Outsourcing of the Boeing 787

David Mahmoodi

01/31/2009

How much of a service can be outsourced before the benefits stop outweighing the costs? For the first time in the history of the company, Boeing is outsourcing more than 70% of the production of its new aircraft the 787 Dreamliner. This is not just the production or assembly of the plane, but also the specifics of engineering the individual parts. With so many parts being designed and assembled in other countries there have been communication issues, lengthy delays and increased costs. This paper will explore the benefits and costs of outsourcing such a big public project. It will discuss how Boeing or similar companies can better mange outsourced projects or more efficient alternatives to outsourcing them all together.

Copyright 2007-2009, David Mahmoodi. All Rights Reserved. For copyright permissions, contact the author directly or Professor Amar Gupta (gupta@arizona.edu) at The University of Arizona.

Outsourcing of the Boeing 787 Dreamliner

Introduction

Outsourcing has become a major trend in recent years with more and more companies

contracting work out to third parties. This work can be done in the same country by another

company or it can be completed in countries thousands of miles away. The Boeing Company,

aircraft manufacturer, is one example of a company outsourcing. The Boeing Company was not

the first company to outsource work to other countries, but did utilize and profit from the use of

3rd party labor. However, this trend of successful outsourcing would end for Boeing with the

introduction of the Boeing 787 Dreamliner. Boeing has outsourced more than 70% of the design

and production of the plane (Seattle Times). However, there have been many complications that

have led to costly delays and billions of dollars being lost. If Boeing would have done a more

complete analysis of the project and its risks, the magnitude of what was being outsourced might

have been decreased. At the same time, if Boeing could utilize a model, such as the 24 hour

knowledge factory, the Dreamliner project could have been much more efficient and cost

effective.

History of Boeing

The Boeing Company was founded in 1916. They worked in several different areas of

work from commercial airplanes to launch and orbital systems. However, it was not until the

1950’s when the jet aircraft was put into use for the first time that the Boeing Company started to

control the commercial airline market (Harvard Business School). Boeing would go

2

unchallenged for roughly the next fifty-three years. However, during this time the European

company Airbus began to grow. Eventually, Airbus would grow into Boeing’s only competition.

In fact, in 2003 Airbus sold more airplanes than Boeing. Airbus has had more deliveries ever

since (Airbus). Boeing needed something to retake control of the aircraft market. It was clear that

Airbus was taking away from Boeing’s market share. During this time, Airbus introduced five

new designs of aircrafts with Boeing still stuck with their next plane design. This heavy

competition is what drove Boeing to create a new plane that would help them reclaim dominance

of the industry. However, they needed to complete the plane quickly and with minimum cost.

This is what drove Boeing to outsource a higher proportion of the new plane compared to any

model before it.

Primary Reason for Outsourcing

There are several reasons why Boeing would choose to outsource the production of its

new plane. The first is because outsourcing was common practice in the Boeing Company. On

several models, production of parts was outsourced. Different companies would manufacture the

parts and Boeing would assemble them all in a single location. The second reason is the cost

savings. If Boeing can outsource the work, then they do not as many employees in-house. They

can trim labor costs because of the lower labor rates in other countries that are candidates to

outsource work to. The third reason, maybe most important, is the time factor. For example,

Planes are not like automobiles that can be assembled quickly. Planes can take up to years before

it’s cleared to fly while a new automobile is much timelier. In comparison, an automobile has

roughly 15,000-20,000 parts while a plane has over 2,000,000 parts. If Boeing can shorten the

time it takes for the plane to be completed, it can lead to higher profits sooner. The sooner you

3

can introduce the plane, the sooner you can start receiving payments from companies and

outsourcing was a way that Boeing could cut the time needed to finish the project. As Airbus was

taking over the market, time was critical for Boeing.

Secondary Reasons

Researching Boeing’s decision to outsource a significant portion of the Dreamliner leads

to reasons that are beyond just cost savings. One of these reasons is the shrinking employment

pool. Engineers are in demand at Boeing. As of the December 2008, it was employing 12,428

people in its engineering department (Boeing). However, engineers would also be needed in

other departments, such as defense systems and commercial airlines. At the same time, the

supply of engineers in the United States has been shrinking. National Academies reports that

“China adds 600,000 new engineers a year; the US, only 70,000. Even India, with 350,000 new

engineers a year, is outdoing the US” (Christian Science Monitor). With the employment supply

shrinking, Boeing looked to outsourcing as a way of tapping into resources that were needed for

the completion of its 787 project.

