Module 4: International

Business Operation

Lesson 1: Exporting, Importing

and Countertrade
Lesson 2: Global Production,
Outsourcing and Logistics
 MD INTERNATIONAL

Al Merritt founded MD International in 1987. A former salesman for a medical equipment company,
Merritt saw an opportunity to act as an export intermediary for medical equipment manufacturers in the
United States. He chose to focus on Latin America and the Caribbean, a region that he already had
experience in. Moreover, trade barriers were starting to fall throughout the region as Latin governments
embraced a more liberal economic ideology, creating an opening for entrepreneurs like Merritt. Local
governments were also expanding their spending on health care, creating an opportunity that Merritt was
poised to exploit.
Merritt located his company in South Florida to be close to his market. Since then, the company has
grown to become the largest intermediary exporting medical devices to the region. Today the company
sells the products of more than 30 medical manufacturers to some 600 regional distributors. While many
medical equipment manufacturers don’t sell directly to the region because of the sizable marketing costs,
MD can afford to because it goes into those markets with so many different devices—a broad portfolio of
products.
The company’s success is in part due to its deep-rooted knowledge and understanding of the Latin
American market. MD works very closely with teams of doctors, biomedical engineers, microbiologists,
and marketing managers across Latin America to understand their needs and what the company can do for
them. The sale of products to customers is typically only the beginning of a relationship. MD International
also provides hands-on training to medical personnel in the use of devices and extensive after-sales
service and support.
Along the way to becoming a successful exporter, MD International has leaned heavily upon export
assistance programs established by the U.S. government. For example, in the early 2000s a shipment to
Venezuela was held up by the Venezuelan customs. They wanted proof that the medical devices were not
intended for military use. Within two days, staff at the U.S. Export Assistance Center in Miami arranged
for the U.S. embassy in Venezuela to have a letter written and delivered to the customs, assuring them that
the products had no military applications, and the shipment was released. Merritt has also worked
extensively with the Export-Import Bank to gain financing for its exports (the company needs to finance
the inventory that it exports).
Despite these advantages, it has not all been easy going for MD International. Latin American
economies have often been highly cyclical, and MD International has ridden those cycles with them. In
2001, for example, after several years of solid growth, an economic crisis in both Argentina and Brazil,
coupled with a slowdown in Mexico, resulted in losses for the year and forced Merritt to lay off one-third
of his staff and cut the pay of others, which included a 50 percent pay cut for himself. Things started to
improve in 2002, and the weak dollar in the mid 2000s also helped boost export sales. However, the
global financial crisis of 2008 ushered in another tough period—although prior experience suggests that
MD International can not only survive such downturns, but come out stronger as weaker competitors fall by
the way side.
 Lesson 1: Exporting, Importing and Countertrade

This lesson is more concerned with the nuts and bolts of

exporting (and importing). Here we look at how to
export. As the opening case makes clear, exporting is not
just for large enterprises; many small entrepreneurial
firms such as MD International have benefited
significantly from the money-making opportunities of
exporting.
The volume of export activity in the world economy has
been increasing as exporting has become easier. The
gradual decline in trade barriers under the umbrella of
GATT and now the WTO, along with regional economic agreements such as the European Union and the North
American Free Trade Agreement, have significantly increased export opportunities. At the same time, modern
communication and transportation technologies have alleviated the logistical problems associated with
exporting. Firms are increasingly using the World Wide Web, toll-free 800 phone numbers, and international
air express services to reduce the costs of exporting. Consequently, it is no longer unusual to find small
companies that are thriving as exporters.

