1. What are the benefits to Boeing of outsourcing manufacturing of components of
ID: 412715 • Letter: 1
Question
1. What are the benefits to Boeing of outsourcing manufacturing of components of the Boeing 787 to firms based in other countries?
2. What are the potential costs and risks to Boeing of outsourcing?
3. In addition to foreign subcontractors and Boeing, who else benefits from Boeing's decision to outsource component part manufacturing assembly to other nation and who are the potential losers?
4. If Boeing's management decided to keep all production in America, what do you think the effect would be on the company, its employees, and the communities that depend on it?
5. On balance, do you think that the kind of outsourcing undertaken by Boeing is a good thing or bad thing for the American economy? Explain your reasoning
CLOSING CASE Building the Boeing 787 Executives at the Boeing Corporation, America's largest Boeing wanted exporter, like to say that building a large commercial jet aircraft like the 747 or 787 involves bringing together more ties for the 787. B to unburden itself of some of the risks and costs associated with developing production facili- outsourcing, it pushed some of those million parts in flying formation. Forty-five yearsrisks and costs onto suppliers, who had to undertake aco when the carly models of Boeing's venerable 737 and major investments in capacity to ramp up to produce for 747 jets were rolling off the company's S duction lines, foreign suppliers accounted for only 5 per eattle area pro-the 787 - So what did Boeing retain for itself? Engineering de of those parts on average. Boeing was verticallysign, marketing and sales, and final assembly are done at ntegrated and manufactured many of the major compo-its Everett plant north of Seattle, all activities where B nents that went into the planes. by outside suppliers were the jet engines, where two of The largest parts produced the were American companies. The lone for- ing maintains it is the best in the world. Of major compo- nent parts, Boeing made only the tail fin and wing to body fairing (which attaches the wings to the fuselage of eign engine manufacturer was the British company the plane). Everything else was outsourced Rolls-Royce As the 787 moved through development in the 2000s, Fast-forward to the modern era, and things look very however, it became clear that Boeing had pushed the out- different. In the case of its latest aircraft, the super sourcing paradigm too far. Coordinating a globally dis- efficient 787 Dreamliner, 50 outside suppliers spread persed production system this extensive turned out to be around the world account for 65 percent of the value of very challenging. Parts turned up late, some parts didnt the aircraft. Italian firm Alenia Acronautica makes the "snap together" the way Boeing had envisioned, and sev center fuselage and horizontal stabilizer. Kawasaki of eral suppliers ran into engineering problems that slowed Japan makes part of the forward fuselage and the fixed down the entire production process. As a consequence trailing edge of the wing. French firm Messier-Dowty the date for delivery of the first jet was pushed back more makes the aircraft's landing gear. German firm Diehl than four years, and Boeing had to take millions of dol- Luftahrt Elektronik supplies the main cabin lighting. lars in penalties for late deliveries. The problems at one Sweden's Saab Aerostructures makes the access doors. supplier, Vought Aircraft in North Carolina, were so se- Japanese company Jamco makes parts for the lavatories, vere that Boeing ultimately agreed to acquire the com- flight deck interiors, and galleys. Mitsubishi Heavy In- pany and bring its production in-house. Vought was dustries of Japan makes the wings. KAA of Korea makes co-owned by Alenia of Italy and made parts of the main the wing tips. And so on. fuselage. Why the change? One reason is that 80 percent of There are now signs that Boeing is rethinking some Boeing's customers are foreign airlines, and to sell into of its global outsourcing policy. For its next jet, a nevw those nations, it often helps to be giving business to version of its popular wide-bodied 777 jet, the 777, those nations. The trend started in 1974 when Mitsubishi which will use the same carbon-fiber technology as the of Japan was given contracts to produce inboard wing 787, Boeing will bring wing production back in-house. flaps for the 747. The Japanese reciprocated by placing Mitsubishi and Kawasaki of Japan produce much of big orders for Boeing jets. A second rationale was to the wing structure for the 787, and for the original ver- disperse component part production to those suppliers sion of the 777. However, recently Japan's airlines who are the best in the world at their particular activity.have been placing large orders with Airbus, breaking he years, for example, Mitsubishi has acquired with their traditional allegiance to Boeing. This seems expertise in the manufacture of wings, so it to have given Boeing an opening to bring wing produc- was logical for Boeing to use Mitsubishi to make the tion back in-house. Boeing executives also note that wings for the 787. Similarly, the 787 is the first com- bon fiber, posites, to supply materials for the fuselage. A third rea- Boeing has lost much of it s expertise in wing produc aircraft to be made almost entirely out of car tion over the last 20 years due to outsourcing, and so Boeing tapped Japan's Toray Industries, a bringing it back in-house for new carbon-fiber wings ert in sturdy but light carbon-fiber com-might enable Boeing to regain these important core Is and strengthen the company's competit position son for the extensive outsourcing on the 787 was that skilExplanation / Answer
1. As mentioned in the case, there are two major benefits to Boeing to outsource the components to firms in other countries. Firstly the countries from where the production was done usually ordered more planes from Boeing. This led to a sufficient increase in the sales and considering the close competition with Airbus for same airspace, the teams had to ensure all possibilities of sales were open and highly used. Another major reason as mentioned in the case is to ensure all the best manufacturers/ service providers could do the work in the respective areas. For instance, when Mitsubishi became a domain expert in manufacture of wings, it ensure that the products received from them were of the highest quality and reliability. Boeing as an organization no longer had to worry about the quality issues and management of inventory. Also using the outsourced model enables Boeing to focus on more value adding areas.
2. Outsourcing always has a risk attached to it. One major issue which is highlighted in the case is late deliveries. When a company such as Mitsubishi is world leader for making wings, other aircraft manufacturers would also be placing the orders to them. For such companies there are lot of pending orders which gets piled up over time and which in turn leads to hasty delivery of shipments to customers. Managing the data flow from such a vast network of outsourced suppliers is also difficult. Another major risk is the data loss which can occur when dealing with such a vast group of suppliers.
3. In addition to foreign subcontractors and Boeing, the major benefactors of such an activity are the customers and the end customers. Customers are the flight service providers who purchase the aircraft and end customers are the passengers of the flight. Having such an agreement for assembly of aircraft ensure that the prices are competitive and the same can be passed on to the end customers. The potential losers could be the local employees who could have got a job in Boeing or its related companies for production of aircrafts.
4. If Boeing`s management decided to keep all the activities with themselves, it would be difficult for them to manage everything. Having a outsourced supplier network helps in focusing the resources to the high value adding areas. This helps in reduction of capital for research and development for each and other area of the aircraft. If Boeing decided to do all these by themselves, they would need to expand the capacities including infrastructure, human resources, skilled labor, inventories, and most importantly the intellectual property.
5. Yes, I am of the opinion that such outsourcing activities are good for the economy. It forges new relationships across borders and helps in ensuring the best products are delivered to the customers when they need. It also give the organizations an opportunity to improve the core competency while not worrying about the other areas of operations. For an economy while the cash flow may be going outside the country, the value of the finished good will be very high. This brings a positive cash flow into the system. This also gives opportunities for the country to show the support in developing other countries.
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