Bombardier CS300

Bombardier is a French aerospace company that produces small/midsize commercial aircraft and private business jets. It currently sits as the third largest commercial aircraft company in the world behind Boeing and Airbus, although Brazil’s Embraer is a close competitor. The airline industry has become increasingly more competitive in recent years effecting Bombardier’s sales and compressing its margins. The company’s latest design, the CS300, is expected to be very competitive in the market, however the CFO is still concerned about the projected margin the company will receive from the sale of each plane. She has hired you to help identify potential ways of increasing the new product’s margin.

Bombardier is a French aerospace company that produces small/midsize commercial aircraft and private business jets. It currently sits as the third largest commercial aircraft company in the world behind Boeing and Airbus, although Brazil’s Embraer is a close competitor. The airline industry has become increasingly more competitive in recent years effecting Bombardier’s sales and compressing its margins. The company’s latest design, the CS300, is expected to be very competitive in the market, however the CFO is still concerned about the projected margin the company will receive from the sale of each plane. She has hired you to help identify potential ways of increasing the new product’s margin.

Profit Tree: (V*P) – (VC+FC) Note: This case is very open-ended in terms of framework. A good candidate will ask about current margin vs. industry average and will consider some sort of comparison in their framework Revenue: This is a dead end. Tell the candidate that a market research survey has already been conducted and that the revenue-maximizing price (and therefore volume) have already been identified. The CFO is not willing to change these. Cost: Test the candidate on their creativity here (don’t let them get into the weeds on anything; keep it high-level and get as many ideas from them as possible). “What are all the ways you can think of that Bombardier can cut costs on the CS300?” If after suggesting 5-8 options, the candidate still hasn’t identified outsourcing, ask questions to help guide them to it: “What do you think some of the most expensive parts of the airplane to produce are?” If Asked: The Fuselage (main body), Wings, and Engines are the most costly parts of the aircraft to produce. Current Fuselage Costs: Labor: $9m, Raw Materials: $9m, Fixed Costs: $2m Total CS300 costs: $78m Outsourcing: Explain to the candidate that the company has considered outsourcing production of the CS300’s fuselage (main body). Currently they are considering manufactures in Japan, China, and India as potential partners. Ask: “What should the CFO’s main considerations should be when deciding 1) whether to outsource at all, and 2) which manufacturer to work with?” Outsourcing Considerations: Labor Rates, Quality Control, Shipping Cost, Tariffs, Raw Material Costs, Regulations, Technology Compatibility, Infrastructure Limitations (undependable utilities, resource controls, etc.), FX rates, and potential IP Theft. Once the candidate has completed the calculations, ask them how outsourcing to China or India will impact the overall margin for the CS300. Calculate Sale Price: 78M / 0.95 = 82.1M (OK to round to 82M) Cost with Outsourcing: 78M – 2.25M = 75.75M New Margin: (82M – 75.75M) / 82M = 7.6% The difference between the expected cost per fuselage in China vs. India is negligible. This should invite a qualitative discussion on the pros and cons of each country. A good candidate will recognize that there are risks of potential Intellectual Property theft (particularly in China) and unexpected changes to government regulations in both countries. Further risks include changes in raw material prices, infrastructure issues, changes in foreign relations (with France), and the potential of a PR backlash (ie. French citizen’s protesting domestic job losses).