Boeing 787 DreamlinerEarlier this week, Boeing (BA) announced yet another -- now the seventh -- delay in the delivery schedule for its first 787 Dreamliner, pushing its initial delivery back at least three years later than originally planned. These delays raise important questions for a management practice that has been around for decades: outsourcing.

Specifically, did Boeing outsource too much of the Dreamliner's components to other companies in other countries? Will the 787's outsourcing problems persist? And what might this mean for airlines, passengers and investors in Boeing stock? The short answers are: yes, probably, and it's too early to tell.

The latest announced delay came as no surprise after a 787 test flight in Laredo, Texas, suffered an electrical fire in November 2010. Boeing now plans to deliver its first aircraft in the third quarter of 2011 -- six months later than the previous expected date. The airline that's supposed to get that first 787, Japan's ANA, says it's glad to learn of the new schedule and is adjusting by keeping its old aircraft going longer than planned.

Both Design and Manufacturing Left Boeing

Boeing claims that the latest delay won't have any financial implications for the 865-order, $139 billion backlog for the 250- to 330-seat aircraft. However, it's worth pointing out that at $12 billion, the cost of developing the 787 is now 120% higher than Boeing's original budget.

The causes of many of the delays (one was due to a strike) can be traced back to two problems I described in my 2008 book, You Can't Order Change. The first is that Boeing decided to outsource both the design and the manufacturing of the 787 to shift the economic risk onto those suppliers. With its previous aircraft, Boeing had outsourced only the manufacturing and maintained tight control over the design -- providing those suppliers with extremely detailed specifications of what each aircraft component should do. But by outsourcing both the design and the manufacturing, Boeing lost control of the development process.

The second problem Boeing encountered with the 787 was that it had never before built an aircraft with composite materials. It had previously used aluminum -- whose behavior in the real world is much better understood. Unfortunately, due to a lack of experience with composite materials, the software that engineers used to predict how the aircraft would behave did a poor job. And this contributed to problems like skin wrinkling on the aircraft's surface.

It "Outran Our Ability to Manage"

Boeing has been struggling with these problems for years, but to its credit it has finally acknowledged them. An in-depth Jan. 20 report from Reuters quotes a Boeing statement: "We made too many changes at the same time -- new technology, new design tools and a change in the supply chain -- and thus outran our ability to manage it effectively for a period of time."

Boeing claims that it has learned tremendously from its errors, but it will continue outsourcing in the future. One step it has already taken, in 2009, was to "in-source" some of the work that it had previously shifted to a supplier that made big chunks of the 787 airframe. In July 2009, Boeing acquired two plants that make those parts from supplier Vought Aircraft Industries.

But after so many delays and promises, it's amazing that investors continue to derive any sense of comfort from Boeing's new deadlines (the stock rose nearly $2, to $72.47, on Jan. 18 after Boeing announced the latest delay). I just hope the Federal Aviation Administration, which must certify the 787 for flight and remains concerned about Boeing's ability to resolve the problems with the 787, will make sure it applies very strict tests before it lets passengers fly aboard a Dreamliner.

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jkennedy806

I have been on both sides of this fence, I have been a real employee and a contractor and let me tell you. It is less expensive to hire a temp or outsource, however, the company has no control -- the temp can walk, and your project is already doomed to be late on time schedules. Outsourcing and that JUST IN TIME (JIT) inventory -- is killing production all over the world. Yes, it will effect the bottom line. And the impact can be devestating. If you keep promising results and a date and do not deliver. The sale could be scrapped.

January 24 2011 at 11:52 AM Report abuse +1 rate up rate down Reply
Larry

Out soursing has been a real draw back on getting aircraft built properly for years, Boeing just does not learn.

January 24 2011 at 7:32 AM Report abuse +4 rate up rate down Reply
burnstagger

Companies ruined or almost ruined by foreign labor

Adaptec - Indian CEO Subramanian Sundaresh fired.

AIG (signed outsourcing deal in 2007 in Europe with Accenture Indian frauds, collapsed in 2009)

AirBus (Qantas plane plunged 650 feet injuring passengers when its computer system written by India disengaged the auto-pilot).

Apple - R&D CLOSED in India in 2006.

Australia's National Australia Bank (Outsourced jobs to India in 2007, nationwide ATM and account failure in late 2010).

Bell Labs (Arun Netravalli took over, closed, turned into a shopping mall)

Boeing Dreamliner ES software (written by HCL, banned by FAA)

Bristol-Myers-Squibb (Trade Secrets and documents stolen in U.S. by Indian national guest worker)

Caymas - Startup run by Indian CEO, French director of dev, Chinese tech lead. Closed after 5 years of ******* VC out of America.

ComAir crew system run by 100% Indian IT workers caused the 12/25/05 U.S. airport shutdown when they used a short int instead of a long int

Dell - call center (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)

Delta call centers (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)

Fannie Mae- Hired large numbers of Indians, had to be bailed out. Indian logic bomb creator found guilty.

GM - Was booming in 2006, signed $300 million outsourcing deal with Wipro that same year, went bankrupt 3 years later

HSBC ATMs (software taken over by Indians, failed in 2006)

Intel Whitefield processor project (cancelled, Indian staff canned)

Lehman (Spectramind software bought by Wipro, ruined, trashed by Indian programmers)

Microsoft - Employs over 35,000 H-1Bs. Stock used to be $100. Today it's lucky to be over $25. Not to mention that Vista thing.

