The January 4, 2010 edition of Aviation Week & Space Technology carried an interesting story called “Tactical Retreat,” that discussed the Boeing 787 supply chain.  We’ve discussed this issue before—notably here—and linked to an article that described Boeing’s supply chain as a “nightmare” in which “individual suppliers [ ] maximize their own self interest at the expense of the program’s objectives. In the 787 supply chain, ‘a complicated array of companies share the risk and the profits of the new airliner. That means financial burdens will inevitably shift up and down the line as each company protects its own interest.’”  In other words, rather than forge true partnerships with its suppliers, Boeing created an environment where risks were pushed downwards in the supply chain, and each supplier was on its own with respect to performance. 

It was a Darwinian environment.  Instead of reinforcing its supply chain to ensure performance, Boeing created a situation where each individual link in the chain was stressed.  Inevitably, some of the links were bound to fail.  We noted in this article that companies connected to Boeing supply chains underperformed their peers.  Finally, the 787 supply chain snapped.  Vought was the first to go—as we reported here—but perhaps not the last.  Boeing reportedly paid out somewhere between $400 million and $1 billion in order to buy out Vought’s South Carolina manufacturing plant, and then paid an undisclosed sum for the Alenia North America portion of Global Aeronautica’s subassembly facility at the same plant.  (In 2008 Boeing bought out Vought’s share of Global Aeronautica in a separate transaction.) 

Although there is likely strategic value in the purchase, the bottom line is that Boeing has paid out hundreds of millions of dollars in order to internalize its external supply chain.  As the AW&ST article states, “Boeing’s [South Carolina] acquisition … gives the company control of a crucial link in the troubled 787 supply chain as it moves to ramp up production….”  The article recounts that Global Aeronautica was “a cornerstone in Boeing’s strategy to outsource major pieces of the 787,” but was “ultimately an example of how that strategy was too far of a reach.”

If there is one axiom of modern aerospace & defense supply chain management, it is this:  execution risk cannot be transferred from one part of the supply chain to another.  Regardless of which entity performed the work, Boeing ultimately was responsible for its aircraft.

The AW&ST article quotes one union member as saying that Boeing’s “attempt to spread the 787’s development risks and costs across the supply chain actually made the company more vulnerable” to performance problems.  We agree with that assessment.  By treating each supplier as an individual entity without properly acknowledging the interdependence of the supply chain—and its ultimate dependence on each supplier at whatever tier—Boeing put its program at risk.  In the final accounting, the 27-month delay in the 787’s first flight is not the fault of any individual supplier; instead, it is the result of Boeing’s mismanagement of its program and its program supply chain.

As the article notes, Boeing paid the price for its mismanagement.  The union member is quoted as saying, “Rather than saving money, Boeing has become the reinsurer of its supply chain and has in fact had to buy outright or loan money to different suppliers to keep its outsourcing model from failing.”  The article reports that part of the Alenia deal “addresses Alenia’s demand to be compensated for costs related to the 787’s schedule slips,” among other things.  Alenia is not alone.  The article states (without providing specifics) that other 787 suppliers have submitted financial claims for the repeated program delays.  An industry analyst is quoted as describing the situation as a “logjam” of supplier claims.

Such claims take time away from program execution, of course, exacerbating an already delicate balance of cost, schedule, and execution.  Time spent reviewing and negotiating claims is time that is not being spent managing program performance.

We’ve heard time and again that implementing long-term fixed-price supplier agreements, even before design finalization, reduces the risk of cost overruns.  This is a nonsensical statement that ignores the fact that supplier change orders and claims are the inevitable result of design changes, schedule slips, and other normal changes to the pricing assumptions initially used.  The Boeing 787 program is evidence that fixed-price supplier agreements mean nothing, if program performance is imperiled.

Although things have reportedly improved—and, really, how could they not?—Boeing’s initial approach to program supply chain management should stand as the poster child of how not to do it.