In 2003, Boeing decided to use a very aggressive outsourcing strategy in order to slash the cost of developing their new 787 Dreamliner.
But last month, the Boeing Commercial Airplanes chief admitted that this strategy backfired completely — outsourcing cost far more money than it saved, and led to a three year delay in the release of the 787. “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” Wall Street analysts have estimated that this bad move cost the company between $12 billion and $18 billion dollars, on top of the $5 billion the plane was originally predicted to cost.
What I find ironic about this is that in 1997, Boeing was able to acquire their major competitor, airplane manufacturer McDonnell Douglas, because Douglas had themselves tried their own disastrous outsourcing strategy. In fact, one of the Senior Technical Fellows from Douglas had warned Boeing in 2001 not to go down the outsourcing path that had led Douglas to virtual obsolescence by the mid-1990s, and predicting that outsourcing would cause massive additional costs.
But Boeing didn’t listen, because they were too busy chasing after a new accounting measure called RONA — return on net assets — an idea they acquired from the close-to-defunct Douglas. The RONA idea is that the less actual work you do per dollar of profit, the better. Taken to its extreme, you could maximize RONA by outsourcing everything other than a 25 cent Boeing decal that you would slap on the nose of the finished airplane.
The problem, of course, is that you lose all control over the airplane itself and increase risks when outsourcing partners are unable to perform. And as you lay off your employees, you lose your core competencies. You are in effect turning your product into a commodity, competing on price alone. As most businesses recognize, this is a very bad situation to be in. But when the outsourcing ends up costing you more money, it is a double whammy.
Boeing has now learned this lesson twice. Will other companies need to make the same mistakes? I hope not.
Another example of Eliyahu Goldratt’s point that business needs to be managed for actual results, not for metrics – because the metrics can lead you to make really bad business decisions. For those interested, check out “The Goal” or any of his work on the Theory of Constraints.
Outsourcing should only be done when the following things are true:
1) The function to be outsourced is NOT a core function of your own business. Outsourcing running your mailroom, OK, outsourcing your core product development, not OK.
2) The function to be outsourced requires specific exertise to be done effectively, and that expertise is not something you use in your core business. Outsourcing legal work, OK, outsourcing your core product design, not OK.
3) The function to be outsourced has volatility in its volume and the infrastructure to support the volume is not your core business. Outsourcing your website’s hosting infrastructure, OK. Outsourcing on-the-floor workflow tracking, not OK.
Boeing used to be smarter than this.
Tax companies who outsource
You think governments that outsource will learn a similar lesson?
No U, not all outsourcing is bad. If I’m a manufacturer, it would be crazy not to outsource the screws, nuts, and bolts that I use in my product. Someone else can do a better job of making those parts than I can. The problem (as Jason points out) is when you get carried away and start outsourcing too much.
We should make it clear that not all outsourcing is to other countries. And even if you just want to tax offshore outsourcing (offshoring), I’m not sure that is the answer either. Would you want everything you buy that is not made in the USA to have a big tax applied to it?
The bigger problem is that we give tax breaks to companies that offshore jobs. Obama tried to change this, but it was filibustered by Republicans in the Senate.
IK – I hat to remind you, but Obama had a super majority for the 1st year and a majority for the 2nd. If he wanted to pass it he could have easily done so the first year. Stop the blame game, it’s geting old.
I agree that not all outsourcing is bad, auto companies do it alot and it supports many smaller businesses. I also agree we should quit the corporate welfare. Remember, Harry Reid and Al Gore are big supporters of CW and Reid wants to keep it that way regardless of Obama’s wants.
First, I’ll stop the “blame game” when Republicans stop filibustering everything.
Second, the Democrats never had a supermajority — unless you count Lieberman.
And finally, four Democrats voted for the filibuster too, along with Lieberman and every one of the Republicans. I’ll gladly blame all of them, including the Dems, and work to stop them from being reelected. Agreed?
According to OpenCongress.org, the Dems who voted against cloture were: Max Baucus [MT], Ben Nelson [NE], Jon Tester [MT] and Mark Warner [VA]. In addition, Blanche Lincoln [AR] abstained. Take this with a grain of salt, as that site sometimes makes mistakes, and other reports said that only three Dem Senators voted against cloture.
Agreed, I like to expose them all (and Lieberman is more Dem then Rep). The new republicans in the house have been less then impressive thus far. Rand Paul is proposing serious budget cuts and trying to sell his plan. I think the looming fight over raising the debt limit will tell the tale. Will it be same ole, same ole or will the freshmen in both houses shake things up.
How come no one made any jokes about Schumer saying the 3 branches of govt are “the house, the senate and the president” of course forgetting the judiciary? If Bachman (i can’t stand her) had said it Matthews would still be calling her out. http://townhall.com/tipsheet/GregHengler/2011/01/30/senator_schumers_3_branches_of_govt_house,_senate,__president
For the filibuster(s) you are referring to the 111th congress, yes? Have there been any blockages by the 112th? Also, since Pelosi ran out all the blue dog dems have she and her cronies ever put forth any legislation to reduce the debt and spending or can they just raise revenues? The coming months may show the dems to be the new party of no, we know they are the party of no spending cuts already. 4 trillion added to the debt in 2.5 years. It took Bush 8 years to add 5 trillion, but then Obama, Pelosi and Reid have always been over achievers in the spending department.
Outsourcing is for greedy corporate types who want to slash the bottom line so that their corporation looks good to the stockholders.
Corporate executives have an moral responsibility to take care of the community where their corporation resides. Part of that corporate morality involves the employment of local people. I know many will argue that the unions have driven corporations to seek manufacturing locales outside of the United States in the past, but there are locations within the United States where employees can be had for low wages and unions are non-existent.
I have no empathy for Boeing. I do have concerns for the safety of their aircraft however. A well placed bolt from a outsourcer with poor quality controls in effect, can lead to a devastating loss of life if a plane crashes as a result.
Boink as I call them has no clue what they’re doing anymore. All of the older, wisened heads, like Vince Weldon, have been either shafted and thrown to the kerb, or silenced thru threat of being fired. Hence, the WET DREAM PANTY LINER, aka the B-787.
and it’ll be what brings this corporation and airplane manufacturing in the U.S., down.
BOEING is now in REAL trouble. Not only have they made a mess of the NO FLY 787 but have been really thrashed at the Paris Air Show. Air Bus 72 Billion woth of orders- Boeing maybe 15?
Last really outstanding plane y BOEING -777
I predict that in 20 years time BOEING will be an ALSO ran in the plane manufacturers lists – with AIR BUS long ahead, Chinese, ahead of Boeing . Boeing will be with Brazilians & Canadians as a plane maker. The US military will keep them afloat but for HOW LONG???