UNIVERSITY OF WESTERN ONTARIO

Boeing 787 Dreamliner A Case Study of Lessons Learned for Project

Managers

Abdullah Gaznai

Jamie Albert Gregory

Alfredo Martinez-Iglesias

Mohamed Solimon

9/17/2013

AACE International - Case Study Competition

Executive Summary:

Over the past couple of decades Boeing has lost significant market share in the large commercial aircraft

(LCA) market to its European competitor Airbus. To regain market share Boeing developed and

launched the 787 Dreamliner, a new state-of-the-art twin-engine LCA. Boeing has continued its historical

trend of becoming a total systems integrator by letting go of the design and development of 70 percent of

the Dreamliner. This ambitious project, that took both technological and logistical leaps, would ultimately

fail to meet stakeholder requirements for both cost and schedule. This report identifies nine project

management lessons learned in the Dreamliner project that could be used to better Boeing’s position for

success in future projects.

In order to achieve the technological leap required for the development of the 787 and minimize

developmental risks, Boeing utilized a modified Toyota-style multi-tier supply chain model. The model

shared developmental risk with its suppliers via risk sharing contracts. The financial calculations used to

rationalize these changes were based on oversimplified metrics, such as Return on Net Assets (RONA),

and failed to account for the hidden costs accompanied by extensive outsourcing and a complex supply

chain. Boeing’s management was unprepared and under qualified to address the major shifts occurring

within the company. This led to a series of mistakes regarding the assessment of overall project risks,

supply chain visibility and the selection and training of suppliers. A reason for Boeings strategic shift was

alluded to be due to the incremental use of IOs. Through their use Boeing has inadvertently tooled and

trained tomorrow’s competitors. Boeing will now need to compete with Airbus as well as encroachment

from others eager to penetrate the LCA market.

Table of Contents Introduction: .................................................................................................................................................... 1

Background: .................................................................................................................................................... 1

Boeing 787 Dreamliner Project: ...................................................................................................................... 2

Major Delays and Setbacks: ............................................................................................................................ 3

Industrial Offsets: ............................................................................................................................................ 3

Lessons Learned: ............................................................................................................................................. 4

Lesson # 1: Cost estimation of a project should follow a full understanding of all the underlying costs. . 4

Lesson # 2: Assemble a management team with requisite expertise. ......................................................... 6

Lesson # 3: Proactively manage relationship with labour unions. ............................................................. 7

Lesson # 4: Customer’s Expectation and Perception should be managed proactively ............................... 8

Lesson # 5: Risk assessment is key to a successful outsourcing strategy. ................................................. 8

Lesson # 6: Risk-sharing contracts need to include partner specific incentives/penalties for timely/late

work. ……………………………………………………………………………………………………………………………………………….. 9

Lesson # 7: Supply chain visibility should be improved to enhance coordination and collaboration with

suppliers. ……….. ................................................................................................................................. 10

Lesson # 8: Improve Tier-1 supplier training and selection process. ....................................................... 11

Lesson # 9: Short term financial decisions decrease future earning potential by increasing competition.12

Conclusion: .................................................................................................................................................... 14

References: .................................................................................................................................................... 15

Appendix: ..................................................................................................................................................... 17

1

Introduction: The 787 Dreamliner is Boeing’s new flagship large commercial aircraft (LCA) that comes in two

different models, 787-8 and 787-9. The models vary in both their seating capacity and flight range. The

Dreamliner provides airlines with a 20 percent reduction in fuel consumption while cruising at speeds

similar to today’s fastest twin-aisle airplanes, Mach 0.85. It also boasts a series of other technological

advancements that include the use of composite materials for the production of 50 percent of the primary

structure – including fuselage and wings (Tang and Zimmerman 2009). For a list of features and their

associated benefits to both airlines and passengers see Table 1 in the Appendix. This report will

investigate Boeing’s 787 Dreamliner project to identify lessons learned for Project Management.