List at least five companies (based here in our region) that are into exporting and
importing. What are their products?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Both large and small firms stand to benefit from exporting. The volume of export activity in the world economy
I increasing as exporting has become easier. The decline in trade barriers under the WTO along with regional
economic agreements such as the European Union and the North American Free Trade Agreement have
increased export opportunities.
Firms wishing to export must identify export opportunities, avoid a host of unanticipated problems that are
often associated with doing business in a foreign market, become familiar with the mechanics of export and
import financing, learn where to get financing and export credit insurance and learn how to deal with foreign
exchange risk.
The Promise and Pitfalls of Exporting
 The potential benefits from exporting can be great-the rest of the world is a much larger market than
the domestic market.
 Larger firms may be proactive in seeking out new export opportunities, but many smaller firms are
reactive and only pursue international opportunities when the customer calls or knocks on the door.
 Many novice exporters have run into significant problems when first trying to do business abroad,
souring them on following up on subsequent opportunities.
Common pitfalls include:
 Poor market analysis
 Poor undertaking of competitive conditions
 Lack of customization for local markets, poor distribution arrangements, bad promotional campaigns
 A general underestimation of the differences and expertise required fr foreign market penetration.
The tremendous paperworks and
formalities that must be dealt with
can be also overwhelming for
exorters.

Improving Export Performance

An International Comparison
 One big impediment to
exporting is the simple lack of
knowledge of the
opportunities available.
 The way to overcome
ignorance is to collect
information.
 Both Germany and Japan have
developed extensive institutional structures or promoting exports.
 For example: Japan exporters can take advantage of the knowledge and contacts of sogo sosha Japan’s
great trading houses. The sogo shosha have offices all over the world, and they proactively,
continuously
seek export opportunities for their affiliated companies large and small.
Utilizing Export Management Companies
Export management companies are export specialists that act as the export marketing department or
international department for client firms.
EMCs normally accept two types of export assignments:
 They start exporting operations for a firm with the understanding that the firm will take over
operations after they are well established.
 They start services with the understanding that the EMC will have continuing responsibility for selling
the firm’s products.
 The advantage of EMCs is that they are experienced speialists who can help the neophyte exporter
identify opportunities and avoid common pitfalls.
 However, there is a large variation in the quality of EMCs, so a careful review of a number of companies
should be conducted.
Export Strategy
Firms can reduce the risks associated with exporting if they are careful about their choice of exporting strategy.
 It helps to hire an EMC, or at least an experienced export consultant, to help with the identification of
opportunities and navigate through the tangled web of paperwork and reulations so often involved in
exporting.
 It often make sense to initially focus on one, or a few, markets.
 It may make sense to enter a foreign market on a fairly small scale in order to reduce the costs of any
subsequent failures.
 The exporter needs to recognize the time and managerial commitment involved in building export
sales, and should hire additional personnel to oversee this activity.
 In many countries it is important to devote a lot of attention to building strong and enduring
relationships with local distributors and customers.
 It is important to hire local personnel to help the firm establish itself in a foreign market.
 It is important for the exporter to keep the option of local production in mind.

Export and Import Financing

Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that
can be particularly acute in international trade: the lack of trust that exists when one must put faith in a
stranger.
Lack of Trust
 Firms engaged in international trade
have to trust someone who may be very
difficult to track down if they default on
an obligation.
 Due to the lack of trust, each party to an
international transaction has a different
set of preferences regarding the
configuration of the transaction.
 The problems arising from a lack of
trust between exporters and importers
can be solved by using a third party
who is trusted by both-noormally a
reputable bank.
Letter of Credit
 A letter of credit is issued by a bank at the request of an importer and states the bank will pay a
specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified
documents.
Draft
 A draft, also called a bill of exchange, is the instrument normally used in international commerce for
payment.
 A draft is simply an order written by an exporter instructing an importer, or an importer’s agent, to
pay a specified amount of money at a specified time.
 A sight draft is payable on presentation to the drawee while a time draft allows for a delay in
payment-normally 30, 60, 90 or 120 days.
Bill of Lading
The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three
purpose:
 It is a receipt
 It is a contract
 It is a document of title
 
A typical International Trade Transaction
The entire process for conducting an export transaction is summarized in the Figure below.

