Case Introduction The Boeing Company announced in 2004 that it was embarking on an ambitious commercial airplane development project

in order to bring the 787 Dreamliner to market. A decade earlier, Boeing had launched its last major commercial airplane, the 777, and was under increasing pressure from Airbus, its primary competitor who was stealing increasing market share from Boeing. Recognizing the need for speed to market for the 787, along with increased quality standards and reduced production costs, Boeing focused on an innovation strategy that changed its former rules for airplane manufacturing, and decided to outsource 70% of the design for the plane (Hill, 2011). If its strategy paid off, it would cut two years off the normal development timeline, drive down costs for making the plane, and increase sales to countries where work had been outsourced. Originally targeted for delivery of its first plane in late 2008, due to many challenges with outsourced suppliers as well as design issues that resulted in an in-flight fire during a test flight, the 787 has experienced multiple delays, which has impacted full production by nearly three years (Goold, 2011). Throughout this case study, we will further analyze Boeings decision to heavily outsource 787 design as well as production and determine what actions the company could have done to limit risk and exposure. Company Profile Originally called the Pacific Aero Products Company, William Edward Boeing founded the company in 1916, with an initial investment of $100,000, settling in Seattle, Washington (Boeing, 2011). Along with G. Conrad Westervelt, a friend who shared a passion for aircraft, Boeing felt he could design and build airplanes that were superior to those that were in production at the time. The two persevered and built the B&W (Boeing and Westervelt) Seaplane. A year later, the company officially changed its name to what its essentially still known as, the Boeing Airplane Company. Today, in addition to commercial aircraft, which is the focus of this paper, the Boeing Company also has business units that focus on military aircraft, space satellites and missile defense systems. As a full service provider, Boeing

performs the design and development function, as well as manufacturing and sales, and product lifecycle support (Datamonitor, 2010). Throughout the companys 95 year history, it has consistently maintained a leadership position in the design and manufacture of military aircraft, as well as a pioneer and leader in the development of the commercial airliner. With its introduction of the 707 in 1945, Boeing began its lucrative commercial airline design and production franchise, dominating the industry until Airbus began to seriously challenge its market leader status in the late 90s. By 2003, for the first time, Airbus posted more orders for new airliners than Boeing (Hill, 2011). This threat prompted Boeing to embark on its ambitious 787 project in order to once again demonstrate clear market leadership. With 2010 revenues of over $64 billion, Boeing is ranked at #36 in the Fortune 500 list, and is the largest company in the aerospace and defense industry. Although its revenues declined 5.8% from 2009, it had an increase in profits, totaling $3.3 billion. Currently headquartered in Chicago, Illinois, Boeing has 160,500 employees worldwide, primarily in the United States and Europe (Datamonitor, 2010). James McNerney is the President & CEO, and has been the Chairman of the board since 2005. Traded on the New York Stock Exchange, Boeing is also a stock on the Dow Jones Industrial Average. Boeings business environment is quite complex, and while current production targets for the 787 represent significant opportunity to regain market leadership and drive financial results, the company also faces noteworthy threats based on the dynamic external environment as well as internal factors. For example, Boeing has a high debt load, with total debt increasing 72% from 2008 to 2009 (Datamonitor, 2011). Principal and interest payments on its debt can adversely affect earnings and cash flow in successive years. Additionally, an external threat is the likelihood of reduced US government spending on expensive weapons programs. As the US faces deficit challenges, there are signs that after years of increases, the defense budget will be cut. Due to the global economic crisis, primary customers are also placing increasing pricing pressure on Boeing, which will likely hurt margins. Problem Description Due to the significant challenges that Boeing faced in the early 2000s, primarily as the result of increased competition from Airbus and a dramatic slowdown in airline purchases after the September 11, 2001 terrorist attacks, Boeing recognized that they needed a game changing innovative strategy to regain its market leadership position. The next commercial airliner that Boeing produced had to be technologically advanced, provide a competitive advantage over Airbus products, minimize production costs and have a shortened design and production timeline. Boeing felt that the 787 Dreamliner represented groundbreaking innovation, with benefits that would resonate with customers and enable Boeing to regain its leadership position in terms of financial growth and brand equity. As Boeing sees it, the 787s composite material
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design, aerodynamics, fuel efficiency and propulsion systems has redefined how commercial aircraft are designed and manufactured, and will impact the broader aviation industry (Emery, 2010). With its ambitious goal of redefining commercial aircraft design and production, the Boeing 787 project represents a significant investment, and one that Boeing is not well positioned to undertake on its own. Considered the largest industrial program in the world, Boeing chose to partner with 17 companies in 10 different countries (Geoffrey, 2006). The outsourcing of the production amounts to 70% of the aircraft. Recognizing that they dont have the internal expertise for to design first in class systems for every design element, Boeing sought out leaders for each of these areas to bring the best together and build the 787. With the rising cost of fuel, a major benefit of the 787 is its fuel efficiency. Because of weight-saving fuselage design, which is 80% lightweight carbon-fiber composite material, the 787 uses 20% less fuel than other planes its size (Hill, 2011). The composite material will