The remaining reasons for outsourcing the Dreamliner appear to be more politically

oriented than the other reasons. Boeing has been vulnerable to several engineer strikes over its

history, with multiple strikes occurring over the past fifteen years, “the machinists have walked

out three times since 1995; the engineers went on strike in 2000”(Murphy paragraph 15). As of

January 31st of 2008, Boeing was in negotiations to end an on going strike. The reason for the

numerous strikes is that Boeing cannot come to an agreement with the unions who represent the

engineers. This has led conclusions that one reason Boeing outsourced such a huge portion of the

787 was to combat the unions. John Newhouse from CIO reports that “[T]he outsourcing does

4

send a message to the unions that Boeing deals with. It says: ‘If you mess too hard with us, we

can always outsource your job to another place.’” (Pg 2). The objective might have been to have

the unions back down on their demands if they see there are alternatives to having workers that

are members of the union. This would not generally be a consideration for outsourcing, but

Boeing looked at it as a confirming reason to outsource.

Another political reason for Boeing to outsource was the opportunity to do business in the

different countries. John Newhouse also reports that Boeing made a deal with several of the

countries in East Asia that they contracted to perform work. The deal was that if the countries

agreed to buy aircraft from Boeing, Boeing would send design and manufacturing work to those

countries. From this, it is clear that Boeing had several interests in contracting the work out to

different countries. Not only were the time savings available but also close-to-guaranteed sales

from the governments of the countries performing the work. In a time when Boeing was losing

its dominance in the commercial aircraft, it needed to make alliances if it meant that it would

produce more revenue for the company. This strategic decision could have the potential to

reclaim the market share that Boeing has lost.

The final political reason for Boeing was that they needed to show the public that they

still could compete with other aircraft manufacturers legally. In 2004, the same year the

Dreamliner project was made public, an ex-CFO of Boeing pled guilty to conflict-of-interest

charges. He approved the hiring of a woman who was working with the Air Force as she was

being reviewed for a position at Boeing. She was in charge of the defense contracts at Boeing.

She supervised and approved a no-bid auction that granted Boeing a $23 billion dollar tanker

contract with the government. She also states that she “she said she had committed the Air Force

to buying 100 airplanes from Boeing at an inflated price of about $20 billion as a "parting gift"

5

before her Pentagon retirement.” (Markon paragraph 19). In 1998 a similar situation happened

were Boeing was left out of a contract decision after it was found they had been illegally using

the other competitors software. This left Boeing’s reputation tainted, and by outsourcing the

plane it could compete with its competitors on price in a legal way. Instead of trying to find out

what the competition was going to bid on a contract, or trying to prevent competitors to enter the

bidding wars, Boeing appeared to try to cut costs by outsourcing. They would compete with their

competitors head to head in price and quality and outsourcing was one of the few, if not only,

ways Boeing could accomplish this. Boeing had two goals it needed to achieve with outsourcing

—produce a new plane unlike any other before it and do it the most efficiently possible.

Dreamliner Announcement

The announcement came on April 26, 2004—Boeing would introduce a new line of jet

liners called the 7E7 (later called the 787) Dreamliner. Boeing would invest $6 billion of the

reported $10 billion to develop the Dreamliner. The rest of the investment would come from

partners involved in the creation of the Dreamliner. The plane would then be sold to companies

at a price of $6 billion dollars (Harvard Business School). There were four reasons for why

Boeing believed the 787 would help to overtake Airbus. The first was that it would use 20% less

fuel than planes of similar size. This meant that airlines would have lower fuel costs—making

the 787 more attractive than Airbus. The second was increased cargo space. This means more

items can be taken from one location to the other. The cargo for the 787 was 57% greater than

the Airbus model of similar size (Harvard Business School). The third was a plane that was

friendlier to the environment and polluted less. Finally, the 787 would be built to be much more

6

comfortable for the passengers (wider seats and aisles). (4 Reasons taken from Harvard Business

School).

What is most innovative of the 787 is not the features of the plane but the material in

which it is made up of. Up until the 787, planes were made typically of steel or aluminum.

