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Is outsourcing to blame for Boeing’s 787 Dreamliner woes?

It's been a miserable week for Boeing. Federal investigators have grounded all of the U.S. company's new and much-hyped 787 Dreamliner jets after reports that the aircraft's lithium-ion batteries were overheating and catching fire.

Two major airlines in Japan grounded all Boeing 787 jets on Jan. 16 after one had to make an emergency landing. (AP)

And already, a favorite culprit has emerged: outsourcing. Critics have long charged that Boeing was far too reliant on offshore suppliers for the 787's production. More than 30 percent of the jetliner's components came from overseas, including the Japanese-made lithium-ion battery that is now garnering all the headlines. (By contrast, just 5 percent of the parts of its predecessor, the 747, were foreign-made.)

But why should outsourcing matter here? After all, it's not as if Japan is incapable of making decent lithium-ion batteries. And this is where the argument gets a bit fuzzier. One possibility is that Boeing's far-flung network of suppliers made it that much trickier for the U.S.-based manufacturer to spot and evaluate systemic problems. Here's the Globe and Mail's Guy Dixon making that case:

But the vast collection of components by hundred of suppliers that go into a 787 makes troubleshooting potentially more difficult. Although outsourcing has always been a part of commercial aviation, the difference now is the complexity and co-dependence of the electronics operating the aircraft.

Aerospace consultant Scott Hamilton quotes an engineer who raises similar worries:

“There aren’t that many qualified outside experts (except at Airbus). Where are they going to get them from?” he says. “This is where the extreme outsourcing really causes problems. How are they going to get their suppliers to be truthful? That has always been a problem in aeronautics. The 787 organization makes it much, much worse.”

These concerns are hardly novel. Back in 2011, Michael Hiltzik published a long piece for the Los Angeles Times questioning Boeing's over-reliance on foreign suppliers for the Dreamliner. That piece, however, was largely focused on delays and cost overruns: "The drawbacks of this approach emerged early," Hiltzik wrote. "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."

And the criticisms go back even further than that. Over at Quartz, Tim Fernholz dredges up a memo (pdf) from aerospace engineer Dr. L. J. Hart-Smith, who warned Boeing way back in 2001 that outsourcing wasn't always a savvy business decision. "A strong case is made that it will not always be possible to make more and more profit out of less and less product and that, worse, there is a strong risk of going out of business directly as a result of this policy."

That said, it's worth adding a note of caution here: It's not yet clear what, exactly, is wrong with the 787 — James Fallows suggests that if it's merely a battery issue, that may be "specific and correctable . . . rather than some mysterious, unbounded threat that could undo the 787 project as a whole." Nor is it even certain that outsourcing was to blame for this particular battery failure. (See Tim Fernholz for some skepticism on that front.) On that, we're still awaiting further details.

But there's a side story here that's also worth noting. Putting the 787's specific battery issues aside, in recent years a number of companies seem to be rethinking the sort of offshoring practices that Boeing (among others) has pursued so heavily. An Economist piece this week outlines the trend:

Most firms do not give enough thought to choosing where to produce. To an alarming degree, says McKinsey, “companies continue to indulge in herd behaviour” when deciding where to base their operations and how to arrange their supply chains. Many of them, says the consulting firm, simply follow each other around to low-cost countries or allow themselves to be drawn in by governments waving wads of cash and other incentives. . . .

Two sets of strategic problems can arise from offshoring production to another part of the world, especially if it is poorly thought out. The first of these concerns the logistics of supply. The more that firms spread their operations around the globe, the more vulnerable they become to disruption from unexpected events such as natural disasters or political unrest. The second strikes at the heart of what companies try to do: sell more and better widgets to customers than their rivals down the road. Often, the more a firm offshores and outsources, the worse it will be at responding to customers quickly.

The piece takes pains to stress that offshoring isn't always a disaster — sometimes it really does help companies become more profitable (though it's not necessarily good for domestic workers). Yet many firms now seem to be realizing that the practice doesn't make sense in all situations. This will be something to watch for in the years ahead, long after Boeing manages to get the 787 up and flying again.



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Brad Plumer · January 18, 2013

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