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Boeing’s Multi-Billion Outsourcing Fiasco

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We’ve repeatedly said that offshoring and outsourcing are often not the big cost-savers that the industry promoting them, Wall Street, and the stenographers among the business press would have you believe.

Direct factory labor is typically just north of 10% of the cost of most manufactured goods; for cars, we are told it’s 13%. Even if you can extract meaningful savings there, you have significant offsets: the upfront cost of re-orgainzing production (which in the outsourcing scenario include hiring costly outsourcing “consultants” and paying attorneys to paper up the deals), higher ongoing managerial costs, higher shipping and related inventory financing costs. Yes, there are cases like Apple where outsourcing has been a big success, but there are also others where the benefits have been underwhelming and have come at considerable costs to US workers, communities, and the economy (see a very good long form discussion by Leo Hindery).

Moreover, these cost savings come with higher risk. The greater span of operations increases business system rigidity and creates more potential points of failure. It is likely to take longer to notice screw-ups and the odds also favor it taking longer to localize and remedy them. Longer lead times mean a manufacturer may wind up with far more unwanted inventory if the economy turns or customer tastes change. Currency price moves can undo much of the expected savings.

But even if outsourcing is only marginally successful, it serves as a transfer from US factory workers to the managers and executives. The top brass can benefit even more, since Wall Street analysts usually look approvingly of outsourcing (I’ve been told by C-level officers of one public companies that they outsourced only because the analysts wanted it; the business case did not support it).

Boeing provides a cautionary case of the possible downsides of outsourcing. In this instance, the losses were so large that the company had to ‘fess up. Query how many lesser failures go unacknowledged.

From the Los Angeles Times (hat tip reader John M):

The next-generation airliner [the Boeing 787] is billions of dollars over budget and about three years late; the first paying passengers won’t be boarding until this fall, if then. Some of the delay stems from the plane’s advances in design, engineering and material, which made it harder to build. A two-month machinists strike in 2008 didn’t help.

But much of the blame belongs to the company’s quantum leap in farming out the design and manufacture of crucial components to suppliers around the nation and in foreign countries such as Italy, Sweden, China, and South Korea. Boeing’s dream was to save money. The reality is that it would have been cheaper to keep a lot of this work in-house.

The 787 has more foreign-made content — 30% — than any other Boeing plane, according to the Society of Professional Engineering Employees in Aerospace, the union representing Boeing engineers. That compares with just over 5% in the company’s workhorse 747 airliner.

Boeing’s goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits.

The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn’t fit together. Some subcontractors couldn’t meet their output quotas, creating huge production logjams when critical parts weren’t available in the necessary sequence.

Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.

Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a meeting of business leaders in Washington state in 2007. That further reduced Boeing’s ability to supervise design and manufacture. At least one major supplier didn’t even have an engineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing’s top global competitor.

On the one hand, Boeing was astonishingly inept and lacking in caution in going about this major change. But it is also widely seen as a sophisticated manufacturer with a great deal of engineering expertise. The costly outcome appears to be the result of hubris as well as the native hazards of this process.

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86 comments

  1. decora

    sooo mullally goes from boeing to ford, and supposedly he has revamped ford based on what he learned at boeing, and now ford is doing well.

    but now boeing is falling apart?

    re wall st analysts driving business decisions. you mean like, investment bank analysts, whose main job is to sell product?

    man i am confused.

      1. Adam's Myth

        I vividly recall that Mulally’s departure didn’t smell right. Just before his resume is to gain the epic bullet point, “CEO who built Dreamliner,” he instead leaves for a risky turnaround in a brutally competitive industry. Not credible. No CEO would make that trade unless certain the 787 was in trouble.

        This rises above the normal foolishness in outsourcing. Garden-variety bad outsourcing merely raises costs and lowers quality — but Boeing also introduced design and schedule risk, revealed trade secrets, educated new rivals. Incredibly stupid.

        I personally have tried outsourcing in my business several times. Good learning experience: all the outsourced work either sucked or proved automatable. More often the latter. I eventually concluded that outsourcing is often (not always) a lazy substitute for careful thinking about process reengineering and automation.

  2. Deus-DJ

    Yves,

    I’m not at all certain that this case shows the danger of outsourcing. With regards to Boeing most of this is not “outsourcing” in the same sense that we think of say Nike moving their factories to China to have products produced by cheaper labor.

    This is simply horrible management. I mean outsourcing the blueprints????? That does NOT sound like something that would have burdened them AT ALL cost-wise, so why did they stop doing it? We have to dig a little deeper, but the only thing that screams out in all of this is management that felt that the old way of doing things was too burdensome, for whatever reason(and I suspect it had to do with something more than price), and justly they got burned for it.

    1. Yves Smith Post author

      Um, I think you are missing the point.

      Boeing is seen as being a very savvy manufacturer. Yet they made a lot of boneheaded mistakes.

      Do you really think every company this process is a paragon of management? By definition, they have probably not done this before. These with the retrospect of hindsight, were gross mistakes, but even seemingly small ones can have outsided consequences.

