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Boeing’s Billion-dollar Outsourcing Problem 1 Boeing’s Billion-Dollar Outsourcing Problem MGMT 6367 Section number University of Houston – Victoria Name Date 2 Abstract This paper considers an offshore outsourcing problem and how outsourcing may not be a pleasant experience without proper research done in vendor selection. The Boeing Company lost billions of dollars and was years behind schedule because of its outsourcing and vendor decisions. Specifically, this paper delves into the problem itself, and provides suggestions on what the company could have done differently from an operations management perspective. Two methods are suggested: the Strategic Importance and Criticality Matrix to identify the candidate components for outsourcing, and the Factor Rating method in vendor selection. Both methods are explained and applied to Boeings specific issue. Furthermore, an analysis of the application of these methods is made demonstrating how it would benefit the company. 3 Background Information Outsourcing is one of the most debatable issues that many multinational corporations need to consider. There are many pros and cons when it comes to procuring from an external source. The decision to outsource requires careful consideration of risks versus advantages. Not only is outsourcing an ethical issue concerning the parent country, it is also an important operations factor concerning the organization. A business article titled 787 Dreamliner teaches Boeing costly lesson on outsourcing by Michael Hiltzik, published in the LA Times, clearly illustrates what can happen when a company does not invest enough time and research before executing the decision to outsource. Even the most prominent of businesses can make mistakes resulting in devastating repercussions and losses. Boeing is the world’s largest leading manufacturer of commercial jetliners and defense, space and security systems. The aerospace company is divided into two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. It has been a premier commercial jet manufacturer for over 40 years. Boeing also produces military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training. Boeing is a top US exporter and support U.S. and allied government customers in 150 countries (Boeing in Brief, 2012). Their corporate offices are located in Chicago and they employ more than 170,000 people in the United States and 70 other countries worldwide. Problem Description This paper considers an offshore outsourcing problem at Boeing. The cause of the outsourcing failure in the Dreamliner project was the lack of planning and consideration before 4 outsourcing. Because of this, they were billions of dollars over budget and about three years behind schedule. Their new plane model, the Dreamliner, boasted its low fuel consumption, reduced maintenance costs, and greater passenger comfort. It was one of the fastest selling jets ever. Unfortunately, they could not deliver to their customers on time. Boeing wanted to maximize profit by saving money through outsourcing. For their Dreamliner 787 model, they outsourced their components from various countries like Italy, Sweden, China, and South Korea. Even though it may have seemed cheaper to outsource at first, other factors came in to play and proved that outsourcing was more expensive. As stated in the Hiltziks article, Boeings experience shows that it’s a folly to think that every dollar spent on outsourcing means a savings on the finished product. Thirty percent of their 787 models were composed of foreign made content as opposed to a mere five percent for their other models (Hiltzik, 2011) Due to the increasing number of imported parts, their domestic aircraft factory in Seattle, Washington seemed more like an assembly plant rather than a factory. One issue among many that led the operations astray was the fact that Boeing did not provide its blueprints to its contractors and expected them to develop their own. Not only that, these very same contractors in turn hired subcontractors meaning an even further stretch for Boeing to oversee and control what was going on. This made it more difficult to manage and supervise the design and manufacture of its parts. Some of their contractors did not have an engineering department, nor did they have the expertise or experience. This would be a good indicator as to why a lot of the parts did not fit together, and why a lot of the contractors did not meet their quotas. This in turn hindered the 5 entire production schedule. Boeings aviation chief admitted that in hindsight, they spent a lot more money trying to recover from the outsourcing than if they had done everything in-house. One of Boeings contractors, Vought Aircraft Industries was bought out by Boeing eventually because they were in charge of producing parts for the 787 and would be involved in the manufacturing of spare parts for the life of the airliner even though they contributed to many delays for the company. The time and trade secrets provided by Boeing to Vought was the main reason Boeing had to buy out the company. Boeing