Boeing decided to change this for the Dreamliner and make it entirely out of composite

materials. Composite material is non-corroding, which means that they last much longer than

aluminum. This means less repair and maintenance cost for the 787 versus similar Airbus

models. Because of the fuel efficiency and lighter material, the 787 would be able to fly much

further by comparison than its predecessors. Boeing reports that it would be able to directly

connect 400 cities that were not served by single flights before (Harvard Business School). This

means people could travel further on the 787 with less layovers or transfers. Boeing had the

vision for the new innovative plane but it still needed to decide on a plan of production.

Change in Outsourcing Process

Boeing has utilized outsourcing several times before the introduction of the 787. Their

process was to outsource their non-core operations and focus on their competitive advantage—

which is design. They have begun to focus more on design and final assembly than the

manufacturing of parts. Because of this, they would outsource manufacturing of parts but keep

design in-house. One description of the process: “Boeing engineers developed the design and the

detailed drawings (often hundreds of pages)…then demanded that their partners build the parts to

exact specifications” (Harvard business School 12). However, this process would change with

the 787, “the innovation, detailed drawings and tooling were now the direct responsibility of the

partner” (12). In the end, the outsourcing of the 787 would be contracted to companies in nine

7

different countries, all with different projects to complete with each company employing their

own engineers (Shown in figure below). Even though America clearly employed the most

engineers for the project, it still outsourced a major part of the design process to the other nine

countries.

8

(Seattle Times)

There was a reason for this change in production process though. Boeing was looking to

car manufacturing giant Toyota to see how a successful production process was operated. It saw

that Toyota would put the design—and risk—of projects onto different partners. This process has

led to Toyota becoming one of the biggest and most profitable cars manufacturers in the world.

Boeing tried to utilize this same method, “Boeing is applying the Toyota Production System

(TPS), which uses lean manufacturing methods such as just-in-time inventory and “continuous”

production” (Cizmeci). However, there were many fundamental differences between the two

production procedures.

TPS (Toyota Production System)

These same differences between Boeing and Toyota can be seen in the recent battle

between Toyota and GM over the lithium battery industry. Both companies recognized the need

9

for alternate ways of transportation. One of these alternatives is to install lithium-ion batteries

into cars. Toyota would take its typical TPS approach while GM would take the approach similar

to what Boeing did with the 787. GM’s process was to take bids from companies on who can

develop and produce the battery. Eventually, it decided on two independent companies. GM

would contract them and buy the batteries directly from the two companies (RP news). Toyota

took a very different approach than GM. Toyota would go on to invest $740 million dollars in a

battery developer. Also, they increased their share from 40% to 60% in a second independent

battery company. (Hybrid Cars). At the same time, it was reported that Toyota would “establish a

department initially comprising 50 engineers…to develop next-generation batteries that would

outperform lithium-ion batteries.” (Reuters). This shows the fundamental difference between the

two processes of outsourcing. Toyota realizes that the knowledge of hybrid batteries can be a

competitive advantage. Because of this, they are trying to make it a core component of the firm.

They want to keep the knowledge of battery creation within Toyota. GM outsourced everything

concerning the lithium-ion battery. They are not directly working with the companies who they

gave the contracts to. They will not receive the knowledge, only the final product. This means

that if Toyota can research and produce better batteries, they can exploit the advantage over GM

in the form of higher profit margins in a market that Toyota already dominates. Boeing’s

approach to the 787 is very similar to that of GM in the lithium-ion battery industry. It gave

companies contracts to finish the projects that Boeing would assign. Boeing would not work with

the companies as much as they should. It would receive the final product and assemble it in

Washington. Instead of receiving the knowledge of the other companies, like Toyota did, they

used them just to finish the work on the project.

10

Risks of Outsourcing 787

There was also another reason why the outsourcing of the 787 was not as successful as

expected. Boeing outsourced its main competitive advantage. Boeing had always been ahead of

the industry in terms of designing. It had “superior knowledge” (Harvard Business School 13), in

the art of designing aircraft. In outsourcing this aspect to different companies, it was taking

several risks. The first was that the work produced by third party companies might not meet the

strict standards that Boeing has created over the past one hundred years. If a part was not

manufactured to that standard, either Boeing would make the company correct the problem or it

would have to manufacture the part itself. Either option would result in money and time being

lost. Besides this, the company’s image may become tarnished because of using parts that

normally would not be up to Boeing’s standard. An example of this would be the recent BMW

recall. BMW had to recall several thousand vehicles. However, it was not due to a BMW part

being faulty but a supplier that BMW used. BMW had used Bosch fuel-pumps in their vehicles.