      The other part, which I neglected to discuss in the post, is that the conventional process for doing outsourcing deals is inherently flawed. The “consultants” I mentioned above aren’t firms that help you make certain the overall process and likely outcome makes sense; they are simply companies that are expert in orchestrating the process, meaning structuring and managing the bidding/contracting process.

      How do they demonstrate their value added? By getting the lowest price. But these deals aren’t one-off purchases, they are ongoing relationships. So if you’ve squeezed your subcontractors to the bone, they’ll have incentives to cut corners where they can and even where they shouldn’t, given the cost and disruption involved in getting out of a contract with one provider and finding a substitute.

      The other way the outsourced companies improve their margin is if the party sending the work to them needs a variance from the contract of some sort. Just like a contractor, they charge big time for any change orders.

      1. Deus-DJ

        Ah, I see. Still though, it’s really hard for me to understand why they wanted to go through this. Totally uncharacteristic of me, but I’d have to go with Brian’s argument below…this is probably just an ideologically driven thing that, despite changes in information to disprove these notions, are being continued despite their harm. This is why I call it bad management. When did they begin outsourcing? That should truly determine whether this is pure politics or simply a danger of outsourcing as you outlined.

      2. Mighty Booosh

        Boeing takes over McDonnell Douglas, a California based company with strong conservative political connections and leanings. MD guys take over Boeing operations as older Boeing guys retired, bringing a failed operating philosophy, corrosive business and labor practices, and over arrogance to the lazy B. Of these, the plan to neuter the Washington based workers and engineers by outsourcing to cheaper foreign countries, moving the headquarters to Chicago for no good reason and shifting other production to “right to work” (too hard for too little) states with powerful Senators.

        1. readerOfTeaLeaves

          MD guys take over Boeing operations as older Boeing guys retired, bringing a failed operating philosophy, corrosive business and labor practices, and over arrogance to the lazy B

          This synchs with what I’ve heard, as well. And just in case other readers missed the ‘lazy B’ reference, Boeing is often referred to as ‘The Lazy B Ranch’.

          Some of those Boeing old-timers were dedicated engineers who loved solving problems and put a lot of time and energy into the local community and schools in the Puget Sound region. Great people, who loved working on planes.

        2. Jib

          This is very true but the issue is more that MD was primarily a defense contractor and defense contractors are the ultimate in coddled welfare queens. Defense contractors development overruns are ALWAYS covered the the govt. So they have zero skill in managing large dev projects. No sense of true risk since there is no real real risk when Uncle Sam will always bail you out.

          The defense contractors may be conservative but they live in a govt created and protected bubble with no idea of how the real world with real risk works. That Boeing management would let that poison infect their commercial division is criminal.

          1. anadianant

            I can concur having worked at one such Defense contractor pretending to be a consumer company.
            Going to their defense oriented sub. was like walking into hell. And the consumer product divisions were so mismanaged, it made no sense at all. Money flowed like water, first class to anywhere, best hotels. Totally nuts. I think Boeing is the same way. Too much easy govt. money along with MD mind-set.
            For the record, they should never have killed the MD-80 series. That was a beautiful aricraft.

            http://aadivaahan.wordpress.com/2011/02/14/oil-crisis-in-a-thousand-words/

    2. Brian Sierk

      Power politics with the Machinists Union. I don’t think we have to look much further. Shareholders should sue.

      1. Richard Kline

        If your remark intends to suggest that the shareholers should sue the Union, you have absolutely no idea what you’re talking about—or are just spewing anti-union vomit which is worse. The strike was about Boeing trying to force down benefit costs with an ultra-hardline, non-negotiationg position on it. The Union didn’t want to go out, but they couldn’t get Boeing to negotiate. Guess what: the suits lost, by being stupid. This was a completely management-induced fuck-up.

        Try researching your remarks before you open your butt and let fly. If your intent was otherwish, your remarks are exceptionally ill-drafted.

        1. Wild Bill

          That’s not how I read it at all, Richard. He’s on your side, says shareholders should sue the company for putting union breaking ahead of profit making. Maybe you’ve go the butt problem, talking to someone that way.

          1. Brian Sierk

            You are correct Bill- the shareholders should sue the management. The MAchinists have kept this company afloat over the past 14 years.

    3. Cedric Regula

      “Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.”

      This description is too simplistic to understand what Boeing did, I think. I read a short news article on it, so I can’t claim in depth knowledge of everything Boeing did, but the other news article implied they were sending out huge engineering-manufacturing-quality control How to Design and Build [name your favorite component or sub-assembly here] manuals.

      Ever since Leonardo da Vinci drew that picture of a helicopter and someone built one a few hundred years later, “build to print” has been a normal way of doing business between a manufacturer and it’s suppliers and subcontractors. For instance, a machined part blueprint is sent to the winner of the bid and any machinist can read it and make the part and QC knows how to inspect it.

