While the initial reaction to Boeing’s 787 electrical problems was to blame outsourcing, there is more and more understanding that outsourcing itself is not the issue. Boeing has always outsourced the production of batteries. There are several explanation that emerged since.
(1) It’s not outsourcing. It is the trend of modularization: We know that more modular designs allow for lower cost, but come at the expense of quality and performance. One should say that this is a very valid argument, since modularization is clearly the enabler of the excessive outsourcing trend.
(2) An alternative explanation is that It’s not outsourcing itself, but rather the specific method of outsourcing where Boeing outsources the design and control over sub tiers. This is the main focus of The Seattle Times’s article (“Boeing 787’s problems blamed on outsourcing, lack of oversight“).
Yet Boeing has never made batteries, and the electrical systems on all its jets have always been sourced from outside suppliers, just like the engines and the landing gear. In that respect, the 787 is not different from Boeing jets like the 777 and the 737, both renowned for their reliability. However, what is very different on the 787 is the structure of the outsourcing. On the Dreamliner, Boeing contracted with a top tier of about 50 suppliers, handing them complete control of the design of their piece of the plane. Those major partners had to make the upfront investment, share the risk and own their design. Each was responsible for managing its own subcontractors.”
Why did Boeing embark on such a revolutionary outsourcing program?
Three years before the 787 was even launched, a paper presented internally at Boeing in 2001 by eminent airplane structures engineer John Hart-Smith predicted the problems that would arise from excessive outsourcing….he said, the underlying conclusions of his outsourcing paper still apply. On the 787, he said, Boeing management thought it could outsource risk and responsibility along with most of the work. That’s not possible, he said, because when something goes wrong with a critical component from a supplier, “It’s Boeing that the FAA holds responsible to resolve the problem, and it’s Boeing that pays most of the associated costs.
Sharing financial risk was one of the key reasons, together with the ability to tap into firms that have more advanced technologies. Yet, as this crisis demonstrates, risk sharing is not an easy task when it comes to quality. The tradeoff between lower cost, lower financial risk and high long term reputation and financial risk is not easy to measure.
The article also highlights another issue related to excessive outsourcing.
The supplier management organization (at Boeing) didn’t have diddly-squat in terms of engineering capability when they sourced all that work,” he said. Traditionally, he said, Boeing’s in-house experts created detailed specifications for every part of the plane made by suppliers, and had the in-house technical capability to closely monitor whether the work came up to spec. “They needed complete knowledge of what was going on,” said Hart-Smith. “I warned that if they outsourced too much work, the day would eventually come when there wouldn’t be enough in-house capability to even write the specs.”….“Internally, we may not have the engineering horsepower required to understand the depths of the (battery system) problem as quickly as we prefer,” he said. “We let too much capability slip away from us.
This points to a very common mistake firms make. When firms outsource production, firms also let go of the engineers that deal with the production. While this sounds like a natural step, the implication is that the firm usually loses the capability to manage the relationship with the suppliers that produce the module. In many cases, this loss of capability is slow, yet when a crisis arises it is too late the build these, and recovery is slow. The solution: increase visibility into your supply chain, and build the capability to manage these suppliers. Boeing has started doing this long ago, but it was too late.