The Role Of The Outsourcing In Boeing's Business Strategy - Research Paper Example

The Role Of The Outsourcing In Boeing's Business Strategy 1.0 Introduction: Boeing is the largest aerospace company and is known for the manufacturing of commercial jetliners, and also the defense security and space systems. Boeing has customers in over 90 different countries and the company has been able to generate revenues of almost $68.3 billion for the year ending 2009 (The Boeing Company, 2010). The company has its head quarters in Chicago and has a number of different locations across the globe. Boeing is a truly global company and almost 70% of the total revenues of the company is generally attained from the international markets (The Boeing Company, 2010). The company has been a part of the industry for a long period of time and has been able to contribute to the growth of the markets to a great extent. This paper aims at discussing the story of Boeing and outsourcing. Also the paper will discuss in detail the potential risks that the company faces with the high level of outsourcing. The paper will also discuss in detail the benefits that the company gains from the outsourcing as compared to risks and these help in identifying more accurately if the benefits by any chance outweigh the risks. The paper will also deal with the issues that the company faced in relation to the globally dispersed supply chain and the issues that the company faces. A detailed discussion of the issues and the reasons for the issues has also been discussed. In addition, the paper also touches upon how the company can avoid being faced with such issues in the future and ensure that such problems do not occur in the future. The paper finally touches upon the criticism that the company has been faced with. The main focus here is to identify the criticism and to identify the ways that the company can deal with the critic’s views in an effective and efficient manner to help the company grow and develop. 2.0 Boeing and Outsourcing: Outsourcing has been defined as, “the practise of taking a significant activity within the organisation and contracting it out to an independent party” (Lafayette, 2010). Companies have been noted to have started outsourcing since the time of the industrial revolution. There are very few companies that complete all the processes within the company itself, prevalent practices within a number of companies is to buy a number of their products and services from outside companies (Aalders, 2001). The introduction of offshore outsourcing was established by the manufacturing industries. Boeing has come into news for the high level of outsourcing that the company has undertaken for the development of 787, which has been the highest level of outsourcing that the company has ever had. It is essential to note that the company only 50% of the overall Boeing 777, 30% of the 767 and just about 5% of the 707. Comparatively the Boeing 787 has been noted to have the highest level of outsourcing of the processes. The company has very strategically allocated each process to different businesses and manufacturers across the world to be able to successfully attain high quality work for cheaper costs. By outsourcing the activities to different companies across the world, Boeing has tried to diversify the risks and to attain the best expertise of people from different locations. However it is essential to note that the company is faced with a number of potential risks which they need to face to be able to successfully emerge (Pandey, 2010). Although the company does have a number of benefits from the outsourcing decision, it is essential to note that the company is also faced with a number of potential risks. The following subsections will detail the potential risks that the company can face while outsourcing the 787 to foreign suppliers. The following sections will also detail the benefits of the outsourcing and a comparison of the benefits vs. the potential risks will be made to gain an insight if outsourcing is a good idea for the company. 2.1 Potential Risks: Considering the size of the company and the investments that are involved in the overall processes, it is essential to note that outsourcing can lead to a number of risks as well. Outsourcing simply means giving a part of the job to another service provider to complete. In the case of Boeing, the development of the Boeing 787 involves a number of steps and each of which can be considered to be a process by them. In the event of outsourcing the processes to different companies it is essential to note that a number of issues can crop up. It is essential to note that the main aim of outsourcing for any company is due to cost cutting. The main risk in the case of a manufacturing unit like Boeing is that although the costs might seem to be much lower in there is a major possibility that the company might be faced with hidden costs (Pandey, 2010). Also, other potential risks involve failure to deliver by the vendors. This can be a major issue and there is a high chance that the company can be led to a number of liabilities due to late delivery from the vendors. Another major issue that the company can face is the issue of knowledge transfer. Boeing has a specific style, while outsourcing, it is clear that there is a major possibility that the vendors might not be able to achieve the same level of accuracy as Boeing and this is mainly due to the knowledge transfer (Wagner & Norris, 2009). In a number of cases the knowledge transfers are not complete and hence this leads to devastating effects on the end product from the side of the vendors. Also another major possible risk is the loss of control. If Boeing outsources its business, there is a high possibility to loss control over those processes of the company. In situations where the company does not have complete control of the processes, it can lead the company to be faced with number of uncertainties and unsure results. Hence there are clearly a number of risks that the company faced while they outsource the decision making for the 787 to foreign vendors. 