      As the subcontracted work becomes more complicated, the subcontractor needs much more specialized in house engineering and manufacturing expertise to be able to interpret a print package, make it and test it to the same procedures as the customer, not to mention have aerospace QC in place. The number of subcontractors in this case gets rather small, and the manufacturer typically splits the biz among all of them to keep them alive.

      Seems to me seems that Boeing was trying increase it’s subcontractor base. There is obviously much leaning curve here, and it never goes smoothly, and the risk to Boeing is they had to divulge a lot of inhouse proprietary knowledge to do it. In the old days we used to call knowledge “competitive advantage”.

      My how has the world has changed.

    1. securecare

      FAA deciding not to subject the 787 to destructive testing.

      This is not quite factually true. The 787 was subjected to a different set of test cases than previous airframes, there was destructive testing done.

          1. bob

            So, you are saying that an entire airframe was broken, they just won’t let me see it? Even Boeing won’t say that, ditto the FAA.

            Good thing they are keeping their cards so close to their chest. Outsourcing the engineering and manufacturing, but not allowing anyone to see the broken pile of plane.

            My initial comment stands, as written, in spite of your vast knowledge of the geography of Boeing’s american footprint.

            There is no broken plane.

        1. Glen

          Two airframes are built for structural test. One gets static tested for extreme loads, one gets fatigue tested to simulate the complete life of the airframe.

          Here is static testing:

          http://www.flightglobal.com/blogs/flightblogger/2009/11/787-static-airframe-passes-cru.html
          http://www.youtube.com/watch?v=sA9Kato1CxA&feature=related

          The second airframe will be in fatigue testing for quite a while:

          http://www.boeing.com/Features/2010/09/bca_fatigue_testing_09_13_10.html

  3. securecare

    For a deeper look at Boeing and the problems inside the organization.

    And here is a local article that covered this earlier. Too bad they didn’t dig any deeper because there is lots more to be exposed to the light.

    Note that Stonecipher is STILL Boeings largest stock holder. Of course he is no longer involved in management (directly anyway) since he was forced out due to some, emmm, “sexual misconduct”.

    No surprise eah ?

    1. Brian Sierk

      Good tip on the Hart-Smith Paper. its been kicking around for a couple weeks here. This is an rather obvious issue. What Albaugh doesn’t admit to is that he is still pursuing outsourcing and line duplication for the purpose of breaking the unions.

    2. Glen

      All I can say is the Sunday Buzz article is very accurate. Mullally ran the 777 program and brought it in on-time, a little over cost, and it’s a beautiful airplane. He got forced into massive outsourcing to lower start up costs to get the BOD to approve the new airplane. The problems with the 787 started at the very top.

      If you want to understand what happened to Boeing, find a retired Douglas Aircraft engineer (i.e. prior to McDonnell-Douglas merger) and learn the history of the McDonnell-Douglas merger.

  4. Brian Sierk

    RE: the Machinist’s strike.

    Boeing has a standard clause in delivery contracts that allows them to void certain penalty charges if there is a greater than 45 day labor disturbance. They did have to pay if the issue was supplier delays. It was pretty clearly an engineered strike.
    http://blog.seattlepi.com/findingclarity/2008/08/26/as-another-boeing-strike-looms-i-wonder-does-boeing-want-the-strike/

    I live in Snohomish Co. Washington, and have many friends who work at Boeing- and the basic understanding on the floor is that the driving management theory is that share price will go up with a less powerful unionized workforce. They moved the corporate offices out of the area, at a significant cost, to lessen the effect of the local media on the thinking of corporate officers, and engaged the 787 process with the intent of breaking the unions. It has failed, and they are more dependent on the Union workers than before.

    Boeing needs a shareholder revolt, and the management needs to be sacked. They have an ideological bug up their butt, and they are costing customers and shareholders millions of dollars.

    1. psychohistorian

      Boeing is owned by the same folks that own everything else. They told Boeing management to try and break the unions just like they told Wall Street and the bankers to fleece the financial sheep.

      We need to get the elite rich sociopaths out of the public policy setting loop, ASAP.

    2. Richard Kline

      So Brian, now I understand your remarks, and I agree with them. The 2008 strike was engineered by management, demanding non-negotiable cramdowns on benefits. Management got its head handed to it. Much of the outsourcing is retaliatory and part of a long term plan to shift work away from its unionized labor force. The result, as we see, has been disastrous _for Boeing_. This is a management fail, for political, class, and personal financial reasons relating to management’s stock options. And all this after Boeing extorted massive give-backs and taxbreaks fromt the State of Washington over decades. Gross corporate politics at its very worst.

    3. readerOfTeaLeaves

      Same region, although we probably know different people – and the people that I know loved Mulally. But I’ve heard the Dreamliner described as ‘the biggest supply chain clusterf*ck ever’.

      Boeing was the 500 pound gorilla in the state legislator for probably a generation. One thing about the old-timers: they cared a lot about the quality of the community. They understood that you can’t have a world-class company without a world-class community and good schools, etc, etc.

      Basically, the Boeing board seems to have been Econned; that helps explain the supply chain disaster.

