[Jeff Higgins]

...con't

The risk of tiered outsourcing
Boeing further aggravated these risks by adopting a new outsourcing model, along with the new technology. Unlike Boeing’s earlier aircraft, in which Boeing played the traditional role of integrating and assembling different parts and subsystems produced by its suppliers, the 787′s supply chain is based on a tiered structure that would allow Boeing to foster partnerships with around fifty Tier-1 strategic partners. These strategic partners were to serve as “integrators” who assemble different parts and subsystems produced by Tier-2 and Tier-3 suppliers.
In due course, Boeing discovered, as Hart-Smith had predicted, that some Tier-1 strategic partners did not have the know-how to develop different sections of the aircraft or the experience to manage their Tier-2 suppliers. To regain control of the development process, Boeing was forced to buy one of the key Tier-1 suppliers (Vought Aircraft Industries) and supply expertise to other suppliers. Boeing also had to pay strategic partners compensation for potential profit losses stemming from the delays in production.
The risk of partially implementing the Toyota model
Boeing’s outsourcing was modeled in part on Toyota’s supply chain, which has enabled Toyota to develop new cars with shorter development cycle times. Toyota successfully outsources around 70 percent of its vehicles to a trusted group of partner firms.
However key elements of the Toyota outsourcing model were not implemented at Boeing. Toyota maintains tight control over the overall design and engineering of its vehicles and only outsources to suppliers who have proven their ability to deliver with the required timeliness, quality, cost reduction and continuous innovation. As Toyota works closely with its suppliers and responds to supplier concerns with integrity and mutual respect, it has established an impressive level of professional trust and an overriding preoccupation with product quality.
By contrast, Boeing adopted the superficial structure of Toyota’s tiered outsourcing model without the values and practices on which it rests. Instead, Boeing relied on poorly designed contractual arrangements, which created perverse incentives to work at the speed of the slowest supplier, by providing penalties for delay but no rewards for timely delivery.
The offshoring risk
Some degree of outsourcing in other countries—i.e. offshoring—is an inevitable aspect of manufacturing a complex product like an airplane, because some expertise exists only in foreign countries. For example, the capacity to manufacture Lithium-ion batteries lies outside the US. Boeing had no choice but to have the batteries made in another country. More than 30 percent of the 787’s components came from overseas. By contrast, just 5 percent of the parts of the 747, were foreign-made.
While there is nothing in principle wrong with necessary offshoring, the cultural and language differences and the physical distances involved in a lengthy supply chain create additional risks. Mitigating them requires substantial and continuing communications with the suppliers and on-site involvement, thereby generating additional cost. Boeing didn’t plan for such communications or involvement, and so incurred additional risk that materialized.
The risk of communications by computer
Rather than plan for face-to-face communications and on-site communcations, Boeing introduced a web-based communications tool called Exostar in which suppliers were supposed to input up-to-date information about the progress of their work. The tool was meant to provide supply chain visibility, improve control and integration of critical business processes, and reduce development time and cost. Instead of people communicating with people face-to-face, the computer itself was supposed to flag problems in real time.
Not surprisingly, the tool failed. Suppliers did not input accurate and timely information, in part due to cultural differences and lack of trust. As a result, neither Tier-1 suppliers nor Boeing became aware of problems in a timely fashion. Boeing’s reliance on computer communications contrasts sharply with Agile practices of continuous face-to-face communications to ensure that everyone is on the same page.
The labor relations risk
We do not know to what extent Boeing’s enthusiasm for outsourcing and offshoring stemmed from a desire to circumvent difficult labor relations in Seattle. We do know that instead of involving the employees in the decision-making about outsourcing and offshoring, Boeing’s management approached decision-making pre-emptively. The approach backfired, as labor relations worsened as a result of the outsourcing decisions and a costly strike ensued.
The project management skills risk
Given the extraordinary risks of the 787 project, one would have expected Boeing to assemble a leadership team with a proven record in supply chain management and diverse expertise to anticipate and mitigate wide array of risks. Amazingly, this was not the case.
“Boeing’s original leadership team for the 787 program,” write Tang and Zimmerman in an important case study, “did not include members with expertise on supply chain risk management. Without the requisite skills to manage an unconventional supply chain, Boeing was undertaking a huge managerial risk in uncharted waters.”
The risk of a disengaged C-suite
The combination of the above risks constituted an existential threat to Boeing as a going concern. Where then was the C-suite while these risks were being incurred? An interview in 2011 with Philip Condit, who was the richly compensated CEO of Boeing when the initial 787 decisions were being made, is revealing.
In 2001, under Condit’s leadership, Boeing moved its headquarters from Seattle to Chicago, a decision continued by Condit’s successor, James McNerney. The ostensible reason for the move was to be neutral among the various divisions of Boeing, which were scattered around the US. In the interview, Condit makes no secret of another factor: as CEO, he didn’t want to be bothered with tiresome “how-do-you-design-an-airplane stuff,” or boring meetings with Boeing’s key customers (airlines) who came to Seattle.
After the move, Condit says that he spent much of his time in the Chicago business community, where he “encountered CEOs frequently gathering to nail down civic goals ranging from landing new companies to building world-class parks. ‘I was surprised by how much that happened,’ Condit said. ‘A meeting in which Starbucks, Microsoft, Costco, Boeing and Weyerhaeuser and a bunch of small businesses are all in the same place — rarely happens in Seattle,” he added. ‘It happened all the time in Chicago.’”
So while Boeing’s CEO was in Chicago, strategizing about the future of Boeing and discussing civic goals with CEOs from other companies, the managers back in Seattle were making business decisions about tiresome “how-do-you-design-an-airplane stuff” that would determine whether there would be a firm to strategize about.