After cars had been sold with the parts installed, BMW discovered that the part was leading to

engines stalling. Even though it was not BMW’s direct fault, they still had to perform the recall.

Consequentially, this led to BMW’s image becoming tarnished. BMW’s reputation was built on

the quality of the cars they manufactured and when they have to recall several models it can be

detrimental to their public image. This could be one of the risks that Boeing would face if they

used parts from suppliers that were not up to Boeing’s standard.

A similar situation happened with the Italian company Boeing used to be in charge of the

fuselage. They ran into several month delays delivering the fuselage. This delay made the rest of

the project slow down as well. The reason for this delay was because the company had never

been contracted to build a fuselage as big as the one needed for the 787. In October of 2007,

11

Boeing delayed the 787 by six months. It is reported that this six month delay cost the company

over $1 billion, with $200 million coming from penalty payments. This means that every order

that is delivered late has to be paid a late fee by Boeing (Seattle Times). In fact, when Boeing

received the first batch of parts to begin the assembly of the Dreamliner, it found that “when

mechanics opened boxes and crates accompanying the fuselage sections, they found them filled

with thousands of brackets, clips, wires and other items that already should have been installed.”

(Tulsa World). The production was not up to Boeing’s standard.

The second risk, and maybe most important, was that it was giving away its competitive

advantage to other companies. It has been reported that both China and Japan wanted to

strengthen their aircraft industry (Harvard Business School). With Boeing outsourcing design to

these two countries, it could lead to even more competition for Boeing. If China and Japan could

take what they learn from Boeing and apply it themselves, they might be able to create a plane

that competes directly with Boeing. Dave Demerjian from Autopia reported that “the Chinese

government has officially approved the launch of China Commercial Aircrafts, which will

manufacture large passenger planes. The plan is to have jets designed and built in China rolling

off an assembly line by 2020”. (paragraph 1). This is an effect of outsourcing that SPEEA says

happens because “In an out-sourcing environment, the supplier enjoys all potential learning

curve benefits and the integrator pursues the supplier for cost concessions.” (Sorscher 5). One of

the reasons Boeing outsourced was to compete with Airbus but indirectly it might have created

even more competition for itself.

Another major risk of outsourcing is the cost that would be incurred to transfer the work

back from the contracted country. This cost would be associated with hiring, training and paying

employees to do the work that was meant to be contracted out. This would also include

12

additional costs, such as materials and equipment that otherwise would be supplied by the

contracted company. These costs would vary according to the job, but it would be higher than

average for the jobs Boeing outsourced. This is due to the fact that employees who work on

manufacturing commercial aircraft have a very high learning curve. This means if they do not

work for an extended period, they cannot just come back to the factory and start were they left

off on the job. This is shown in the figure below, which illustrates how high costs of labor in the

aircraft industry. BP was used instead of the name of the original company, however, it is one of

the largest companies in the United States.(SPEEA)

13

It is clear that the highest costs incurred are during strikes, or when the model on which

the employees working on changes. Even though this graph is from the years of 1974 to 91, it is

still relevant in terms of costs of strikes or model changes are proportionally very high for the

company. If Boeing had to bring back the design of the 787 to the United States, a model that the

team has not worked with extensively and very different from previous models, the costs would

be very high. To produce one model, the learning curve is very high at the beginning and levels

out as corrections are made and the workers begin to create a routine to build the airplanes. This

is shown in the figure below. (SPEEA)

The graph shows the number of hours needed to complete a certain number of models of

an airplane per year. This graph is for the Lockheed’s L-1011. What this shows is that at the

beginning the labor requirement is very large. After the routine is established, the output per year

14

achieves capacity and the amount of labor is at its minimum. However, this does not happen until

approximately 70 units are built. This means that if Boeing had to bring the 787 project back to

in-house their labor costs would be extremely high. This would drive the price of the plane up,

giving an advantage to competitors like Airbus.

Risk Assessment

Boeing could have prevented these consequences from taking place if they had preformed

a risk analysis of outsourcing. Ravi Aron and Jitendra Singh wrote a procedure that companies

can use to decide what activities and the form in which they should be outsourced. To perform

this study, the company needs to identify two different risks—operational and structural.

