Last month, an
electrical fire on board a Boeing 787 Dreamliner marked yet another of the
ongoing problems with the aircraft, which can be directly tied to Boeing’s
foolish effort to “globalize” its construction to keep costs down and make the
sales success of the plane a “global” concern…Subcontractors in Japan warned
Boeing that they were being asked to build parts that were not of correct
specifications, while in Italy, parts seemed to be built according to an every
man for himself “specification”…A shortage of fasteners, fasteners not riveted
flush, flight guidance software incomplete, wings not safely fastened to the
fuselage, problems with the Rolls-Royce engine, condensation inside the plane,
and the electrical fire only compounded the endless shortages and delays of
delivery of parts from all over the globe. It is as if Boeing is trying to put
together a jigsaw puzzle with pieces from multiple puzzles. Assemblers in
Everett are nevertheless busy—with 100,000 mistakes requiring rework on 20 planes
that are nowhere near ready to fly.
A recent story? Well, not exactly. I wrote the above in a
post dated December 23, 2010. The Seattle Times and its “aerospace reporter,” Dominic
Gates, finally decided this past weekend to talk to people with some expertise
on the subject—Boeing engineers—and they basically arrived at a similar
conclusion: That outsourcing and lack of quality control is to blame. Of
course, a few months ago Gates and the Times were whining about a few nuts and
bolts being outsourced to Mexico (“Boeing is actively encouraging its suppliers
to outsource work to Mexico”) after they waxed enthusiastic in 2005 about “our
global partners” in Europe and Asia, and the “spectacular” 747s with “bulbous
tops” ferrying in “giant pieces of the
787 for assembly.” Yet in regard to Mexico, Gates wrote “(Jim) Mullen (a Boeing
supplier) argued, counter-intuitively,
that his firm's outsourcing created additional work in Washington state.” In
regard to complaints about the quality of outsourced work in Japan and France, Gates
claims that these are merely a “reflexive response,” implying that it is sour
grapes by local workers upset about the loss of jobs.
Yet it is clear that because of the nature of the
outsourcing—that each of the “partners” be responsible for the design they are
tasked to build—Boeing has lost control of the process and as noted, assemblers
here have to “fix” countless mistakes and irregularities which could more
easily be corrected from the outset if the work had been done”in-house.” The
Times was good enough to provide a link to a report by Dr. L. J. Hart-Smith, an
engineer who wrote a paper for Boeing in regard to outsourcing way back in 2001;
if you took the time to read it, you will see that Hart-Smith warned Boeing
about the dangers of outsourcing too many of the components of a plane to
foreign firms, which the company doesn’t seem to have taken to heart.
For one thing, Hart-Smith noted that there was very little
correlation between outsourcing and cost-saving, particularly when practically
all of the component parts of a complicated piece of machinery:
Out-sourcing is commonly looked upon by management as a tool for
reducing costs. But the unresolved question is “which costs?”. In addition,
there is the matter of “what is the effect on overall costs?”. The most
important issue of all is whether or not a company can continue to operate if
it relies primarily on out-sourcing the majority of the work that it once did
in-house. The experiences of the former Douglas Aircraft Company would suggest
that, in the context of the aerospace industry at least, it cannot! In the more
general context, it should be obvious that a company cannot control its own
destiny if it creates less than 10 percent of the products it sells. One
purpose of this paper is to explain why selective out-sourcing can be
beneficial to all concerned, and why out-sourcing as a supplement to sales
activities may be justified but needs to be recognized, on average, as an added
cost, not a cost reduction...
While outsourcing reduces local
labor, the net effect is actually to increase the number of workers involved in
the production of the plane, and cost-savings is temporary is temporary because
even in Asian labor markets, workers will not accept low wages in the
long-term. The habit of then moving to another low-wage market tends to be
counterproductive with the need to build new facilities and an experienced
workforce:
The inescapable problem with outsourcing work that could be done in-house
is that it necessarily increases the tasks and man-hours to carry out the work
way above those needed to perform all assembly, including most subassemblies,
at one site. Experience in the electronics industry has shown that out-sourcing
work to regions of low labor rate is only a transitory phenomenon. The reason
why the rates were low was that there had previously been no work there. Once
the work became available, hourly rates increased, so that the primary electronic
companies kept moving the work to yet another as-yet-under-developed area, and
the cycle was repeated. This may be cost-effective for small items, with
production lives of only a few years at most, but it is inappropriate for large
aircraft that may need spare parts throughout a service live in excess of 50 years
(80 or more for some military aircraft) and for which the manufacturing program
itself may last 40 or 50 years.
Hart-Smith also noted the
incongruity between “down-sizing”—yet increasing outsourcing. The effect, among
other things, is the wastage of home-grown expertise. Furthermore, reducing the
workforce while maintaining the same level or more of work potentially increases costs; for example, although
some money is theoretically “saved” by laying-off workers, if the workers who
remain are required to work overtime, there is the associated higher wages that
go with it:
Most employees in the aerospace industry today equate out-sourcing of
work they used to do to subsequent down-sizings in their own organizations.
This is natural. But some down-sizings are implemented without any associated
out-sourcing. The consequences of these policies are now well known; diminished
motivation and company loyalty amongst both blue-collar and whitecollar workers,
along with far higher than acceptable attrition rates and a loss of technical
skills that it has not been possible to replace. However, there is another
aspect to the policy of downsizing. There appears to be no doubt that salary
reductions save money in the short term and decreased pension obligations save
money in the long term. Yet the only circumstances under which down-sizing can
continue to decrease costs is the very rare situation in which every department
being downsized has excess personnel and equipment. If even ONE department is
understaffed or under-equipped, the traditional lawnmowering (across-the-board)
reductions in head count will cause the total production costs to increase.
Hart-Smith also noted that
out-sourcing work to inferior facilities accrue higher costs if the product
produced is of lesser quality:
Out-source only on the basis of better facilities; never on the basis
of a temporarily lower labor rate. Out-sourcing as offsets for sales must be
acknowledged as an increase in cost, on average, not a desirable cost saving.
Outsourcing work on the scale
that Boeing was proposing with the 787 is, however, “feasible” if the company
understands that
…out-sourcing work increases total span time and transportation costs.
It out-sources all of the profits that are associated with that work. It also
entails additional inhouse activities that would not have been needed if the
work had been retained in-house…Acknowledge that cost-saving techniques that
work in other high-volume industries are often quite inappropriate for
low-volume industries like aerospace…Find work to fill excess capacity; do not
close it down or sell it off to boost return on net assets. Take on non-core
activities, from time to time, if that is what is needed to reach a balance between
head-count and budgets. Otherwise, irreplaceable critical skills will be lost
and it will not be possible to deliver even core products.
The question one must ask is if Boeing’s business executives
actually believed that it was cost-effective to out-source so much of the
production of the 787, or if they were motivated by other factors. One that
comes to mind is that Boeing believes it would be a competitive advantage
against its principle rival, Airbus, if it gave potential customers a stake in
the success of the airplane, by providing jobs in those countries where in the
current economic climate has made job creation difficult. Thus Boeing may see
its bottom line assisted by being perceived as a “good neighbor”—just as
Japanese automakers have tried to do by locating some of its assembly plants in
the United States. However, unless Boeing successfully solves quality control
issues, the massive outsourcing involved in the 787 will be a costly mistake.
No comments:
Post a Comment