Outsourcing and Supply Chain Management at Boeing - Case Study Example

? Outsourcing and supply chain management at Boeing Introduction This is an American aerospace corporation that started business in 1916. It is one of the leading worldwide manufacturers of commercial, defence and private planes. From a humble beginning, the company has expanded its operations to many countries outside the US. It has made lucrative deals with the American government including being the sole builder of the International Space Station. This helps the government monitor its defence capabilities and monitor activities in other counties that may compromise global peace for example, monitoring developments of dangerous missiles. It manufactures commercial aeroplanes, military jets, space shuttles and rockets. It has over the years produced a series of planes among them the latest project; the Boeing 787. This project was referred to as the 7E7 before being renamed the 787 in 2005. The plane has a similar size to the 767 with the overriding advantage over the former being its fuel consumption which is at 20% less. In addition to fuel efficiency, the 787 is credited with features like smooth nose shape, noise reducing chevrons and a four-panel windshield which are streamlined to reduce air resistance when airborne (Turner, 2010). This 787 project has not gone smoothly without operational hiccups; when the engineers came up with the first design, the plane said to have been overweight to the tune of 2,300kgs above the specified weight. This was however not all; there were 7 delays in the project process among them being an in flight fire on the Rolls Royce engine during testing. That not enough, just in the month of January 2012, the company reported numerous problems on some 787 fuselages. The effort and capital that was employed to come up with this latest machine is outrageous. Once the airline companies and other clients found the products offered by this company faulty, they claimed compensation which resulted in a dip in Boeing’s margins. Boeing’s corporate profile In terms of turnover, the company is among the largest in designing, assembly, selling and after-sales maintenance of aircrafts and other defence equipment. There are other companies within the European Union for instance the European Aeronautic Defence and Space Company (EADS) and French owned Dassault, who collectively share this global aircraft manufacturing business with Boeing. It is placed third, according to the latest estimations, in supply of defence systems and aerospace equipment with the biggest client being the American government. America continues to have interest in the management of the company because of the place it occupies in being part of its future ambitions in space exploration and general protection of the citizenry. The company, listed in the Dow Jones bourse, is America’s sixth largest exporter by product value. Good share prices at the listing helps it get more operational capital to finance its expansion strategies which is vital in an increasingly competitive market with new entrants like Embraer from Brazil. To add insult to injury, the year 2001 bombing of Twin Towers in New York dented the company’s revenue streams as the markets were down because of weak American economy. Such terrorist activities and general insecurity causes a fall in the number of airline passengers and increases fuel prices which are the two main problems associated with airline industry. Boeing global business model focuses on mass production of these plane components and defence equipment. It has a strong and well funded research and development department that looks into new technologies to tackle global communication problems. Its vitality as a producer of these important gadgets to the American government makes it look like a partner to the administration which funds some of its processes. In 2007, it partnered with NASA which is fully funded by the government to produce special parts of the Space Shuttle. By the year 2008, it topped the list of companies with the highest value contracts with the American Federal Government. The company expands its market share in its globalization initiatives by acquiring smaller companies offering similar or slightly different products for instance, the year 2005 acquisition of Aviall. Boeing 787 After many years of good fortunes in the company, it lost its market share as the leading supplier of commercial aircraft parts to Airbus. This is because it focused on researching and developing high end products for instance the Sonic Jet, which required massive capital and time to bring to full completion. It also had huge uncompleted orders because of the rising numbers of airline companies that drove up demand especially in the emerging economies. It terms of lawsuits, settlements and subsidy claims, the company has settled many of these due to violations of good corporate governance practices. For instance, the global trade watchdog, World Trade Organization (WTO) after a study of Boeing financial statements, discovered that the company receives a lot of money through government subsidies. All these, together with the company abandoning some programs half way due to cost constraints dented its image as a reliable supplier of plane parts. Due to these developments, Boeing changed its focus to develop a new high capacity aircraft model to rival Airbus’s A380. Global aviation was riddled with many problems due to high energy costs resulting from terrorism activities affecting key oil producing regions in the Middle East. Another problem was the general uncertainty over global peace as America was involved in two major battles in Iraq and Afghanistan; the major tactic used by these networks is attacking flying American and allies’ citizens. All these resulted to a fall in global air travel volumes. The sole intention of introducing this new airline was to address these concerns by producing a safe craft with good internal efficiencies that reduce fuel and overhead costs to airline companies. Initial market perception favoured