Operational risk is risk derived from the perception that many third party companies will not

perform the work as well as the in-house employees. They report that there are two causes of

operational risk. The first is that companies cannot “codify work” (4). This means that

companies cannot easily write a set of procedures or steps that the third party should follow to

complete the work outsourced to them. The second cause is that companies have no real way of

measuring the quality of the work being done by the outsourced company. A company needs to

assess both of these aspects to calculate the overall operational risk. An example of operational

risk would be the failure of the Mars Climate Orbiter (MCO). The MCO was supposed to be the

first weather satellite to leave the atmosphere of earth. It was launched on December 11, 1998

and was lost soon thereafter. After several investigations, the official reason why the MCO failed

was because of “the failure to use metric units in the coding of a ground software file, ‘Small

Forces,’ used in trajectory models.(Mishap Investigation Board). Instead of it being in the metric

unit of Newton-second it was coded in the English unit of pounds-second. This is what led the

15

MCO to lose course and be lost forever. There was a problem with delivering the specifications

to the person who coded the software. If the specifications where clearly defined—the MCO

might not have been lost.

Boeing has also had to deal with the problems created by operational risk. One of the

projects that Boeing outsourced was the production of the fasteners that helps to keep the

fuselage attached to the plane. Boeing estimates that they will need to replace up to 8,000

fasteners—further delaying the delivery of the 787. Initially, Boeing blamed their suppliers for

producing fasteners that where not of specified quality. However, latter investigation found the

source not to be the suppliers—but Boeing itself. Joy Romero, V.P of Vought’s 787 program

explains that “[he doesn’t] think it should be pushed on the inexperience of the mechanics. It's

more about the clarity of the specifications and the confusion of the specifications.” (Smock

paragraph 5). These specifications where written by Boeing’s own staff. This is another clear

example of operational risk. Boeing did not properly codify their work. Even though this is not a

direct consequence of outsourcing to other countries, it is still a valid example. If the

specifications were too difficult to codify, Boeing should not have just sent the project out to its

assemblers without communication. Because they did not have this communication, and left the

specifications unclear, they lost millions of more dollars in profit. This is a risk Boeing took in

outsourcing complicated projects without direct communications. Stan Sorscher from SPEEA,

the union who represents engineers in the aircraft assembly industry reports that “If we intend to

translate that core competency to an outsourced business environment, then we should

understand how to cultivate and manage the new set of skills, knowledge and experience needed

in the new environment.”(4). What this means is that Boeing should have better estimated the

skills needed to outsource such a major aspect of the 787. Boeing did not change their managing

16

practices after they began outsourcing. They needed to mange to project better. They needed to

codify their work, and transfer it to the countries performing the work. Because they did not

adapt to the new environment, they began to lose money due to dealays. However, Aron and

Singh developed a procedure to determine the exact operational risk.

To determine how high the operational risk is for a project, the authors developed a

matrix where you rate how easy it is to codify the work and how objective or subjective it is to

measure the work being done. Obviously, it is nearly impossible to write a manual on how to

design a plane. Several people could each have a different method of design and each could work

equally well. This means that Boeing would rate codifying the work being done as difficult. The

second aspect is how subjective it is to measure the work being done. Because it is design, it is

very subjective to measure the work because of the reasons stated above. This means measuring

the work is also very difficult. This gives Boeing an operational risk of “Highest Risk” (Aron

and Singh pg. 5).

The second risk that needs to be analyzed is structural risk. Structural risk is the risk that

the outsourcing of the work will fail. The main strategy to keep structural risk down is to have a

strong monitoring service in place. Boeing has also seen the consequences of not taking more

preventative measures to combat structural risk. Boeing outsourced the production of the wing

box to Mitsubishi Heavy Industries, based in Japan. A wing box is what keeps the plane’s wings

in place and prevents them from breaking during up thrusts. When Boeing received the

completed wing box from Mitsubishi, it found a huge problem with the production. A Boeing

spokesperson explains that “[Mitsubishi Heavy Industries] shaved off too much weight so we did

not have the strength…the problem was found in testing.” (Dodge paragraph 4). Following this,

Boeing had to temporally correct the problem on the first six Dreamliners already in assembly.

