Economics Airbus, the European consortium

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Welcome, Nicole Jarvey.
Sunday, December 10, 2017 4:12 PM
Assignments & Exams
Course: Microeconomics: ECO-1011709
Assignment: Assignment 3
Question #1:
In 2006 Airbus, the European consortium that
competes with Boeing in the aerospace
market, suffered setbacks in its production of
the new A380 aircraft. Originally promised by
April 2006, the delivery date has been
repeatedly delayed.
Singapore Airlines (SIA) is one of the
clients whose plans have been disrupted
by the delays. When asked, in October
2006, how SIA would be affected by the
A380’s problems, a spokesman replied,
“The consequence of the A380 delay is the
inability to grow capacity on the flights
where we would like to replace 747-400s
with the larger A380s, … It would mean a
delay in capacity increase, rather than a
decrease in the number of flights we
already have.” (Sreenivasan, Ven.
“Opportunity cost adding up for SIA with
A380 delay”. The Business Times
Singapore, October 3, 2006.) SIA was not
going to spend any more money to acquire
its airlines, so what kind of cost was the
spokesperson describing? How does this
cost affect SIA?
Question #2A:
Economic theory explains the existence of
firms as the outcome of a cost-minimization
process. Following the insight provided by
Ronald Coase, we predict that a task will be
performed within a firm, as opposed to outside
of the firm, only when there is a cost
advantage to that arrangement. An example in
Chapter 9 illustrates the
to top costs of
having your car fixed at an established garage
versus contracting separately with mechanics,
parts suppliers, and equipment providers. The
garage owner can exploit economies of scale
by buying capital equipment and establishing
contractual relationships with mechanics and
suppliers and using these assets to serve
many customers. The transactions costs per
customer are lower than those the customer
would incur if he had to make all these
arrangements for himself.
Recently, however, technological change in the
telecommunications industry has dramatically
lowered the cost of transmitting complicated
information over large distances. People
skilled in the creative use of this technology
can reduce the level of uncertainty
surrounding routine management decisions
such as how many shirts of a given size and
color to store in the warehouse. Today, a firm
called TAL, based in Hong Kong, specializes in
inventory management—traditionally an inhouse function—for a host of retailers.
“TAL collects point-of-sale data for Penney’s
shirts directly from its stores in North America,
then runs the numbers through a computer
model it designed. The Hong Kong company
then decides how many shirts to make, and in
what styles, colors and sizes. The
manufacturer sends the shirts directly to each
Penney store, bypassing the retailer’s
warehouses—and corporate decision
makers….It supplies labels such as J. Crew,
Calvin Klein, Banana Republic, Tommy
Hilfiger, Liz Claiborne, Ralph Lauren and
Brooks Brothers. …Now, TAL is negotiating a
deal to manage Brooks Brothers’ shirt
inventory the same way it does Penney’s. For
Lands’ End, TAL stitches made-to-measure
pants in Malaysia and flies them straight to
U.S. customers, with a shipping invoice that
carries the Lands’ End logo.
These retailers have been willing to cede
some functions once seen as central because
TAL can do them better and more cheaply.
Rodney Birkins Jr., vice president for sourcing
of J.C. Penney Private Brands Inc., describes
as “phenomenal” the added efficiency Penney
has been able to achieve with TAL. Before it
started working with TAL a decade ago,
Penney would routinely hold up to six months
of inventory in its warehouses and three
months’ worth at stores. Now, for the Stafford
and Crazy Horse shirt lines that TAL handles,
“it’s zero,” Mr. Birkins says.” (Kahn, Gabriel,
“Made to Measure: Invisible Supplier Has
Penney’s Shirts All Buttoned Up; From Hong
Kong, It Tracks Sales, Restocks Shelves,
Ships Right to the Store; Inside a ‘Radical’
Power Shift”. Wall Street Journal (Eastern
edition), September 11, 2003: pg. A1)
Explain how TAL exploits economies of
scale in the production of inventory
Question #2B:
The (former) in-house inventory
management department at JC Penney’s
was less efficient than TAL for two reasons.
First, the employees in that department
lacked the software and specialized skill of
the innovative entrepreneur at TAL. In
addition there were inefficiencies resulting
from the imperfect incentive structure of
salaried employees. Explain, using the
concept of the principal-agent problem.
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