End of an Outsourcing Era: 787 Nightmareliner

♠ Posted by Emmanuel in , at 1/12/2013 02:26:00 PM
There is a justifiably very well-cited article in the Review of International Political Economy by Gary Gereffi, John Humphrey and Timothy Sturgeon concerning "The Governance of Global Value Chains." (I think it's required reading for anyone with an interest in the field; simple as that.) Here, the authors discuss different sorts of arrangements possible in global value chains which range between the two extremes of hierarchy (you make everything yourself), and market (you exchange for everything and make virtually nothing yourself). Table 1 on p. 87 is very helpful in summarizing these different ideal types:

Again, anyone with a familiarity with the global commodity chain, global value chain or supply chain literatures--they're basically similar IMHO--should know there is no one "best" arrangement for everyone. See, for instance, the so-called "reshoring" movement. As with most things, "it depends" on such things as the need to maintain proprietary information in-house and the transaction costs of dealing with far-flung suppliers. In the latter respect, the 787 set new standards for a modular type of arrangement in the terminology of Gereffi et al. First, aviation contracting is obviously of high complexity unlike, say, garments manufacture. Among other things, you have fly-by-wire avionics systems, fuel-efficient jet engines...and water-efficient toilets [?!] Second, the conceit of Boeing at the time of the 787's conception was that it could do what it thought it did best--design airplanes--and then simply leave subcontractors to fill in the smaller details since the ability to codify transactions in airplane assembly was also high. Third, Boeing obviously thought that the supply base was high enough in skill to outsource the required engineering work.

Earlier on, students of business practice including yours truly were enamoured with what Boeing was going to do. Remember, this was at the height of the outsourcing craze--again different from offshoring since having things made by others does not necessarily mean they were made outside of the US of A (30% of the 787 was supposedly made abroad):
Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its outsourcing to become more competitive. "For any company that wants to be successful in aerospace manufacturing, Boeing's new strategy is the way forward," says Aboulafia. "Which is ultimately good news for small business."
With the benefit of hindsight, more than half a decade later we realize that Boeing's vision was shambolic and that many of us were similarly deluded into thinking this was "the future." Drawing from Gereffi et al. once again, the assumptions were wrong. First, the complexity of the transactions was indeed high--so high that Boeing and its contractors suffered from the "Humpty Dumpty effect" wherein the plane could not be put together as intended despite the best minds in aviation working together since they were only doing so after the fact. Hence the many delays this plane suffered prior to its delivery. Second, Boeing vastly overestimated its ability to state what needed to be done by the others. Once more, the fit of various subcomponents from different suppliers with each other left much to be desired. Third, it is fair to say that Boeing had too much confidence in these suppliers to come up with designs compatible with the 787. Whereas it would once provide detailed blueprints, it assumed with the 787 that the suppliers would have enough engineering expertise to ensure their delivered products would be compatible with everything else.

Of course, Boeing is not without fault. There is probably nothing wrong with attempting to revolutionize passenger jet manufacture. That's part of the innovation process. Instead, the fault lies in simultaneously introducing a radical new production process and a novel airplane design. It may have been more feasible if Boeing either (a) followed the template of previous jets alike the 777 in contracting but moved to more subcontracting as the plane rolled out smoothly or (b) tested much more subcontracting of previous designs alike the 737/747/777 before attempting to do the same with a wholly new design. One step at a time, as they say.

Alas, we now know what's happened. The 900+ subcontractors have caused no small amount of problems for Boeing in delaying the rollout of this plane. Now we also get word that the American aviation regulator is looking into the safety of this design so many years after it first rolled off the assembly line. For an airplane manufacturer, I suppose that's nearly the equivalent of a drug recall due to fatalities in the field in terms of embarrassment short of grounding the fleet. To be sure, the customer list of Boeing for the 787 remains long since it is an outstanding design in terms of fuel efficiency, range and carrying capacity for a model in its class. That said, Boeing may not be able to fulfil its order book given further delays that may occur as various authorities look into its business.

Fearless (but predictable) prediction: Boeing will soon move back to a more relational arrangement based on more processual coordination and iterative testing of fewer subcontracted components. If it worked with the 777 and previous models, I guess why mess with a good thing in the name of specious or probably non-existent savings?

As the saying goes, if you want something done right, you might as well do it yourself.

1/17 UPDATE: Me and my big mouth. Now Japan Airlines and ANA have grounded their fleet of Boeing 787s. Sometimes you hate being prescient.

1/18 UPDATE: Now almost all 787s in commercial operation are grounded. It's getting even worse for Boeing...