  5. kwark

    Hmm. . . I think I’ll skip flying on that model. When I make my flight plans guess I’ll be scrutinizing the plane assignments even more closely than before.

    Does seem like just one of the many forms outsourcing takes – the horrible management being only part of the mess. I’ve seen similar screw-ups (if not so spectacular) with software development split between programmers in Europe, India and the US. Even in an “always connected” world often the left hand didn’t know what the right hand was doing. The notion was that “someone was always working” but the reality left something to be desired. So, of course, now both the design AND coding is done only in India.

    1. YankeeFrank

      Yes, I’ve seen it all too often in the software realm. I worked for a firm that decided to call their software development operation in India their “Center of Excellence”. It was a running joke because all of the software devs that worked in the CofE were newbies just out of school (read cheap) and couldn’t tie their shoe laces let alone understand the needs of their client base in NYC. The failed projects were often and costly. Of course management was of the opinion that devs are fungible. The funny thing is there are of course good developers in India — they just happen to cost a lot more and were too close in cost to what they paid us in NY. Outsourcing software development is a joke. According to Yves Apple does well with their outsourcing but I read recently that even if the iphone was manufactured in the US the profit margin would’ve still been 50%. Wall Street and the capitalist class have sold out the American worker and what makes it even more of a tragedy is that there was no good reason for it. Somehow the Germans manage to pay their workers well and maintain a strong manufacturing base. I guess if American capitalists didn’t hate their workers so much things would’ve been different. I’m starting to hate my country and am thinking of moving to Sweden where I could live like my grandparents generation did — in a society that is building and renewing itself continually — it seems almost like a dream when I think about it.

      1. ven

        As a aspiring immigrant, I agree with most of your points.
        Now software outsourcing is at the point where US companies are trying to buy whole products which are made offshore and integrate them!! Imagine the nightmare there….
        My local utility has a billing system which was built in offshore, a contracts system which is built offshore by a different company. To just register for online bill pay, I had to jump through hoops (6-7 phone calls) and found out in the end that I will be charged $7 more if its online automatic ACH transaction. I am now mailing 3 checks each month….

        1. IBelieveInMagic

          Outsourcing is simply an outcome of the US reserve currency global financial system — it is the quid pro quo for getting other commodity importing countries (China/India, etc.) to cooperate with the US in sourcing commodities on favorable terms from commodity surplus countries without having to constantly compete/fight for the stuff. This arrangement allows the labor surplus countries listed above to create jobs and the US and other developed countries (thru currency swap arrangements) get to source commodities based on export of colored paper. The arrangement is net-net win for the US but the gain is not evenly distributed — elite gets big returns, an increasing number of worker bees have their jobs outsourced and put on welfare.

  6. Tao Jonesing

    One thing that this story shows clearly is the detrimental effects of financialism on capitalism.

    Capitalism– the working of capital by labor to produce a product in a manner that maximizes profits– has been abandoned by top management in favor of meeting financialism’s expectations of perpetual exponential earnings growth because that is what shareholders have come to expect at the insistence of Wall Street and the Chicago School of Ponzinomics. Since financial considerations now drive all executive decision-making, finance is normative and economics, which was intended to describe capitalism, has been rendered completely inoperative and obsolete.

    Bottom line: maximizing profits and growing them at an expoential rate in perpituity are two entirely different things. Not only does financialism destroy the shareholder value it claims to maximize (in favor of enriching top management and Wall Street), it destroys capitalism itself by insisting on making money from money (i.e., compounding interest) over producing real value.

    1. Steve Keen for Nobel Economics Prize

      Indeed. All very well described in Steve Keen’s “Are We It Yet” part of the summary of which reads:
      “What their blinkered ignorance of the role of the finance sector obscures is that the essential class conflict in financial capitalism is not between workers and capitalists, but between financial and industrial capital. The rising level of debt directly leads to a falling worker share of GDP, while leaving industrial capital’s share unaffected until the final collapse drives it too into oblivion.”

    2. Winston Churchill said the same thing...

      Or if you prefer your criticism of Ponzinomics from a more conservative source, try this description of last time round from Winston Churchill:

      “Never before had such immense quantities of goods of all kinds been produced, shared and exchanged in any society…

      This splendid manifestation had been shattered and cast down by vain imaginative processes and greed of gain which far outstripped the great achievement itself.”

    3. Toby

      But maximizing profits is by definition also, in part, minimizing costs. Can this be good for the environment? Does this not necessitate externalities? Also, exponential growth is demanded by a money system which creates money as interest-bearing debt. Can capitalism be funded by another money type? Can capitalism allow the creation of money for non-profit reasons, money as a pure public utility? Finally, labour is work for a wage. Is this a sustainable model? Labour is a cost, which must therefore be minimized to maximize profit. Is this good for human dignity? It cannot be capitalism’s role to create jobs and maximize profits. Meanwhile, technological developments mean less and less human labour is necessary to produce more and more goods and services. If we abandon growth, as we should, must we not also abandon any desire for full employment? In short, don’t we need an entirely different, and new, distribution system?