17

The seventh Dreamliner will receive the permanent fix. This problem could have been prevented

if Boeing had better monitoring procedures in place. Boeing did not have direct communication,

but just assumed that their suppliers would design and produce parts that would be up to

Boeing’s quality standards. If Boeing would have watched the work that was being done more

closely, they might have been able to prevent the wing box problem. Because they did not,

Boeing is losing more money due to delays in deliver dates.

Another example of structural risk is when Boeing received the nose/cockpit and forward

fuselage. Both parts were designed and manufactured in different locations, Wichita and Japan.

When both parts arrived, they were given to assemblers to connect the parts together. However,

what they found was that “a bulge of more than an inch and a half was discovered” when the

sections were lined up. (Wallace paragraph 5). Again, Boeing trusted that these two companies

could produce parts that not only were functional but compatible with each other. However,

because the two companies did not have communication with each other and their

communication with Boeing was limited, there was no monitoring over the production process.

If the two companies could have discussed the specifications, or even discussed them with

Boeing, during the design and production phase, the problem might have been discovered much

sooner. However, because the communication was very limited, Boeing was not able to discover

the problem until the time when the plane was supposed to go through final assembly. In the case

of the Italian company who ran into delays building the fuselage, Boeing had to buy a 50% stake

in the company. They had to do this because they were already dependent on the company to

deliver the fuselage. Boeing could not end the partnership and begin building it themselves

because the delays would be too costly. Instead, they bought a majority share of the company to

correct the problems that led to money being lost.

18

Like operational risk, structural risk can be determined from two aspects. The first is

ability to monitor work and the second is ability to measure the work being done (same as

operational risk). From the first assessment, Boeing had a difficult time measuring the design of

a plane from a third party. The ability to monitor the design of a plane is also difficult because it

is extremely hard setting up measures to rate the progress of a company. This means the ability

for Boeing to monitor design is very difficult. With both aspects being rated as difficult, Boeing

receives a structural risk of “Highest Risk” (6). To rate the overall risk of outsourcing, a third

matrix was created with the two aspects being the operational and structural risk. Because

Boeing received high on both risks, the matrix recommends that the service not be outsourced

but kept in-house. Even if you took both risks down to moderate instead of high, Boeing could

outsource but would need to closely monitor the work being contracted out—which has been

shown to be very difficult (Matrixes taken from Aron and Singh). If Boeing would have used this

risk assessment technique, they might have not outsourced as much of the design of the plane as

they did. It could have saved a lot of money that was spent due to delays.

24 Hour Knowledge Factory

Even if Boeing decided to outsource the design of the plane after the risk assessment,

there are models it could have implemented to aid in making the process more efficient. This

model is referred to as the 24 Hour Knowledge Factory. The theory behind this model is that a

company will outsource work to different countries, but that each is in time zones roughly eight

hours apart. This means that when one country is done working on a part of the project, the next

country is just waking up and ready to continue work on the project. This means that work is

constantly being done—24 hours a day (Gupta). This model has many advantages that Boeing

19

could have utilized. The first is the time savings. Working 24 hours a day can help to complete

the project much quicker than if the project was done in-house or outsourced to one country

completely. This indirectly leads to the second advantage which is cost savings. Less time being

spent on the project and using third party labor can lead to reduced costs for the company.

However, within this 24 Hour Knowledge Factory model there can be several “hybrid” models

that can be used to complete the work. For example, instead of work being completed by each

party, one party can complete the work and send it off to the second country for testing. When

the first country arrives to work in the morning, they will already have the test results and can

modify the product accordingly. This gives more control to the first country but still utilize the

opportunities of outsourcing. This relates back to the core competency of the organization. If a

company decides not to outsource certain projects because they are crucial to the survival of the

organization, they can still benefit from outsourcing. An example of this would be a software

programmer. One problem with programming software is that once a person begins the process,

it is very difficult for that person to stop and transfer for it to another person to resume work on

it. This would appear to be a situation were outsourcing would not be of much use to the

company. However, with the hybrid model of the 24 hour knowledge factory, benefits can still

be achieved. The programmer would write the code, and at the end of the working day would

send it to the contracted country. That company could then test the code for any bugs or

problems. If any problems are found, they can be sent back to the programmer’s country. The

programmer could fix any problems that were found by the second country. This could save time

because the programmer would not need to have test the software himself. It would also save

time because he would not need to wait for the software to be tested, which generally occurs

during the same time the programmer could be working on finishing the software. With these

20

hybrid models, companies could benefit from outsourcing even if they are in industries that

would not be considered for outsourcing.

