The outsourcing risk
Complicated products like aircraft involve a necessary degree of outsourcing, simply because the firm lacks the necessary expertise in some areas, such as engines and avionics. However, Boeing significantly increased the amount of outsourcing for the 787 over earlier planes. For the 737 and 747 it had been at around 35-50 percent. For the 787, Boeing planned to increase outsourcing to 70 percent.[6]
Boeing didn't approach outsourcing as a troublesome necessity. Instead, like many US firms, it enthusiastically embraced outsourcing in the 787 as a means of reducing costs and the time of development. “The 787's supply chain was envisioned to keep manufacturing and assembly costs low, while spreading the financial risks of development to Boeing's suppliers.”[7]
In his 2001 paper, Hart-Smith had warned of the additional costs and risks of outsourcing. Outsourcing didn't cut costs and increase profits, he wrote; instead, it drove profits and knowledge to suppliers while increasing costs for the mother company. “Not only is the work out-sourced; all of the profits associated with the work are out-sourced, too.”
Hart-Smith argued that make-buy decisions should be based on complete assessments of all of the costs: “The hope is that, in future, make-buy decisions will be based on complete assessments of all of the costs – and that, in future, make-buy decisions will not be made until after the product has been defined and the relative costs established.” Outsourcing requires considerable additional up-front effort in planning to avoid the situation whereby major sub-assemblies do not fit together at final assembly, increasing the cost by orders of magnitude more than was saved by designing in isolation from the work-allocation activities.
Boeing didn't follow Hart-Smith's advice and outsourced the engineering and construction of the plane long before the product was defined and the relative costs established. The results have been disastrous. Boeing's 787 project is many billions of dollars over budget. The delivery schedule has been pushed back at least seven times. The first planes were delivered over three years late.