2.2 Benefits vs. Risks: Outsourcing can have a number of benefits for Boeing. Outsourcing the Boeing 787 processes can lead the company to be faced with a possibility of cutting costs, by paying much lower levels of wages to the high skilled workers (Wagner & Norris, 2009). Also, this enables the company to gain the best expertise from different regions of the world, while also focusing on its costs. Also, outsourcing can allow the current employees of the company to be able to work on more critical aspects of the manufacturing process. However considering the risks, it can be concluded that the risks of outsourcing outweighs the benefits of outsourcing in the case of Boeing. The main reason for this is that the company invests a great deal into the project. Outsourcing of the processes can lead to delays which in turn can lead to the late delivery of orders to the customers. In the case of Boeing 787 the project involves high levels of finances and investments and hence a single delay or a single mistake can cause the company a very high level of liabilities. For instance, if the suppliers do not provide the supplies on the promised date, it will lead to delays in the process of the company which in turn will delay the final product to the customer. Also, in terms of the level of quality of the products and the overall processes, any lack in terms of the quality can impact a number of lives. Hence there is no margin for error in this type of outsourcing (Wagner & Norris, 2009). It is also important to note that in situations like these, companies need to focus more on pluralistic approach, i.e. an approach where everyone benefits. However considering the case of Boeing, it is clear that the company’s risks are way higher than the benefits. The risks of these are relatively much higher than the overall benefits. Hence it can clearly be concluded that the risks involved in the outsourcing approach is much higher than the benefits and hence it is essential for the company to rethink the decision. 3.0 Boeing’s Supply Chain: Boeing has been known for the major changes that the company made to the overall supply chain management of the company. With the urge to streamline the processes and the overall time that it takes for the development of the 787 Dreamliner, the company brought about a number of changes to the way that they built the planes. In the past it is to be noted that the Boeing focused on a number of suppliers for the parts and the company would work on assembling the entire plane themselves. The overall time taken for this would be very high. However with the new supply chain, the company was very highly reliant on the suppliers. As seen in the case, the author explains, “Some 17 partners in 10 countries produce major parts of the aircraft. Vought Aircraft Industries in South Carolina makes the rear fuselage, and Alenia Aeronautical of Italy produces the middle fuselage sections and horizontal tailpieces” (Building the Boeing 787, 2010). The major sections had been outsourced to the suppliers for building, and which were then expected to be sent back to Boeing for final assembly and testing. However although the outsourcing strategy seemed to be a full proof plan, the company has been faced with a number of issues due to the decision (Wagner & Norris, 2009). The following sections will detail the main issues faced by the company and clear details have been provided for the possible solution. The solutions have been drawn out considering the current position of the company as well as the decision made based on the most useful decision in the interest of the company and the overall brand image of the company. 3.1 Issues Faced: The suppliers formed the main issue for the company. Boeing’s strategy was being faced with major cracks in the background. The company was noted to have a number of issues as the suppliers of the company were unable to keep up with the schedules. This led to a delay in the delivery for the assembly which in turn led to delayed finished products to the customers. The company has seen to be delayed by almost six months for the delivery of the finished products. The main issue that the company faced is the inability of the suppliers to meet the needs of the company in time. As explained by Kevin Meyer, the company has been faced with, “having to design and build huge Rube Goldberg transportation devices, miscalculating total assembly time, transferring knowledge to a potential competitor, running out of fasteners, and even spinning off a subassembly operation that turned into a profitable company... something just didn't pass muster” (Meyers, 2007). It is essential to also note that the company’s change in strategy for the 787 and the decision for outsourcing has been one of the most incorrect decisions. The company has been faced with major delays in the final delivery of the