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IncreasingProfitsinJetFlightManufacturing1OverviewActivelylistentothecaseYourclientisaU.S.defensecontractorthatmanufacturestheMohawkLightFighterJetfortheBritishRoyalAirForce.Thecompanyhasproducedthe$20millionfighterjetforthepast12years.TheBritishgovernmenthasdecidedtoputthecontractouttobid,however,andtowintheprogram,theclient'spurchasingagentshaveestimated,thecompanywillneedtocutitscostsby5percent.IthasaskedBCGtohelpitreducecosts.ClarifyEstablishunderstandingofthecaseLetmefirstclarifythequestion.Theclientmanufacturesa$20millionjetand,becauseofcompetitiveforces,hastoreduceitscostby5percent.IsBCG'srolealsotoverifythepurchasingdepartment'sestimate?No,youcanassumethatthepurchasingestimateiscorrect.BCG'sroleistofindthecostsavingstomeetthatestimate.CouldItakeafewminutestothinkaboutthecase?Sure,pleasedoso.ApproachSetuptheframeworkFirst,Iwouldliketounderstandthecoststructureofthejettoseewhatweshouldlookatfirst.Next,Iwouldliketolookatmajorfactorsdrivingthecostswearetargeting.Finally,Iwouldliketoexplorepotentialideastoreducecost.Thatsoundslikeaverylogicalapproach.Let'sproceed.EvaluateEvaluatethecaseusingtheframeworkBecausethetimefortheinterviewislimited,Ithinkweshouldtrytoidentifythoseareasmostresponsibleforthecostofthejet.Timeislimitedonrealprojectsaswell,soIthinkthatwouldbeagoodidea!Youhavethefollowingcostinformationforthejet.Howwouldyouinterpretit?IncreasingProfitsinJetFlightManufacturing2Themajorcostdriverforthejetappearstobepurchasedmaterials.Withinmanufacturing,directlaborisafairlylargecomponentofcost,asareprogrammanagementandcorporateoverheadwithinoverhead.Ithinkwewouldwanttoconcentratemostonmaterials,however,sincethat'swheremostofthecostscanbefound.Thatsoundslikeagoodplacetostart.Wherewouldyoulookwithinmaterials?Iseethatmaterialsarebrokendownintopurchasedsubassemblies,components,andrawmaterials.Iunderstandwhatrawmaterialswouldbe,butwhatwouldbethedifferencebetweencomponentsandsubassemblies?Asubassemblyfunctionsonitsown.Anexampleisthepilotnightvisionsystem.Acomponentisasmallerpart,suchasapartoftheengine.Iknowthatgovernmentalagenciesoftenhaveverystrictguidelinesaboutpurchasingthatcouldaffectthecostofmaterials.Forthesakeofthiscase,youcanassumethattheBritishMinistryofDefense,MOD,allowscommercialoff-the-shelfpurchases,whichmeansthattheclientisfreetopurchasefromwhomeveritwants,aslongasitcanensurethatthepartsmeetMODqualityguidelines.Iseethatpurchasedsubassembliescomprisemorethan70percentofmaterials.Howmanysuppliersarethereforthesesubassemblies?Therearesevensuppliersofmajorsubassembliesthatgointothefighterjet.Thatseemslikearelativelysmallnumber.Aretheremoresuppliersthatarequalifiedtodothistypeofwork?ThemanufactureofthesepartsrequiresasubstantialinvestmentinR&D,engineering,andinfrastructure.Itwouldbeverycostlyfornewsupplierstomaketherequiredinvestment,particularlyiftheclientistryingtoreducethepriceitpaystothesubassemblymanufacturers.Sincethereareonlyafewsubassemblysuppliers,andtheinvestmenthurdlewouldprecludebringingincompetingmanufacturers,itwouldbedifficulttoreducethepricepaid.Perhapsweshouldlookelsewhereforsavings.Butremember,ifyourclientlosesthecontract,itwillloseitscustomerunlessitisteamedwiththecompetingbidder.Eventhen,ifthecompetitorisunderbiddingyourclient,therewillbeevenlessroomforittoprofit.Perhapsitwouldhaveanincentivetoreduceitscostsinordertomaintainthecontract.Arethemajorityofitscostsinmaterialsaswell?IncreasingProfitsinJetFlightManufacturing3Howcouldyoufindthatout?Iwouldwanttointerviewthepurchasingandengineeringpersonnelofthedifferentsubcontractorsinordertounderstandtheircoststructures.Ifwehadabetterunderstandingoftheireconomics,ourclientmightbeabletoreducecostacrosstheboard,allowingittocompetemoreeffectivelyforthecontractwithoutkillingeveryone'smargins.Let'ssaythatpurchasedmaterialsaverageapproximately70percentofthepricepaidtomostofthemanufacturers.Ifthecostofsubassembliesrepresents40percentofthejetcostand70percentofthatispurchasedmaterials,totalpurchasedmaterialswouldbeapproximately28percentofthejetcostsubassemblies.Purchasesofrawmaterialsandcomponentsrepresentanother15percent,foratotalofaround43percentofthecostofthejet.Ifourclientcouldreducethecostofrawmaterialsby20percent,itcouldreducethecostofthejetbymorethan8percent,morethanenoughtooffsetthe5percentreductionitwouldneedtowinthecontract.Thatsoundsreasonable,but20percentisaveryloftygoal.Howwouldyougoaboutdoingthat?First,Iwouldlookatthenumberofsuppliers.Aretherealargenumberofsupplierstothesubassemblymanufacturers?Theclientestimatesthatthereareapproximately125suppliersofrawmaterialsandcomponentsamongthemanufacturersofthesubassembliesanditself.Well,thatsoundslikealargenumberofsuppliers.Ofcourse,theycouldbeprovidingveryspecializedmaterialstothesubassemblymanufacturers.Arethesesuppliersprovidingcustomizedormorecommodityproducts?About80percentoftheseproductsarecommodities,suchassheetmetalandwireharnesses.Evensomeoftheelectronics,suchasprintedwireboardsandcircuitry,arefairlygeneric.Thatsoundspromising,butIwouldneedtoknowwhetherthesecommoditiesareinterchangeab