By Kevin Meyer
For years we've kept you updated on Boeing's outsourcing adventures and how that game has created major problems for the 787 Dreamliner program and the company as a whole. A year or so ago even the company was beginning to admit that a lesson had been learned. Recently an article in The Los Angeles Times of all publications also described the lesson.
The biggest mistake people make when talking about the outsourcing of U.S. jobs by U.S. companies is to treat it as a moral issue.
Sure, it's immoral to abandon your loyal American workers in search of cheap labor overseas. But the real problem with outsourcing, if you don't think it through, is that it can wreck your business and cost you a bundle.
Case in point: Boeing and its 787 Dreamliner.
"Wreck your business and cost you a bundle." Doesn't get any more blunt – and factual – than that.
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.
And the impact of that outsourcing?
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.
The company has begun to recognize and even admit the mistake.
Boeing executives now admit that the company's aggressive outsourcing put it in partnership with suppliers that weren't up to the job. They say Boeing didn't recognize that sending so much work abroad would demand more intensive management from the home plant, not less.
No kidding. A bunch of us could have told you that – and we did. As did others with presumably more influence.
Boeing can't say it wasn't warned. As early as 2001, L.J. Hart-Smith, a Boeing senior technical fellow, produced a prescient analysis projecting that excessive outsourcing would raise Boeing's costs and steer profits to its subcontractors.
As an engineer at McDonnell-Douglas' Long Beach plant, he said, he saw how extensive outsourcing of the DC-10 airliner allowed the suppliers to make all the profits but impoverished the prime manufacturer. "I warned Boeing not to make the same mistake. Everybody there seemed to get the message, except top management."
Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.
Bingo. But they should also keep in mind that final assembly done right can also be a value center – and profitable. A lesson most outsourcing companies, like Apple, also forget.
Boeing's experience shows that it's folly to think that every dollar spent on outsourcing means a cost savings on the finished product.
Compare that to the cost of delays, design and production oversight, and just recently spending a billion to acquire one of those subcontractors, Vought.
That's the first lesson.