Building the Boeing 787 Case Study - Essay Example

? Building the Boeing 787 Case Study of the ANSWER The major advantage of outsourcing business is that the organization is able to focus on the core function. In order to operate efficiently in a global marketplace which is increasingly becoming competitive, it is important for the organizations to differentiate their services and products. Sometimes, outsourced businesses can be obtained at a lower cost compared to in-house hiring of the expertise, which saves a lot of cost in operations. Apart from that, the company can also gain special expertise while outsourcing different business units. New market opportunities are created as a result of cost reductions and thus firms are also able to generate new job opportunities. There has been a tremendous increase in the outsourcing business, especially in software and IT companies. Apart from the advantages, outsourcing business comes with few risks and disadvantages too. Companies joining the bandwagon of outsourcing might be surprised by unique complications and costs, especially in cases of overseas outsourcing. Sometimes, international vendors are marred with financial difficulties which increase the time span of delivery process. Quality of the services and products and maintaining required standards are other factors which makes outsourcing a risky business (Tang & Zimmerman, 2009). Boeing has always been into outsourcing business. Most of the production parts are outsources. Apart from that cost savings also attracts this business. In order to develop market sources and revenue growth, Boeing 787 was developed. The company announced an unconventional supply chain process for the production, manufacturing and sourcing of the aircraft. The organization decided to outsource almost all important functions of the aircraft. Around 17 partners were selected from 10 countries to complete the manufacturing process. Few of the benefits which induced maximum outsourcing of the Boeing are as follows; Reduction of time frame and developmental costs The initial developmental time for launch of Boeing was six years and overall development cost was estimated to be 10 billion dollars. With the introduction of the unconventional supply chain, the estimated development time reduced to 6 years and cost went down to 6 billion dollars. The manufacturing and supply cost was reduced and financial risk was spread among suppliers. The major advantage of outsourcing was gained in terms of expertise in areas of operations. Different parts of the aircraft were outsourced to those businesses which were expert in that area. This ensured production of best quality parts and maintenance of world standards. For example, most of the engines manufacturing were outsourced to General Electric and Rolls Royce, who have mastered the art of advanced engineering in the present competitive world. For Boeing 787, the company outsourced around 70 percent of its business which ensured a lot of cost savings. This cost was put into other areas such as marketing, brand building and launch campaigns for the aircraft. Most of the supplier’s relationship was based on contacts and Boeing had special contracts with tier-1 suppliers. A strict supplier relationship helped in maintaining the time frame for production and shipping of the parts, which helped in timely installation and development. Thus by outsourcing more, Boeing was able to reduce the development cost to a significant level (Wanke, 2004). This was done by leveraging the capabilities of the suppliers. In order to maintain coordination and collaboration between its suppliers, Boeing also established a web-based technology which helped in increasing supply chain visibility and improving overall integration and control of the supply chain business. Reduction in financial risks Most of the outsourced suppliers were in contracts with the company. The company also established risk sharing contracts with each of its suppliers. Under this contact, the final payment will be given only after the successful launch of Boeing 787. This contact was also intended to bring incentives for fast delivery. The company wanted to make sure that the aircraft parts are delivered on time and as per the required standards. Thus, instead of fixed price contracts which were used in earlier Boeing businesses, Boeing 787 introduced risk-sharing contacts (Kwon, Lippman, McCardle & Tang, 2009). This ensured high quality business from the suppliers. Since most of the aircraft parts were outsourced, the company was relieved from procurement of raw materials and early components. This gave the company time and opportunity to focus on other resources and business processes such as supplier relationships, secondary and tertiary development services etc. Access to superior technology and global networks Another benefit of outsourcing business was to gain access of the superior technology in particular fields. The new Boeing 787 has many special features which differentiated it from rest of the Boeing aircrafts. For example, compared to a traditional aircraft, Boeing 787 was 20 percent lighter. More than 80 percent of the composite materials were made of carbon fiber, which made the aircraft lighter thereby saving cost of fuel and consumption. Thus, outsourcing business helped the company to gain advantage in terms of product differentiation. Another benefit which the company was expecting from outsourcing was gaining access to the global network. The company expected that outsourcing business will help in selling of the airlines in those countries. Outsourcing the logistics and manufacturing functions helped in increment of overall quality of the aircraft. Quality improvement happened because the company was able to focus its attention on other parts of the business. Establishment of advanced technologies, equipments and designs created competitive