By John Herrman
Posting in Design
After years of broken deadlines and cost overruns, Boeing finally acknowledges what many have said before: outsourcing has its limits.
Almost immediately after the project's inception, the story of the Boeing 787 split into two threads. One was a tale of technology and innovation, of a long-overdue update to a vital niche in Boeing's stable of airliners. The other, which proved more resilient and interesting, was the story of the plane's design and construction, which has shifted from a bold experiment in outsourcing to a public debacle.
Industry watchers and aviation enthusiasts have long criticized this strategy, and after years of delays and budget overruns, something of a consensus formed around the subject. But it was only recently, in front of an audience at Seattle University, that Boeing--or rather, Boeing's Commercial Airplanes Chief Jim Albaugh--publicly reflected on the issue. Via the Seattle Times:
We spent a lot more money in trying to recover than we ever would have spent if we'd tried to keep the key technologies closer to home.
So, a little background: Boeing set out to produce the 787 in a fundamentally different way from its predecessors, outsourcing not just individual part production, but the production of large, complicated subassemblies. (It's worth noting that prior to the 7e7/787, Boeing had successfully run projects in which over 50% of money spent went to contractors. The 787, however, was a broad step beyond this.)
Boeing's hope was, perhaps obviously, to reduce costs. But skepticism about the plan was immediate and fierce, and, as noted by the Seattle Times, internal. A senior technical engineer at the company published a report in 2001 titled 'Out-sourced Profits-- The Cornerstone of Successful Subcontracting', in which he convincingly argued that Boeing's plans for expanded outsourcing--which had been made clear before the 7e7/787 was properly announced--could never work. Why? Because, he claims [PDF], there is a limit to the cost-saving potential of outsourcing:
Out-sourcing is commonly looked upon by management as a tool for reducing costs. But the unresolved question is “which costs?”. In addition, there is the matter of “what is the effect on overall costs?”. The most important issue of all is whether or not a company can continue to operate if it relies primarily on out-sourcing the majority of the work that it once did in-house.
Among his concerns, nearly all of which were borne out by the later development of the 787:
- The "true cost" of outsourcing is not widely ackowledged, having been shielded from public view by "misleading cost-accounting procedures"
- Outsourcing simple, small parts saves money because they can be manufactured in countries with low labor costs. More complicated tasks cannot be dependably completed in these countries, and must be outsourced to companies operating in countries with high(er) labor costs
- Parts and subassemblies must be designed around this new manufacturing model, which increases upfront costs
- The more complex the outsourced elements, the less likely they are to assemble correctly on the first attempt
- Outsourcing expensive, vital subassemblies doesn't just distribute work--it funnels profits outward, too.
To be sure, outsourcing will continue to be a vital tool for aircraft manufacturers and other makers of highly specialized, low volume equipment. But the harsh lesson of the Boeing 787--that for expensive, complex and long-term products, outsourcing has clear limits--will resonate for years to come.
Feb 8, 2011
Modern times when internet has so much facility of gossip and stuff, your articles have awfully refreshed me.
YOU ARE TOTALLY RIGHT, "ZACKERS". Mulally was very pro-active and aggressively organized (LEAN) and would have weeded out all the unnecessary! :-)
Boeing's biggest mistake was not giving Alan Mulally the CEO spot. He was the one that made the 777 become reality. While the 787 is more complex, Mulally would have never let the program get as out of control as it did. Instead, Mulally wound up as CEO of Ford, where he has successfully turned the company around without a single federal bailout dollar.
Actually, the primary issue is not about small versus large parts, or less developed countries versus more developed countries. The real discussion is about transferring risk. If Boeing transfers risk to a subcontractor, along with that transfer goes a transfer of profits. Otherwise it would not worth the subcontractor taking on the committment. So why should Boeing give away its potential profits? When the required subassembly is not within its core competence so it cannot make a profit by manufacturing it itself. Taking this idea to its logical conclusion, if Boeing subcontracted the whole manufacturing job it would just become a design and marketing company. Ah! just like the incredibly successful Apple, perhaps!
..."Outsourcing simple, small parts saves money because they can be manufactured in countries with low labor costs" is suspect, because even simple, small parts often must be made to exacting specifications which cannot always be guaranteed when the manufacturer is also trying to cut costs and is far out of the way, and far out of direct control.
The executive that approved this is long gone from Boeing and the 787 is completing testing for delivery in the 3rd quarter, hardly the plane that never was. The true story is published in many places.
The Boeing executive who approved this outsourcing will probably be given a huge bonus. The 787 will always be known as the plane that never was.