The outsourcing debate behind the Dreamliner debacle—and the memo Boeing execs should have read

With governments around the world grounding Boeing 787 Dreamliners following a series of embarrassing and costly safety issues, the search for responsibility is on. One potential culprit? The already controversial outsourcing of its manufacturing, including the Japanese-made lithium-ion battery that has attracted the most public attention.

US-based Boeing outsourced about 30% of the Dreamliner’s manufacturing, more than any other Boeing plane. (Just 5% of the famous 747 was made in countries outside the US.) That fact comes from Michael Hiltzik’s investigation of how an unprecedented outsourcing push contributed to the Dreamliner being years late and billions of dollars over cost after design challenges, quality control issues and delays. Boeing execs have admitted that their supply chain management was faulty and that it will need to adapt in the future.

But that was before the rash of accidents. Now, Boeing is scrambling to convince aviation regulators, including the US Federal Aviation Administration, that its planes are safe enough to fly. One of the challenges will be convincing regulators that Boeing’s parts suppliers can be trusted at a time when the FAA doesn’t have the expertise it needs to validate new technologies. Journalist and pilot James Fallows points to this explanation of the challenge, which is compounded by tense labor negotiations between Boeing and the union representing its aerospace engineers. It quotes an independent engineer:

“There aren’t that many qualified outside experts (except at Airbus). Where are they going to get them from?” he says. “This is where the extreme out sourcing really causes problems. How are they going to get their suppliers to be truthful? That has always been a problem in aeronautics. The 787 organization makes it much, much worse.”

Despite the regulatory difficulties, it’s not clear that outsourcing lead to the production of faulty parts, and no one is sure yet which specific parts are responsible for the most worrying electrical failures. Lisa Reisman, editor of MetalMiner, a trade publication, thinks untested technology is to blame rather than the supply chain:

The reality is that the Dreamliner contains multiple new systems and new materials that simply don’t have the performance history behind them (e.g. lithium-ion batteries, electrical systems, new power and distribution panels). So I think the story becomes a little less about the OEM/supplier relationships per se, and more about how a products company approaches the product development process given the competitive and pressure-filled environment companies like Boeing find themselves in….To me, the issue appears more fundamental – Boeing has a product development process that has failed to deliver a problem-free safe plane, outsourced or not. Fix the product development process and you fix the company.

Speaking of the product development process, it’s possible all this would have been avoided if Boeing had paid more attention to a now-infamous memo (pdf) presented by Dr. L. J. Hart-Smith, an aerospace engineer, at a 2001 conference.* Hart-Smith makes the case that outsourcing doesn’t cut costs and increase profits but rather does the reverse, driving profits to suppliers and increasing costs for the mother company. Only by cutting costs across the company and maintaining control of its manufacturing could Boeing succeed. He notes that rival Airbus’ outsourcing procedures, a result of the company’s multinational nature, are more efficient than Boeing’s but still fraught with inefficiencies absent in a more centralized approach.

Hart-Smith’s ideas were not adopted, and Boeing, led by then-executives Harry Stoneceipher and Allan Mullally (now Ford’s CEO), made a bet on short-term cost cutting. Perhaps the new Boeing will become a case study of in-sourcing as it seeks to fix its problems.

*Hart-Smith’s paper includes the best footnote ever: “The views expressed here are those of the author and not necessarily those of the Boeing management. Conversely, the visible policies of the management are not necessarily those that the author would have recommended, had he been asked.”

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