      1. moi

        when the people shall have nothing left to eat, they will eat the rich.

        let’s have that distribution system.

      2. securecare

        don’t we need an entirely different, and new, distribution system?

        Indeed we do, one based on reality and not some fantasy currency.

        It will come but the transition (which we are in the midst of) will be painful as TPTB, Old Guard, what ever you choose to call them fight their rear guard action to prevent losing control.

        Gonna be messy.

  7. Salviati

    Much of the focus on outsourcing has been from the perspective of profitability. But I would suspect that companies would still do it even if it entailed a fractional loss over the short to medium term. The reasoning is that it gives employers leverage over the workforce, so the medium to long term effect is to suppress wages and workers rights. You can not underestimate the power that is accrued through spreading fear throughout the society. Perhaps I am giving these scoundrels more credit then they deserve, but I do think this Mafia-like thinking plays a role in their decision making.

    1. Brian

      This is exactly the case. The only “economic” incentive to shifting labor outside the US is the power over the workforce. If outsourcing loses money, it still breaks labor’s back, which is the real point.

  8. JJ

    A lot of you with no aviation backgrounds or backgrounds in engineering and production (almost everybody on NC) are missing a good part of the story. Boeing spread out the work on the 787, primarily, for much the same reasons that defense contractors spread out work among the states. Constituencies and sales. With some production and design in these countries, the thought is that sales will follow. Boeing did not go to Italy (where the largest single component of the aircraft, the fuselage barrel, is made by Alenia) for low labor costs for lords sakes. The wing and center wing box are made in Japan by Fuji and Mitsubishi, not exactly low cost labor either. Domestically, Boeing has indeed shifted more work to South Carolina from the plants in WA, but that was originally move based on lack of capacity in WA, although machinist cost was certainly a factor.

    Secondarily, there was also history and experience there. Alenia had made the fuselage for the late Boeing 717, the old MD-80-95 series, which had a higher proportion of composites in its airframe than any other airliners. Mitsubishi has long produced wing boxes for BA, including the 777. There is a lot more here than simple low-cost outsourcing, although, of course, Boeing has to be cost conscious as does any company competing in the international arena in a fiercely competitive sector.

    Component breakdown for the 787:
    http://www.seattlepi.com/business/275465_japan27.html

    While they have been some pretty bad missteps no doubt, it must be remembered that the 787 is a ground-breaking aircraft and big delays are not all that unusual.

    There will be no shareholder revolts whatsoever. Since the market lows in 2009, the stock has just about doubled, after total returns with dividends taken into account.

    1. Yves Smith Post author

      Ahem, this is not about the delays but the cost overruns. This piece is not about Boeing but about Boeing as an illustration of the perils of outsourcing. Whether they felt they had to do it or not is irrelevant. For most companies, it is elective.

    2. alex

      “A lot of you with no aviation backgrounds or backgrounds in engineering and production (almost everybody on NC) are missing a good part of the story.”

      I don’t see how that has any relevance to the rest of your post, which is about business rather than design/manufacturing concerns. And FWIW I am an engineer (electronic).

      “Boeing spread out the work on the 787, primarily, for much the same reasons that defense contractors spread out work among the states. Constituencies and sales.”

      That excuse has been seriously overused. Offsets are nothing new in aviation, but using them on this scale is another matter. And the comparison to defense work is incorrect, because the trick in defense is to spread the work out amongst as many states as possible in order to get those congressional votes. Different animal when for-profit airlines are buying the planes.

      “Mitsubishi has long produced wing boxes for BA”

      While the wing box is a critical component, there’s a big difference between outsourcing the wing box and the wings themselves – those are the most critical part of the design and what used to be a treasure trove of trade secrets and proprietary know-how. Boeing replaced that approach (you know, the one where your company is more than just a brand name) with what Boeing engineers dubbed the “open kimono” policy. On the bright side, I think Boeing has kept the trademark for their logo (though perhaps that’s up for negotiation).

    3. Ron Horn

      It seems clear to me and others that outsourcing is a major cause of Boeing’s problems. I think JJ and Alex have pointed to a very important factor, in addition to anti-labor bias, that is influencing this dysfunctional outsourcing. These two responders referred to “constituencies”. But constituencies for what?

      As Wikipedia defines the word, “A constituency is any cohesive body of people bound by shared identity, goals, or loyalty.” So, I ask, what are the goals and loyalty here? And I believe the answer is to garner public support for the military-industrial complex and its highly profitable wars.

      It seems clear to me that this has successfully stifled much of the anti-war opposition in the US. The latter are often portrayed in mainstream media as anti-jobs. With unemployment so high, this view works very well to stifle dissent.

  9. Renee

    This mistake is being repeated in all kinds of sophisticated manufacturing. My brother kept losing his job to inept Asian plants where they couldn’t figure out how to configure anything.

