Introduction
As a consultant, I have been hired by Boeing to investigate the advantages of outsourcing, the problems, and risks of outsourcing, and to give recommendations based on the Boeing 787 project. In January 2003, the Board of Boeing decided to offer a new, light, fuel efficient, long-range airplane made out of composites (Tang & Zimmerman, 2009). To reduce the development cost from $10 billion to $6 billion, and cut the development time from six to four years, Boeing’s management outsourced the manufacturing of the 787 aircraft to its Tier 1 suppliers (Tang & Zimmerman, 2009).
The complex supply chain was a big gamble. Traditionally, Boeing used a supply chain where Boeing would assemble different parts and subsystems manufactured by thousands of suppliers (Tang & Zimmerman, 2009). The complex supply chain led to major delays and cost overrun. Boeing had scheduled the first test flight for August 2007, and the first delivery to be in May 2008. However, they missed the target by more than two years with 787 making its first test flight in December 2009 (Peterson & Washington, 2011).
Problem
Boeing adopted a complex supply chain that involved outsourcing 70% of the manufacture of the 787 to 50 Tier 1 suppliers, who would in turn manage several Tier 2 and Tier 3 suppliers. The complex supply chain presented Boeing with problems and risks that included:
Communication and collaboration – outsourcing many suppliers impeded teams from being able to execute their daily tasks efficiently and with coordination with other colleagues (Peterson & Washington, 2011). The transfer of core competencies to Tier 1 suppliers who were responsible for the development of entire sections of the plane rather than a small part of the plane could erode Boeing capabilities to manufacture aircrafts (Tang & Zimmerman, 2009).
Control - Boeing lost control over the supply chain because problems such as political unrest, natural disasters, and financial problems affecting any of the suppliers in the chain would have a major impact on the project progress.
Technical problems - the 787 was a new type of aircraft that Boeing did not have prior manufacturing experience. The design of the 787 posed new challenges to the suppliers who had not developed the technical capabilities resulting in composite fuselage safety issues, engine interchangeability issues, and computer network security issues (Tang & Zimmerman, 2009).
Value Chain Analysis
Value chain analysis involves the systematic examination of the series of activities that create and build value for an organization (Antoniou, Levitt, & Schreihans, 2011). The Value chain analysis categorizes the organization activities into primary activities and support activities. The Value chain analysis led to businesses gaining better understanding of their customers and supply chain that in turn led to increased outsourcing of primary and support activities (Antoniou, Levitt, & Schreihans, 2011).
When Boeing conducted a Value chain analysis, they estimated that they could reduce the development time from six years to four years by having different suppliers develop different parts of the 747 concurrently (Tang & Zimmerman, 2009). Value chain management requires a proactive management of outcomes with knowledge of output, a robust management of channels of information, and a robust management of the relationships between customers and suppliers (Antoniou, Levitt, & Schreihans, 2011).
The Value chain analysis shows that Boeing destroyed value by their failure to manage the value chain proactively. One would expect that Boeing would have had dedicated managers managing the Tier 1 suppliers constantly offering support to the suppliers but instead Boeing adopted a hands free approach. Suppliers did not share information about the challenges that they were facing until it was too late. Boeing failed to manage the customer expectations about the expected delivery dates resulting in many cancelled orders.
Alternative
Boeing outsourced 70% of the manufacture of the 787 a move that had promised lower costs and faster development. However, the supply chain led to increase in the development cost and delays in the delivery of 787. Boeing could have pursued the following alternatives:
Boeing could have reduced the amount of work they outsource to external suppliers. Ideally, Boeing should have identified the bottleneck process and stopped outsourcing them.
Use of design software would help reduce the development time and cost through early detection and fixing of defects.
Second their engineers and other professionals to suppliers who lack the technical capabilities of completing their part of the project.
Recommendations
Boeing could mitigate the risks and problems presented by outsourcing some of the activities in the value chain by pursuing a number of strategies that include:
Buy out key suppliers, this would give Boeing some control over some of the critical suppliers who are experiencing challenges and thus delaying the delivery of the 787. However, buying out suppliers will increase Boeing invested capital and might cause a reduction on return on investment (ROI).
Boeing should use of an efficient enterprise resource program (ERP) system. The ERP would facilitate efficient communication and collaboration between the various suppliers. In addition, Boeing should have the right incentives to encourage suppliers to share accurate information about the status of their progress. This would allow for timely intervention of those suppliers who might have trouble in completing their part of the project.
Boeing should conduct a more rigorous selection of Tier 1 suppliers. Specifically, Boeing should evaluate each of the Tier 1 technical capability to for developing and manufacturing a particular section of the 787.
Conclusion
Boeing had ambitious objectives of cutting the development time from six years to four years and cutting the cost of developing the 787 by outsourcing 70% of the manufacturing to Tier 1 suppliers. This represented a marked shift from the traditional supply chain of the Aerospace industry. While the complex supply chain failed to deliver the promised savings and caused delays in the delivery of the 787, it offered important insights on the problems and risks on outsourcing critical activities in the value chain. While outsourcing, the company should balance between cost savings and retaining control over the delivery and the quality of the outsourced products. A firm should carefully evaluate the supplier’s technical capabilities before outsourcing to them. A firm should also proactively manage the suppliers in order to ensure that suppliers deliver the project milestones as scheduled. Effective communication and collaboration among the various suppliers is critical to the success of the project. Therefore, a company should have an ERP system that provides an appropriate platform for communication and collaboration. Companies should be ready to help suppliers who run into trouble. Overall, supply chain restructuring presents opportunities for cost savings but there are many problems and risks involved. Successful restricting of the supply chain will require the firm to be aware of the potential problems and risks and develop appropriate contingency plans.
References
Antoniou, P., Levitt, C., & Schreihans, C. (2011). Managing Value Chain Strategy. Journal Of
Management And Marketing Research, 1-11.
Peterson, K. & Washington, E. (2011). A Wing And A Prayer: Outsourcing At Boeing. Reuters
Special Report, 1-11.
Tang, C. & Zimmerman, J. (2009). Managing New Product Development and Supply Chain
Risks: The Boeing 787 Case. Supply Chain Forum, 10(2), 74-88.
