The hard lessons of Boeing's 787 outsourcing

After years of broken deadlines and cost overruns, Boeing finally acknowledges what many have said before: outsourcing has its limits.
Written by John Herrman, Contributor

Almost immediately after the project's inception, the story of the Boeing 787 split into two threads. One was a tale of technology and innovation, of a long-overdue update to a vital niche in Boeing's stable of airliners. The other, which proved more resilient and interesting, was the story of the plane's design and construction, which has shifted from a bold experiment in outsourcing to a public debacle.

Industry watchers and aviation enthusiasts have long criticized this strategy, and after years of delays and budget overruns, something of a consensus formed around the subject. But it was only recently, in front of an audience at Seattle University, that Boeing--or rather, Boeing's Commercial Airplanes Chief Jim Albaugh--publicly reflected on the issue. Via the Seattle Times:

We spent a lot more money in trying to recover than we ever would have spent if we'd tried to keep the key technologies closer to home.

So, a little background: Boeing set out to produce the 787 in a fundamentally different way from its predecessors, outsourcing not just individual part production, but the production of large, complicated subassemblies. (It's worth noting that prior to the 7e7/787, Boeing had successfully run projects in which over 50% of money spent went to contractors. The 787, however, was a broad step beyond this.)

Boeing's hope was, perhaps obviously, to reduce costs. But skepticism about the plan was immediate and fierce, and, as noted by the Seattle Times, internal. A senior technical engineer at the company published a report in 2001 titled 'Out-sourced Profits-- The Cornerstone of Successful Subcontracting', in which he convincingly argued that Boeing's plans for expanded outsourcing--which had been made clear before the 7e7/787 was properly announced--could never work. Why? Because, he claims [PDF], there is a limit to the cost-saving potential of outsourcing:

Out-sourcing is commonly looked upon by management as a tool for reducing costs. But the unresolved question is “which costs?”. In addition, there is the matter of “what is the effect on overall costs?”.  The most important issue of all is whether or not a company can  continue to operate if it relies primarily on out-sourcing the majority of the work that it once did in-house.

Among his concerns, nearly all of which were borne out by the later development of the 787:

  • The "true cost" of outsourcing is not widely ackowledged, having been shielded from public view by "misleading cost-accounting procedures"
  • Outsourcing simple, small parts saves money because they can be manufactured in countries with low labor costs. More complicated tasks cannot be dependably completed in these countries, and must be outsourced to companies operating in countries with high(er) labor costs
  • Parts and subassemblies must be designed around this new manufacturing model, which increases upfront costs
  • The more complex the outsourced elements, the less likely they are to assemble correctly on the first attempt
  • Outsourcing expensive, vital subassemblies doesn't just distribute work--it funnels profits outward, too.

To be sure, outsourcing will continue to be a vital tool for aircraft manufacturers and other makers of highly specialized, low volume equipment. But the harsh lesson of the Boeing 787--that for expensive, complex and long-term products, outsourcing has clear limits--will resonate for years to come.

This post was originally published on Smartplanet.com

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