  10. BrianSJ

    JJ has a good point. Boeing has always run a large offsets programme with countries that bought their aircraft, but may have realised it wasn’t enough to remove the political heat in e.g. Europe or China. ‘We build where you buy’ must help with the orders, and mitigate FX risk. VW had a similar set of problems with outsourcing major modules if I remember right.

    The Vince Weldon risk is still lurking of course.

  11. stuhlmann

    Airbus, Boeing’s main competitor, has had similar problems, with different pieces of airplanes designed and built in different countries. Airbus has had to do business this way from its beginnings, since it came about as a result of money and support from a number of European governments. Boeing doesn’t even have that excuse.

  12. Matt

    Years ago the WSJ did a post mortem on Arthur Anderson. The died in the wool accountants who had aced their CPAs had replaced themselves with the gentlemen C golfers who were the rainmakers.
    Believe me, when management tells engineers they will be done by a deadline, then management gets whatever has been done by that deadline. If management does not continue work and push back the deadline they get the Boeing nightmare without even having outsourced the work.
    I think Boeing would still be in the soup if the work was in house. Once the leadership becomes “business process” driven instead of “earning the customers trust” and technical excellence the demise of the enterprise has begun.
    We can see that in the Dell computer fiasco with shipping millions of broken computers, bad capacitors and power supplies, and a totally broken warranty system. The same “business process” that makes the average life of a Dell, Nikon, IMac, or Ipod 24 to 48 months at best is a road to ruin. And I certainly expect this has been applied to airplane manufacturing.

    1. skippy

      Now apply that logic to about every critical piece of industrial infrastructure / plant, around the world, save a few ie Europe & Japan.

      Every thing from engineering to build all moving in different directions. Why…because the rainmakers like it that way, it makes them rich, screw legacy problems.

      Skippy…long gone or too many suckers to lay the blame on to ever sweat it.

    2. Attitude_Check

      As a practicing engineer that worked as a subcontractor to Boeing on a major project (not 787) for ~10 years, the problem is deeper and much more pervasive. But you touch on it.

      Process is not a replacement for domain knowledge. The problem is that the management types have no understanding of engineering, and therefore make a number of ignorant assumptions.
      1. All engineers are fungible (as long as the engineering process is documented). This is a complete lack of understanding of the engineering discipline, especially developmental engineering.
      2. Development design changes are avoidable with enough “management help” and oversight. (complete failure of understanding that new system development is a highly complex problem, where “you don’t know what you don’t know” at the beginning of the effort)
      3. Minimizing the cost of individual engineers will minimize the cost of development. (ignoring the potential costs of bad/incapable engineers)

      These principles are why Boeing outsources, among others as discussed. These beliefs are wide-spread in the Aerospace industry and much of US industry. Bottom line, modern management is too stupid for their job, they have no understanding of the impact that their policies will have on the actual production and therefore profit of the company.
      2.

      1. halbhh

        I think you have an especially good point = it is about the engineers. There is a cultural issue of what one expects of oneself, which is a large complex of many pieces. In Japan for instance, there is a reason high quality shows up again and again. Something like an airplane is where the issue of quality reaches a peak. Process can’t possibly compensate for the cultural complex. For every critical structure, all the materials and techniques have to be oriented towards quality instead of maximizing the momentary bottom line. Thus, since subcontractors are involved, culture becomes so central.

      2. JeffC

        “engineers are fungible”
        This was exactly what I concluded was deeply wrong with Boeing when I worked there as an engineer in the late 80′s and early 90′s. I’d seen other companies fall into this fungibility trap, but none so severely as Boeing. They did recognize that an electrical engineer is different from a mechanical engineer, but that’s about as far as their discrimination went. That electrical engineering, for example, covers a vast range of specialized disciplines is something of which management there seemed largely unaware. To them one was like another; they were interchangeable.

  13. Verdant

    “Stenographers in the business press” What a turn of
    phrase. Something more venal comes to mind usually.

    For almost two decades we’ve railed against
    offshoring, starting in the Clinton administration.
    Our motto was

    “If we’re not good enough to make it then
    we’re not good enough to buy it…”

    Americans had better learn the honorable skills of
    poverty or they are in for a rough time.

  14. Anon

    As someone with relatives that work and have worked at Boeing at various levels, the management screwups have been shocking in nature. Sadly, Boeing began its’ decline when the “merger” with McDonnell Douglas occurred and the new management was almost entirely consisting of former MD execs.

    What follows has been a series of decisions that were solely focused on the “next quarter” without regard for the longer-term outlook. The 787 outsourcing disaster falls right into this – it allowed Boeing to book much lower R&D costs and hence higher profits in the interim years before true assembly began, but at the cost of project management failures on a scale in my view beyond anything in the last 50 years.
    I have no doubt that had Boeing used internal engineering and manufacturing talent to their fullest extent, they would be in a much stronger position today, albeit with worse quarters in the short-term a few years ago.

    Myself working in the software industry, it’s amazing how the same foibles are done again and again in that industry as well.

