Last week, Boeing announced that it was acquiring “the business and operations conducted by Vought Aircraft Industries at its South Carolina facility, where Vought builds [the rear fuselage and tail-cone sections] for Boeing’s 787 Dreamliner airplane.” The price tag is almost $1 billion, when you combine the $580 million Boeing is paying for the acquisition plus the $422 million Boeing had advanced to Vought earlier this year to help cover its manufacturing costs. According to Scott Carson, president and CEO of Boeing Commercial Airplanes, “Integrating this facility and its talented employees into Boeing will strengthen the 787 program by enabling us to accelerate productivity and efficiency improvements as we move toward production ramp-up. In addition, it will bolster our capability to develop and produce large composite structures that will contribute to the advancement of this critical technology.”
The primary catalyst for this move, of course, is the delay (yet again) of the Dreamliner’s delivery schedule. The 787 was supposed to go into service in 2008, but after the most recent setback, first deliveries probably won’t occur until late 2010 or even sometime in 2011. Hence, the continued rollercoaster ride of Boeing’s stock price.
From a supply chain standpoint, I think the Dreamliner program is a wonderful teaching case because it offers a variety of “lessons learned” and raises some important questions. Here’s a “lessons learned” example:
Back in 2007, as highlighted in an excellent Wall Street Journal article by J. Lynn Lunsford and Paul Glader (“Boeing’s Nuts-and-Bolts Problem”), Boeing experienced a shortage of nuts and bolts used to assemble the Dreamliner. As you can imagine, these fasteners are not the basic variety you can buy at your local hardware store. They are highly-specialized parts produced by Alcoa and a couple of other suppliers. The root cause of the shortage problem was the reduction of fastener capacity in the aerospace industry following 9/11, as the airlines cancelled orders for new jets and Boeing and its suppliers laid off employees (Alcoa, for example, laid off 41 percent of its fastener division employees).
What are the lessons learned? It’s much easier to cut capacity than to add it. Many companies will learn this lesson when the economy recovers. Also, make sure your interests and those of your suppliers are properly aligned. As highlighted in the WSJ article, “Boeing needs only a comparative handful of fasteners to roll out its first few planes. But Alcoa [and the other suppliers] prefer to make thousands at a time…Each bolt must be individually made on a lathe-a process that can’t be hurried. Because it takes time to set up the lathe, Alcoa would prefer to make thousands of one type of fastener before breaking the machine down and resetting it.” Finally, and speaking as a former new product development engineer, recognize that using specialized parts creates supply chain risks and constraints that must be addressed and managed from the very beginning of a project.
Boeing’s acquisition of Vought’s 787 operations raises an important question: What’s the right balance between outsourcing and maintaining operations in house? Between the “flexibility” outsourcing supposedly offers and the greater “control” that keeping operations in-house supposedly provides?
It seems to me that Boeing is reversing course a bit with this acquisition, perhaps deciding that having more “direct control” over critical aspects of the Dreamliner supply chain is a better strategy. In some ways, this is similar to the path Crocs followed in setting up its supply chain, where instead of outsourcing, the company decided to build and operate its own manufacturing plants and distribution centers in the Americas and elsewhere to better control and manage its responsive supply chain model. However, when the economy soured, Crocs found itself with a lot of fixed assets and costs, which the company is now trying to get rid of (see “Crocs: From Revolutionary Supply Chain to Almost Bankrupt“).
There’s no straightforward answer to this “flexibility vs. control” question. If forced to generalize, I would say that in cases like the Dreamliner, where you’re dealing with “first-of-its-kind, never-been-done-before” product and supply chain innovations, it’s probably better (less risky) to keep critical supply chain operations in-house, at least until the product and associated supply chain processes reach a certain level of maturity. But if you go the fully-outsourced route, it’s critical that you set up a centralized command and control center to track the project’s status and enable ongoing communication with all stakeholders.
That’s my viewpoint. What’s yours? Has Boeing’s experience with the Dreamliner taught you any supply chain lessons?