goods as well as major liabilities for not keeping up with the delivery schedules. The idea of global outsourcing for the processes did not assist the company in any manner (Wagner & Norris, 2009). It is essential to note that the company focused on the development of the product as well as a lot on innovativeness, however Boeing failed to accurately calculate the risks for the project. The company shows high levels of over confidence which has been the main reason for the issues that had been caused. A report highlights that, “The supplier problems ranged from language barriers to snafus that erupted when some contractors themselves outsourced chunks of work. Many of these handpicked suppliers, instead of using their own engineers to do the design work, farmed out this key task to even-smaller companies. Some of those ended up overloading themselves with work from multiple 787 suppliers, Boeing says. The company says it never intended for its suppliers to outsource key tasks such as engineering” (Evolving Excellence, 2007). In the words of the director of the Centre for International Industry Competitiveness at the University of New Haven - George T Haley, “If Boeing mismanaged anything, it is that they have tried to introduce an innovation in their supply systems at the same time they have innovated in product and assembly. Boeing should have held all systems and suppliers close to their assembly lines to facilitate cooperation between suppliers and Boeing” (McInnes, 2008). Hence it is evident that the main issues that the company faced inaccuracy in the decision making of the company and also the incorrect timing of events (Wagner & Norris, 2009). Having understood the main issues, it is essential to focus on the possible solutions that the company could incorporate to ensure the issues are not faced again in the future. 3.2 Possible Solutions: The issues that have been created due to the decision of global outsourcing cannot be undone, however the company can work on improving the current situation and developing the Boeing 787 in a more effective and strategic manner. It is essential to note that Pat Shanahan the replacement of Mike Bair has pinpointed the errors and the issues very effectively and “Shanahan characterized the 787's problems as a breakdown in the transition from the design and development phase to aircraft production” (Evolving Excellence, 2007). Considering the issues that the company has faced, it is recommended that companies like Boeing focus on the supply chain management to a great extent and focus on developing the supply chain in an effective and efficient manner. Companies in the position of Boeing, where the investment levels and the contractual liabilities are so high, need to ensure that the risk assessment of all decisions is strongly made (Cohan, 2008). Here it is evident that the company has had low focus on the risk assessment and the decision making has not been very clear and focused. Hence avoiding these types of situations will permit a higher chance for success. The company’s overall supply chain management has proved to be quite weak in the case of Boeing 787 and hence the company needs to focus on development of stronger supply chain and also needs to keep in track with the various theories. In order to gain complete success and benefits from the supply chain, it is best for Boeing to focus on the value chain aspects. This will help ensure better overall success for the company. An effect method that the companies can follow is to ensure that all production is stopped until the errors are clearly found. This is the technique used by Toyota Production System. It is cheaper to stop complete production until the source of the error is found rather than focusing on correcting the mistakes once they are committed (Evolving Excellence, 2007). Industry analyst have highlighted that the problems faced by the company is “growing pains” (Cohen, 2009) which will not make any difference to the suppliers until there is a strong stance taken by the company. Hence following Toyota’s Production System will prove to be an effective method for companies in this situation. 4.0 Critics and Boeing: Boeing has been faced with a high number of criticisms over the past few years. The company has been in the news for the issue of the late delivery of the Boeing 787 and the intense issues that the company has been faced with due to the global outsourcing. There have also been numerous critics that have also accused the company to export the American jobs to other international locations with the outsourcing efforts. With the high levels of stress and confusions that the company has already been through due to the delays from the suppliers and there are more number of critics waiting to attack the company and to criticize the actions of the company. One of the most common criticisms that have been heard include how the company has exported the America jobs and how the outsourcing efforts of the company have had a negative impact on the American jobs. There have also been a number of other criticisms about the company including those of the safety of the Boeing 787 and the reliability of the plane after all the confusions and chaos. However for this study, the only focus here is on the criticism about the export of American jobs. Hence in order to identify whether or not these criticisms are fair as well, as to consider what the company needs to respond for these criticisms the following sub sections discuss these points in detail. 