advantage for the aircraft and a formation of high quality service aircraft (Kremic, 2006). Apart from the above direct benefits the company also achieved many indirect benefits from the unconventional outsourcing business. A heave outsourcing strategy helped in saving substantial capital investment and also increased overall cash flows in the company balance sheet. The company no longer needed distribution houses, factories and warehouses. This increased overall capital funds for the company. Apart from that, the organization also saved itself from the depreciation costs incurred from maintenance of warehouses and factory equipments. Another benefit of outsourcing is the control of intellectual property rights. Although the supply chain strategy of 787 has helped in reducing the overall development time and costs, there are certain risks associated with the supply chain process. The risks range from IT system to technology, process risks, supply and demand risks, financial risks and labor risks. In the current outsourcing strategy, the company has been heavily relying on Tier 1 strategic global partners in order to build and develop its entire selections of the aircraft. Even a single hitch in the supply chain can break the process and result in delay of overall production process. In order to reduce the overall time frame, the company reduces the procurement and fitting process. Most of the outsourcing logistics were running on just in time strategy. Thus, even if one section is not able to make delivery in time, the overall delivery schedule of the entire aircraft is delayed. Since the company has outsourced most of the aircraft parts, the risk of late delivery has increased. Unless the aircraft keeps some spare parts and stocks, it is unlikely that the aircraft will start its services on time. The risk-sharing contracts also possess potential risks for the company. According to the contract, the suppliers will be paid only after the successful launch of the aircraft. Also, incentives will be penalized if some suppliers deliver before others. This may induce suppliers to deliberately slow down work, thus reducing overall performance. Boeing 787 can also suffer from management risks. When a company is using an unconventional supply chain strategy and decentralizing its entire operations, it is important to have a leadership team. This leadership team will be responsible for overall smooth flow of the entire supply chain process. They should be able to understand the potential risks associated with a high outsourcing business and plan appropriate strategies in order to reduce risks and develop alternate action plans. An absence of leadership and strategic team might have an adverse affect on the proper functioning of the business. Apart from management risk, the company can also suffer from demand risk. Increasing delays from the suppliers and recurring issues such as demand supply gap, technicalities might result in decreased consumer confidence. Also, delay in flight scheduled might result in penalties from high end customers who have already booked for initial flights. The overall analysis of risks and benefits associated with outsourcing business will be complicated. The initial aim of outsourcing majorly of the business was to manufacture components from suppliers with best expertise and concentrate on the core functions of the business. The company also expected greater revenue generation within lesser time frame. However, the overly ambitious supply change risk taken by the company did not go well. The unique manufacturing techniques and marvels boasted by the company were in question and unproven. Boeing’s ever increasing issues of meeting deadlines and failing to comply with the standards is an example of loss control of the supply chain management process. While the benefits associated with outsourcing are use, it needs to be properly managed and strategically monitored. Any misbalance in the supply or demand side should be quickly contemplated and repaired. Although it is certainly difficult to identify all possible contingencies and rectify the errors in time, proper assessment of risks and the long term view of the implemented strategic will surely work wonders for any company opting for outsourcing business (Salman, 2013). ANSWER 2 Till late 2007, the outsourcing strategy of Boeing seemed to work fine. At the end of 2007, the company started facing problems in delay. At first Boeing suffered from some technological issues which resulted in an 8 months delay from the scheduled flight. Soon after, these problems became more critical and deep. It was found out that most of the suppliers of Boeing aircraft were not able to deliver on time, further reducing the timeframe of flights. Below is a comprehensive analysis of the problems which created havoc in the global supply chain management. The technology used to create Boeing aircraft was itself in question. Even though the technology and developed composition was considered to be effective, the credibility and feasibility of the composition was unproven. Many analysts feared that the composition used for making the aircraft parts might not work and give expected performance. Due to the huge differences in engineering technologies, the aircraft also faced interchangeability issues. The engines which normally take 24 hours to be replaced were taking 15 days because of fitting issues. Overdependence on external suppliers exposed Boeing to supply risks. The company announced delay in its first planned flight during early 2007. This was caused due to shortages in parts as well as integration of the remaining systems and software. Even though the company establish a web-based technology for collaborative interaction, timely and accurate integration of information was very difficult to achieve. As the management looked deeper, they found out more critical problems, apart