Boeing and the 24 Hour Knowledge Factory

Boeing could have implemented the 24 Hour Knowledge Factory in the production of the

787. However, it would need to implement one of the “hybrid” models. It would have been

difficult for engineers in America to start designing a part for the 787, stop in the middle and

send it off to someone in Japan to finish the design. The reason for this is because designing of a

plane is very objective. There is not one way to do it, the engineer in America might design

differently than the engineer in Japan. At the same time, Boeing should not continue to outsource

the entire design to other countries because of the costly delays that it has endured. However, it

could implement a hybrid model of the Knowledge Factory. An American can design the part

entirely but then send the production and testing of the part to another country. When the

American engineer returns to work the next day, he will have the results of the test and

prototype. He can then modify the design or product according to the results. However, this also

raises difficulties for Boeing because of the magnitude of the project. Certain parts of the plane

cannot be transported easily from country to country to ensure it was manufactured correctly. For

example, the fuselage cannot be easily transported from Italy to America so that engineers can

check the work. To correct this problem, Boeing would need to hire of team of supervisors to

monitor all work that cannot be transported easily. A team of supervisors can stay in Italy, and

make sure the work is being done according to the design done by American engineers. If they

find a problem with the process, they can fix it immediately on site. If they find a problem with

the design of the part, they can send it back to America to be corrected. The engineer in America

21

can fix the design quickly and send it back so that work can continue. The 24 Hour Knowledge

Factory can still be used in this case because work would still be done constantly but with

America in control of the entire project. At the same time, Boeing would benefit from the cost

and time savings but would not have to outsource its competitive advantage—design. The

concept of the 24 hour knowledge factory is to have work being done constantly. This can still

apply to Boeing because they would be in different time zones. If one party finds a problem, they

can send it to the second party to have it corrected. This can all happen without time being lost—

the main advantage of having parts of projects done in different time zones.

Conclusion

At one of its most crucial times, Boeing introduced a new plane that would aid in taking

back its market share. At the same time, it tried a brand new process of outsourcing. They

outsourced all aspects of the new 787 Dreamliner—including their competitive advantage of

design. As discussed in this paper, the risks were too great for Boeing and it is now spending

billions of dollars due to delays. The risk assessment could have helped to prevent several of

these delays, and saved billions of dollars. Boeing could have then implemented a model to help

make the process more efficient in the 24 Hour Knowledge Factory. As more and more

companies begin to use this model, including its competition, it will become critical that Boeing

learn the right way to outsource the production of its aircraft—or stop it all together.

After the long delays that were incurred with outsourcing the 787, it appears that Boeing

will be doing less design outsourcing. Michael Denton, who is vice president of engineering and

is technical executive “said changes were in the works…We will probably do more of the design

and even some of the major production for the next airplane ourselves as opposed to having it all

22

out with the partners," (Weber 2). Weber, from Business Week, also reports that Boeing might

be considering a “dual” process for any future projects. He explains that both Boeing and its

suppliers would work together to manufacture future models. This would be very similar to the

proposed 24 hour knowledge factory solution. Boeing is also reducing the amount of jobs they

would contract out to third parties, in a recent deal with the unions “the contract also limits

outsourcing. The IAM says that it recaptured the scope of work that was lost in the 2002

contract.” (Hoop paragraph 4). It appears that Boeing will keep most of the current staff instead

of contracting them out. The staff can produce many of the designs that are needed for future

production and send it off to other companies to manufacture them. In this way, if Boeing could

utilize the hybrid 24 hour knowledge factory, they might be able to cut costs—and deliver a

plane with high quality that Boeing prides itself on. Even though it cost Boeing millions of

dollars, it appears that they learned that while outsourcing can be very effective it is still a

difficult process to master. However, with the implementation of the 24 hour knowledge factory

and better management practices, Boeing will be able to achieve the benefits of outsourcing that

they did not get from the 787 project.

23

References

1. Aron, Riva and Jitendra V. Singh. “Getting Offshoring Right”. Harvard Business Review.

December 2005.

