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Rousing the Dreamliner from its nightmare

Boeing 787 DreamlinerBy Shamus Angkrom, Raghu Gopal, Joseph Hake, Jacquelyn Hunter and Matt Williamson

All people with any interest in flight, from the casual passenger to the industry analyst, will no doubt have been exposed to the recent buzz regarding the Airbus A380 and the Boeing 787 Dreamliner. In the United States all eyes have been set firmly on the production of the 787, as both regional and long-haul service providers plan to utilize the 787 in a manner that will create a great deal of competition for the A380. You would be hard-pressed to reference commercial air travel or U.S.-based defense without the inclusion of Boeing or its various subsidiaries.

Several years ago, one could scarcely mention Boeing without alluding to its former claim-to-fame, the 747 “jumbo jet.” Those of us fortunate enough to have traveled overseas for business or pleasure have undoubtedly experienced the enjoyment of being a passenger on one of these airborne behemoths. Nowadays, when discussing the premiere platform for wide-body, long-haul commercial air travel, most would reference the Airbus A380 instead of the “dated” 747.

The scale at which Boeing is able to produce large-scale aircraft, 20 airplanes per month, is both impressive and indicative of the company’s size and efficiency. The amount of capital and labor involved in the timely production of large-scale precision machinery is such a barrier of entry that, insomuch as commercial airline production is concerned, Boeing only has a single serious competitor, Airbus.

The Dreamliner

Airbus is the only aircraft manufacturer with the available resources to position itself as Boeing’s chief and sole competitor. In response to the public’s viewing of the 747 as a thing of the past, Boeing developed, as its latest piece-de-resistance, the 787 Dreamliner.

The origin of the Dreamliner was the now-scrapped Boeing Sonic Cruiser, which would fly at just below the speed of sound, while using roughly the same amount of fuel as the 767. Post-9/11 fuel prices, however, shifted the market’s eye toward even greater fuel efficiency. The Dreamliner began as a plane that would use fuel 20 percent more efficiently than other long-distance mid-sized planes.

The planning and development of the 787 did not stop at fuel efficiency, but rather continued in a direction that vied to revolutionize the commercial airplane experience. The amenities and attributes of the 787 alone appeal to the masses. For fans of “green” technology, the fuel efficiency and “hybrid” qualities of the 787 will please you and your fellow environmentalists. For frequent business travelers, the opportunity to fly in a humidity controlled cabin environment where the air from outside the plane actually circulates throughout the cabin, mitigating the common “airborne” symptoms, provides an incredible advantage to any other current commercial models. For the chronically nervous passenger, the 787 has self-monitoring systems to alert ground crews of malfunctioning systems. Furthermore, the 787 embodies state-of-the-art technology to the point of having the capability to fly itself; at most eliminating all but our psychological need for a pilot, and at least having the ability to override pilot error.

By the end of 2003, the market for 787s was estimated at $400 billion and the board of directors had approved the project. In early 2004, Boeing had official relations with 15 suppliers, and the launch of the Dreamliner project was made official. By the third quarter, airline companies had already begun making orders. All things running smoothly, the end of 2006 saw the 787’s design made final, manufacturing begun, and more than 400 orders were placed. Boeing announced that 787 deliveries would arrive in May of 2008, as scheduled.

It seems as though the stars had portended Boeing’s time to dominate the industry. The stars, however, had something else planned. The 787, as was the Airbus A380, is already billions of dollars over budget and stands to be at least three years behind schedule with over 100 orders cancelled to date.

What cruel twist of fate was it that transformed Boeing’s newest, and potentially greatest, design from a boon to a burden?

The nightmare

Boeing President and CEO Jim McNerney admitted, “I think that we bit off more than we could chew, clearly. We would have drawn some lines in different places, but that's the learning curve that most industries go through as they globalize partnerships. And we're going through it.”

What he is referring to is Boeing’s attempt to revolutionize the industry even further by creating a sophisticated global supply chain network that was to reduce the process of the 787 by up to three months. The slowly evolving aerospace supply chain has been in place for decades, pragmatic and predicated upon time-tested techniques and trusted suppliers. The O.E.M.s, creating the capstone of the pyramid, are supported by their Tiers 1, 2, and 3 suppliers. These suppliers, in turn, are supported by a larger group of smaller suppliers, i.e. revenues not exceeding $500 million, referred to as Tiers 4 and 5 suppliers. Beneath these reside manufacturing facilities and other domestic or foreign “job-shops.”

As you move up the supply chain, the levels of sophistication, engineering, procedural quality, and process intensify at near-exponential levels. In order merely to be able to supply a Tier 2 supplier, a Tier 5 supplier must first endure a battery of inspections, quality control procedures, and countless aerospace-specific certification procedures. This process is expected not only of the Tier 2 supplier alone, but also for the O.E.M. to which Tier 2 supplies and the affiliated regulatory bodies such as, but not limited to, NADCAP and ISO. As arduous and redundant as this process can be, it is a time-tested and proven methodology that has provided us with nearly every plane that has ever flown the skies above our heads.

Boeing sought not to revolutionize only the standard of commercial airplanes, but also the efficiency and breadth of the aerospace industry’s supply and value chains. "The world has changed, and Boeing has changed with it. They've offloaded a lot of production. They are farming out everything to others so they don't have to build it," said Michael Boyd, a Colorado aviation consultant. The premise sounded logical: leverage the proven global outsourcing model via specialized manufacturers to decrease lead times and costs, while simultaneously driving profitability and throughput. "All Boeing does is design it and glue it together," said Boyd. The fact that Airbus was forced to announce delays of the A380, as a result of attempting such a task on a single continent, did not deter Boeing from attempting a similar, albeit far more complex, supply chain model.