from demand-supply gap. It was found out that many of the tier-1 suppliers were hiring sub-suppliers or tier-2 suppliers in order to finish the outsourcing and production processes. This had resulted in further disintegration of the outsourcing business, further complicating the process. Also, cultural differences were found in many of tier-2 and tier-3 businesses which resulted in inaccurate information processing into the system (Minkov, 2011). Many times these tier 2 and 3 companies failed to deliver the exact standard required by Boeing. Also, these companies were directly reporting to tier-1 companies, so their activities were not recorded by Boeing. As a result of these fragmented businesses, the overall quality of the outsourcing business was hampered. As stated earlier, around 70 percent of the manufacturing and production process was outsourced. As a result, the company was relying heavily on the suppliers in order to complete the process in time. Most of the outsourcing parties were working on a just in time basis and the total integration time provided was three days. Thus, it was evident that delay from any of the supplier would result in overall delay of the whole airplane. Slowly it became difficult for the company to control overall logistics and supply chain. The company faced many delays from suppliers. Apart from that, the company imposed serious penalties and incentive reduction to suppliers who were not able to finish their work on time. This hurt the sentiments of many suppliers and they started delaying the processes intentionally (Eltantawy, Fox & Giunipero, 2009). Inclusion of a diversified outsourcing business needs proper management. Since Boeing invested in more than 17 suppliers in 10 different countries, there was a need of a leadership team in order to handle the supply chain process. The leadership team should be equipped with appropriate resources and skills in order to identify any diversion in the normal flow of the business. The company should have included leaders with proven expertise and knowledge about supply chain, logistics, outsourcing business as well as appropriate experience (McMillan, 2010). The leadership team was required to anticipate any risk in the business and develop contingency plans in order to mitigate the impacts. However, the original leadership team for Boeing airplane did not include any expert in supply chain or outsourcing. Without any expert help on supply chain risk management, the company was in a huge managerial risk. Another publicized issue which resulted in a black mark on the global supply chain management of Boeing was mismanagement of the labors. As most of the manufacturing and production process was outsourced, there was a growing fear among labors of losing their jobs. The increasing concerns with job security lead more than 25,000 employees of Boeing to go on a strike in early 2008. Anticipation of strike also resulted in many suppliers decreasing their working hours and days for employees in other areas. This resulted in reduced work and in turn reduced output from the suppliers. As a result of continuous delays in flight scheduling many big customers lost their overall confidence on the development capacity of Boeing aircraft. As a result of the anticipation of possible delays and technical difficulties in the new aircraft, many customers started cancelling their orders or opting for leasing contacts in order to reduce the risk. This has a negative impact on the overall image of the brand. Also, the company had to pay huge penalty in million because of the delay in its first scheduled flight. In order to manage the disruptions that occurred due to mismanagement of a complex global supply management process, the company can take various steps so that these issues do not occur in future. In order to mitigate the supply risks, Boeing 787 will have to take control of the supply chain process. One of the issues with supply chain was that many of the tier-1 and most of the tier-2 suppliers were not able to develop the required components for different sections of the aircraft. Strategic acquisition of these suppliers or taking control of their operations will ensure that the productivity as well as quality of the manufactured components is maintained (Benvenuto, 2005). The company also found out that many of the suppliers were incurring heavy losses due to delays in delivery and the completion of the entire project was at risk. To resolve this issue, Boeing 787 can fund these suppliers and even pay advanced payments so that the vital operations are finished. Process issues pose great risk in the proper completion of any project. In order to mitigate the process risk, the company will have to look into the problem in a detailed manner. Boeing can send expert professionals and engineers in places where the suppliers are having problems with production. This might be a little expensive but in order to complete the installation process and stop further delays, it is a necessary step. The company might have to redesign some of its assembly process so that suppliers having major defaults are sidelined and processes are taken over from them. In order to increase visibility among suppliers, the company can use information technology to insure that the entire supply chain is transparent and works are done in an ethical manner (Sodhi & Tang, 2009). The management can look into the risk-sharing contracts and incentive schemes and if required, make necessary changes in order to make the deals more profitable for both parties. In order to restore customer confidence in the aircraft and ensure that the company is not faced by further delays, Boeing will have to put expertise in the global supply chain management process. In order to find out the issues and challenges, it is necessary for the company to recruit people who have experience and expertise in