Friday, February 1, 2013

The Boeing 787 Dreamliner: Learning the Wrong Lessons from Globalization

Boeing’s new 787 Dreamliner is currently grounded due to problems that have arisen. Difficulties with new versions of planes are not unusual, particularly when the plane is carrying so many new technologies. It is too early to know if the issues are serious or not. In the meantime, numerous articles have appeared suggesting that Boeing’s aggressive use of outsourcing may have been a source of the difficulties, and certainly was a source of cost overruns and schedule delays. 

A number of companies that earlier had sent their manufacturing operations overseas are now beginning to return home, especially those heavy into technology and light on labor costs. The reasons given for this decision usually involve difficulties in ensuring quality control, delays in development and delivery, worries about protecting proprietary information, and, recently, excessive costs. A less publicized reason involves the decay of capability. Once one begins to outsource production, one eventually forgets how to produce. If one no longer knows how to produce the product, one certainly no longer knows how to produce it well.

If the design, engineering, and production are all eventually outsourced, the company no longer has an agent working for it, it has a partner—one over which it may have little control. While today companies are running from that dependence, Boeing embraced it in organizing its 787 project, and thought it was the wave of the future.

The most interesting of the recent articles seems to be a short piece by James Surowiecki: in The New Yorker: Requiem for a Dreamliner? He tells us how Boeing came to make some decisions at the outset of their 787 project that came back to haunt them.

The Boeing engineers had a winning concept for their new project.

"It’s built largely of carbon-fibre composites rather than aluminum, which makes it significantly lighter than other planes. Its braking, pressurization, and air-conditioning systems are run not by hydraulics but by electricity from lithium-ion batteries. It uses twenty per cent less fuel than its peers, and so is cheaper to run, yet it also manages to have higher ceilings and larger windows. It is, in other words, one of the coolest planes in the air."

The wisdom of this design is apparent from the enormous number of orders that have been placed for the plane.

Surowiecki places the beginning of the problems with the 787 back in time to the purchase by Boeing of its last domestic competitor, McDonnell-Douglas, in 1997.

"Technically, Boeing bought McDonnell Douglas. But, as Richard Aboulafia, a noted industry analyst with the Teal Group, told me, "McDonnell Douglas in effect acquired Boeing with Boeing’s money." McDonnell Douglas executives became key players in the new company, and the McDonnell Douglas culture, averse to risk and obsessed with cost-cutting, weakened Boeing’s historical commitment to making big investments in new products."

When the Dreamliner had to be sold internally, it had to meet the demands of both the ambitious engineers and the risk-averse financial types. A compromise was arrived at that would provide the desired features, while limiting Boeing’s up-front costs and risks—supposedly.

"So the Dreamliner’s advocates came up with a development strategy that was supposed to be cheaper and quicker than the traditional approach: outsourcing. And Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty "strategic partners." Boeing itself ended up building less than forty per cent of the plane."

These companies Boeing was dealing with were often partners in the truest sense. They would risk their own funds to the development process in return for a share of the returns from the sale of the plane.

A graphic from the Washington Post indicates how diverse and worldwide this partnership became.

It is not surprising that such a project would encounter difficulties. Boeing had to announce seven delays adding up to a three year slip in delivery schedule, and the project was billions of dollars over budget.

Fielding a new aircraft design is enormously complex and expensive. If for some reason the 787 should prove to have a serious design defect or safety problem, the entire market could be lost to Airbus which is developing a slightly less ambitious competitor. Such an occurrence could be an existential threat for Boeing. This leads one to ponder over what the Boeing executives might have been thinking as they decided on what the assumed was a low-risk path.

"....there hasn’t been a fatal airliner crash in the United States in almost four years. The safer we get, the safer we expect to be, so the performance bar keeps rising. And this, ultimately, is why the decision to give other companies responsibility for the Dreamliner now looks misguided. Boeing is in a business where the margin of error is small. It shouldn’t have chosen a business model where the chance of making a serious mistake was so large."

There are number of interesting conclusions one could draw from Boeing’s experience. One might be that if you have a complex technical project, it is probably not a good idea to let bean counters tell you how to avoid risk. If you are an airplane manufacturer and you fear the risk of developing a new plane, then perhaps you are in the wrong business.

A second take involves the decision-making process in general. Analysts are beginning to evaluate the great era of outsourcing and are concluding that much of what companies were doing was following a fad, rather than making serious, in-depth analyses of the consequences of their actions.

One as to wonder about the type of analysis the Boeing executives put into their decision-making process. Were they merely following the herd overseas, or were they afraid of the risk, or did they just not understand their own business?

1 comment:

  1. I will give an edge to the "herd overseas" and the subsequent loss of on site quality control, an ALL too common malady. The traditional business model changes drastically. I suspect those batteries were not tested under the full field loads that should have been anticipated. Fortunately, the smoky batteries were caught in time. I was fortunate to be stationed at an AF base in the 1960's when we got the new, hot B-58's in, replacing the old B-47 bombers. The cold war was on full and these 58's were handed over to us without being fully wrung out by civilian test pilots, so that America could show up the Russians, and yet, with painful results. Jane's All The World Aircraft records an all too high accident rate.


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