thought that by outsourcing, they would save money by asking their partners/contractors to make the investments that Boeing should have made. “The company now recognizes that they needed to know how to do every major system on their airplanes more than their suppliers do” (Hiltzik, 2011). Proposed IOM Concepts/Tools There are a few strategies that Boeing could incorporate when considering outsourcing in order to lessen its losses and maximize its profit. As the author of the article stated in regards to outsourcing, “If you don’t think it through, it can wreck your business and cost you a bundle” (Hiltzik, 2011). The analysis of what should be outsourced should be carefully considered utilizing the Strategic Importance and Criticality Matrix as shown below as tool to determine what should be produced in-house or by an outside vendor. 6 There are two dimensions to this matrix that include the strategic value of the part itself, and the criticality of the part to the final product (Dornier, Phillip-Pierre, & Ernst, 1998). The strategic value is the value of the part based on the stand-alone criticality of that part in the market. For example, the wing of the Boeing 787 Dreamliner would be considered to have low value in the market place on its own since it is specific to the jetliner model and serves no purpose by itself. “Some of the broad indicators of strategic value include technological complexity of the part, proprietary nature of the relevant technology, and where the part fits into the products’ life cycle” (Dornier et al., 1998). The criticality of the part to the final product is the second dimension to consider and includes factors such as the percentage value of the part to the final product, and the extent to which the quality and reliability level of the final product depends on the part. In this case, the wing of the 787 Dreamliner model has a high level of criticality to the final product- the airplane. Components are divided into four categories based on the SIC matrix: novelty, proprietary, commodity, and utility. The novelty category includes products that require sophisticated technology but that are not essential to the functioning of the final product. The proprietary category includes products that are the core of the company. According to Doriner et al, commodities include products that have low technology and minimal contribution to the principal functional aspects of the end product. Lastly, utilities are very critical to the final product but are based on low or readily available technology. Because some of the outsourced parts did not fit together, Boeing should have realized the criticality of these parts and decided on a different method for manufacturing. Or in the very least, they should have realized that more supervision would be necessary rather than having subcontractors come up with their own blue prints to this specific product. 7 Once Boeing figures out which parts to outsource and which parts to manufacture in house based on the SIC Matrix, careful consideration should also be taken when evaluating vendors. Factor rating is one of the methods we can use in vendor selection. The first step to take in factor rating is to list the criteria that are critical to the particular outsourcing activity. Next, an importance weight must be assigned to each of the factors. Weights are assigned to the criteria based on importance to the firm. Rate each vendor based on the criteria on a scale. A simple scale from 1-5 with 5 being the most satisfactory can be used. For example, if vendor A has the best price, then they would receive a rating of 5 for price. If they are also trustworthy, they can receive a 5. If their logistics system is poor, they could get a 1 for logistics and so forth. Once all vendors have been rated for each criterion, multiply those ratings by the criteria weight. Then sum those numbers for each vendor. The vendor with the highest score is the best choice. If Boeing had effectively applied the SIC matrix to its outsourcing decision, it would have been clear that outsourcing its major, crucial components to various inexperienced vendors in multiple countries would have been a poor choice. Secondly, after deciding to outsource anyway, they should have used the factor rating method to help find more qualified vendors. Unfortunately, due to poor outsourcing decisions, Boeing ran into many issues with their vendors. Pieces manufactured did not fit together, some could not meet their output quotas, and some didn’t even have an engineering department. Application of IOM Concepts /Tools The Boeing 787 Dreamliner model is no ordinary airplane. With the use of new materials, the Dreamliner 787 uses less fuel, and has lower maintenance than other planes. Kesmodal & Michaels state that it is the first big passenger jet built largely from plastics reinforced by carbon 8 fiber instead of aluminum. With this information, we know that the plane certainly includes unique and specialized parts. Considering the parts that Boeing outsourced during the time of the article, we will apply the SIC matrix to see if it should have been outsourced or