Let us see how the process works in a typical case, sticking with the example of the US exporter and the French
exporter. The typical transaction involves 14 steps (as shown in the figure above)
1. The French importer places an order with the US exporter and asks the American if he would be willing
to ship under a letter of credit.
2. The US exporter agrees to ship under a letter of credit and specifies relevant information such as prices
and delivery terms.
3. The French importer applies to the Bank of Paris for a letter of credit to be issued in favor of the US
exporter for the merchandise the importer wishes to buy.
4. The bank of Paris issues a letter of credit in the French importer’s favor and sends it to the US
exporter’s bank, the Bank of New York.
5. The Bank of New York advises the exporter of the opening of a letter of credit in his favor.
6. The US exporter ships the goods to the French importer on s common carrier. An official of the carrier
gives the exporter a bill of lading.
7. The US exporter presents a 90-day time draft drawn on the Bank of Paris in accordance with its letter of
credit and the bill of lading to the Bank of New York. The exporter endorses the bill of lading so title of
the goods is transferred to the bank of New York.
8. The bank of New York sends the draft and bill of lading to the Bank of Paris. The Bank of Paris accepts
the draft, taking possession of the documents and promising to pay the now-accepted draft in 90 days.
9. The bank of Paris returns the accepted draft tot eh Bank of New York
10. The Bank of New York tells the US exporter that it has received the accepted bank draft, which is
payable in 90 days.
11. The exporter sells the draft to the Bank of New York at a discount from its face value and receives the
discounted cash value of the draft in return.
12. The bank of Paris notifies the French importer of the arrival of the documents. She agrees to pay the
Bank of Paris in 90 days. The Bank of Paris releases the documents so the importer can take possession
of the shipment.
13. In 90 days, the Bank of Paris receives the importer’s payment, so it has funds to pay the maturing draft.
14. In 90 days, the holder of the matured acceptance (in this case, the Bank of New York) presents to it to
the bank of Paris for payment. The bank of Paris pays.
Export-Assistance
Prospective US exporters can draw on two forms of government-backed assistance to help their export
programs:
 They can get financing aid from the Export-Import Bank
 They can get export credit insurance from the Foreign Credit Insurance Association
Export-Import Bank
 The Export-Import Bank (Exim bank) is an independent agency of the US government
 Its mission is to provide financing aid that will facilitate exports, imports and the exchange of
commodities between the US and other countries
Export Credit Insurance
 In the US export credit insurance is provided by the Foreign Credit Insurance Association (FICA)
 FICA provides coverage against commercial risks and political risks

Countertrade
 Countertrade is an alternative means of structuring an international sale when conventional means
of payment are difficult, costly or non-existent.
 Countertrade refers to a range of barter like agreements that facilitate the trade of goods and
services for other goods and services when they cannot be traded for money.
The Incidence of Countertrade
 Countertrade arose in the
1960s as a way for the
Soviet Union and the
Communist states of
Eastern Europe, whose
currencies were generally
nonconvertible, to
purchase imports.
 During the 1980s, the
technique grew in
popularity among many
developing nations that lacked the foreign exchange reserves required to purchase necessary
imports
 There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997.
Types of Countertrade
Countertrade can be categorized into five distinct types of trading arrangements:
 Barter
 Counter purchase
 Offset
 Switch trading
  Compensation or buyback
Barter
 Barter is a direct exchange of goods and/or services between two parties without a crash
transaction
 Barter is the most restrictive countertrade arrangement
 It is used primarily for one-time-only deals in transactions with trading partners who are not credit
worthy or trustworthy.
Counter purchase
 Counter purchase is a reciprocal buying agreement
 It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a
sale is made