Background:

The aerospace sector has historically been an important employer within the United States providing

relatively high paying, highly skilled jobs both in manufacturing and R&D. Along with the automobile

manufacturing sector it is considered by many to be the technological backbone of the U.S.

manufacturing base (Platzer 2009). The aerospace sector has seen a significant decline in employment

since the 1980s. It employed over 900 thousand in 1989 (Department of Commerce 2013). This figure

stands today at slightly under 500 thousand (Department of Commerce 2011). In 2008 the sector

employed approximately 2.8% of the United States manufacturing workforce and generated 1.4% of the

U.S. gross domestic product down from 1.7% in the 1990s (Platzer 2009).

American LCA manufacturers, commercial aircraft manufacturers producing planes with a seating

capacity of over 100 passengers, dominated the global market following World War II. They enjoyed a

virtual monopoly of the market until the 1970s (D. Pritchard and Macpherson 2004). Following decades

of industry consolidation, Boeing has emerged as the sole remaining U.S. manufacturer of LCAs. The

company incorporates most of the contractors that executed the Apollo moon project (Fingleton 2005).

The global market for LCAs is a duopoly consisting of Boeing and its European competitor Airbus.

2

Boeing is the world’s second-largest manufacturer of LCAs controlling half of the global market (B. D.

Pritchard and Macpherson 2004).

Over the years Boeing’s management has been steering the company towards systems integration and

away from manufacturing (Fingleton 2005). Systems integrators are specialized in co-ordinating the

completion of final products through various outside contractors. Each contractor may be responsible for

individual parts, subsystems or subassemblies that are brought together in a functional manner by the

systems integrator to form the final product. Boeing’s transition to systems integration can be seen by the

rising rate of outsourcing used during the design and development of their previous planes. The Boeing

727 (1960s) and the 777 (1990s) had 2% and 30%, respectively, manufactured overseas (Airbus 2010).

The Boeing 787 Dreamliner had a staggering 70% of its components developed overseas (Airbus 2010).

“American imports of aircraft and aircraft parts now equal 45 percent of its exports, up from just 5

percent in 1960s. “ (Fingleton 2005)

Boeing 787 Dreamliner Project:

In the hopes of reducing the development cost of the 787 Dreamliner, from $7.3 billion to $4.2 billion

and development time by 2 years, Boeing decided to increase outsourcing and manage suppliers via a

multi-tiered supply chain structure (D. Pritchard and Macpherson 2004). The supply chain was modeled

based on a modified version of the Toyota supply chain that had never before been used by the aircraft

manufacturing industry. Traditionally Boeing maintained a “build-to-print” relationship with suppliers,

provided thousands of suppliers manufacturing specifications for parts and subsystems that where later

assembled in-house (B. D. Pritchard and Macpherson 2004).

“U.S. prime contractors were always in control of the design, manufacturing procedures, and

core technologies of 1,000s of first, second and third tier suppliers.” (D. Pritchard and

Macpherson 2004)

The new 787 supply chain allowed Boeing to contract approximately 50 Tier-1 strategic partners, that

where responsible for the design and completion of aircraft subassemblies. Tier-1 partners were in turn

3

supplied by Tier-2 and Tier-3 suppliers. This unconventional supply chain had Tier-1 partners delivering

approximately 50 completed subassemblies to Boeing’s plant in Everett, Washington, where complete

assembly of the aircraft would occur in three days (see Figure 1 in Appendix). Other alleged advantages

incurred by Boeing’s multi-tier supply chain included: reduction of unit cost, externalizing non-recurring

expenditures and product development risk.

Major Delays and Setbacks:

Boeing had scheduled the maiden flight of its 787 Dreamliner to take place by the end of August 2007.

The incomplete aircraft was premiered a month earlier in anticipation for the flight. The 787 Dreamliner’s

maiden flight would only occur following a string of delays on December 15, 2009, almost two and a half

years behind the originally scheduled date. The project would later be plagued by a series of other

technical issues – delaying deliveries of the first 787’s to All Nippon Airways until the end of 2011. On

January 2013 the 787 was grounded by the FAA due to issues with the new lightweight lithium batteries –

the first time the FAA had grounded an airliner since 1979. The flight ban was later removed by the FAA

at the end of August following modifications to the lithium battery design (Telegraph 2013).