4.1 Fairness of Criticism: Considering the criticism of the loss of jobs for Americans with the outsourcing efforts of Boeing, it can clearly be noted that all these criticisms are unjust and unfair. Outsourcing has been defined as, ‘Contracting, sub-contracting, or 'externalizing' non-core activities to free up cash, personnel, time, and facilities for activities where the firm holds competitive advantage (Mack, 2004). Considering this from the view point of the company, it is essential to note that the process of outsourcing is not meant for taking away the American jobs but is more so for the success of the company and the benefits of the company. The criticism can be deemed to be negative and unfair as the outsourcing benefit the business in the following manners. Firstly, it allows for easier knowledge transfer and better internal commitment, the involvement of outside providers helps in building the consensus and also allows the company to follow best practices, secondly, it helps in reduction of costs of the resources. Outsourcing also helps in the improvement of the skilled resources as well as improvement of quality. Finally, it also permits a chance for multiple locations, vendors, and also a chance to reduce risks and improve overall flexibility (Mark & Richter, 2004). Considering the benefits of outsourcing, it can be clearly said that it is fair on the side of the company to opt for outsourcing the jobs as it helps in cost cutting as well as allows more skilled labour to complete the work in more effective and efficient manners. Although in the case of Boeing, due to the number of issues that the company has faced, the outsourcing benefits do not fit in perfectly and this leaves a number of loop holes. However, the company definitely has its reasons for the decision making and there is always a pluralistic approach that companies follow to ensure that everyone is a winner. However, when Boeing is attacked with criticism of exporting the American jobs, then the company definitely requires responding back. The following section deals with how the company can respond to such criticism. 4.2 Company’s Response: Critics have made a number of comments and criticism of Boeing to have outsourced the American jobs. It is essential for the company to provide their side of the story as well and to explain the reason for the outsourcing. Here the company can provide details explaining why the decision of outsourcing has been implemented. A recent report highlights that the Boeing Chairman and CEO James McNerney explained, “We face a global skill shortage. The problem is growing acute in the U.S. We face a skill shortage, not a labor shortage.”, The report also went on to explain, “There may be 1,000 Boeing employees who could come up with a way to solve that problem” (Arndt, 2010). The above statement by the CEO provides a clear overview of the decision made. This provides a clear answer to the critics and helps the people understand the company better. It is also essential for the company to attend the press meetings and to provide their views on the various critics. It is also essential that the company overlooks the tone of the criticism and focuses only on the suggestions. It is also essential to look for the best from the criticism and to use this as a stepping stone to success for the company. It is a common point to be critiqued and to be put into the spot light for most companies. Hence for Boeing, it is essential that the company focuses on the suggestions being made and also focuses on what can be done about the situation at present to help ensure a more successful company. 5.0 Conclusions: Boeing has been in the industry for a long time and the company has been able to meet the industry needs and standards effectively over the years. Boeing has always ensured for complete assembly within its own company and does not outsource the major development to any other company. The company has been known for the design, assembly and support systems for both the commercial jetliners as well as the defense air planes. However the decision for the Boeing 787 has involved a high level of misjudgment as well as lack of complete and accurate risk analysis (Cohan, 2008). As has clearly been noted in the above discussion, this has led the company to be faced with a number of issues and the company has also been slapped with major contractual liabilities as well. It is essential to note that although this cannot be corrected, the company can still get control of the situation. As a recommendation to the company, it can be noted that the company implement the ‘Toyota Production System’ which will help ensure that quality of the final product is in no way low in quality (Meyers, 2007). Also, in terms of the constant criticism that the company faces, Boeing requires to answer the questions of the press and media in a calm and composed manner and to explain their reason for outsourcing the jobs to global suppliers. On the whole, Boeing has been able to build a brand name and image over the years (The Boeing Company, 2010). One mistake however has lead the company to be faced with high number of liabilities as well as criticisms and together all these have dampened the brand image of the company to some extent. The case has helped understand the importance of accurate risk assessment as well as accuracy in the development process of products. 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