Strategic Failure During Boeing’s 787 Dreamliner Program

Boeing, an US company, was using its inhouse production system to most of components for its airlines i.e., vertical integration for its 737 and 747 model and average 5% parts were imported.

For its 787 Dreamliner project, parts of about 65% of value were imported from 50 international suppliers. How came this massive shift?

Mainly for two reasons :

1. Around 80% of the Boeing clients are non-US companies. Giving businesses to those countries reflects back with getting increased orders for Boeing in return from them.

2. Encashing the opportunity of using ‘expertise’ of the vendor company who is ‘best in the world’ in that segment.

Mitsubishi is the best cited example in both of these cases.

Evidence for the first reason had been seen in 1974 for the contract offered by the Boeing to Mitsubishi to produce inboard wing flaps for 747 model. Over the years, Mitsubishi qualified for second reason with its significant level of expertise in wings production and Boeing extended the contract for 787 Dreamliner to Mitsubishi.

Likewise, it had been win-win situation for both, Boeing and its vendors. Vendor gets the business and Boeing benefits from the transfer of risk and costs of investment.

Zooming out on this, the vendor nations used to get a good scale up into its economy with given factor of output and US gets customers helping increase its own economy to next level to given fraction of industry.

Seems a good deal for all the stakeholders, right? Well, not so!

Why?

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Good deals often come with risk and probability of failure.

On its 787 Dreamliner project, the biggest challenge and hurdle the Boeing faced was raised by Boeing itself. It’s not just by the action of outsourcing the production of parts but the collection of issues arose out of this policy. Outsourcing the massive 65% of value of production accumulated the excess risk in airliner assembly and the final shipment.

How?

The foremost issue was, coordinating the manufacturers spread across the world. It is for requirement specifications, criticality of components and their interoperability in final product than mere functioning in isolation.

Another issue had been about higher dependency on these companies for essential parts. Further, their failure to supply in time delayed the entire production schedule. This brought forward the point of time management which can be related with the culture of those organization and people working therein.

Most risky affair had been on technical front. Parts from different suppliers shown up not fitting with each other at the time of assembly and so, failing the final operation at its core.

In parallel, Boeing learnt it lately that many of the suppliers were not technically ‘advanced’ as per Boeing’s expectations; thanks to the engineering problems at their sites to highlight this fact. This ultimately delayed the Boeing’s inhouse operations dependent on accuracy and desired quality of these crucial resources.

Eventually, the delivery of first Dreamliner delayed by almost four years. Not only that, its profit also eroded by amount of millions of dollars by virtue of customers levying penalty for late deliveries. Thus, this 787 case had been the big blow for the company and its reputation as such. It won’t be exaggerated to say, the Dreamliner turned out like an nightmare for the Boeing.

Said that, it’s not that Boeing went all down. It’s neither out of the business too. It’s still running by dint of earlier models.

But what about this failure?

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Boeing had miserably failed in its plan of outsourcing parts’ production to other countries. The program had been designed to gain the benefits through extending the business opportunities to those countries and in parallel, utilise the expertise of ‘world’s best’ manufacturer for that particular part.

Alas! The things had not been shaped as expected.

In due course of time, Boeing’s 787 Dreamliner Program had turned out as a case of strategic failure for the company.

But, had it ended here? No!

Two related but indirect effects of this tragedy have been scaled up to next level.

First, this worst situation of Boeing’s business transmuted as competitive advantage for its traditional rival Airbus. Airbus naturally fell in the ‘beneficiary position’ and opportune to make the most of this mishap to increase its market share, especially into Japan. The Japanese airlines has extended their large orders of the airlines to Airbus despite Boeing being their traditional partner in this business. Thus, Boeing had not only lost the earned customer base by shrinking market share but also the potential business from this established base. Additionally, Airbus outmaneuvered Boeing from creating new allies in the business and expanding further.

Second, lately Boeing realized that it also lost on its own competitiveness on in-house production of the parts. And not only that, but also the technical expertise around those too. By this time Boeing could have excelled itself in those areas if it had retained the capabilities of its in-house production. But attributed to failure of this outsourcing strategy, Boeing lagged in internal aggressiveness too, up to some, if not much, extent.

Well, why are we discussing all this?

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On the sidelines of broaching it as “The Dreamliner effect”, the Boeing’s 787 Dreamliner program has been one of major and essential case to study for all businesses and management people.

What are the learnings from failure of strategy of outsourcing its parts’ production?

First, reduce, if cannot avoid, the dependency on uncompromisable products and services. In-house production system is the best option for this. If that is not available, management first need to give a thought to possible vertical integration. Analysis of PIR, BCR, ROI, etc. can give the necessary insights on this part, to decide whether to go for it or not?

Second, in case of external dependency, consider the risk as the factor given a higher weightage to. Analyze the Risk Management Cost, Business-Continuity Preparedness, Contingency Reserves Management, etc. along with tracking all important risk management KPIs. If you are dealing into international trade with fulfilling the requisite regulations, an extra caution is necessary due to cultural differences and political influences.

Third, rely on processes. Along with the cost, quality and rest of parameters of a business, evaluate the vendors based on their capability, adaptability, agility, business readiness, etc. Performing a full scaled technology audit of the vendor as per our requirements, checking for established practices like SOPs, process excellence, operational excellence, lean, six sigma, etc. can be considered as good parameters for this reliance.

It’s not that Boeing don’t know all this. They do know and that’s why they are into the business till now. Such decisions have never been taken solitarily. Neither those are intended to go wrong. But somehow, miscalculation happens. And that brings numerous learnings valuable for others as well as next generations of businesses to come.

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