Offset
 Offset is similar to counter purchase insofar as one party agrees to purchase goods and services
with a specified percentage of the proceeds from the original sale.
 The difference is that this party can fulfill the obligation with any firm in the country to which the
sale is being made.
Switch Trading
 Switch trading refers to the use of a specialized third-party trading house in a countertrade agreement
 When a firm enters a counter purchase or offset agreement with a country, it often ends up with what
are called counter purchase credits, which can be used to purchase goods from that country.
 Switch trading occurs when a third-party trading house buys the firm’s counter purchase credits and
sells them to another firm that can better use them.
Compensation or Buybacks
 A buyback occurs when a firm builds a plant in a country-or supplies technology, equipment,
training or other services to the country-and agrees to take a certain percentage of the plant’s
output as a partial payment for the contract.
The Pros and Cons of Countertrade
 Countertrade’s main advantage is that it can give a way to finance a export deal when other means
are not available.
 If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a
competitor that is willing to make a countertrade agreement.
 A countertrade arrangement may be required by the government of a country to which a firm is
exporting goods or services.
The drawbacks of countertrade are substantial:
 Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm
cannot dispose of profitably
 Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide
network of contracts to dispose of goods acquired in countertrading.

To learn more about Exporting,

Importing and Countertrade
please watch the video posted
in our Facebook Group/ Group
Chats.
A firm based on Washington State wants to export a shipload of finished
lumber to the Philippines. The would-be importer cannot get sufficient
credit from domestic sources to pay for the shipment but insists that the
finished lumber can quickly be resold in the Philippines for a profit.
Outline the steps the exporter should take to affect this export to the
Philippines.
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
___________________________________________________________________

You are the assistant to the CEO of a small textile firm that manufactures
quality, premium-priced, stylish clothing. The CEO has decided to see
what the opportunities are for exporting and has asked you for advice as
to the steps the company should take. What advice would you give to the
CEO?
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
______________________________________________________________________
 Lesson 2: Global Production, Outsourcing, and Logistics

As trade barriers fall and global markets develop, many firms increasingly confront a set of interrelated issues.
First where in the world should production activities be located? Should they be concentrated in a
single country, or should production activities be dispersed around the globe, matching the type of activity with
country difference in factor costs, tariff barriers, political risks, and the like to minimize costs and maximize
value added? Second, what should be the long-term strategic role of foreign production sites? Should the firm
abandon a foreign site if factor costs change, moving production to another more favorable location, or is there
value to maintaining an operation at a given location even if underlying economic conditions change? Third,
should the firm own foreign production activities, or is it better to outsource those activities to independent
vendors? Fourth, how should a globally dispersed supply chain be managed, and what is the role of Internet-
based information technology in the management of global logistics? Fifth, should the firm manage global
logistics itself or should it outsource the management to enterprises that specialize in this activity?

Identify what is being refered in the following statements:

________ 1. Used to economize on inventory holding costs by having materials
arrive at a plant in the time it is needed.
________ 2. Refers to the activity that controls the transmission of physical materials
through the value chain, form procurement through production and into
distribution.
________ 3. Refers to the modern successor of TQM- a statistically based philosophy
that aims to reduce defects, boost productivity, eliminate waste, and cut costs
throughout a company.
________4. Refers to a quality standard wherein the processes and the products of a
certain company will undergo a certification process before being allowed in the
marketplace.
Strategy, Production and Logistics
How can production and logistics be conducted internationally to:
 Lower the costs of value creation
 Add value by better serving customer needs
Production refers to activities involved in creating a product.
Logistics refers to the procurement and physical
transmission of material through the supply chain, fork
suppliers to customers.
 The objectives of the production and logistics
function are to lower costs and increase product
quality by eliminating defective products from both
the supply chain and the manufacturing process. The
two objectives are interrelated.
There are 3 ways in which improved quality control reduces
costs:
 Productivity increases because time is not wasted manufacturing poor quality products that cannot be
sold
 Increased product quality means lower re-work and scrap costs
 Greater product quality means lower warranty and re-work costs

 The main management technique that companies are utilizing to boost their product quality is the Six
Sigma program which aims to reduce defects, boosts productivity, eliminate waste, and cut costs
throughout a company.
 Six Sigma, a direct descendant of total quality management (TQM), has a goal of improving product
quality.
 Some countries have also promoted specific quality guidelines.
 The European Union requires that the quality of a firm’s manufacturing processes and products be
certified under a quality standard known as ISO 9000 before the firm is allowed access to the European
marketplace.
Two other objectives are important for international companies:
 Production and logistics functions must be able to accommodate demands for local responsiveness.
 Production and logistics must be able to respond quickly to shifts in customer demand.