Industrial Offsets:

Industrial Offsets (IO) are defined as trade agreements that are made where the seller grants concessions

to the importer. Direct IOs include production sharing (subcontracting), technology transfer, or workers

training. These types of negotiations are common in sectors that have a high unit price and competition is

intense - oligopsony. Along with subsidies, IOs are supposed to be illegal for countries that adhere to the

World Trade Organization (WTO) policies, though commonly used. One of the first recorded industrial

offsets in the commercial aircraft sector occurred during the 1960s by Douglas, when Boeing was still

competing with other American LCA manufacturers. Douglas sought to secure sales with Canada and

Italy that would have not taken place had the offset deal not been struck. Today Douglas no longer exists

(MacPherson, Alan; Pritchard 2003).

4

The Japanese and other governments (e.g. China, Russia) have shown interest in developing their own

aerospace sectors. These governments negotiate direct IOs in order to incubate their aerospace industries

(B. D. Pritchard and Macpherson 2004). Some analysts are now predicting that by 2020 the Western-

dominated LCA duopoly will be threatened by such nations as China and Japan (MacPherson 2009).

Outsourcing has had short term financial benefits for Boeing. Industrialist governments have assumed the

financial risk of product development, by providing loans and tax breaks to their manufacturers, in return

for technology transfers and its associated infrastructure development that will eventually lead them to

become competitors within the LCA market (B. D. Pritchard and Macpherson 2004).

“We’re not just losing the airliner industry, but all the scientific, engineering and technological

know-how that goes with it, (…) advanced composites, glass, aluminum, titanium materials

technology, (…) precision tooling and machining, (…). And since these technologies are used in jet

fighters, bombers, tankers and space vehicles, we’re hitting the defense industry as well as the

commercial aerospace industry.” – Jack Davis (Fingleton 2005).

During the 1980s Boeing’s main concern was to ensure that its design secrets, especially those regarding

the design of wings, were not leaked or stolen. It developed elaborate procedures to control the movement

of visiting engineers within the firms factories and offices (Fingleton 2005). Today it would seem that

Boeing no longer holds its once prized “tribal knowledge”, or engineering knowhow, at such high esteem.

“(…) the transfer of wing manufacturing and assembly expertise to Japanese companies

effectively gives Japan ‘total production competence’ with regard to commercial airframes.”

(B. D. Pritchard and Macpherson 2004)

Lessons Learned:

Lesson # 1: Cost estimation of a project should follow a full understanding of all the

underlying costs.

The decision by Boeing’s senior executives to increase outsourcing was based on partial cost calculations,

which aimed to reduce cost, assembly time, and financial risk. Another motivation for taking that decision

was to increase Boeing’s Return on Net Assets (RONA), a financial measure of the efficiency of a

5

company to make profit compared to its total assets. By having subcontractors invest a larger portion of

the required capital for the project, Boeing was able to invest less and that increased its RONA. Analysts,

such as Wall Street analysts, frequently use RONA to measure the performance of a firm, and that led to

increase Boeing’s stock price and its management’s credibility (Cockburn 2013). However, Boeing’s

financial calculations failed to identify all the underlying costs incurred due to the increase of outsourcing

and the adoption of the new supply chain. For example, the cost of coordinating the suppliers and the

integration of suppliers subassemblies was underestimated (Calleam Consulting Ltd. 2013). In a speech at

Seattle University in 2011, Jim Albaugh, Boeing’s Commercial Airplanes Chief said “We spent a lot

more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies

closer to home” (The Seattle Times 2011).

Accurate cost calculation of the project is a critical input to the project planning that will support and

contribute to good decision makings, the control of the project, and the reduction of unexpected overruns.

What makes that decision worse is the fact that the senior managers of Boeing had been warned in

advance that the cost measurement method that they were using was inadequate. In an internal paper

entitled “Out-Sourced Profits – The Cornerstone of Successful Subcontracting” written by John Hart-

Smith, who was a senior technical engineer at Boeing, he showed how the outsourcing cost were being

underestimated and how the out-sourcing strategy could destroy the knowledge base of the organization

and specifically for aerospace industry, causing its downfall. (Hart-Smith 2001)

Hart-Smith wrote his paper based on his experience working for Douglas Aircraft where he witnessed

firsthand how outsourcing increased the overall cost of manufacturing and weakened the organization

(Tang and Zimmerman 2009). Unfortunately senior management did not take that paper seriously and the

project ended up spending billions in unanticipated integration costs as the project progressed.

