The Dangers of Outsourcing Too Much: Boeing and its 787 Dreamliner

Update 11-13-09:

Now another glitch has been found in the Dreamliner, according to the Wall Street Journal:

As Boeing raced to find a remedy this summer, it discovered another issue with the composite material in the plane’s wings, according to internal company documents and a person familiar with the matter. Metal bolts inside the wings of one of the six test airplanes were found to have slightly damaged the surrounding material—causing so-called delamination, or cracking—the documents show.

The discovery of the damage comes at a very late stage in the Dreamliner’s development and production process. The company is preparing to ramp up production once its aircraft clear the rigorous test-flight phase. Crafting engineering solutions for problems such as these at this stage of production can be exceedingly complicated and expensive.

According to a person familiar with the details, Boeing is still aiming to get the first Dreamliner airborne on Dec. 22. Workers at Boeing’s massive factory in Everett, Wash., are on duty around the clock preparing the first batch of Dreamliners for test flights.

Original Post 10-21-09:

Back in the 1990s, I would often lecture my MBA students that the Big Three auto manufacturers (back then, GM, Ford, and Chrysler) were risking too much by outsourcing large amounts of their manufacturing, engineering and design to automotive suppliers while relentlessly pushing those suppliers to reduce their costs simply by mandate.  In contrast, the Japanese automakers, while also using suppliers extensively, were much more collaborative in their relationships with their suppliers and their equally aggressive efforts to reduce costs.  One important risk was that eventually those firms supplying GM, Ford, and Chrysler would simply do their best work for the Japanese and other OEMs who pursued a partnership model.

In its efforts to cut costs, it appears that Boeing has not learned much at all from the failures from the domestic automotive industry, and the results are hardly surprising, according to today’s Wall Street Journal:

Boeing Co. Chairman and Chief Executive Jim McNerney said the company had overreached in outsourcing production on its marquee 787 Dreamliner program, leading to a string of problems and contributing to a $1.56 billion loss for the third quarter.

Mr. McNerney’s comments were the most explicit acknowledgement to date about the limits of one of the company’s major strategic shifts in recent years. One of the hallmarks of the Dreamliner program, which is more than two years behind schedule, was Boeing’s strategy to outsource most of the work to a network of global suppliers and perform final assembly at its Washington factory.

But Mr. McNerney said problems emerged partly because engineers were scattered around the world. He said Boeing needs to bring more engineers back in house. “When you look back, you see that we lost some of the disciplines, particularly within the context of outsourcing so much of the work,” he said on an earnings conference call Wednesday.

Beyond the Dreamliner, Boeing’s revamped 747 jetliner also has been beset with delays. Shuffling engineers from the new 747-8 program to the Dreamliner earlier this year contributed to delays and another write-down on the new 747, which mostly is being ordered as a freighter.

Boeing recorded $3.5 billion in previously announced third-quarter charges on its 747-8 and 787 Dreamliner jets in development and on Wednesday slashed its earnings forecast for the year.

I’m still rooting for Boeing to have a big success with the 787 Dreamliner.  Let’s hope it applies its lessons learned quickly.

Aneil