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OM in the News: Boeing and Airbus Change the “Make or Buy” Formula

September 11, 2017

A Boeing employee working on a vertical fin assembly for a 787 in Salt Lake City. Boeing will start to manufacture some parts for its planes to tap into the lucrative aircraft components market.

“The world’s largest plane makers are testing a seemingly simple formula to smooth production, cut costs and fatten profits: Make more of the parts that go into their jets themselves,” reports The Wall Street Journal (Sept. 8, 2017). Worried about getting squeezed by parts company consolidations (like United Technologies proposed $23 billion takeover of Rockwell), Boeing and Airbus have moved to protect themselves by building more of their parts in-house. This month, Boeing started construction of a new plant in England that will make the motors that help move a wing’s flaps.  The wings for a revamped version of Boeing’s 777 jetliner also will be built at a new plant near Seattle rather bought from a supplier.

Airbus, meanwhile, is planning to build its own nacelles, the metal casings that house a plane’s engines. “We are constantly revisiting our ‘make or buy’ decisions,” said Airbus’ COO.  “The opportunity ahead of us, in terms of transforming how we design and build, how we manufacture, is even greater than some of the product innovation that we’re going to bring to the table,” added Boeing’s CEO.

Boeing and Airbus are slated to deliver new planes worth more than $100 billion this year. Under pressure to deliver all those planes, they have pressed their suppliers for cost savings and deadline commitments. Parts represent more than half the value of each of those planes and are mostly made by dozens of suppliers such as United Technologies, Spirit AeroSystems, and GE. Profit margins for plane makers have averaged 9% over the past 2 years, compared with 14% for “tier one” suppliers such as United Technologies and Rockwell, which make finished parts directly. Margins come in at 17% for tier 2 suppliers, which provide smaller components for those parts.

Classroom discussion questions:

  1. What are the plusses and minuses of changing from “buy” to “make?”
  2. What other reasons are there for Boeing to make its own parts?
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