this new product, mainly because of its much publicised high capacity and the delays in deliveries of Airbus A380 planes. It leveraged on this competitive advantages to initially redevelop its 747 version to meet global demand due to A380 order cancellations. There was widely open competition from these two global players with Airbus improving on its A330 to counter the order cancellations and avoid loss due to these supply chain problems. However, this could not change client’s preferences as they thought the 747 was a better bet. The 787 has also had its fair share of supply delays with the first sample being flown in 2009; this is two years behind schedule on its original plan. Outsourcing in Boeing 787 operations Outsourcing is contracting some business functions to other independent companies; these processes are not considered central to the company. Supply chain management of the Boeing 787 proved a difficult task after the company decided to adopt a strategic decision to outsource construction of some of its components to companies based in countries outside America. This was done because the plane development was a continuous process requiring high capital and workload that the company could not handle with limited capacity after the steep fall in revenue realized in 2007. Despite the initial hiccups resulting to a 3 year delay in assembly of the first plane, this change in strategy changed the way large industrial companies do their business as they were able to observe and learn how the 787 project underwent. Using Boeing’s example, they have managed to avoid the problems faced by this company when implementing the same strategy. The basic advantages associated with the Dreamliner were efficiency in fuel consumption and making this massive plane at low costs. The engineers wanted to make a plane that has greater passenger and luggage capacity which reduces the number of trips the airline companies have to make to carry the same number of passengers. This makes economic sense to these companies operating in a volatile business environment with unpredictable global oil prices. The plane frame uses carbon reinforced plastic materials which are not very expensive compared to aluminium compounds used for other models; and this covers about half of the materials used for the entire plane structure. This was a good idea on paper though as later implementation proved tough since the company had no industrial capacity to manufacture these carbon reinforced components. The management brainstormed on the next move as the orders were coming in; having learnt from the Airbus A380’s delivery problems, Boeing did not want its clients wait for long before getting their orders. This process of contracting some plane building functions to other companies involved a lot of internal reorganizations which provided for seamless exchange of information and data between the parent company and its contractors. Boeing then adopted an open operations plan that ensured the shareholders, suppliers, customers and employees were constantly aware of what is going on to keep their hopes alive (Pearlson & Saunders, 2010). Issues of Boeing management of supply chain With these issues affecting Boeing’s operations, they handled their crisis by involving all stakeholders and contractors in their management and decision making process. Big companies with large industrial output face numerous problems relating to employees and other internal functions. This is because they operate in an ethnically and professionally diverse setting which requires constant monitoring to avoid operational hiccups. Boeing established a communication portal which allowed for seamless transfer of information between suppliers and clientele with the company being an intermediary. As it realized, all the customers needed was to be assured that their deliveries are going to be made at the required state. The success associated with Boeing’s supply chain transparency has made states like California also adopt legislation requiring big firms to disclose operational information for instance, human resource management procedures (Garg, 2012). Boeing can address supply chain problems by overhauling its internal processes; for any company that wants to cut costs incurred in when adding value to a good, the key requirement is for it to increase its efficiency. This is done by investigating how company workforce is spread out in different departments then looking for a way of ridding out duplicating tasks; a company may even outsource non-core duties to reduce wage related costs. The following are the benefits of a well set business processes model Boeing adopted: Time saving: It saves time taken to execute certain tasks since it identifies those duties which are handled by more than one person or team in the workplace. In Boeing’s perspective, after doing an internal audit on its human resource capabilities, they found out that they employed close to 200,000 people in America alone. As a company experiencing financial difficulties caused by the global market slump after September 11th bombing of Twin Towers, it needed to focus on more profitable lines of business. According to Garg (2012), it did this by focusing on its much praised 787 model and reducing the workforce to protect shareholder’s wealth. The basis for outsourcing its 787 manufacturing process was because it was cheaper and time saving over building an internal capacity to manufacture these parts. However, job cuts has to be done in a humane manner to save company’s image that can be tainted once former employees object to the layoffs. In January this year, Boeing made known its intentions to close its Kansas plant which employs slightly above 2000 people compared to 45,000 working there by the turn of 21st Century. Accuracy: Contracting duties that are not central to an organization to other well established and credible companies ensures that these contractors focus on the lines they understand best, thus improving on accuracy. Revamping a business process starts by evaluating all the tasks in an