Wednesday, February 20, 2013 28 comments

The Disastrous Outsourcing of the 787

source: Boeing

The Boeing 787 Dreamliner is a technological marvel. It’s built largely of carbon-fibre composites rather than aluminum, which makes it significantly lighter than other planes. Its braking, pressurization, and air-conditioning systems are run not by hydraulics but by electricity from lithium-ion batteries. It uses twenty per cent less fuel than its peers, and so is cheaper to run, yet it also manages to have higher ceilings and larger windows. It is, in other words, one of the coolest planes in the air. Or, rather, on the ground: regulators around the world have grounded all fifty Dreamliners... The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an airplane.
— James Surowiecki, "Requiem for a Dreamliner?"

Don't have much time to comment on this but it appears that the outsourcing trend is probably near its end. Like all management concepts, outsourcing tactics over the last decade generated a lot of wealth and made companies more efficient, but it has resulted in some disastrous outcomes. The textbook example presently is Boeing and its 787 airplane; I am sure there will be even worse examples to come.

The following diagram illustrates the various suppliers of the 787:

It's still not clear if outsourcing may be the entire cause of the 787's problems but one can't deny that it played a major role.

The Economist once touched on the reasons for outsourcing:
But the business logic behind outsourcing remains compelling, so long as it is done right. Many tasks are peripheral to a firm's core business and can be done better and more cheaply by specialists. Cleaning is an obvious example; many back-office jobs also fit the bill. Outsourcing firms offer labour arbitrage, using cheap Indians to enter data rather than expensive Swedes. They can offer economies of scale, too.
Having said that, as is often the case for those trying to implement something well past its shelf life—Six Sigma approach in the early 2000s comes to mind—the incremental benefit of outsourcing appears to be declining significantly. It's difficult to say what went wrong with Boeing but James Surowiecki appears to suggest that Boeing outsourced itself out of its core business:
Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.

This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it—since it meant that Boeing had to put up less money—it was a huge headache for the engineers. In a fascinating study of the process, two U.C.L.A. researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget. In 2011, Jim Albaugh, who took over the program in 2009, said, “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.” And the missed deadlines created other issues. Determined to get the Dreamliners to customers quickly, Boeing built many of them while still waiting for the F.A.A. to certify the plane to fly; then it had to go back and retrofit the planes in line with the F.A.A.’s requirements. “If the saying is check twice and build once, this was more like build twice and check once,” Aboulafia said to me.
The situation at Boeing isn't as bad as it could be. It is essentially an oligopoly, along with Airbus, in the large passenger aircraft market (as well as in some military aerospace markets) and hence will survive through turbulence. But I suspect it will be a different organization after all this is said and done: it may actually may end up building more than 50% of a plane by itself!

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28 Response to The Disastrous Outsourcing of the 787

February 21, 2013 at 9:06 AM

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February 23, 2013 at 8:11 AM

This article gets it wrong.

Technology has moved ahead so much that it is no longer possible for any one company to have even a reasonable 'control' of the entire supply chain. For a surgeon in a operating theater, reliance on an anesthesiologist, a team of nurses, technicians is not a choice, it is inevitable for successful outcome.

In Boeing's case, the challenge of using Li-ion batteries was known before hand and deemed to be an acceptable risk. It was a known known (in the words of our beloved former Sec of Defense). The risk was taken and it failed. We are glad the no one was hurt or killed. We now go back to the drawing table and make changes to the battle plan.

A critical element of this change of plans would be how to have better coordination with our partners. Strengthen the 'outsourcing' of design, development and provisioning of systems and components to develop superior products or services.

There is folklore among Buddhists - the Jataka tales - in which a turtle falls from the sky when it talks while being carried by two swans on a stick that it holds tight with its mouth. The lesson - do not talk when you it is better to keep your mouth shut. How relevant to this turtle with flying on its mind...

February 23, 2013 at 1:22 PM

This sounds to me like it was more of a top-level design flaw in relying too heavily on battery power rather than a risk directly resulting from outsourcing.

February 26, 2013 at 10:13 PM

Anon 1,

Technology isn't the cause of the changes at Boeing. Most of what Boeing has done is business process re-engineering simply to improve their product (possibly in terms of cost, time to ship, etc). I don't think technology is at play here because Boeing is in an oligopoly and is the dominant player and hence dictates the markets. It's not as if another company is leapfrogging Boeing by utilizing better technology.

I don't know if I'm right but I do get the feeling that the "outsourcing trend" may have run its course. In business, there is always trends that are taken to the extreme and then fail. Six Sigma is a good example of that--companies who has no skills in that or where those quality processes don't apply started implementing them.

In the case of Boeing, it apparently assembles less than 50% of the plane, and likely designs a similar proportion of the components (although it may carry out most of the high-level design). The question for Boeing shareholders and senior management is what is Boeing if it doesn't even assemble half the plane. Is it simply a design firm (like, say, Dell is to the PC business)? If it simply becomes a design firm for such a complex product, it will likely be a smaller firm.

February 26, 2013 at 10:16 PM

Anon 2: "This sounds to me like it was more of a top-level design flaw in relying too heavily on battery power rather than a risk directly resulting from outsourcing."

Some critics claim that if Boeing was designing and manufacturing the batteries themselves (or some other alternate solution), they would have had better control. By outsourcing many of the key components, Boeing appears to have lost control of quality.

In any case, although I didn't go into it and I probably should have, the outsourcing problems with Boeing is not limited to the battery problem; they faced serious problems a few years ago and ended up with delays that cost billions.

I still feel that they outsourced too much of the company.

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March 22, 2013 at 4:59 PM

Its amazing what some companies will do to save a few pennies. Boeing is a great example. Outsourcing production to other countries to save money you know now that really sounds familiar does in it. Its sort of a lot like another example some years back a large percentage of dog and cat food companies were outsourcing and contracting out production of some of their dog and cat food products to a small almost unknown company menu foods. Turns out some of the ingredients that menu foods was using in their dog and cat food were being imported from a company based in china and some of the food was contaminated with a chemical used to make plastic.

April 5, 2013 at 3:47 AM

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August 2, 2013 at 6:41 AM

Outsourcing process is almost common in all fields . Many electronics and software concern also forward their task to IT outsourcing companies in UAE and other regions of the world.

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