When does outsourcing work?
Outsourcing works for the electronics industry due to the low labor rate. That’s why iPhones are designed in California but made in China. Companies outsource to countries with cheap labor. Their business brings even more work, which leads to increasing hourly rates. Once the costs rise, electronic outsourcing moves to another cheap and undeveloped area, where the cycle starts over again.
But aircraft manufacturing is different. What works in high-volume industries like consumer electronics may not work in low-volume ones like aviation. Aircraft manufacturing programs are designed on a 60-year time frame — three decades for active production, followed by three more decades of support costs for hardware and software costs. Beyond that, an aircraft wing costs just a tad more to transport than a stone-weight iPhone.
In contrast, the 787 parts didn’t seem to fit together. The wing didn’t securely attach to the body of the airplane, and there was a large gap between the flight deck and the fuselage. Boeing’s workers wanted the airplane to “snap together.” But different parts of the aircraft, from the wings to the smoke detectors, didn’t fit. Boeing paid the price:
"In the end, much of the plane’s real design happened on the assembly line, and Boeing had to write off three separate mock-ups that were too much like science projects to pass off as airworthy planes. In the end, the Dreamliner (another name for the 787) cost no less than $30 billion, and probably closer to $50 billion."
When it comes to outsourcing, aircraft engines are the exception that proves the rule. Jet engines are built by separate manufacturers due to economies of scale for manufacturers and technical expertise that does not translate to the rest of the aircraft, making it exactly the kind of product a company should outsource.
As the famous saying goes: “In theory, there's no difference between theory and practice. In practice, there is.”
One Boeing engineer named L. J. Hart-Smith warned against the dangers of outsourcing in a leaked memo published in 2001. In the memo, Smith argues outsourcing should be seen as an added cost, not a cost reduction. He observed power within Boeing had shifted from ambitious scientists to slick lawyers and financiers.
Subcontractors, not Boeing, would benefit from increased outsourcing. In the case of Boeing, outsourcing threatens the survival of the company because too much outsourcing causes the profits to disappear along with the work itself. Without lots of up-front planning, the subassemblies may not fit together at assembly, which will lead to delays and increased costs.
Outsourcing is a symptom of a larger move towards cost-cutting. Like many large bureaucracies, the aircraft industry is siloed by department. Instead of taking a comprehensive look at the system, managers analyze the business under a microscope. Each slice of the organization is responsible for minimizing their own costs instead of reducing costs for the organization at-large.
Systems, though, are interconnected. An improved engineering process can reduce the cost of designing or manufacturing a product. Rather than minimizing costs in isolation, Smith advised Boeing to take a bird’s-eye view of the manufacturing process. After all, one system-wide cost reduction is worth more than 20 small and isolated efficiency gains.
I fear Boeing executives were overly concerned with following standard management doctrine. Just as “nobody got fired for buying IBM,” nobody got fired for outsourcing to a cheaper manufacturer. The modern economy is globalizing, and the workers within it are increasingly specialized. But Boeing took outsourcing and cost reduction too far, and the company suffered the consequences.
In the advertising industry, companies hire third-party advertisers to do the dark and dirty work of sketchy data practices. Then, when the company is blamed for malpractice, they can point their blame at that third-party firm. I wonder if outsourcing is driven by similar motivations. To be clear, I’m not accusing Boeing of intentionally ignoring safety. But by outsourcing manufacturing to third-parties, Boeing can shift the blame to partners with lucrative outsourcing contracts and little incentive to stand up for themselves.
Boeing’s troubles were evident before the 737 Max crash. The Boeing 787 project went over budget by $12-18 billion, with delays and unexpected costs as the culprits. Executives couldn’t keep up with the 787’s complex manufacturing process. The aircraft contained 2.3 million parts built in 5,400 factories. Parts from those far-flung suppliers didn’t fit. Entire manufacturing lines were delayed when some subcontractors missed their quotas. Some subcontractors outsourced engineering to other subcontractors, which reduced Boeing’s visibility in the project. According to one analysis, one major supplier didn’t even have an engineering department when it won the Boeing contract.
Due to battery fires in two planes, regulators had to ground 50 787s after the aircraft started flying. Because of these delays, I didn’t fly in a 787 until 2018, twelve years after I visited the Boeing factory.
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