6

Lesson # 2: Assemble a management team with requisite expertise.

Boeing’s multi-tier supply chain required coordinating risk sharing partners, which was paramount to the

manufacturing process (Denning 2013a). Synchronizing information such as supply/demand, logistics,

and delays across multiple partners, over multiple tiers is crucial when the turnover time for a complete

aircraft assembly is just three days. To coordinate all key components being delivered on-time and up to

quality within such a short time frame would prove to be a difficult task, even for experienced managers.

As seen in Figure 2 and Figure 3, this supply chain method is much more complex than the traditional one

Boeing had utilized for previous aircrafts.

Having said this, the original project management team was led by Mike Bair, a man with proven

marketing expertise and no experience in supply chain management. Steve Denning, a contributor for

Forbes, stated the following,

“Given the extraordinary risks of the 787 project, one would have expected Boeing to assemble a

leadership team with a proven record in supply chain management and diverse expertise to

anticipate and mitigate wide array of risks. Amazingly, this was not the case.” (Denning 2013b)

Additionally in an important case study of the Boeing Dreamliner, authors Tang and Zimmerman wrote,

“Without the requisite skills to manage an unconventional supply chain, Boeing was undertaking

a huge managerial risk in uncharted waters.” (Tang and Zimmerman 2009)

It should have been evident to Boeing that it was essential to assemble a leadership team that included

some members with proven supply chain management expertise, who are able to identify possible risks

and develop contingency plans to mitigate their potential impact.

The lack of requisite experience in the project team was a management risk that Boeing paid for in the

end. The poor management of the project led in part to many publicly announced delays, resulting not

only in millions of dollars of additional costs but harm to the company’s reputation and the customers’

confidence in the Dreamliner. Fortunately, Boeing corrected its mistake by replacing Bair with Patrick

7

Shanahan in 2005. Shanahan has proven expertise in supply chain management and is now coordinating

all activity for Boeing’s major plane families (Tang and Zimmerman 2009).

Lesson # 3: Proactively manage relationship with labour unions.

Boeing is no stranger to labour disputes. There is a long history of bad blood between Boeing and its

unions. In 1995 Boeing endured a 69-day strike that would, over the following years, cost the company

$2.5 billion and further disrupt labour relations. These were the years of what was the biggest boom in

aviation history at the time, and Boeing wasn’t making any profits. In 2008 demand was once again on

the rise and once again Boeing was preparing to undergo another labour strike (Holmes 2005).

On September 7, 2008, about 27,000 machinists went on strike (Holmes 2005). At the time Boeing was in

the middle of the Dreamliner’s development and had 3,700 jets (not only 787’s) on back order. The union,

International Association of Machinists (IAM), was striking on the issue of: outsourcing, job security, pay

and benefits. The first two related directly to the Dreamliner development. It wasn’t until November 1,

2008 that a contract agreement was ratified, ending an eight week strike. The strike cost Boeing $100

million per day in revenue and penalties with late delivery of aircrafts. At this time Boeing had a $350

billion backlog (Isidore 2008). The resulting contract forced Boeing to, along with increase pay and

benefits, decrease outsourcing and provide job protection. This was the largest strike since 1995 and the

fourth in 20 years.

Boeing clearly did not learn from previous mistakes how significant the impact of labour strikes can be on

its projects. This labour risk could have been mitigated and/or avoided by proactively assessing and

managing the risk. A proactive solution to this risk would have been to consult with the unions, prior to

the project, regarding the increases in outsourcing and the new supply chain model. Instead Boeing’s

management moved ahead with its plans without involving the employee union in the decision-making

process. This approach backfired, the labour force immediately became concerned over job security, and

a costly strike ensued (Tang and Zimmerman 2009).

