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Dream Postponed

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The costs and the benefits of globalisation are all around, even high in the skies above us. A prototype of the Boeing 787 Dreamliner recently caught fire during its second test flight and was forced to make an emergency landing. The required design changes and updating of systems software to take care of the problem could further push back the Dreamliner's launch. It is already two years behind schedule. That a vanguard of a new generation of passenger aircraft should encounter some delays and birth pangs is not unusual. What makes the Dreamliner saga a cautionary tale is that it is the world's largest and most ambitious product to be based on outsourcing and supply chain. What went right and wrong with its outsourcing strategy may hold lessons for everyone involved in globalised manufacturing.

True, not all technical glitches can be blamed on outsourcing. But a product that relies to an unprecedented degree — 70 per cent — on outsourced components, and whose partners' errors represent the bulk of its problems, should be sobering to manufacturers that embrace outsourcing. The idiom about the weakest link in the chain holds as true for supply chains as for the metallic variety. In recent years, products from Toyota cars and Barbie dolls, to pet food and blood-thinning pharmaceuticals have been recalled because one supplier fell short.

Boeing's Dreamliner is different even from these other products in that it was conceived of as a global product from the outset. Those who manufacture its multitudes of components are not just suppliers of parts designed by Boeing, but rather partners from design to delivery. Since 1993, the company adopted a ‘make-buy' strategy that cut not only labour costs — by manufacturing abroad — but also the upfront R&D costs by involving foreign companies not as subcontractors but full partners. As a result, parts for the 787 are designed and built at 135 sites in two dozen countries before semi-assembled parts are transported in a giant modified 747 to be assembled in Puget Sound.

This revolutionary approach was a game-changer for the aviation industry. In addition to securing Boeing a vast number of orders, the lean production has reduced Boeing's labour force by more than half, from 109,000 in 1998 to 48,000 in 2004. But the downside is becoming all too apparent: the complexity of the operation involving collaborative designing, engineering and fabrication has already caused major delays, forcing Boeing to reevaluate its partners and appoint new ones when necessary.

A recent book, Turbulence: Boeing and the State of American Workers and Managers by four academics and industry insiders, is based on 14 years of interviews with Boeing employees and offers a unique insight on America's iconic company. "The innovations and changes Boeing introduced to remain a leading producer of airplanes," the authors write, "produced stress and turbulence in the lives of workers and managers alike." It may now be hollowing out the industry leader's core competence. Many large corporations are also embracing the outsourcing and decentralising strategy that Boeing adopted and their outcomes could prove similar.

Boeing may well be producing more planes with fewer people, but a serious loss of morale among its employees means that engineers and executives who were proud of their product now live in constant fear of being laid off. "If I am just a number to them," one employee told the authors, "they're just a paycheck to me". In the wake of the troubles it encountered, Boeing ‘onshored' some work back to its US-based employees, but this could prove to be only a temporary palliative.

Meanwhile, engineers with long years of service worry what the new outsourcing strategy might mean for Boeing and for America. "As the company sells plants, gives away its hard-earned and expensive know-how, it is opening the door for competition against itself and losing control of the prime components of its product," a veteran engineer told the authors. Sacrificing the technical knowledge that the current strategy entails would eventually weaken the company's core competence as a successful large-scale system integrator.

Boeing's transformation from a ‘family' to a ‘global team' may have been dictated by the exigencies of changing economic and technological environments, but its long-term consequences will hold important lessons for others embarking on a similar path.

The author is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online.

boundtogether dot bw at gmail dot com

(This story was published in Businessworld Issue Dated 27-12-2010)

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