    1. halbhh

      “I have no doubt that had Boeing used internal engineering and manufacturing talent to their fullest extent, they would be in a much stronger position today, albeit with worse quarters in the short-term a few years ago.”

      Yep. Management should be composed mostly of former engineers, when a business is building such a complex product.

      1. securecare

        Management should be composed mostly of former engineers

        Boeing was such an organization until the 1980s when Frank Shrontz took over. It has been down hill ever since.

        [No, I don`t work there nor have I ever, I just have lived in the area for a long time]

  15. Perfect Stranger

    “Yes,there are cases like Apple where outsourcing has been a big success,…”

    It depends how to gauge or define that very word “success”.
    According to Asia Development Bank Institute research iPhone is one of the causes (among others) of the US trade deficit with China. Incidentally, I read this article recently. The link is here:

    http://www.adbi.org/working-paper/2010/12/14/4236.iphone.widens.us.trade.deficit.prc/

    in less detail:
    http://www.businessinsider.com/iphone-impact-on-trade-deficit-2011-1

    In my opinion the “policy of outsourcing” is just one tool in toolkit of neoliberal economic model/policy. Since there is no costs saving nor comparative advantage, it can be explained only as: export of neoliberal economic policy, whenever is possible. With force, overthrowing foreign government if one resist or sneaking into the countries as FDI, free trade, or joining WTO.

    The social impact is immense in both countries from: unemployed domestic labor force to social cohesion and breakdown and turmoil in Foxcomm’s factories.

  16. Max424

    Boeing nurses on Momma’s teat, then Boeing turns around and betrays Momma. What a venal and treacherous little lad is Boeing!

    We subsidize this — too big to fail — airplane manufacturer to the tune of billions of dollars ($23 billion last year alone) to build a bunch of superfluous death machines. You’d think the least they could do — for this great, great country — after all that; is build their other stuff, the peaceful stuff, in-house.

    When I take over, Rule #3 will be: if you receive one of my (piddly) defense contracts, and then you outsource, especially if you outsource to the country you keep telling me is the single gravest national security threat EVER; you will stand trial for treason — in a court of my choosing.

    Note: Rules #1 and #2, in no particular order, involve Wall Street and the sell-out Demo/Blue Dog/Republican/Supreme Courtiers — in, of course, a court of my choosing.

    1. GLOBAL GROUNDHOG


      if you receive one of my (piddly) defense contracts, and then you outsource, especially if you outsource to the country you keep telling me is the single gravest national security threat EVER; you will stand trial for treason

      Second the motion. What our government now needs is *The Coordinator General of the USA*, Someone to reduce to the lowest common denominator each of our efforts to run-off-in-opposite directions.

    2. Cynthia

      Perhaps Boeing should think about doing what Lockheed has done, which is to ditch selling planes to the private sector and only sell them to the public sector. That way the folks at Boeing won’t need be competent at building safe and reliable planes. Nor will they have to worry about going broke paying for any cost overruns; taxpayers will do that for them. The folks at Lockheed are well aware of this, which has enabled them to become one of the top corporate welfare queens at the Pentagon. There are only two things that a corporate welfare queen like Lockheed needs to be competent at doing: buying off DC politicians and infiltrating the White House with pro-war zealots.

      1. Max424

        “There are only two things that a corporate welfare queen like Lockheed needs to be competent at doing: buying off DC politicians and infiltrating the White House with pro-war zealots.”

        Yup. Same with Northrup Grumman. They practically ran Junior’s administration. At one point, ex-NorGrumman boys had control of NASA (Sean O’Keefe), Pentagon financial oversight (Comptroller Dov Zakheim), and the Air Force (Secretary James Roche); and had senior deputy positions at Defense ( neo-con extraordinaire, P. Wolfy Wolfowitz), and in the White House ( chief-of-staff to President D. Halliburton Cheney, I.L. “the Scooter” Libby).

  17. ep3

    This is the way the Big 3 have been going for sum time. If not for their bankruptcy, things might be a little farther along schedule. I worked in a component supply factory. There was no difference from working for GM; GM had a rep that came out and told us how to build and what to use. We just didn’t receive GM wages and benefits and pension. What the Big 3 did was outsource to small local shops versus going overseas or to the lowest bidder. They used longer term contracts as well to encourage the supplier to stick around. Also, the Big 3 had been doing outsourcing for years.

  18. LJR

    13% of final cost is misleading. If the manufacturing were done in the US the cost would be closer to 35% due to higher labor costs. You’re pulling a fast one here. The fact that it’s 13% is what allows Apple to be fat and profitable. If they were making iPads and iPhones here they’d lose half their profits.

    I’m surprised you haven’t figured this out yet.

    1. Perfect Stranger

      http://www.adbi.org/working-paper/2010/12/14/4236.iphone.widens.us.trade.deficit.prc/could.the.iphone.be.assembled.in.the.us/

      “As iPhone sales increase globally, that profit margin would also increase. In this hypothetical scenario, iPhones, the high-tech product invented by the US company, would contribute to US exports and the reduction of the US trade deficit, not only with the PRC, but also with the rest of world. More importantly, Apple created jobs for US low skilled workers; those who could not be the software engineers needed by Apple. Giving up a small portion of profits and sharing them with low skilled US workers by Apple would be a more effective way to reduce the US trade deficit and create jobs in the US.”