8

Lesson # 4: Customer’s Expectation and Perception should be managed proactively

It is important for all companies to help their customer set proper expectations, especially for projects that

involve new product development. In the case of the 787, the use of new technologies and the increased

reliance on suppliers increased the risk of delays. Had these risks been understood by the customers,

customer dissatisfaction may have been reduced down the road (Tang and Zimmerman 2009).

It is advisable for the company to have open and honest communication with its customers to gain

customer’s trust and improve their loyalty. Information such as the actual progress, what challenges the

project is facing, and what corrective measures are implemented should be honestly shared with the

customers. (Tang and Zimmerman 2009)

Lesson # 5: Risk assessment is key to a successful outsourcing strategy.

Outsourcing is a common risk mitigation strategy as it may transfers or share risk to a third party,

especially if these outsourcing operations are not core operations. Boeing used outsourcing extensively as

it outsourced the manufacturing and design of entire subassemblies of the 787 without doing in depth

outsourcing risk assessment (Denning 2013a). Although that outsourcing may decrease financial risks, it

increased the execution risk. In addition to all the risks of the lesson learned in this report, there are

hidden risks of outsourcing like its negative impact on business processes, company reputation, and

customer satisfaction. Boeing did not do in depth risk assessment which resulted in not having mitigation

plan for many problems they faced in the project execution. For example, the contractors did not have

experience with the FAA approval processes, which in turn caused a considerable delay in the schedule,

which in turn affected the company reputation (Zimmerman, Tand, and Yeh 2013). Also as highlighted in

Lesson #2 the number of sub-contractors caused an increase in integration complexity as there were more

than 28 different languages spoken by sub-contractors, in different geographical locations with different

time zones (James 2009). Miscommunication coupled with the high level of technological complexity

inherent in the 787 resulted in the disruption of the integration of systems and parts.

9

Boeing should have spent more time assessing the risks of outsourcing, essentially since it entailed the

outsourcing core business operations. Doing this in depth assessment could have allowed Boeing to avoid

several of the risks mentioned in this report and put it in proactive position (Mahmoodi 2009). Identifying

risks and threats upfront would have allowed Boeing to mitigate some of the execution risk or decide to

keep more of the financial risk.

Lesson # 6: Risk-sharing contracts need to include partner specific incentives/penalties for

timely/late work.

During the development of the 787, Boeing instituted a new risk sharing contract in order to both reduce

the risk of delays and to share the financial risk of the project. In this contract Tier-1 suppliers would

receive payment for their development costs upon delivery of the first Dreamliner. The reasoning was that

this would push suppliers to collaborate together, ensuring the coordination of Tier-1 development efforts

as they would all want the project to be on time in order to be paid. The suppliers thus assumed the

financial risk if the project and in return they would obtain the intellectual property and manufacturing

capabilities developed over the course of the project. Having increased their stake, exposure to risk, gave

them the opportunity for increased profits and future opportunities to license their knowledge (Tang and

Zimmerman 2009).

This model would hold as long as each Tier-1 supplier had the same level of human and capital resources

at their disposal. If a supplier ran into delays due to whatever reason, all the Tier-1 suppliers would be

penalized as a whole. There would be little incentive for other Tier-1 suppliers to provide financial or

technical assistance to those struggling to meet deadlines as the prime contractor, Boeing, would hold the

ultimate responsibility for the project’s success. This was seen when Boeing was forced to send out its

engineers to assist Tier-1, Tier-2, or Tier-3 suppliers worldwide with various technical problems causing

delays to the 787 project (Denning 2013b). Another issue was that the Tier-1 suppliers had no incentive to

work faster than the slowest amongst them. This forced Boeing to purchase Vought Aircraft Industries, an

10

American Tier-1 supplier that was responsible for the aft fuselage, on July 8th 2009 at a cost of $1 billion.

Vought was plagued by technical issues with the composite technology it was using on the aft fuselage

and its own sub-tier supply chain.

In future projects, Boeing should modify its risk-sharing contract to include incentives for Tier-1

suppliers if they reach their milestones early or on time, and penalize those who are unable to meet their

obligations, while maintaining final payment upon satisfactory delivery of the final product to the clients

This would give Tier-1 suppliers increased buy-in and ensure that they act collectively to ensure the

overall success of the project.