last longer than the aluminum alternative, which should result in lower maintenance costs for the airlines that purchase the planes. Additional benefits include more passenger legroom, cargo space and noise reduction. Historically, Boeing has outsourced much of its manufacturing, which it considers noncore to its operations. Instead, Boeing has focused on owning its core design work, which it views as its competitive advantage. However, with the 787, Boeing opted to also outsource much of the development work, recognizing that the detailed design and production went hand in hand, and were needed to be done by the partner in order to capitalize on their industry leading expertise. Ultimately, the decision to outsource so much of the design and production of the 787 resulted in the project not meeting its ambitious goals in terms of reduced production cost and speed to market. Key Facts and Assumptions When considering whether, and how much design or production to outsource, various facts and assumptions weigh into the decision. These facts and assumptions identify potential risks and benefits, and influence decision evaluation criteria. For example, while a fact was that Boeing had a competitive advantage in design work, an assumption was that outsourced design partners would be able to provide a comparable level of quality. Boeings ability to accurately identify and understand key facts, as well as their ability to manage risk associated with inaccurate assumptions is critical to being able to optimize the outsourcing decision and subsequent implementation. Several facts that impact the outsourcing decision are high development costs, variable labor costs throughout the world and recognition of industry leading centers of excellence. The first fact of development cost is that the combined development cost would be cost prohibitive for Boeing to perform entirely on its own. Due to the projected cost being close to $8 billion, sharing work and costs with partners would relieve Boeing of bearing the full cost on its own.
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Additionally, another fact is that labor costs for employees are different throughout the world. Since Boeings organic facilities are all based in the United States or Europe, where labor costs are high, outsourcing some of the development or manufacturing elements of the work to countries with lower labor costs can reduce overall program costs. The third fact is that while Boeing may have a competitive advantage in some aspects of aircraft design and manufacture, they also recognize that other companies represent centers of excellence for other aspects in which Boeing is not as strong. Therefore, partnering with these companies can increase the likelihood of having a truly state of the art product. A critical assumption on the part of Boeing was that they could effectively perform project management and supplier oversight. Due to the complexity of the project and lack of integrated communication between different outsourced suppliers, Boeings project management office would have to act as the conductor of a massive orchestra, managing companies with very different organizational cultures and business processes. Another fundamental assumption was that outsourced partners would meet strict quality standards that Boeing had established. If this assumption was incorrect, Boeing would have to either reject the work or take ownership of the work and perform it itself. An important assumption was that partners would meet production and delivery timelines they had agreed to. Due to the significant number of suppliers that were reliant upon one another, any delay from one supplier could result in major problems or delays for other downstream processes that worked in a serial fashion, and required earlier task completion in order to begin work. Boeing also assumed that it would not lose its competitive advantage by outsourcing major elements of the design work. When a company retains ownership of tasks, they are able to ensure intellectual property protection. However, outsourcing work will increase risk of other competitors being able to contract with the same suppliers and acquire proprietary information. From a customer demand perspective, Boeing assumed that strategic outsourcing of design and production to companies in target countries would generate goodwill with specific foreign governments and increase the likelihood of future orders. When countries have financial interests in the continued success of companies, they typically take actions to support them, either because of political pressure from constituents or from labor lobbying efforts. Potential Courses of Action When considering how to most efficiently and effectively manufacture the 787, Boeing essentially had three different courses of action it could pursue. Well consider each course of action, along with the risks and benefits associated with each. It was important for Boeing to have appropriate decision evaluation criteria to compare different courses of action and select the best option. The three options were: 1) maintain the traditional approach which involves outsourcing approximately 30% of the manufacturing, 2) balance company ownership of
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manufacturing processes and outsourcing, with 50% of manufacturing being outsourced, and 3) implement a heavy outsourcing strategy, with 70% of the work being outsourced. In the first option, Boeing would choose to perform most of the work on its own. This was the traditional approach used to manufacture the 737 (Tang & Zimmerman, 2009). By selecting this course of action, Boeing would assemble different subsystems and parts that they would purchase directly from thousands of suppliers. One benefit to this is that Boeing would own most of the manufacturing process, increasing the amount of control it has, along with the price negotiating leverage it would have with suppliers. Boeing would be able to maintain intellectual property protection for its manufacturing processes and systems. This approach would limit the amount of operational risk. However, this option also has specific drawbacks. By performing the majority of the manufacturing itself, the timeline would be extended. Production costs would increase as well, since Boeing would have parts storage inventory carrying costs combined with high labor costs through its heavily unionized workforce. Therefore, financial