2. Amend, James. “Battery Deal May Give GM Jump on Toyota in Next-Gen Hybrids”.

WardsAuto. August 9, 2007. Retrieved Oct 27, 2008

3. Cizmeci, Daglar. “Is Boeing’s 787 the New Camery?”. Harvard Business School. 2005.

4. Clayton, Mark. “Does the US face an engineering gap?”. December 20, 2005.

Retrieved: January 29, 2009

5. Demerjian, Dave. “China to Compete With Boeing, Airbus in Passenger-Jet Game” April 2

2008. Retrieved: January 29,2009

<http://blog.wired.com/cars/2008/04/china-gets-into.html>

6. Dodge, John. “Boeing Stiffens 787 Wing Box Spars: More Schedule Delays Possible” Design

Design News. March 21, 2008. Retrieved: December 19, 2008

http://www.designnews.com/article/8571-

Boeing_Stiffens_787_Wing_Box_Spars_More_Schedule_Delays_Possible.php

7. Gates, Dominic. “Boeing 787: Parts from around world will be swiftly integrated”. The

Seattle Times. September 11, 2005. Retrieved Oct 27, 2008

http://seattletimes.nwsource.com/html/businesstechnology/2002486348_787global11.htm

l

8. Gates, Dominic. “Another big delay for Boeing’s 787”. The Seattle Times. January 16,2008.

Retrieved Oct 27, 2008

http://seattletimes.nwsource.com/html/boeingaerospace/2004127686_boeing16.html

24

9. Gupta, Amar. “Outsourcing and Offshoring of Professional Services”. Information Science

Reference. Hershey, Pa. 2008.

10. Hoop, Darrn. “Did strikers win at Boeing?”. October 31, 2008. Retrieved: January 29,2008

<http://socialistworker.org/2008/10/31/did-strikers-win-boeing>

11. Kim, Chang-Ran. “Toyota to Start Lithium-Ion Battery output in 2009”. Reuters. June 11,

2008. Retrieved Oct 27, 2008

12. Lunsford, Lynn. “Globally Outsourced 787 Now Mess for Boeing Co.”. Tulsa World.

December 8, 2007. Retrieved Oct 27, 2008

http://www.tulsaworld.com/business/article.aspx?articleID=071208_5_E1_spanc30513

13. Markon, Jerry. “Ex-Boeing CFO Pleads Guilty in Druyun Case”. November 16, 2004

Retrieved: January 29,2008.

<http://www.washingtonpost.com/wp-dyn/articles/A51778-2004Nov15.html>

14. Mecham, Michael. “Boeing Buys Vought Share of Fuselage Builder”. Aviationweek.com.

March 28, 2008. Retrieved December 19, 2008

15. Newhouse, Jim. “Boeing Versus Airbus: Flight Risk, Outsourcing Challenges”

Retrieved: January 29, 2008

<http://www.cio.com/article/29096/Boeing_Versus_Airbus_Flight_Risk_Outsourcing_C

hallenges_?page=2>

16. Smock, Doug. “New Fastener Glitches Slow the Dreamliner Again”. Design News.

Retrieved: December 19, 2008

http://www.designnews.com/article/160514-

New_Fastener_Glitches_Slow_the_Dreamliner_Again.php

17. Sorscher, Stan. “Challenge in Aerospace Leadership”. SPEEA

25

Retrieved: January 29,2009

<http://www.speea.org/new_temp_items/SPEEA_Challenge_in_Aerospace

_Leadership.pdf>

18. Wallace, James. “James Wallace on Aerospace”. Seattlepi.com. Retrieved: December 19,

2008

http://blog.seattlepi.nwsource.com/aerospace/archives/116545.asp

19. Weber, Joseph. “Boeing to Rein in Dreamliner Outsourcing”. January 16, 2009.

Retrieved: January 29,2009-01-30

<http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090116_971202.h

tm>

20. Harvard Business School. “Boeing 787: The Dreamliner”. June 21, 2005.

21. “BMW to recall faulty diesel cars”. BBC. Retrieved: December 19, 2008

http://news.bbc.co.uk/1/hi/business/4227159.stm

22. “Boeing’s Outsourcing for the 787 Dreamliner”. Seeking Alpha. September 29,2006.

http://seekingalpha.com/article/17727-boeing-s-outsourcing-for-the-787-Dreamliner

23. “GM awards lithium-ion battery development contracts”. ReliablePlant. Retrieved Oct 27

2008.

24. “Lithium Ion Hybrid Batteries”. HybridCars. April 8, 2006. Retrieved Oct 27, 2008

26