Where to Produce?
There are three factors that should be considered when making a location decision:
 Country factors
 Technological factors
 Product factors
Country Factors
 Country factors suggest that a firm should locate it
various manufacturing activities in those locations
 where economic, political and cultural conditions, including relative factor costs, are most conducive to
the performance of that activity.
 Regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as
can expectations about future exchange rate changes.
Technological Factors
The type of technology a firm uses in its manufacturing can affect location decisions.
Three characteristics of a manufacturing technology are of interest:
 The level of fixed costs
 Its minimum efficient scale
 Its flexibility
Fixed Costs
 In some cases, the fixed costs of setting up a manufacturing plant are a high that a firm must serve the
world market from a single location or from a very few locations.
Minimum Efficient Scale
 The larger the minimum efficient scale (the level of output at which most plant-level scale economies
are exhausted) of a plant, the more likely centralized production in a single location or a limited number
of locations makes sense.
The term flexible manufacturing technology or lean production covers a range of manufacturing technologies
that are designed to:
 Reduce set up times for complex equipment
 Increase the utilization of individual machines through better scheduling
 Improve quality control at all stages of the manufacturing process
 Flexible manufacturing technologies allow a company to produce a wide variety of ed products at a unit
cost that at one time could only be achieved through the mass production of a standard output.
 Mass customization implies that a firm may be able to customize its product range to suit the needs of
different customer groups without bearing a cost penalty.
 Flexible machine cells (grouping of various types of machinery, a common material, and a centralized
cell controller) are another common flexible manufacturing technology
 Adopting flexible manufacturing technologies can help improve the competitive position of firms by
allowing the firm to customize products to different national markets in accordance with demands for
local responsiveness

Summary
Concentrating production at a few choice locations makes sense when:
 Fixed costs are substantial
 The minimum efficient scale of production is high
 Flexible manufacturing technologies are available
Concentrating production at a few choice locations is not as compelling when:
 Both fixed costs and the minimum efficient scale of production are relatively low
 Appropriate flexible manufacturing technologies are not available
Product Factors
Two product factors impact location decisions:
 The product’s value-to-weight ratio
If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to
other parts of the world.
If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations
across the world.
 Whether the product serves universal needs (needs that are the same everywhere)
Since there are few national differences in consumer taste and preference for such products, the need for local
responsiveness is reduced, increasing the attractiveness of concentrating manufacturing in a central location.

Locating Production Facilities

There are two basic strategies for locating manufacturing facilities:
 Concentrating them in the optimal location and serving the world market from there
 Decentralizing them in various regional or national locations that are close to major markets
The appropriate strategic choice is determined by various country, technological, and product factors.

The Strategic Role of Foreign Factories

The strategic role of foreign factories and the strategic
advantage of a particular location can change over time.
 A factory initially established to make a standard
product to serve a local market, or to take advantage
of low-cost inputs, can evolve into a facility with
advanced design capabilities
 As governmental regulations change and/or countries
upgrade their factors of production the strategic
advantage of a particular location can change
 As the strategic role of a factory is upgraded and a
firm develops centers of excellence in different
locations worldwide, it supports the development of a transnational strategy
  A major aspect of transnational strategy is a belief in global learning, or the idea that valuable
knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign
subsidiaries

