life and high ROI Risk is shared with suppliers Lower unit cost Concentrate on creating value to customer No expense is incurred with equipment maintenance Pricing technique is enhanced, Marginal cost is known Variable costs are known which help to allocate resource Plan, coordinate and manage corporate resources.

An outward shift signifies an increase in demand The financial gains of outsourcing will force firms to build this aspect into their strategy; this will create a shift in demand for the commodity, thereby shifting the curve to the right. An increase in demand will cause shift in demands as oppose to a movement along the curve which is the result of a reduction in price. {draw:frame} Gross Domestic Product of domestic and foreign economy India’s economy is the twelfth largest in the world by nominal value, and ranks fourth in purchasing power parity.

In 2008, India had established itself as the world’s second fastest growing major economy. The service industry in India accounts for 62. 6 percent of the country’s GDP followed by the industrial and agricultural sectors which contribute 20 percent and 17. 5 percent. India’s GDP in 2008 was 3. 344 compared to the US GDP which was 1461 in 2008. GDP graph of India and the United States Outsourcing is the practice of using a service from an outside supplier.

There are many pros and cons when it comes to outsourcing; however, many big name airline companies based in the US weigh their opportunities. India has become the leader in outsourcing, gathering interest of companies looking to save money. India is well known for their IT, science, and technology, giving companies like those in the airplane industry a reason to consider outsourcing. Those who wish to outsource reap the benefits of paying lower wages: however, it can come at a cost of language barriers and cultural differences.

In some circles the language barrier is considered a pro not a con because many Indian vendors invest money in cross cultural training. There is also the uncertainty of the outsourcing company being able to stay in business. In today’s economy many airlines are using outsourcing by purchasing goods at a lower rate than they would if they were to buy them domestic. Many of the major players in the airline industry are finding it more beneficial to purchase the materials that they are using for their business via outsourcing.

The airplane manufacturing industry as a whole is expected to grow between 150 billion and 225 billion by the year 2020 in total offshore engineering. India provides aerospace firms both aircraft design and on board electronics systems such as flight control and engine control. The Future of Outsourcing The future of outsourcing appears to be unswerving as processes will remain available to any firm that needs to utilize the activity. However, there are benefits and challenges to major component of selecting the correct provider.

These are _appropriate offshore locations, selections of ideal outsourcing partner, dynamic Challenges and outsourcing in-house problems_, are key factors which will determine the future of outsourcing for both supplier and consumer. The future of outsourcing is contingent on the ability to outsource a need effectively, this is empirical to the future of the economy in which outsourcing is a major contributor, for example Boeing and many other firms outsourced to China for years and China’s economy grew due to the decisions that were made.

Outsourcing is economically smart on a micro-economic perspective; however, it can be devastating on a macro-economic perspective if the goal is purely capitalistic. {text:bibliography-mark} Priorities for selecting an outsource partner . Kate Vitasek speaks of the decision to outsourcing and the approach to successfully outsourcing. In her views that is the goal of Vested Outsourcing, and this is accomplished by implementing five basic rules explained in her book. Focus on outcomes, not transactions.

Agree on clearly defined and measurable outcomes. Optimize pricing model incentives for cost/service trade-offs. 5. Governance structure provides insight, not merely oversight. Is it Outsourcing or Offshoring? There are some anti-outsourcing trend booming in the US, but the US Chamber of Commerce (USCC), has evidently come out sturdily in favor of outsourcing as it considers it good for the US economy and it has reportedly decided to fight legislative moves against outsourcing of jobs to countries where jobs are being outsourced. text:bibliography-mark} . With the large amount of lay-offs which have occurred and the many more which may come about, outsourcing is on the hot-plate of a political split, many agree and many disagree with outsourcing; however, is it outsourcing that is the problem or ‘offshoring,’ there are many who agree on a macro-economic perspective that ‘offshroring’ is unhealthy for the economy and have argued their point.

The Aerospace industry has ‘offshored’ since the 1960’s and have not collapse the US economy in doing so; however, it has placed itself in dear competition with China who now makes their own planes and gained experience from having been Boeing’s major outsourcing partners.

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