organization and assigning employees these duties based on their competences. Focusing on a single line of duty makes employees become creative and continually improve on their lines for the gain of entire system (Garg, 2012). In outsourcing its functions, Boeing gave a Russian company, VSMPO-Avisma, a contract to manufacture its titanium forgings; this is a large output company and a global leader in production of high quality plane components. In looking for partners, Boeing is looking for the best in the trade, and this makes it assemble a high quality 787 product line. Transfer of responsibility: once a company identifies its key job descriptions and delegates these duties to contractors, they may evaluate these processes to establish if things are going as planned. Boeing took a completely new venture to begin a project riddled with numerous uncertainties; they did not anticipate immediate problems but delegated manufacturing duties to other businesses. In the evaluation stage, the company investigates the contracts to establish those that fall behind schedule hence slowing down the whole supply chain. Once this is done, companies that violate the terms and conditions of the contract due to delays are marked. Boeing then decides whether to terminate the contracts depending on the strength of contractor’s reasons. However, the main problem was communication; this is because the clients, the company and its contractors were not engaged in real time process monitoring to see if indeed it delays were as a result of incompetence. In 2008, Boeing announced that it was acquiring a South Carolina manufacturing plant from Vought Aircraft Industries (VAI) which made some parts of the 787 fuselage (Meyer & Waddell, 2009). Benefits of Outsourcing to Boeing The company applied a major shift in supply chain management after it realized that some contractors were not delivering their parts in time. Boeing took a monumental task of initiating a project that they had no internal capacity to complete. The crisis the company went through after realizing a drop in revenue did not dampen their spirits; the management too this risk as it is the only way to stay afloat in this competitive market. It took one day at a time, adjusting their operations whenever they encountered a problem, to make this project a success. The real time availability of reliable information to all these people in the internal and external business environment proved worthy since they became part of the process; they could also make their valid input that Boeing respected. Criticisms of outsourcing Outsourcing is an upcoming trend since many companies are moving out of America to operate their industries in places with cheap labour thereby reducing operational costs. This is a very tough topic among legislators as some feel these companies move out to avoid paying domestic taxes by operating in emerging economies which offer tax incentives to global investors. They also argue that this form of business has decreased both high and low end employment opportunities in America as these services are moved to other countries (Hira & Hira, 2005). The following are some of the complaints Americans had for Boeing’s outsourcing plans: The main problem associated with outsourcing is worker insecurity as they are unsure if their positions will be given to another person or machine. America is presently moving from a market slump which is characterised by high unemployment rates; outsourcing then compounds this problem as many people are trying to get domestic job opportunities. Boeing did a lot of layoffs that had a huge implication on employment figures. Outsourcing also compromises on information security as large speciality companies are known for their conservative approach to information sharing. Boeing is operating in a competitive environment and was forced to outsource due to little internal capacity to make the 787 parts. Due to this openness in its operations, competitors can easily copy their technology from the suppliers scattered across the world (Krueger, 2010). Boeing is in order to defend itself by looking justifying its actions with the operational efficiencies attained which is in public domain. Conclusion When Boeing announced plans to manufacture the first 787 Dreamliner, it also said that it is revolutionizing the way it does business to meet high global demand for it’s yet to be completed model. Most of the Dreamliner’s components are made by independent suppliers across the globe. Slightly over three years into the new business model, there was nothing to celebrate about as the contractors delayed in supplying the components. The company then went to a panic mode as it wanted to buy back the contracts to control the whole supply chain to protect their business from collapse thereby shielding shareholder’s wealth. However, the company managed to sail through by adopting new operational procedures that allowed for constant exchange of ideas between the company and suppliers. Outsourcing may present different challenges at first but it is the sure way of reducing on costs of production by reducing the wage bill that plagues companies trading in a competitive environment. References Garg, M. (2012). Cases on supply chain and distribution management issues and principles. Hershey, PA: Business Science Reference. Meyer, K., & Waddell, B. (2009, July 7). Evolving Excellence: Boeing Continues to Re- Learn the Outsourcing Lesson. Evolving Excellence. Retrieved April 15, 2012, from http://www.evolvingexcellence.com/blog/2009/07/boeing-continues-to-relearn-the- outsourcing-lesson.html Hira, R., & Hira, A. (2005). Outsourcing America: what's behind our national crisis and how we can reclaim American jobs. New York: American Management Association. Pearlson, K., & Saunders, C. S. (2010). Managing and using information systems: a strategic approach. (4th ed.). Hoboken, N.J.: Wiley. Krueger, L. (2010). Does outsourcing harm America?. Detroit: Greenhaven Press. Turner, E. (2010). The birth of the 787 Dreamliner. Kansas City, Mo.: Andrews McMeel ;. Read More