Obsessive Outsorcing Is Expensive, Just Ask Boeing

by: Bill Egnor AKA Something The Dog Said

Thu Feb 17, 2011 at 07:37:57 AM MST

The theory behind the high C level salaries in corporate America are that these gals and guys are so good at the big picture, developing series of strategies to address the needs of the company that they should be paid out the nose. Having worked in those jungles as a process improvement guy, I have come to see that this is really not the case. In general they don't have a massively well rounded set of skill, it is more that they are one trick ponies. There is the "turd-in-the-punch-bowl" guy who nitpicks projects to death under the guise of caution. There is the gal who wants to take profit out of the workers instead of the customers and then there is the guy who wants to outsource everything.

These techniques do have their efficacy in the right situations, but they are not the solution for every problem. When they are taken too far they all cause problems, and increase cost. Which is the very expensive lesson that Boeing is learning right now.  

http://articles.latimes.com/20...
Michael Hilzik of the LA Times has a good rundown of how a favorite idea of CEO's everywhere to save costs turned into a much more expensive project. The basic story is this; in late 1990's Boeing merged with McDonnell-Douglas and got a new CEO who was all about cutting costs and he thought that the best way to do it was to outsource a lot more of the components of Boeing aircraft.

The idea was the Boeing would become primarily the assembly point for the aircraft and the little suppliers would have 30% of the component manufacturing. Now I have never been convinced that you can really reduce any cost except wages and pensions by this scheme. Someone else has to make the parts and they have to make a profit. Sure they are smaller and because of that size they can get a low wage structure out of the workers, since everyone is going to feel like it is fairer for giant companies to pay better wages and it is easier to keep unions out of small companies.

The other problem with this, and it is especially true when you are talking about something as complex as huge airliner is quality control. If you contract for the parts that you need from a lot of outside sources you have to be sure that they are going to work well together. That means either you spend a lot of time and money in the front end to nail down the specs and then except no parts that are out of spec or you have to spend even more time and money inspecting every widget you get from every supplier.

Boeing, in their shocking lack of wisdom did neither of these things. From the LA Time Article:

The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence.
Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.
Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a meeting of business leaders in Washington state in 2007. That further reduced Boeing's ability to supervise design and manufacture. At least one major supplier didn't even have an engineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing's top global competitor.

So, between sending the work out and failing to give them the very detailed specifications for the parts, Boeing wound up receiving parts that did not fit together and could not be assembled with the rest of the plane. In fact it grew so bad that Boeing actually had to buy one of the suppliers of the air frame for a billion dollars in cash and stock, so they could take over the manufacturing. This resulted in a duplication of staff and facilities.

This scheme also had another problem that Boeing was warned about by an internal technology analyst. You see the profit margin in air planes is not that great to start with. They cost a ton to build and when you are competing against another manufacturer there is a lot of pressure for discounts in the front end. Where you make it up is in the fact that an airliner has a 20 year plus life span and during that whole time it needs spare parts.

Boeing was keeping the assembly business, which only makes money on the sale end, and giving the spare parts business to these outside suppliers. In their rush to reduce the labor costs (which, as I said is really what outsourcing is all about) they did not realize they were giving away the back end profitability of their newest product.

Even worse for them is that once that expertise goes out the door it is expensive to bring it back in house. If you get rid of your avionics manufacturing division, you don't need the engineers and technicians that do that work. They go work for someone who is building that kind of thing and you're stuck either starting that division up from scratch again or poaching them back. Both are far more expensive propositions than keeping them in house in the first place.

It is fine to enjoy a little bit of schadenfreude over Boeing stepping on its own dick in this case, the fact is this kind of thinking is what destroys the manufacturing sector in this country. By obsessively focusing on reducing labor costs, many manufacturers have fragmented the expertise that is required to make world class products. There is a reason that manufacturing jobs were the backbone of the economy, they are more than just putting a bolt in the right place. Engineering is all about tolerances and meeting specifications, when you spread out the manufacture of a product too far that suffers. Then your business suffers and the workers suffer and the whole economy suffers.

This is just one example of how having a single strategy for everything can really hurt a company. I don't have a problem with the idea of paying a super-genius who really can see all the moving parts of a Fortune 500 company millions of dollars a year. Such a person is worth it, the problem is there are not even 50 such people in the United States, let alone 500 plus.

The floor is yours.