required field. The company can also recruit experts in outsourcing business to figure out the pros and cons of outsourcing business and make necessary changes wherever required. Bringing expertise will also increase the overall confidence of employees and internal executives, thereby increasing overall effectively in work. Job security and concerns of job outsourcing led to a huge strike at Boeing. More than 25000 workers stopped working (Rigby & Hepher, 2008). In order to curb the issues of strike, the company can promise hikes in pays and bonuses over a fixed period of time. This will insure security and confidence among the workers. It was found that the major concern among employees was that most of the manufacturing and production works were outsourced and this was reducing. In order to resolve this concern, it is necessary that the company agrees on terms and conditions on what amount of jobs should be outsourced. The company can also perform outreach and engage communications with the unions and workers for strategic outsourcing. Engaging employees and workers in the decision making process will increase their confidence for the company as well as their job. The constant delivery failures had a negative impact on the customer sentiment. Many of the big customers began cancelling their orders. To solve this issue the company should take strategic steps like supplying replacement aircrafts in order to manage the time. Also, the company should clear off all the compensations and penalties with respect to late and failed deliveries so that the customers might not keep any apprehension against the company. In order to boost confidence among the general public, Boeing can establish communication through websites. The company can put useful information like its current progress and likely schedules in order to make people aware and generate interests. In order to avoid further complications, the company can make strategic partnerships with premium customers and create better communications in cases of late deliveries. The company can also conduct publicity campaigns in order to revive its image and focus on the superior technologies which are giving it a competitive advantage over others. ANSWER 3 In the current phase of industrial evolution, companies are fast recognizing that they cannot get expertise in every function of their business. They need to concentrate on their core business and delegate less profitable businesses to others. Thus, outsourcing business gained its popularity. As the companies started noticing the advantages of outsourcing business, more and more functional units began to be outsourced to other parties. Even though the practice of outsourcing business has been going on for decades, offshore outsourcing is quiet new. As this offshore outsourcing brought excitement among various national and international business, it also brought anxiety, concerns and anger among various population groups, especially among the domestic workers from United States. Offshore outsourcing gave US companies a chance to exploit the differences in international compensations, thereby increasing profits with much lesser pay packages. Apart from the compensation, companies were also able to negotiate employee benefits, legal requirements and operating costs in order to increase profit margin and be more productive. The same situation happened with Boeing. The company is one of the largest employers in America. Boeing has been engaged in employing more than 100,000 people in United States alone (Peterson, 2011). Previous to Boeing 787, the company had been producing most of its functional parts in-house only. Thus, the company has a huge resource of man-power. However, during the strategy formulation for Boeing 787, the company decided to outsource almost 70 percent of its work to offshore business. This decreased the functional capacity of more than half of the company’s manufacturing units. Many workers were unemployed and the economy of U.S was undermined. Even though outsourcing is criticized by most of the domestic workers, it still remains one of the most attractive ways of gaining expertise in business functions. The global supply chain and outsourcing strategy of Boeing was severely criticized. The main reason was outsourcing of core manufacturing processes even though the company had sufficient resources and skilled forces. However, it should be kept in mind that the entire outsourcing business should not be seen negatively, solely based on Boeing 787 case. Businesses cannot be expected to perform all their jobs and expert all of them. Especially in case of big MNCs having diversified businesses, it was extremely difficult to manage all services and production processes involved. Thus, in order to increase profitability, it is right for the companies to outsource businesses for which the company does not have adequate resources or skills. The only negative effect is that in pursuit of finding low cost offshore suppliers, companies sacrifice the domestic workers who either are working in that particular field or preparing for the job. The number of opportunities for domestic workers reduces and employment opportunities are cradled. The attractiveness of outsourcing business in United States is not mystery. America falls in one of the forward continents of the world with living standards, compensations and wages higher than other parts of the world. Contrast to this, the compensation and pay packages are much lesser in developing countries such as China and India. As knowledge workers are increasing in emerging countries, US companies are no longer concentrating their business to domestic workers only (Dhar & Balakrishnan, 2006). The vast differences in pay packages have made the outsourcing business more critical, with companies exerting power over domestic employees. Another reason why outsourcing business is criticized