Outsourcing Production: Make-or-buy Decisions

Should an international business make or buy the component parts to go into their final product?
Make-or-buy decisions are important factors in many firms’ manufacturing strategies
The Advantages of Make
Vertical integration (making component parts in-house):
 Is associated with lower costs
 Facilitates investments in highly specialized assets
 Protects propriety technology
 Facilitates the scheduling of adjacent processes
Lowering Costs
 If the firm is more efficient at that a production
activity than any other enterprise, it may pay a
firm to continue manufacturing a product or
component part in-house
Facilitating Specialized Investments
 Internal production makes sense when
substantial investments in specialized assets
(assets whose value is contingent upon a
particular relationship persisting) are required
to manufacture a component
Protecting Propriety Product Technology
 A firm might prefer to make component parts that contain propriety technology in-house in order to
maintain control over the technology
Improving Scheduling
 The weakest argument for vertical integration is that the resulting production cost savings make
planning, coordination, and scheduling of adjacent processes easier.
The Advantages of Buy
Buying component parts from independent suppliers:
 Gives the firm greater flexibility
 Helps drive down the firm’s cost structure
 Helps the firm to capture orders from international customers
Strategic Flexibility
 The greatest advantage of buying component parts from independent suppliers is that the firm can
maintain its flexibility, switching orders between suppliers as circumstances dictate
 This is particularly important hen changes in exchange rates and trade barriers might alter the
attractiveness of various supply sources over time.

Lower Costs
Firms that buy components from independent suppliers can avoid:
  The challenges involved with coordinating and controlling the additional subunits that are associated
with vertical integration
 The lack of incentive associated with internal suppliers
 The difficulties with setting appropriate transfer prices
Offsets
 Outsourcing can help firms capture more orders from suppliers’ countries
Trade-Offs
The benefits of manufacturing components in-house are greatest when:
 Highly specialized assets are involved
 When vertical integration is necessary for protecting propriety technology
 When the firm is more efficient than external suppliers at performing a particular activity
Strategic Alliances with Suppliers
 Firms have tried to capture some of the benefits of vertical integration, without encountering the
associated organizational problems, by entering into long-term strategic alliances with key suppliers.
 While such alliances can help the firm to capture the benefits associated with vertical integration firms
may find their strategic flexibility limited to alliance partners.

Managing a Global Supply Chain

Logistics encompasses the activities necessary to
get materials to a manufacturing facility, through
the manufacturing process, and out through a
distribution system to the end user.
 The logistics function is complicated in an
international business by factors such as
distance, time, exchange rates, and custom
barriers.
 Efficient logistics can have a major impact
upon a firm’s bottom line

The Power of Just-in-Time (JIT)

The basic philosophy behind JIT systems is to economize on inventory holding costs by having materials arrive
at a manufacturing plant just in time to enter the production process, and not before.
 JIT systems generate major cost savings from reduced warehousing and inventory holding costs.
 JIT systems can help the firm to spot defective parts and take them out of the manufacturing process
and boost product quality.
The Role of Information Technology and the Internet
Web-based information systems play a crucial role in materials management:
 Facilitates the tracking of inputs
 Allows the firm to optimize its production schedule
 Allows the firm and its suppliers to communicate in real time
 Eliminates the flow of paperwork between a firm and its suppliers
 To learn more about
Global Production,
Outsourcing and Logistics
please watch the video
posted in our Facebook
Group/ Group Chats.

Explain how an efficient logistics function can help an international

business compete more effectively in the global marketplace.
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
__________________________________________________________________