Microsoft - Lian Yang, Microsoft-Contracted Engineer, Arrested in Smuggling Plot After Another FBI Sting in Portland in 2010

MIT Media Lab Asia (canceled)

PeopleSoft (Taken over by Indians in 2000, collapsed).

Polycom - Former senior executive Sunil Bhalla charged with insider trading.

Qantas - See AirBus above

Quark (Alukah Kamar CEO, fired, lost 60% of its customers to Adobe because Indian-written QuarkExpress 6 was a failure)

Rolls Royce (Sent aircraft engine work to India in 2006, engines delayed for Boeing 787, and failed on at least 2 Quantas planes in 2010, cost Rolls $500m).

Skype (Madhu Yarlagadda fired)

State of Indiana $867 billion FAILED IBM project, IBM being sued

State of Texas failed IBM project.

Sun Micro (Taken over by Indian and Chinese workers in 2001, collapsed, has to be sold off to Oracle).

United - call center (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)

Virgin Atlantic (software written in India caused cloud IT failure)

World Bank (Indian fraudsters BANNED for 3 years because they stole data).

I could post the whole list here but I don't want to crash any servers.

January 24 2011 at 2:36 AM Report abuse +3 rate up rate down Reply
James

As A Long Time Boeing Shareholder,
As far as Dreamliner delays go, what did we expect fom Boeing gone amok ?
Face it, Boeing today is not the Boeing of yesterday, for many reasons.
Sadly, it's not the Company we believed in, invested in.
Far worse than Shareholder shortchanging, it was a Betrayal of American Confidence, ala Enron, et al. Another victim of personal aggrandisement, at the expense of others.
Board room decisions based on bedroom dalliances, should never have been permitted. Stonecipher-Druyon was the tip of the iceberg. The Board was derelict in it's oversight, duties. It's all too embarrasing, no one wants to go there....
But we, the Shareholders, and America, allowed this to happen. I am to blame too.
Corporations, their employees, shareholders held hostage to personal alliances.
Shameful. Don't even ask why the Corporate move to Chicago a few years ago.
Disgraceful. A story in itself, no one wants to breach.
Lets hope the Deamliner 787 will someday come on line, without fatique crown line forward fuselage issues like 757, 737 models that have been regularly showing up recently. At least Rolls-Royce can deal with powerplant concerns.
All of this does not inspire Confidence.
I always welcome alternative viewpoints, and opinions like mine.

January 23 2011 at 5:18 PM Report abuse +3 rate up rate down Reply
1 reply to James's comment
burnstagger

I suggest you put your $ in Apple instead - they stillemploy mostly Americans and they are booming. Everyone else who decided to outsource is going belly up.

You get what you pay for America.

January 24 2011 at 2:37 AM Report abuse +5 rate up rate down Reply
n6fb

As retired President of a company who designed and supplied critical electrical systems and flight control subsystems to Boeing for many years, I have watched with concern the many errors they made in the original strategies associated with development of the 787.

Boeing has always been a top notch aircraft manufacturer, ane a pleasure to work with on new projects. High competence in Engineering and Program Management have always been trademarks of the this fine customer.

Times have changed since my dealings with them, but I fear even making allowances for this, they made major errors in structuring this program.
Globalization has driven many organizations to out-source for the purpose of cost and risk sharing, but adding the pressures of choosing suppliers based on their country-in order to develop orders from that country- has been their undoing on this high tech aircraft which pushes the design envelope in many areas.

The most difficult part of any major development is communications, both inside and outside the piome contractor. This was grossly under-estimated by Boeing on this program, and they will be paying the price-along with their cost/risk sharing partners, for many long years to come.

January 23 2011 at 10:32 AM Report abuse +1 rate up rate down Reply
1 reply to n6fb's comment
burnstagger

Globalization is just another word for Communism - take the jobs created by Americans and give them to the lazy 3rd world who sat around for 50 years while Americans built the modern world.

January 24 2011 at 2:38 AM Report abuse +5 rate up rate down Reply
alfredschrader

Boeing is a solid company. That Dreamliner is going to be way cool.

January 23 2011 at 10:07 AM Report abuse -3 rate up rate down Reply
Iselin007

They should give the defense contracts to employer's of Americans.

January 23 2011 at 8:53 AM Report abuse +6 rate up rate down Reply
Iselin007

The US job market builds the US we need Corporations that remember that.The corporations that are about building without US workers employed they can go out of business.

January 23 2011 at 8:43 AM Report abuse +4 rate up rate down Reply
crazy ray

Boeing tried to shift the economic risk to suppliers? Yes, they tried to do that to me when they wanted their equipment fixed. Take on long term liability, they said. I said, "NO!" They said, "others do it". I said, "Go to them to fix your instruments." Of course, they couldn't. So, eventually, we bought back the instruments for a penny on the dollar. Does anybody really wonder why this company can't make a buck?

January 23 2011 at 8:43 AM Report abuse +4 rate up rate down Reply
Iselin007

When the jobs end they should kick the corps out on ther arses there is no further use for since they provide no benefit to the US workforce.

January 23 2011 at 8:40 AM Report abuse +4 rate up rate down Reply