risk for the company would be high. Another drawback is that it would not be able to capitalize on the latest technology or centers of excellence from cutting edge companies. Course of action 2 would involve balancing the production of the 787, outsourcing 50% of it while retaining ownership of the other 50% of the manufacturing process. This approach would be consistent with the strategy Boeing used when it manufactured the 777 (Hill, 2011). By outsourcing half of the production, it would lower the financial risk compared to option 1, but increase operational risk since it would have less ownership or control over elements of production. While development and production timelines may be reduced through outsourcing, there is also a risk that both timelines and cost could increase as Boeing bears less direct control. Another benefit is that Boeing could partner with best in class, cutting edge technology companies that could outfit much of the 787 with the most current equipment for both passenger amenities and flight engineering. Downsides include managing supply chain issues since half of the work is outsourced, while half is performed organically. The third option that Boeing could have chosen was to minimize the amount of work that the company performed itself, and outsource 70% of the work. This would be a very aggressive approach, something that no major commercial aircraft manufacturer had previously pursued. It would involve Boeing creating partnerships with a high number of strategic partners who would assemble subsystems and parts that they purchased from suppliers. These strategic partners would then sell the assembled subsystems to Boeing, who would then conduct the final integration and assembly of the aircraft. If executed well, this strategy has the highest potential payoff for Boeing. With multiple strategic partners performing much of the aircraft subsystem production simultaneously, the production timeline could be significantly reduced in relation to the other two options. Production costs could be shared as well, with the strategic partners shouldering much of the financial risk. Outsource labor costs would be minimized since work could be performed outside the high labor cost countries or conducted by non-unionized workers.
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Finally, with the majority of the work being outsourced, Boeing would be able to identify and partner with suppliers who are industry leaders for their particular area, and would be able to supply the highest quality and most up-to-date technology for the aircraft. However, due to the high risk of this approach, it also has multiple potential disadvantages as well. Since the vast majority of manufacturing would be outsourced, Boeing would limit its direct control, oversight or ownership of the production process. Thus, operational risk is very high. Boeing would be accountable for work performed by partners which they have little control over. If work is not performed to their standard, Boeing would have to decide between rejecting substandard work and incurring production delays or lowering their quality standards in order to achieve timelines.

Course of Action Selection When comparing the three different courses of action, Boeing had to basically choose between its tolerance for risk and desire for control with its desire to speed production time and reduce cost. On one end of the spectrum, with a low amount of outsourcing, course of action 1 would give Boeing the highest amount of control and have the lowest risk. However, it also has the highest likelihood of slow timelines and high direct costs for Boeing. On the other end of the spectrum is course of action 3, which outsources most of the work. This option has the highest operational risk and lowest level of control for Boeing. However, it also has the highest potential upside for the company in terms of speeding the production process and decreasing the cost of production. Option 1 would have the highest number of suppliers, literally thousands, while option 3 would limit the number of strategic partners to approximately 50 companies, who Boeing would work with. The relationships between Boeing and its suppliers in either option would look very different. With option 1, the supplier acts in a traditional supplier role, with a fixed price contract in order to manufacture parts for Boeing. Conversely, option 3 would have risk sharing contracts with strategic partners, thereby changing the relationship from traditional supplier to true partner with upside or downside risk. With option 1, most of the manufacturing would be performed by Boeing employees, and it would take them 30 days to perform final assembly, while option 3 would reduce final assembly to 3 days (Tang & Zimmerman, 2009). A major consideration for Boeing had to take into account was what their core capabilities and areas of excellence were. Typically, companies have competitive advantages in a few core areas, and seek to maintain parity within their industry in other non-core areas. Traditionally, aircraft design was a core area for Boeing, and one in which they led the industry. Supplier and partner management was not traditionally an area that Boeing was renowned for. Boeing had to carefully consider whether they wanted to outsource areas that were competitive advantages for them, since it was likely that these partners would not perform to the level that Boeing would. Additionally, Boeing had to accurately assess its ability to manage supplier and
