Offering frequent news and analysis from the majestic Evergreen State and beyond, The Cascadia Advocate is the Northwest Progressive Institute's unconventional perspective on world, national, and local politics.

Thursday, April 23, 2009

Has Boeing management finally learned that outsourcing doesn't pay?

There's a new article out in Conde Nast Portfolio for its May issue about the trouble Boeing's been having getting its new Dreamliner off the ground.

Entitled "Bumpy Ride", the article explains how Boeing management's thoughtless decision to outsource pretty much everything has repeatedly cost the company oodles of precious time and money (not to mention the strain it's created between executives and workers, who have become justifiably concerned about the possibility that the company might eliminate their jobs).

In fact, the cost of the Dreamliner delays looks like it could be more than the projected budget shortfall that state legislators are currently grappling with.
The Dreamliner’s delays are expected to cost Boeing as much as $10 billion in canceled orders and compensation to airlines. The fiasco has become an object lesson for manufacturers in how not to do global outsourcing and has eroded Boeing’s reputation for efficiency and innovation.

Now, on the eve of its big launch, the Dreamliner carries the company’s hopes of recapturing lost revenue and repairing the damage to its image. If the plane passes the rigorous yearlong series of flight tests that begin this spring, it could lead Boeing out of the financial crisis. But if the Dreamliner fails, Boeing could become the General Motors of the skies, with enormous repercussions for the U.S. economy and the U.S. manufacturing base.
Yikes, that's not a very rosy picture, is it? Hopefully the Dreamliner will be successful - Boeing's future is riding on it - but in this economy, there's certainly no guarantee of that. People aren't traveling as much, and airlines are canceling orders as a result.

Boeing could have probably had the 787 flying years ago, but...
...the plane fell victim to infighting between Boeing’s bean counters and engineers, who had to gamble on a low-cost—but unrealistic—manufacturing strategy. "We may have gone a little too far, too fast" with the technology and materials and in outsourcing production, Boeing chief executive James McNerney told Condé Nast Portfolio. "The program was more than we could handle."
A little too far? How about a lot?

Incidentally, the Dreamliner isn't the only instance where management's decision to outsource has led to major headaches.
Boeing also stumbled by adopting a Dreamliner-like outsourcing strategy on a $20 million Homeland Security contract to create a 28-mile “virtual fence” along the Mexican border, with infrared cameras, ground sensors, radar, unmanned planes, and databanks to guard against illegal immigration. When Boeing delivered the equipment in 2007, hardly any of the pieces, bought from dozens of subcontractors, fit together. After much trial and error, a scaled-down version was switched on this year.
Oops.
Boeing’s slide can be traced to the company’s ill-fated $13 billion purchase of McDonnell Douglas Corp. Under chairman John McDonnell and chief executive Harry Stonecipher, McDonnell Douglas starved its design and engineering operations and became little more than a sales organization, barely surviving on offshoots of its aging DC-9 and DC-10 models. The 1997 acquisition infected Boeing’s forward-thinking culture, emphasizing cost-cutting at the expense of innovation.
With the cost cutters in charge, Boeing ended up settling into a glide towards the end of the nineties and into the 2000s. While Airbus pumped money into its research and development budget, Boeing did just the opposite, fattening its bottom line slightly and surrendering its competitive edge as a result.

A couple years into the new millennium, Boeing Commercial Airplanes chief Alan Mulally (who now heads Ford) realized Boeing needed a new innovative airplane that would carry the company into the next era of aviation. Unfortunately, his vision had a price tag that was too big for management to swallow.
Conceptual drawings showed that the Dreamliner’s cost would at least match the $10 billion-plus price tag of the 777. After becoming chief executive in 2003, Stonecipher said he intended to seek board approval for the Dreamliner. However, the unspoken message was “but not at the current price,” says Jon Ostrower, an aviation insider who writes for Flightglobal.com. Mulally was told that the plane’s projected development costs would have to be 50 percent or more below the 777’s.

To meet this demand, Mulally came up with a wildly unorthodox plan: He would farm out the design, engineering, and manufacturing of the 787 — virtually everything except final assembly — to suppliers that would shoulder more than $9 billion of the project’s $13 billion cost, in exchange for lucrative, multiyear guaranteed contracts and a slice of the plane’s sales. These outside companies would coordinate with one another to produce whole sections of the plane, stuffed with assembled components, systems, ducting, insulation, and wiring. Boeing workers in Everett would merely have to connect the major parts of the aircraft.
And we now know how that all worked out...
No large manufacturer had ever before so audaciously turned over control of the entire process — from concept to shipment — to outside firms. In a critical oversight, no provision was made for monitoring the suppliers. Mike Denton, vice president of engineering for Boeing’s commercial-airplanes division, recalls that the vision for the Dreamliner was “not to encumber the partners with the Boeing way of doing everything. So we erred on the side of giving them more free rein than in retrospect we should have.”
Apparently Harry and Friends never paused and stopped to ask themselves this question: What is the reason for our existence if we are simply going to let "partners" decide how to build our own products?

Did they simply forget, at some point, everything they learned in business school? That it costs money to develop new products? That companies that don't innovate will eventually collapse and die?

Evidently they did forget. They were so preoccupied with dollars and cents that they saw Boeing's manufacturing prowess as a liability rather than a huge asset. Even though that is what Boeing does - manufacture airplanes, not just sell them. What did they think Boeing's business was?

They were blinded by greed.

By insisting that the Dreamliner be built as cheaply as possible at the expense of all other objectives, they gambled and experimented with Boeing's future.

Fortunately, Harry Stonecipher is no longer the chief executive officer of Boeing, and the company has been taking corrective action to save the Dreamliner program, sending hundreds of employees to monitor its suppliers and insisting that things be done "the Boeing way". Management has hopefully learned a hard lesson about the perils of outsourcing. Hopefully, for its next airplane, Boeing will go back to relying on its own talent and know-how to get the job done.

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