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What Are The Potential Costs

Read the Management Focus on Boeing and answer the following questions: (Pg. 9 of the uploaded text on Canvas)

a) What are the potential costs and risks to Boeing of outsourcing?

The potential costs and risks to Boeing of outsourcing, is that some of the suppliers may not be able to undertake major investments in capacity to ramp up their production and will not supply Boeing with what they need, for example: parts turning up late and some partsdon’t “snap together” as Boeing wants. As a consequence, the dates for delivering jets can belate and fines will need to be paid by Boeing.

b) In addition to foreign subcontractors and Boeing, who else benefits from Boeing's decision to outsource component-part manufacturing assembly to other nations? Who are the potential losers?

Developing countries will surely be benefitted from Boeing’s decision to outsource. Boeing will create many job opportunities in developing countries; moreover, it will boost the economy on these countries. Furthermore, the potential losers will be the United States’ economy. Many people will do not have jobs because most the jobs that supposed to be in the United States will be had by the outsource countries. In addition, United States will also lose its competitive advantage.

c) Do you think that the kind of outsourcing undertaken by Boeing is a good thing or a bad thing for the American economy? Explain your reasoning.

If Boeing keep all production in America, there are some possibilities that Boeing is not able to mitigate the risks of production. Moreover, company will have higher production costs. Higher production costs mean that the price of the aircraft will increase. However, Boeing plant is in Seattle, and Seattle tax rate is high. This is also one of the reasons that the aircraft price is high. If Boeing builds a new plant on other part of the United States, the price will decrease too. Moreover, if they build a new plant, Boeing will open many job offers. In addition, Boeing’s employees might increase their area of expertise in order to bring back competition with other competitors (Airbus); thus, it will strengthen the company’s core skills and competitive position.

As the chapter discusses, differences in political, economic, and legal systems have considerable impact on the benefits, costs, and risks of doing business in countries around the world. It also has a considerable impact on how easy it is to do business in these countries. The World Bank Doing Business Indicators measure the extent of business regulations in countries around the world. Compare the Brazil, Ghana, India, New Zealand, the United States, and Turkey in terms of how easily contracts are enforced, how property can be registered, and how investors can be protected. Identify in which area you see the greatest variation from one country to the next.

Doing business indicators:

These indicators showcase the laws and measures that a business unit has to follow before establishing in a particular region. Data has to be gathered about various indicators so as to compare and select the best possible business regulation environment.

“Doing business measures” is the detailed index provided by the “world bank” every year for 189 countries. These indicators are well used to analyze economic outcomes and identify the reforms and regulations of business that have worked significantly.

Enforcement of contracts:

This sort of indicators includes judicial process index, i.e. if the business unit faces commercial disputes, the time and cost the company has to bear in order to resolve the issue.

Variations in areas:

  • Usually the variation occurs in measuring complexity and cost of regulatory processes.
  • The cost of regulatory processes includes such as commencing business, construction permits, taxes, trading and registration of property.
  • If the business maintains an affiliation with suppliers in any other region, make them part of the contract.
  • Provide all necessary clauses in the deeds.

Protecting the investors is considered to be the toughest task for the busness unit, as the risk factors in terms of internal and external environment varies.

Increased instability in the global marketplace can introduce risks in a company’s daily transactions that can be unanticipated. As such, your company must evaluate these commercial transaction risks for its foreign operations in Argentina, China, Egypt, Poland, and South Africa. A risk analyst at your firm indicated that you could evaluate both the political and commercial risk of these countries simultaneously. Provide a commercial transaction risk overview of all five countries for top management. In your evaluation, indicate possible corrective measures in the countries with considerably high political and/or commercial risk.

A search on the globalEDGE website for a comprehensive analysis of political and commercial risks for any country leads one to the web site of Ducrore/Declredere S.A.NV. This is a credit insurance company situated in Belgium that provides insurance cover for export contracts. It rates commercial risk as low, medium and high. Based on this it declares whether it is willing o determine the risks for the following countries.

a. Argentina

Political Risk Rating:5

Commercial Risk Rating: High

Cover: Open cover without bank guarantee is possible

b. China

Political Risk Rating:1

Commercial Risk Rating: High

Cover: Open cover without bank guarantee is possible

c. Czench Republic

Political Risk Rating:1

Commercial Risk Rating: Medium

Cover: Open cover without bank guarantee is possible

d. India

Political Risk Rating:2

Commercial Risk Rating: Medium

Cover: Open cover without bank guarantee is possible

e. Indonesia

Political Risk Rating:2

Commercial Risk Rating: High

Cover: Open cover without bank guarantee is possible

f. United Arb Emirats.

Political Risk Rating:2

Commercial Risk Rating: Medium

Cover: Open cover without bank guarantee is possible

The best route to mitigate any risk whether political or commercial is to get an Irrevocable Letter of Credit which is confirmed by a bank in the home country. This is not only guarantees the payment of the monies against the letter of credit but also that the foreign exchange remittances would be made. Alternatively one could request a letter of credit opened in either US dollars or Euros by a major US or European Bank.


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