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partner quality standards and timeline expectations. As more work is outsourced, it would put more pressure on Boeings alliance management skills, and potentially expose it to much more operationally risk. Recognizing that the increased competition from Airbus put pressure on it to make a game changing move within the commercial aircraft design and production industry, Boeing chose to go with a high risk and high potential reward strategy. They chose to aggressively outsource development and production, with 70% of the work being contracted to strategic partners. Boeing felt that had it executed well, and its strategic partners met expectations, then Boeing would benefit greatly. It would demonstrate industry leadership and regain its financial position as the market leader. Believing it could proactively manage the inherent risks, Boeing focused on the potential benefits and boldly pursued its aggressive outsourcing strategy. Major Problems Boeing overestimated its ability to effectively perform the project management oversight role and manage partner/supplier relationships. Its ambitious goals for reducing timelines and production costs were not realized due to major unanticipated obstacles. When the project was launched in 2004, it made commitments to deliver its first production model in four years, shaving two years off its normal production schedule. Additionally, the strategic partner risk sharing strategy combined with the faster production schedule was projected to deliver significant cost savings and drive increased revenue. For a myriad of reasons, through March 2011, Boeing experienced seven major delays and other problems which resulted in the delivery schedule being nearly three years behind plan (Goold, 2011). Unfortunately for Boeing, many of the previously identified risks were not effectively mitigated, and multiple issues arose across different workstreams that added to the delays. Boeings supplier management skills were initially tested when one of its strategic partners who were contracted to produce the 787s fuselage in Italy fell several months behind schedule, which led to additional delays. This initial six month delay is estimated to have cost Boeing $1 billion due to penalties, late fees and cancelled orders (Tang & Zimmerman, 2009). Throughout the project, there have been occurrences where Boeings partners failed to meet their timeline commitments due to lack of full knowledge about various government regulatory requirements for building manufacturing facilities on the scale required for this project. As a result, they overcommitted and under-delivered. This was exacerbated by Boeings lack of knowledge about the initial parts suppliers that sourced the strategic partners. There was an operational risk that suppliers would not deliver parts or subsystems that met Boeings high quality standards. Some of the delays that its strategic partners encountered were the result of their suppliers not meeting the quality standards required by Boeing. Since they were far downstream from Boeing in the supply chain, Boeing

did not have visibility of their manufacturing and quality processes, and ultimately that was the root cause of the deficiency. While the potential to save money in labor costs was a driver in Boeings decision to outsource, it also became a major source of friction with its labor union. By diversifying its workforce through outsourcing and seeking to build non-unionized plants in the southeast United States, Boeings labor union felt particularly threatened. As a result, in September 2008, over 25,000 members of Boeings machinists union went on a 57 day strike, which delayed production costing the company $2 billion and drove several airline customers to cancel Boeing orders and move business to Airbus (Foust & Bachman, 2009).

Recommendations In my opinion, although it is currently being punished for it Boeing ultimately made the right strategic decision to outsource the majority of the work performed on the 787. While the decision was a good one, Boeings execution was weak, which resulted in significant production delays, loss of goodwill amongst customers and financial losses as the result of penalties and late fees. The only aspect that I think was a poor decision was Boeing choosing to outsource much of the design work, which was a core competitive advantage for the company. In order to maximize their position relative to their competition, companies must develop and exploit core capabilities that create a competitive advantage. These core capabilities serve as a foundation for what the company focuses on. This internal and external analysis reveals what activities or capabilities are not essential and could be outsourced without negatively impacting the companys performance. However, when core capabilities that lead to competitive advantage are outsourced, it can lead to degradation of performance and thus negatively affect the company. In this case, Boeing sought a strategy of aggressive outsourcing, which included some of its core capabilities. While Boeing demonstrated visionary leadership in pursuing a strategy of high outsourcing to strategic partners in order to exploit partner expertise, it over-reached in choosing to outsource design work. Aside from outsourcing its competitive advantage of design work, the primary problem with Boeings decision was not the strategy, but rather its poor execution. Upon making the decision, Boeing should have realized that dramatically increasing its percent of outsourcing would fundamentally change how it must manage projects and conduct supplier/partner oversight. Additionally, there are differences in managing suppliers versus strategic partners. Research doesnt indicate that Boeing proactively changed its alliance management and supplier management processes.

By 2007, it was revealed that lack of Boeings ability to assess product quality of suppliers who sourced strategic partners was the root cause of quality problems. The concept of working with strategic partners was not the problem, however. Upon moving to the strategic partner strategy, Boeing should have recognized early on that they could not completely disengage from maintaining awareness of supplier parts quality. Although Boeing felt they could rely on their strategic partners to effectively perform this role, they should have predicted that these partners were not well established enough in conducting their own supplier management at the level that Boeing required. Ultimately, I believe that Boeing will learn from this experience, and be able to appropriately adapt its processes to determine its optimal level of outsourcing and ensure effective partner/supplier management. While it will suffer setbacks in the short term, the long term benefits can be significant in terms of reducing future production costs and improving aircraft design. Through experimenting with different forms of risk sharing and supplier accountability mechanisms, Boeing should be able to develop stronger capabilities. Had Boeing been able to execute on its original plan, the company would have benefited tremendously and truly changed the paradigm for commercial aircraft design and production. While the 787 project has not delivered on its promises to date, it has likely served to drive organizational culture change which will create a more competitive company.