Tuesday, February 12, 2013

A Reversal from Outsourcing: GE's Aviation Division

Recently, Boeing Co. tried contemporary outsourcing practices to cut costs by relying on outside suppliers to provide crucial components for their new Dreamliner aircraft.  Consequently, the Dreamliner has become more infamous than famous due to its well known problems with cost over runs and continuous project delays. Even now, the Dreamliner fleet is still grounded as there are worries about overheating and potential fires in their lithium-ion batteries, which were made by outside suppliers.

GE trying to protect a significant portion of their sales, "Aircraft engines account for about half of GE's $211 billion order backlog" (WSJ), has started purchasing most of it's suppliers, in terms of engine production.  Just last year, GE bought Avio, an Italian parts supplier, as well as a three dimensional printing company (to secure access to silicon carbide), Morris Manufacturing in Cincinatti to produce fuel nozzles on their new engine, and SeaCast Co. in Montana for the maunfacturing of miscellaneous engine parts from tubes to castings.  

This new, vertically integrated approach is a reversal from their past outsourcing practices. Colleen Athans, who runs the supply chain management for GE Aviation was qouted "We want more under our control, [rather] than pay a supplier to do it, we would like to protect our intellectual property."  In addition to the Boeing Dreamliner debacle, current events like the flooding Thailand or the tsunami in Japan have made it obvious that some supply chains have grown too long and fragile.  And unlike Apple in the Iphone4 Supply Chain in China article, they cant afford to only focus on costs as engine production requires an emphasis on safety, any inferior quality manufacturing practices can result in a problem like the one Boeing is currently experiencing.

GE Aviation plans to open at least three new manufacturing plants within the United States located in Mississippi and Alabama, with the third yet to be determined.  The growing importance of the avation division within GE and the need to protect its intellectual property along with guaranteeing the ability to secure supplies can be see as the catalyst for this change. Their newly designed engine has already attracted massive demand, 15,000 customer orders have already been taken. To put that in perspective, there are only 25,000 GE engines in use across the globe.  

Is this just the first step in a larger strategy in which GE plans to scale back outsourcing in other high-end, high-revenue products or is this just limited to aircraft engines due to the unique challenges of production? What would be the benefits of vertically integrating other GE departments as well?

Source: http://online.wsj.com/article/SB10001424127887324906004578288373219034986.html

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