is the loss of wages. According to many research agencies, more than 14 million jobs will be outsourced in United States. With the divestment of businesses, the companies are also giving off wages, in turn share of economy. This factor has been criticized by the economists and according to them, this can led to serious economic issues in near future (Gupta & Sao, 2009). When Boeing 787 outsourced majority of its manufacturing and production, it also gave critical control of the processes to the third party suppliers. This weakened the entire management control over the production and manufacturing of aircraft parts. In case of aircraft manufacturing, strict monitoring is required as the entire process in lengthy and complicated. The best method of aircraft manufacturing is when a group of skilled builders and engineers work together in close proximity and without any distractions such as language barriers, bureaucracy or cultural differences. Precise control over the various processes and a complete knowledge of the manufacturing of parts are important. In this case, the entire image of the process came from suppliers and the company did not have any first hand contact with the actual progress. In conditions such as above, the first step which a company can take is initiating an effective public relations campaign. Whenever, there is a crisis situation in a firm, the first step is taking precautions in front of the media. Any controversial statement or act in public can fasten the already depleting image. Effective teams should be recruited and an able spokesperson should be chosen to speak in public. This step will make sure that the issues are in control and do not get exaggerated by the media. In the next immediate step, the company should make strategic statements in order to clear all communications between the organization and the media. Further, the company will have to ensure that the major investors and customers of the company have their confidence intact in the project. The company should establish clear, two-way communications between its major customers and investors. In order to reinvigorate confidence among the customers and investors, Boeing can also engage them in the general decision making process. In cases such as failure to deliver on time, company should not shy away from taking the responsibility and make immediate replacements so that profits and interests of the investors and customers are not ignored or affected. Public announcements of the current progresses made by the company will keep the interests of the general consumers. This can be done by posting updated information about their work on their website. The best way to make sure that these criticisms do not happen again is to find out the reasons behind these crises. Most of the concerns among investors as well as general public were loss of work opportunity and loss of overall profit margin due to several delays. In order to avoid these crises, Boeing should make appropriate strategies for outsourcing business as well as supply chain management. The company should divide the management in teams. Each team will be handling a separate set of division, thus a separate set of issues and problems. This will help in deeper analysis of the problems. Sustainable growth and development can be achieved only when a company is aiming for long term growth strategies, rather than short term profit making formulas. In order to make sure that the customers and investors stay with the company, Boeing should focus on making strategies which will help in saving interests of its key investors and customers. References Benvenuto, N.A. (2005). Outsourcing: A risk management perspective. Information Systems Control Journal, 5, 1-6. Dhar, S. & Balakrishnan, B. (2006). Risks, benefits, & challenges in global IT outsourcing: Perspectives and practices. Journal of Global Information Management, 14(3), 39-69. Eltantawy, R.A., Fox, G.L. & Giunipero, L. (2009). Supply management ethical responsibility: Reputation and performance impacts. Supply Chain Management: An International Journal, 14(2), 99 – 108. Gupta, A. & Sao, D. (2009). Anti-off shoring legislation and United States federalism: The constitutionality of federal and state measures against global outsourcing of professional services. Texas International Law Journal, 44(4), 629-663. Kremic, T. (2006). Outsourcing decision support: A survey of benefits, risks, and decision factors. Supply Chain Management: An International Journal, 11(6), 467–482. Kwon, D., Lippman, S. A., McCardle, K. & Tang, C. S. (2009). Time-based contracts with delayed payments. Working paper, Los Angeles: UCLA Anderson School. McMillan, C. (2010). Five competitive forces of effective leadership and innovation. Journal of Business Strategy, 31(1), 11 – 22. Minkov, M. (2011). Cultural differences in a globalizing world. Bingley, UK: Emerald. Peterson, K. (2011). Special report: A wing and a prayer: Outsourcing at Boeing. Reuters. Retrieved from http://www.reuters.com/article/2011/01/20/us-boeing-dreamliner-idUSTRE70J2UX20110120 Rigby, B. & Hepher, T. (2008). Boeing strike impact to be felt globally. Reuters. Retrieved from http://www.reuters.com/article/ousivMolt/idUSN052945182008 0908. Salman, S. (2013). Risk assessments of outsourced service providers. Retrieved from http://www.theiia.org/intAuditor/itaudit/2013-articles/risk-assessment-of-outsourced-service-providers/ Sodhi, M. & Tang, C. S. (2009). Managing supply chain risk and vulnerability: Tools and methods for supply chain decision makers. New York: Springer. Tang, C.S. & Zimmerman, J.D. (2009). Managing new product development & supply chain risks: The Boeing 787 case. Supply Chain Forum: An International Journal, 10(2), 74-86. Wanke, P.F. (2004). Strategic logistics decision making. International Journal of Physical Distribution & Logistics Management, 34(6), 466-478. Read More