Tuesday, September 8, 2009

To Outsource or to Do It Yourself and Boeing

Sunday's NY Times had a terrific article, A Dream Interrupted at Boeing, that highlighted what went wrong in the design and production of Boeing's 787 Dreamliner airplanes, which are two years behind schedule. Specifically, it analyzed how Boeing's missteps in outsourcing have taken a huge toll. The CEO, W. James McNerney Jr., is even recognizing that Boeing lost control of its production of the Dreamliner by outsourcing more design and production work than previously and not monitoring closely its suppliers. The Dreamliner's novel design lies in its use of plastics reinforced with composites for half of its structure. The composites of carbon fiber are both lighter and stronger than aluminum and, hence, will allow the planes, once operational, to fly further and to significantly reduce fuel costs.

However, there are now new stresses identified where the wings join the fuselage. Also, the outsourcing partners agreed to "share the risk" and to share in the Boeing profits but not when they delivered the parts to Boeing but, rather, when the planes were actually delivered to the airlines (now years behind schedule). Certain suppliers are demanding that Boeing now pay them in advance since they are angry about the delivery delays, understandably.

The article concludes that Boeing still believes in its model of teaming up with partners that share in the risks, but it intends to retain a greater share of the engineering on future projects and to monitor its partners' work more closely. There are, nevertheless, potential positives -- if the technology works, given that the only possible competitor is Airbus, the 850 advance orders for the Dreamliner at $125 million each could bode well for Boeing.

There is much to be learned in terms of supply chain management from Boeing's experiences. Indeed, our group at the Virtual Center for Supernetworks has been conducting studies on mergers and acquisitions and horizontal integration of supply chains. We are now moving to researching tradeoffs regarding the risks associated with outsourcing and the costs versus the benefits, but from a system-wide perspective. Ultimately, our network models will be able to identify when to outsource and when to "do it yourself." In recessionary times and when quality matters the latter may be the best solution of all.