Expert Insight: Gilmore's Daily Jab
By Dan Gilmore
Date: Jan. 9, 2012

Supply Chain Comment: Are Boeing's Supplier Stress Tests Defeating the Point of Outsourcing in the First Place?


New Program Seems Like Aggressive Approach to Risk Reduction, but Brings into Question the SCM Strategy from Another Perspective

I have watched the saga of the Boeing 787 Dreamliner literally for years. In short summary, an ambitious decision to vastly outsource the design and assembly of major subsystems in the mid-1980s for the widely anticipated new aircraft sounded promising and was viewed as a breakthrough in supply chain thinking for stodgy old Boeing - at least on paper.

In fact, Boeing's executive for the outsourcing program was named supply management executive of the year by Purchasing magazine, when it was still with us (I confess I am not 100% sure on that, but I know it was some magazine, almost sure it was Purchasing).

A little premature to say the least - like when a new Adidas distribution center was named Modern Material Handling's Warehouse of the Month right before it had a near fatal WMS meltdown. The outsourcing program was a disaster. Many Boeing suppliers could handle their new responsibilities, Boeing didn't know how to manage a vast outsourcing program, the left hand didn't know what the right hand was doing half of the time, there were both shortages of low cost fasteners and delays in major assemblies, and lots more.

The plane was three years - yes three years - late, and cost Boeing several billion (with a B) dollars in costs to expedite supply and lost sales revenues, some of it for good. It was the second worst supply chain disaster of all time in our most recent list (new one soon), behind the Foxmeyer Drug debacle that literally put a major drug wholesaler out of business.

So we did a story last week based in part on an article in the Wall Street Journal on how Boeing has learned its lessons from that disaster as it finally starts to fill a huge backlog of 787 orders, as well as a full order book for several other models. Annual aircraft output will be up 60% for each of the next three years. (See Still Stinging from 787 Supply Chain Disaster, Boeing Now Putting Suppliers to the Test.)

To cope with that spike effectively, Boeing has rolled out a massive supply management program, which involves visits, testing protocols, tools and more to ensure 1000 of its suppliers have the capabilities and capacities to keep on track. 200+ engineers and supply managements have already been hired to augment existing teams already on this mission. Many suppliers receive daily visits. The analogy is literally to the same kinds of "stress tests" US and Euro banks have been put through to see if they can financially withstand further weakness in the economy.

What a show of force. Of course, one could argue this only makes sense given the huge cost of each airplane, and the billions of revenue at stake, and so hence isn't really a model for other companies in terms of supply chain risk management, but still it seems an impressive, proactive effort.

Or is it? Duncan Klett, VP of Analytics Research at supply chain software provider Kinaxis, sent in a letter based on the article with a simple question: If this is the kind of effort it takes to get the supply base to perform, is the outsourcing strategy even worth it?

"The original arguments for outsourcing/contract manufacturing were lower cost and allowing the customer to focus on its primary business and not need to manage production processes outside its core/critical competence," Klett wrote. "For new and/or state of the art production processes, it sounds like the risks and management requirements have not been reduced by outsourcing."

It would certainly seem not. Again, maybe the dollars involved are so huge that throwing some tens of millions at the management of the suppliers is just not that big a deal, and well worth it to reduce the risk. Likely Boeing is committed deep enough to the outsourcing for the current set of aircraft that there was no turning back, and I am sure the thought of going to investors in the next couple of years and saying that there were still more supply chain glitches standing in the way of revenues and profits was a thought the CEO just couldn't bear. The backlog of business means the top and bottom lines are probably assured for several years barring another supply chain disaster.

I no zero real details of Boeing's supply chain, so keep that in mind, but from the outsiide one has to wonder if it isn't time Boeing takes and step back and rethinks its supply chain design, either bringing some production back in house to gain better control and visibility, or developing an outsourcing program that doesn't require massive troop deployments in the field to get the job done.

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Dan Gilmore is the editor of Supply Chain Digest.

Gilmore Says:

One has to wonder if it isn't time Boeing takes and step back and rethinks its supply chain.

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