Boeing and Airbus: Outsourcing and Managing Visibility

The Wall Street Journal ran a series of articles on the challenges Airbus is facing. I will try to cover several of these, as each highlights a different issue, and I would like to begin with the one discussing the effort made by both Airbus and Boeing to fight the delays that plagued their operations during the last several years (“Hit by Delays, Airbus Tries New Way of Building Planes“.)

Both Boeing and Airbus have outsourced, during the last few years, not only their production, but also the design of the different parts, as well as the management of the suppliers’ sub-tiers. We have documented these in the past (“Boeing Delivers First Dreamliner“,) and the article, briefly mentions these. Manufacturing problems have left Boeing with more than 40 almost-completed Dreamliners awaiting fixes. Their main customers now expect to get their planes around four years late. The project has cost Boeing billions more than its initial $10 billion budge.  The reader must recall that Boeing has embarked on this ambitious outsourcing plan to reduce investment costs, and speed R&D and production. As we all know, things have not panned well for these two goals. What were the main reasons: loss of visibility of the progress of different suppliers, as well as incentive issues.  It took Boeing quite a while to figure it out, but they finally have:

In a major retreat, it has since bought up suppliers, brought work back in-house and integrated more closely with its remaining contractors.  ”We gave away a lot of elements of work that we’d always done in the past, and then didn’t provide the kind of oversight necessary for some of the people that were doing work that they’d never done before,” said Boeing Executive Vice President Jim Albaugh, who ran its airplane division until June, at an investor conference last fall. To retrench, Boeing mobilized hundreds of engineers specialized in manufacturing and industrial issues, who have pored over every element of the program, including at suppliers. At its factory near Seattle, Boeing built a control room with video links to overseas suppliers, allowing its engineers to examine parts live on shop floors in Japan or Italy. For a second, larger version of the Dreamliner, Boeing opted to design many outsourced components itself, such as the plane’s rear section and tail wings.

The solution included several elements: first, it included buying several key suppliers, integrating them into the existing operations. Second, Boeing improved the oversight on the progress of different suppliers by having people on the ground working with the suppliers, and working more closely with suppliers through a more sophisticated coordination technology, and third, integrating the design of many parts back to the Boeing, even for parts that would ultimately, be produced by contractors (i.e. opting for the more traditional outsourcing model). We can summarize the main lesson with the following:

We’ve got to know more about the airplane than our suppliers do, so if they get in trouble we can help,” Mr. Albaugh said recently.

This is a very common mistake firms make when they outsource key activities.  If you decide to outsource, you must retain the ability to manage the outsourcing process. Firms cannot outsource processes, unless they have the capabilities to monitor their suppliers and guide them in achieving their goals.  What about Airbus? Airbus suffered from similar issues.  The famous story the article mentions is of miles of discarded wires, that were produced by a supplier several inches too short, dimming them useless, due to the use of outdated design software.  As in the case of Boeing, Airbus realized that suppliers need more “hand-holding” in the process.

Airbus is pushing a similar approach even further on its new A350, which competes with Boeing’s Dreamliner and is slated to start carrying passengers in 2014. Airbus, a unit of European Aeronautic Defense & Space Co., for the first time designed the plane alongside its key suppliers and links to them constantly through digital blueprints. Airbus has sent armies of engineers to help its contractors handle their portions of the project, told them what equipment to buy and trained them in managing subcontractors. “ To help suppliers shift from designing parts to manufacturing them quickly, A350 project manager Didier Evrard has issued a 100-page handbook, titled “The A350 Making-Of,” to guide the ramp-up. “My focus has been on how we build, as much as what we build,” Mr. Evrard said.

If you ask yourself, why it took them so long to figure out, what seems like a very simple lesson, a partial answer is provided in the article:

The new approaches at Airbus and Boeing are driven by the complexity of jetliners. New models only get developed about once a decade, so each marks a technological leap beyond its predecessor. They are designed foremost for safety, under intense regulatory scrutiny, but are sold to airlines that face brutal pricing pressure.