A firm must decide whether to make a component part in-house or to

contract it out to an independent supplier. Manufacturing the part
requires a nonrecoverable investment in specialized assets. The most
efficient suppliers are located in countries with currencies that many
foreign exchange analysts expect to appreciate substantially over the next
decade. What are the pros and cons of (a) manufacturing the component
in-house and (b) outsourcing manufacturing to an independent supplier?
Which option would you recommend? Why?
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
______________________________________________________________________
Building the Boeing 787
Boeing’s newest commercial jet aircraft, the wide-bodied
787 jet, is a bold bet on the future of both airline travel and
plane making. Designed to fly long-haul point-to-point
routes, the 250-seat 787 is made largely out of composite
materials, such as carbon fibers, rather than traditional
materials such as aluminum. In total, some 80 percent of
the 787 by volume is composite materials, making the
plane 20 percent lighter than a traditional aircraft of the
same size, which translates into a big saving in jet fuel
consumption and costs. The 787 is also packed full of other
design innovations, including larger windows, greater
headroom, and state-of-the-art electronics on the flight
deck and in the passenger compartment.
To reduce the risks associated with this technological
gamble, Boeing decided to outsource an unprecedented 70 percent of the content of the 787 to other
manufacturers, most of them based in other nations. In contrast, 50 percent of the Boeing 777 was outsourced,
30 percent of the 767 and only 5 percent of the 707. The idea was that in return for a share of the work,
partners would contribute towards the estimated $8 billion in development costs for the 787. In addition, by
outsourcing, Boeing felt that it could tap into the expertise of the most efficient producers, wherever in the
world they might be located, thereby driving down the costs of making the plane. Furthermore, Boeing believed
that outsourcing some work to foreign countries would help it to garner sales in those countries. Boeing’s role
in the entire process was to design the plane, market and sell it, and undertake final assembly in its Everett
plant in Washington state. Boeing also believed that by outsourcing the design of so many components, it could
cut down the time to develop this aircraft to four years from the six that is normal in the industry. Some 17
partners in 10 countries produce major parts of the aircraft. Vought Aircraft Industries in South Carolina makes
the rear fuselage, and Alenia Aeronautical of Italy produces the middle fuselage sections and horizontal
tailpieces. Three Japanese companies, Fuji, Kawasaki, and Mitsubishi, produce the plane’s wings. Toronto-based
Onex Corporation makes the nose section. All of these bulky pieces are shipped to Everett for final assembly
aboard a fleet of three modified Boeing 747 freighters called
“Dream lifters.” Until late 2007, the strategy seemed to be working remarkably well. Boeing had booked orders
for over 770 aircraft, worth more than $100 billion, making the 787 the most successful aircraft launch in the
history of commercial aviation. But behind the scenes, cracks were appearing in Boeing’s globally dispersed
supply chain. In mid-2007, Boeing admitted that the 787 might be a few months late due to problems with the
supply of special fasteners for the fuselage. As it turned out, the problems were much more serious. By early
2008, Boeing was admitting to a delay of up to 12 months in the delivery of the first 787 and an additional $2
billion in development costs, and it was facing the possibility of having to pay millions in penalty clause
payments for late delivery to its leading customers. The core issue was that several key partners had not been
able to meets Boeing’s delivery schedules. To make composite parts, for example, Italy’s Alenia had to build a
new factory, but the site that it chose was a 300-year-old olive grove. It faced months of haggling with local
authorities over the property and had to agree to replant the trees elsewhere before it could break ground. To
compound problems, its first fuselage sections delivered to Boeing did not meet the required quality standards.
Then when parts did arrive at Everett, Boeing found that many components had not been installed in the
fuselages (as required), and that assembly instructions were only available in Italian. Other problems arose
because several partners themselves outsourced mission-critical design work to other enterprises. Vought, for
example, outsourced the design and building of floor pieces for which it was responsible to an Israeli company.
In turn, the Israeli company had trouble meeting Boeing’s exacting quality standards, but because it was
reporting to Vought, not Boeing, executives at Boeing did not learn of this problem until it had already become
a serious bottleneck. Upon learning of the issue, Boeing rapidly dispatched engineers to Israel to work with the
company, but by then several months had been lost. Despite all of these issues, Boeing remains committed to its
outsourcing program. What the company has learnt, however, is that if it is going to outsource work to foreign
suppliers, much closer management oversight and coordination is required to make it work.

Case Discussion Questions

1. What are the benefits to Boeing of outsourcing so much work on the 787 to foreign suppliers?
What are the potential risks? Do the benefits outweigh the risk?
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
2. In 2007 and 2008 Boeing ran into several well-publicized issues with regard to its management
of a globally dispersed supply chain. What are the causes of these problems? What can a company
like Boeing do to make sure such problems do not occur in the future?
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________

3. Some critics have claimed that by outsourcing so much work, Boeing has been exporting
American jobs overseas. Is this criticism fair? How should the company respond to such criticisms?
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________________