Precision manufacturing, by its very nature, cannot be outsourced in its entirety, particularly in regards to the aerospace and defense manufacturing industry, as demonstrated by both the 787 and the A380 projects. Defense has its own very obvious reason: national security. Commercial aerospace, however, must go one step further: safety and regulatory requirements for this industry are easily some of the most rigorous in the world. Boeing’s attempt to capitalize on the industry’s excitement about the Dreamliner by taking part in the outsourcing trend has proven disastrous. This is not to say that Boeing is without hope, as the massive scale of this project is forcing them to perfect the new aerospace supply chain model.

What was to be a ground-breaking example of value innovation instead became a serious and ever-growing liability.

The disaster

"If Boeing mismanaged anything,” says George Haley, of New Haven University. “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."The first delay was announced in September 2007; just a couple months after Boeing’s stock had reached record value. Despite even longer delays announced in October, there were now over 800 Dreamliners ordered. 2008 was the year when the big problems began to emerge. Supply shortages, design flaws, unfinished work by suppliers, labor strikes, software problems, incorrectly sized fasteners all contributed to a three-month delay becoming a two-year delay. “We lost control and, in the future, I believe we will outsource less”, said Jim Albaugh, who was, at the time, director and is currently C.E.O. of Boeing’s commercial airline division.

2009 saw more problems with products provided by suppliers, and the announcement of even further delays. By this time, even though early testing of the plane had occurred in 2007, Boeing had redesigned the 787 so much that any previous testing was no longer relevant to the plane. At this point, Boeing’s problems with potential customers started to develop. In 2008, Azerbaijan Airlines became the first customer to cancel their order for 787 planes; in 2009, Russian Airlines became the first major airline to cancel their order.

2009 unfolded to see more cancellations, more delays, billions of dollars worth of losses, and the first lawsuits. 2010 brought about an exploding Rolls-Royce engine, two test flights, one of which saw puddles formed from leaks in the climate-control system and ended with the power distribution system catching fire, and Air India claiming $840 million in restitution for the delays. By the end of 2010, the delivery date was set to July 2011—more than three years after the original delivery date.

Piecing it back together

“In addition to oversight, you need insight into what's actually going on in those factories. Had we had adequate insight, we could have helped our suppliers understand the challenges,” Scott Carson, former C.E.O. of the commercial airline division, says of the supplier problems.

In the beginning of 2008, Boeing began the process of taking better control over the supply chain. The first move Boeing made was to purchase a 50% stake in Global Aeronautica, from Vought Aircraft Industries. The remaining shares are owned by Alenia. This acquisition led to the eventual purchase of Vought’s production facility in Charleston, South Carolina in July of 2009. By purchasing the facility, Boeing was able to take direct control of the fuselage production, which was previously handled by Vought. The new facility in South Carolina not only provided Boeing with a greater amount of production control, but also provided themselves with a second assembly line far-removed from the lingering labor issues in Washington.

“On the execution side, where we have been challenged, I'm pleased to say we are making significant progress toward resolving the start-up issues in our supply chain and in our own factories. We have put people and processes in place at our major suppliers to help ensure their performance going forward,” said C.E.O. McNerney during his 2008 address to Shareholders. By the end of the year, Boeing had purchased the remaining shares from Alenia.

Consolidation

The acquisition of Global Aeronautica by Boeing was by far the greatest stride Boeing has made toward recovering from the Dreamliner nightmare. If Boeing were to begin a large-scale supply chain consolidation process, it would do well to start it by overseeing the osmosis of the supplier network. To essentially eliminate the lowest tier, composed of hundreds of small suppliers, by having the Tier 4 suppliers acquire the small machine shops would simplify the consolidation process, simultaneously creating larger revenues for Tier 4.

By consolidating what is now an incredibly over-diversified range of producers, Tiers 1, 2, and 3 suppliers would finalize the consolidation through acquiring a much simpler and more streamlined production network. By gaining a greater amount of control over top-tier suppliers, Boeing would direct the consolidation of smaller suppliers into the lower tiers of the supply chain.

By following this model, Boeing would be able to supervise greater areas of the supply chain, gaining the ability to better predict shortcomings and creating the possibility to compensate for slow production. While speeding up and filling the gaps existent in the current model, by directing the consolidation of the lower end of the supply chain, Boeing would be able to purchase significant stake in the newly-formed conglomerates, giving them not only a sustainable control over suppliers, but also a significant competitive advantage over competitors.

The vertical integration of the supply chain would also further allow its stakeholders to implement stricter standards and regulations regarding the quality, precision, and timeliness of producers, allowing a sort of “natural selection process” that will eliminate the weakest elements.

Instead of pulling back, and centralizing the supply chain, Boeing should take advantage of the system it has created. By doing so, Boeing will have developed a cost-effective and efficient system that will be near-impossible for competitors to duplicate any time in the near future.

The Dreamliner project, although fraught with disaster, is beginning to piece itself together. The problems seem to have been addressed, supplier issues have been identified, and the trial-by-fire that Boeing has experienced has given it an unparalleled insight into how to control a massive and complicated supply chain.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.