Tuesday, December 11, 2007

Outsourcing Snags Ground Boeing's Dreamliner

Special Thanks to Peter Cohan @bloggingstocks.com

Peter Cohan cites The Wall Street Journal report that Boeing (NYSE: BA)'s 787 Dreamliner is being delayed due to its global value chain. This suggests that despite the best efforts of globalization proponents to extol the virtues of a flat world, there are still some mighty big rocks in its path.

Boeing encountered much bigger challenges than anticipated in its efforts to lower the $10 billion cost of developing the 787 by shifting the job to other companies. It mistakenly thought that it would be easy to snap together at its Seattle-area factory a collection of parts designed and built by worldwide suppliers. The resulting delays have affected 19 of the 52 airlines that have ordered the 787, some of which were counting on using their planes during the 2008 Summer Olympics. Boeing could end up paying millions in penalty payments to customers.

The basic problem Boeing faces is that its suppliers -- instead of using their own engineers to do the design work -- outsourced that work to even smaller companies. And in their eagerness to profit from the 787 windfall, overloaded themselves with work from multiple 787 suppliers. In effect, Boeing is now learning that it did not provide strict enough performance goals to its suppliers. And now it's at their mercy.When Boeing gives its progress briefing on Tuesday, odds are good that the 787 will be delayed even more than originally anticipated. Dreamliner's final-assembly process had been designed to bring together about 1,200 components. Instead, according to Mike Bair, the executive who was replaced when the delay became apparent, said the first airplane had come to the factory in 30,000 pieces.

This gap between expectations and reality suggests that Boeing has a long way to go to get its delivery schedule under control. And it also highlights the dangers of blithely assuming that globalization is the solution to the problem of high costs.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Boeing.


Citizen Carrie said...

Thanks for posting about Boeing, 2Truthy. The whole project looked like a major catastrophe even before production began.

2Truthy said...

Hi CC,
Ya think Boeing is surprised? I find it a bit ironic that the Dreamliner was designed for cramming hundreds of people on transnational hauls from third world countries to first world etc. to "do the jobs that Americans won't do" yada yada...while Flexjet fractional leases are soaring and the airline industry continues to cut budgets at the expense of the "squeezed" middle class.

Anonymous said...

Boeing and Bill Gates want to take over the world