Lesson # 7: Supply chain visibility should be improved to enhance coordination and

collaboration with suppliers

The visibility of the supply chain is essential to facilitate collaboration and coordination between the

manufacturer and the suppliers. In aerospace and defense industries its importance is more obvious as in

those industries they rely heavily on outsourcing for many of the components. In Boeing 787’s case, the

visibility of the supply chain was critical for the project’s success, because the rate of outsourcing in

Boeing 787 has been increased to a very high level, about 70% of the components, furthermore Boeing

implemented a new outsourcing model, the new model is based on a tiered structure that increased the

complexity of the supply chain and hence increasing the supply chain risk. (Tang and Zimmerman 2009)

Other difficulties arose from the high rate of off-shoring, as it requires a higher degree of communication

to overcome the long distances and language and cultural differences.

Boeing has relied on a computer application to improve its visibility; however, that has failed in part due

to cultural difference as suppliers did not input accurate information and in promptly manner, as a result

Boeing and its tier-1 suppliers did not become aware of the problems of their suppliers and were surprised

when they would encounter delays of the parts from sub-tier suppliers. This made it difficult for tier-1

suppliers and Boeing to respond quickly to delays (Tang and Zimmerman 2009). Boeing’s practice of

11

communication that is largely dependent on computer application is in contrast with Agile practice to

keep all parties have a complete understanding of the situation by continuous face-to-face

communications. As a result Boeing was forced to send hundreds of its engineers to tier-1, 2, or 3

suppliers to fix their problems which proven to be costly on Boeing.

Boeing should have investigated the cultural practices regarding project tracking and reporting of its

multinational supply chain. This would have allowed Boeing to set-up appropriate incentives for all

suppliers to use Exostar and to input accurate and timely information.

Lesson # 8: Improve Tier-1 supplier training and selection process.

When it came down to giving a root cause for the excessive delays experienced on the Dreamliner, a

frequent response was, “a slowing up in the supply chain.” In a project structure that relies heavily on the

capabilities of outside companies for the project’s success, it is important to ensure that those companies

have the capacity to deliver. For Boeing’s multi-tier supply chain to be effective every one of the

approximately 50 Tier-1 suppliers had to deliver a quality and on-time subassembly. In this case,

especially in the early to middle stages of the project this was not the case. When outsourcing such a

complex project, incorrect integration of the subassemblies can provide a great risk.

“In order to minimize these potential problems,” wrote Dr. L. J. Hart-Smith, a Boeing aerospace

engineer, (…) “it is necessary for the prime contractor to provide on-site quality, supplier-

management, and sometimes technical support. If this is not done, the performance of the prime

manufacturer can never exceed the capabilities of the least proficient of the suppliers. These costs

do not vanish merely because the work itself is out-of-sight.”(Denning 2013a)

As mentioned by Dr. Hart-Smith above, the performance of Boeing on the 787 is only as strong as the

weakest link. Yet Boeing selected a handful of Tier-1 strategic partners who were incapable of

performing such a complex and highly technical project. In the case of both Alenia Aeronautica SpA and

Vought Industries Inc., relatively inexperienced plant workers were hired in from the local area to begin

building the most technologically advanced commercial airplane in history (Lunsford 2007). In 2009,

12

Boeing was forced to purchase Vought Industries Inc. after identifying them as a major delay to the

critical path and a problem partner (Ray 2009).

A more in-depth screening and selection process for the Tier-1 companies could have mitigated some of

the damages caused. Evaluating each supplier’s technical capabilities and supply chain management

expertise required more effort than was given. Unknown to Boeing, Vought had little experience in

supply chain management and had outsourced this task to Advanced Integration Technology (Tang and

Zimmerman 2009).

