The introduction of the Boeing Company’s (NYSE:BA) 787 Dreamliners serves as an important milestone in commercial aviation, with the implementation of a global outsourcing supply chain network. This outsourcing strategy was unprecedented in the aviation industry at the time and raised eyebrows when announced. We conducted research to determine why Boeing upheaved its previous manufacturing process and the results that followed. In the following case study, we dive into Boeing’s outsourcing, risk identification and mitigation considerations.

Boeing: From Never Outsourcing to Global Outsourcing

On January 29, 2003, Boeing introduced its 787 Dreamliner aircraft concept to the world, marking an important milestone for Boeing and for commercial aviation. The 787 production represented a whole new global supply chain and international outsourcing process. The entire industry was shocked as Boeing had always relied on its internal manufacturing capabilities and had been on record vowing to never give up its wing production.

Turning to the World for the 787:

Why the Change?

Boeing’s management team decided to outsource globally after several supply chain roadblocks. One of the issues experienced was the inability to forecast the supply of aerospace fasteners due to an industry wide shortage and the cyclical demand (Boeing predicted in 2007 that there would be a shortage of fasteners until 2012, which it was able to resolve eventually with better inventory management processes). In addition, management realized the entire supply chain process could be simplified. Boeing changed its supply change network to a tiered system to deal with less suppliers directly, closely resembling the automotive manufacturing sector’s:

Pre-Dreamliner Supply Chain:

Dreamliner Supply Chain:

Management was also concerned with the financial risks associated with the 787s. By sourcing parts from various locations worldwide, Boeing believed that they would be able to convince the flag carrier airlines of these countries to purchase the new 787s. Boeing also envisioned the possibility of spreading the financial risks of development to its global suppliers while keeping manufacturing and assembling costs low.

Differences in Supplier Strategy:

What Worked for Boeing?

By implementing these unprecedented changes, Boeing was able to assemble its 787s within shorter cycle times. Final assembly went from 30 days down to three. Boeing was able to refocus its efforts on relationships with tier 1 strategic partners instead of dealing with raw material sourcing and early component sub-assembly. The company also understood the importance of vendor communication and developed a web-based tool called Exostar to increase supply chain visibility, improve vendor control and enhance the integration of critical processes.

Boeing also introduced risk-sharing contracts, where no supplier would receive payment until the first 787 was delivered to Boeing’s customers. This clause was meant to incentivize Boeing’s suppliers to meet Boeing’s deadlines. Despite being exposed to more financial risk, suppliers generally accepted the clause as Boeing allowed its suppliers to own the related intellectual property.

To gain better control over its supply chain and quality, Boeing stationed employees at supplier factories that were tasked to oversee production activities and to communicate progress to management. Boeing’s employees acted as external consultants to the suppliers to rationalize processes and redraw areas of responsibility to improve overall efficiency.

Hurdles Along the Way

Boeing’s 787 manufacturing process involved dramatic shifts in its conventional supply chain strategy, as well as certain obstacles encountered during the transformation. For instance, the risk sharing contracts ended up backfiring as a few suppliers recognized the potential of being penalized unfairly despite completing their parts on time due to delays by other suppliers. The table below summarizes other key challenges encountered and how Boeing handled these:

Conclusion

Switching from traditional manufacturing and supply chain methods requires continuous commitment, communication and perseverance from all parties involved in the business. Boeing succeeded in navigating through this transformational change and reaping the benefits of the overall success in 787 sales and consequently, its share price appreciation. The 787s serve as a prime example where outsourcing is beneficial for companies with various sub-components in their final product. By outsourcing certain components of one’s manufacturing process, a company can better focus on its core expertise and customer service in the long term.