When does it make sense to outsource key elements of product design – and how far do you take it?

Boeing obviously went too far with its disastrous supply chain strategy for the new Dreamliner 787 aircraft, outsourcing the design and manufacture of a huge number of components to its supply base for the first time ever. Unfortunately for Boeing, the scale of the change, its ability to manage that process, overly optimistic projections from suppliers and other factors led to huge delays with the new aircraft’s expected launch date and $2 billion or more in extra costs.

On the other hand, Chrysler this week announced that it was much closer than most who follow the auto industry realized with the development of its new prototype of electric cars. It appears to me that this announcement – cars that can achieve 200 miles on a single battery charge and quickly accelerate to highway speeds on battery power, can resuscitate Chrysler’s market position and possibly be among the factors that change the current oil-usage equation.

"We are well ahead where the industry observers thought we were," Chrysler President Tom LaSorda said.

Chrysler is the smallest of Detroit’s big 3 and now, outside of Daimler as a private company, probably has the least deep pockets of any of the world’s major auto OEMs.

Whether it was that financial aspect, time-to-market issues, or a combination of both, Chrysler chose to rely on suppliers for help in design of many key elements of the new electric prototype to a much greater degree than usual.

“Chrysler was able to make quick progress on electric cars by relying on outside suppliers for many of the key components,” The Wall Street Journal noted. “That is a big change from the auto industry's traditional approach in which car makers develop most of a car's components themselves.”

Right now that bet looks smart. It is clearly part of the Megatrend we call “Supply Chain Virtualization,” as companies in most industries are adding less and less value to the products they sell. The supply chain adds 80% or more of the value in many cases, from a production perspective. The final seller is increasingly just the “final assembler” in the process.

But you also have to wonder about the impact on competitiveness long term. Will Chrysler “own” the new component designs developed by its suppliers? Did it make smart choices about keeping enough of the real competitive advantage in-house? Or, are these basically all commodity components in the end, and the real key is simply executing the development process faster than the next OEM?

Those are the questions, it seems to me. The answers for each company and situation will be different, but getting those decisions right is already a critical determinant of a company’s short and long-term success.

I’d love your thoughts on this.