Similarly, the Tier-1 partners did not receive adequate training to perform to the standards expected of

them. After announcing a 3-month delay in 2007, Scott Carson, chief executive of Boeing’s Commercial

Airplanes unit said, “If there's a lesson learned you'd start earlier and do a little more training with our

people there” (Lunsford 2007). Boeing did not plan to provide on-site support for its suppliers; they

actually explicitly delegated this to sub-contractors (Denning 2013a). This backfired and when the

suppliers were unable to perform, Boeing was forced to send hundreds of engineers across the globe to

solve the issues and ensure the suppliers were trained and performing up to standards. This was a very

large expense that should have been included in the original project cost and schedule.

Lesson # 9: Short term financial decisions decrease future earning potential by increasing

competition.

Based on our review of Boeing, the company has failed to satisfy its strategic need to maximize

shareholder profits while maintaining a competitive marketplace advantage. Boeing’s upper management

has strived to increase revenues at the expense of their competitive advantage. This policy demonstrates a

lack of long term strategic thinking, as gains in revenue incurred from the loss of “tribal-knowledge,”

reduces Boeing’s competitive advantage and thus its future earning potential. The Dreamliner project did

not meet both strategic objectives guiding its portfolio project selection criteria.

13

What this report concludes is that externalizing design and development is of value to large aviation firms

not because they are used to reduce costs through efficiency gains, but add value as direct IOs – sharing

Western technological knowhow in exchange for subsidies and sale guarantees from industrialist

governments. This allows large corporations, like Boeing, to become increasingly complacent and

reduces their need to innovate and evolve. An example of Boeing’s complacent behavior can be seen in

the series of innovations that Airbus brought to the LCA market over the past three decades:

Airbus brought to market the first twin-engine LCA (1974) that slashed airlines operating costs

(Fingleton 2005).

Airbus introduced computerized navigation controls or as it is known in the industry “fly-by-wire

(1988)” - Boeing followed in 1994 (Fingleton 2005).

Computer aided drawings was first adopted by Airbus, developed by a French firm Dassault

Systemes. Boeing resisted its adoption – today Dassault Systemes Catia is the dominant software

used in aviation design and is used by Boeing engineers (Fingleton 2005).

In four decades Airbus managed to go from virtually zero market-share 1970 to around 50% today.

Boeings drive to maximize its revenue has hollowed out its human capital developed over years of

experience, through the incremental use of industrial offsets or as Boeing management prefers to refer to

it, outsourcing. Boeing’s competitive advantage and thus its future revenue is in danger of not only

Airbus but now due to its own short sighted practices new national level competitors like Japan, China

and Russia (MacPherson 2009).

It may be too late for Boeing to correct the damages it has done to its manufacturing capability,

engineering knowhow and ability to innovate. A recommendation would be to eliminate direct industrial

offsets and utilize the European approach, indirect offsets. This method provides none technological

concessions to customer nations including exclusive landing rights. Following this approach would allow

Boeing to meet its shareholder obligations both in short and long term revenue generation.

14

Conclusion: Over the years Boeing has lost significant market share in the LCA market to Airbus. To win back its

market share Boeing developed and launched the 787 Dreamliner. The project was a significant

technological leap in LCAs. In order to achieve this leap and minimize developmental risks Boeing

utilized a novel multi-tier supply chain and shared developmental risk with its suppliers. The shift in

supply chain structure was accompanied with a change in the corporation’s core business model,

becoming increasingly a systems integrator. The financial calculations used to rationalize these changes

were based on over simplified metrics, such as RONA, and failed to account for the hidden costs due to

extensive outsourcing and a complex supply chain. Boeing’s management was unprepared and under

qualified to address the major shifts occurring within the company. This led to a series of mistakes

regarding the assessment of overall project risks, supply chain visibility and the selection and training of

suppliers. Issues with the risk sharing contract were also experienced, which led to delays and limited

supplier buy-in into the project. A reason for Boeing’s strategic shift towards outsourcing was to

guarantee sales via IOs. This strategy was found to be short sighted and has inadvertently tooled and

trained tomorrow’s competitors. Boeing will need to continue to compete with Airbus and additional

encroachment from others eager to penetrate the LCA market.

Planned Actual

Development Cost $4.2 Billion $151-182 Billion

Schedule Four years behind schedule.