    2. dw

      the other thing you didn’t mention. Germany pays more to almost all of their manufacturing workers. hasn’t seemed to have hurt them much. they are still among the biggest exporters in the world.

  19. Gumps

    Having followed the 787 debacle for some time, I was mystified as to why foreign-made parts didn’t fit well. Now, I guess I have the answer:

    “Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.”

    This was a recipe for disaster. Sadly, the same was true for Future Combat Systems – another Boeing-led failure. FCS was a huge defense program with many companies participating, Boeing was the Lead System Integrator (LSI), along with SAIC. As with the 787, specifications, particularly in the software were, in a word, horrific – incomplete, vague, and in a lot of cases, just plain wrong. As with the 787, major S/W applications didn’t “play well” together and a lot of time and $$ was wasted. Again, you can blame management hubris, as well as a lack of expertise in critical areas for the program’s failure. It’s sad – I used to have such high regard for Boeing. But then, I once felt the same way about Motorola – about 20 years ago.

    1. Dirk77

      FCS. Sigh. Yes, destined for failure from the start. “It’s all about having the right processes in place.” “All engineers are pretty much interchangeable.” “If we could outsource all of our engineering we would, but if we need any, we can just hire them off the street.” Great ideas—if you are an MBA with no experience building anything. You sow what you reap. Well, eventually that is.

  20. Dirk77

    Yves, thanks for this piece and practically everything else you’ve written about. As a former Boeing employee, it rings true and is sad. It is sad, but not from the from the mistakes and the money lost because Boeing could recover from that. It is sad because I fear that Boeing, in the grip of Wall St. suited bozos and the shareholder value mantra, may not learn the right lessons from this debacle and similar ones will thus follow. Or any American company, (read American worker) will till it is too late. But they might. All they lack is understanding.

  21. mezurak

    “the 787 is a ground-breaking aircraft”

    The De Havilland Comet was ground-breaking as well, both in design and flight. Who in their right mind is going to knowingly get on an aircraft that has had the bad publicity of the 787?

    Which is why I refuse to book with certain airlines and tend to fly in smaller jets when possible. The seats are better, fewer passengers to beat to an exit, maintenance more likely to be performed properly, and less chance some engineer in India designed his portion of the aircraft in centimeters instead of Everett inches.

    1. dw

      not sure i would fly on the smaller planes unless i had to. they are almost always flown by a regional carrier (flying using a major carrier’s colors). and they have the worst maintenance records. and they pay their pilots as little as possible. which usually means they get thew newbie pilots just out of training. and they have the worst accident record. who knew? not doing maintenance or paying for good pilots would cause such havoc.

    1. alex

      “The 787 is made from plastic, right?”

      Oh please, that’s right out of a 60 Minutes story title. The carbon or Kevlar fibers make the “plastic” just a wee bit stronger than what you find in your average consumer disposable.

      Hey, steel is stronger than aluminum (and has better fatigue properties), so they’re making cut-rate airplanes when they use aluminum instead of steel, right?

  22. propertius

    Boeing is a major customer of mine, and I’ve had a ringside seat as Boeing management unravels the company through short-term thinking. It isn’t just the 787 (or even the commercial division), either.

  23. Ione

    My mother was in charge of Boeing Skunkworks for 23 years crossing over from the Flight Simulator Program at Plant 2. She gave me a piece of advice “Don’t let you friends fly in the 787.” By the way if you want to see the wreckage in you have Google Earth Pro. You need to look where they do all the hard core flight test. Which would happen to be at the Mosses Lake Flight Test facility. One question I will ask all of you. How would you feel watching a non-boeing employee applying Epoxy to the wing and body after it is hit by lightning. Just something to think about.

    1. dilbert dogbert

      Ione,
      Thanks for the reminder about lightning. Back in the days when Jesus was riding dinosaurs, and I was working at NASA on aircraft issues, I remember reading that repairs of plastic aircraft after a lightning strike was a very interesting issue.
      I remember when Boeing HQ moved to Chicago and thinking SELL!

  24. Paul S.

    Once again, the journalists miss the main driver of the “offshore” move of manufacturing. Cisco, Intel, Apple, et. al., have moved offshore to realize tax-free income. The decision to move manufacturing to Ireland, Singapore, Malaysia and other spots is hugely influenced by “tax free” operations. Realize the bulk of the value in a tax-free location . . . ship it to the US and Europe and other markets at full market value . . . and no profits realized in the U.S.!

  25. MarcoPolo

    Yves, though I agree completely that the savings are not what people believe, especially to consumers, the benefits of outsourcing are not what you seem to suppose. I don’t know anything about Boeing, but if they went abroad for the reasons indicated above, largely in comments; no wonder they got burned. But it’s complicated and I won’t be able to explain it easily.

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