Monday, September 30, 2013

Boeing’s outsourcing flaws

Federal investigators have grounded all of Boeing's new 787 Dreamliner jets after reports that the aircraft's lithium-ion batteries were overheating and catching fire. Various analysts blame their outsourcing strategies to be the most important flaw behind this debacle. Boeing, an iconic American company that is a symbol of American manufacturing decided to outsource its key components, both nationally and internationally for their new aircraft, the Boeing 787, as a way of lowering costs and accelerating development. The approach was estimated to reduce the aircraft’s development time from $10 to $6 billion.



Source: www.newyorker.com and bloga350.blogspot.com

However the end result was the opposite, the project outcome was billions of dollars over budget and three years behind schedule. Boeing adopted this approach not only to reduce cost but, to improve travel experience for their customers by using new materials (carbon fiber, aluminum and titanium) that would allow for increased humidity and pressure to be maintained in the passenger cabin, offering substantial improvement to the flying experience. The lightweight composite materials would enable the 787 to fly nonstop between any pair of cities without layovers. Also, to improve the value for its immediate customers (Airline companies) by improving the fuel efficiency and an electrical system using lithium-ion batteries, resulting in 20 percent less fuel for comparable flights and cost-per-seat mile 10 percent lower than for any other aircraft.

Once the aircraft was released, it became the fastest selling plane in aviation history. The stock price exploded and the C-suite (Corporate suite or important senior executives) received their bonuses. But the reality has since set in. Boeing 787 was subjected to a lot of complaints such as braking problems, fuel leak, cracked windshield and electrical fires, and emergency landing in Japan due to overheating of lithium ion batteries. Critics have blamed the company’s strategy to offshore its suppliers, more than 30 percent came from overseas, including the Japanese-made lithium-ion battery that is one of the prime concerns for Boeing.

Upon careful attention on the manufacturing process of boeing 787, some serious flaws were identified. First is the lack of coordination.  A Boeing aerospace engineer Hart-Smith stated, “It is necessary for the prime contractor to provide on-site quality, supplier-management, and sometimes technical support. If this is not done, the performance of the prime manufacturer can never exceed the capabilities of the least proficient of the suppliers. These costs do not vanish merely because the work itself is out-of-sight.” Boeing did not provide such on-site support to their suppliers. When the suppliers did not perform the necessary coordination, boeing had to send hundreds of their engineers to Tier-1, Tier-2 and Tier-3 suppliers to troubleshoot various technical problems that ultimately resulted in the delay of the 787’s development. A good flow of information from and to the suppliers is necessary to reduce variability in the parent company’s expectation and keep the manufacturing process coordinated with the suppliers.

Second is the risk of outsourcing complicated products. Complicated products like aircraft involve a necessary degree of outsourcing, simply because the firm lacks the necessary expertise in some areas, e.g. engines and avionics. However Boeing significantly increased the amount of outsourcing for the 787 over earlier planes from 30 to 50 percent for their previous models to 70 percent for the 787.Boeing embraced outsourcing in the 787 as a means of reducing costs and the time of development.

But Outsourcing didn’t cut costs and increase profits; instead, it drove profits and knowledge to suppliers while increasing costs for the mother company as told by Hart-Smith. Boeing didn’t follow Hart-Smith’s advice and outsourced the engineering and construction of the plane long before the product was designed and the relative costs established. The results have been disastrous. Boeing’s 787 projects are many billions of dollars over budget and the first planes were delivered over three years late. 


Source: liftndrag.blogspot.com

Third is the risk of offshoring. Some degree of outsourcing in other countries is an unavoidable aspect of manufacturing a complex product like an airplane, because some expertise exists only in foreign countries. For example, the capacity to manufacture Lithium-ion batteries lies outside the US (in Japan). Boeing had no choice but to have the batteries made in another country.
While there is nothing in principle wrong with necessary offshoring, the cultural and language differences and the physical distances involved in a lengthy supply chain create additional risks. Mitigating them requires substantial and continuing communications with the suppliers and on-site involvement, thereby generating additional cost. Boeing didn't plan for such communications or involvement, and so incurred additional risk that materialized.
In order to gain an edge over its competitor after losing market share to Airbus in the late 1990’s, boeing decided to focus on reducing the selling cost and provide an improved experience to its immediate (airlines) and secondary customers (passengers). The intention of Boeing was on the right track but the implementation of their supply chain strategies was where they made mistakes. Better coordination and better flow of information between the parent company (Boeing) and their suppliers, and nullifying the innovation risk by proper testing methods could have helped reduce such variability in their products. Other than the suggestions stated above, what strategies do you think Boeing could adopt to be cost effective and provide quality products at the same time?
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