1 - (Gates 2011)

2 - (Ltd 2013)

In conclusion, Boeing should do a deep outsourcing risk assessment to come up with a balanced approach

between the financial benefits of outsourcing and its negative impacts especially when it is related to core

critical mission business operations. Boeing should take more manufacturing and design responsibilities

in future projects to re-build its human capital. Last but not least, spending more time in assessing and

planning projects can save Boeing from a lot of unplanned and unmanaged situations.

15

References:

Airbus. 2010. “Don’t Let Boeing Close The Door On Competition”. Herdon, Virginia.

Cockburn, Andrew. 2013. “Boeing’s Plastic Planes.” Harper’s Magazine, July.

Denning, Steve. 2013a. “The Boeing Debacle: Seven Lessons Every CEO Must Learn.” Forbes, January.

———. 2013b. “What Went Wrong at Boeing.” Forbes, January.

Department of Commerce, United States of America. 2011. “KEY U . S . AEROSPACE STATISTICS”.

Vol. 3364. Washington, DC.

———. 2013. “KEY U . S . AEROSPACE STATISTICS”. Vol. 3364. Washington, DC.

Fingleton, Eamonn. 2005. “Boeing, Boeing ... Gone.” The American Conservative, January.

Gates, Dominic. 2011. “Boeing Celebrates 787 Delivery as Program’s Costs Top $ 32 Billion.” The

Seattle Times, September 24.

Holmes, Stanley. 2005. “Boeing’s Strike: Go Figure.” Bloomberg Businessweek, September.

Isidore, Chris. 2008. “Boeing Strike Another Hit to Economy.” CNN Money, September.

James, Andrea. 2009. “Boeing ’ s 787 Production Is Mission-controlled.” The Seattle Post-Intelligencer,

April 30.

Ltd, Calleam Consulting. 2013. “Boeing Commercial Aeroplanes.” Why Projects Fail.

Lunsford, J Lynn. 2007. “Boeing, in Embarrassing Setback, Says 787 Dreamliner Will Be Delayed.” The

Wall Street Journal, October 11.

MacPherson, Alan. 2009. “The Emergence of a New International Competitor in the Commercial Aircraft

Sector: The China Syndrome.” Futures 41 (7) (September): 482–489.

MacPherson, Alan; Pritchard, David. 2003. “The International Decentralisation of US Commercial

Aircraft Production.” Futures 35 (3): 221–238.

Mahmoodi, David. 2009. “Outsourcing of the Boeing”. Tucson, Arizona.

Platzer, Michaela D. 2009. “U.S. Aerospace Manufacturing : Industry Overview and Prospects”.

Washington, DC.

Pritchard, By David, and Alan Macpherson. 2004. “Outsourcing US Commercial Aircraft Technology

and Innovation : Implications for the Industry’s Long Term Design and Build Capability.” Canada -

United States Trade Center.

Pritchard, David, and Alan Macpherson. 2004. “Industrial Subsidies and the Politics of World Trade: The

Case of the Boeing 7e7.” The Industrial Geographer 1 (2): 57–73.

16

Ray, Susanna. 2009. “Boeing Agrees to Buy Vought Aircraft 787 Operations.” Bloomberg, July 7.

Tang, Christopher S, and Joshua D Zimmerman. 2009. “Development and Supply Chain Risks : The

Boeing 787 Case.” Supply Chain Forum 10 (2): 74–87.

Telegraph, The. 2013. “Boeing 787 Dreamliner: a Timeline of Problems.” The Telegraph, July 28.

Zimmerman, Joshua, Christopher Tand, and Brian Yeh. 2013. “Boeing’s 787 Dreamliner: A Dream Or A

Nightmare?” Los Angeles, CA: Decisions Operations and Technology Management (DOTM)

Faculty.

17

Appendix:

Table 1: Dreamliner 787 technological features and their benefits to airlines and passengers (Tang and Zimmerman 2009)

18

Figure 1 - Dreamliner major subassemblies with their corresponding Tier-1 suppliers (Tang and Zimmerman 2009)

Figure 2- Traditional Boeing supply chain (Tang and Zimmerman 2009)

Figure 3- Unconventional Dreamliner supply chain (Tang and Zimmerman 2009)