Almost exactly a decade ago, Boeing Senior Technical Fellow, Dr. L. John Hart-Smith, presented a paper at the company's third annual Technical Excellence Symposium in St. Louis Missouri. That paper, ten years later is the subject of a Seattle Times Sunday Edition article on the "prescient" warning to the company on the perils of outsourcing.
Dominic Gates, who is the Times' aerospace reporter, has written about the Hart-Smith paper before, first in 2003 when Wall Street analysts dismissed it as "more of a rant than anything."
The Hart-Smith Paper (available here) delves into the risks of dis-integrating an aerospace institution by outsourcing once-integrated manufacturing capabilities to suppliers.
One former Boeing executive recently said to me that the 7E7 program was designed, in part, around satisfying the obsession with the idea of maximizing return on net assets or RONA. RONA is a measurement of the ratio of bottom line profit in comparison to the overall scope of the program's assets. In short: how much money are you making in terms of the size of the work required. At the Boeing's helm at the time of the 7E7 program's launch in December 2003 was Harry Stonecipher, former CEO of McDonnell Douglas and a fierce RONA advocate.
The result of this strategy has been well-documented, with 3+ years of delays, supplier buyouts and massive cost overruns mostly absorbed by Boeing.
While errors of the past cannot be un-made, the implications of the company's RONA-driven strategy on the current state of the 787 program inform how Boeing is approaching the 787-9 or a 777 upgrade and why more of the 787 structure is set to be brought in-house. Hart-Smith took a hypothetical look ahead at what is surely contributing to Boeing's thinking as it takes steps toward launching a clean-sheet program to replace the 737.
As structural work is outsourced, the original contractors will make a relatively small profit on the initial sale, but can make even more on the support of the aircraft in service. If supply contractors control manufacturing those parts, then profit is outsourced as well (which could explain the motivations for Boeing's GoldCare program).
The basic problem with being only a systems integrator is that it does not cover a sufficient fraction of the total work for a large company to remain in business. The engines and avionics alone typically represent some 50 percent of the cost of producing large aircraft. There is simply not enough structure involved for too much of it to be out-sourced. Surely even a 5 percent profit on 25 percent of the total work is more valuable that a 15 percent profit on only 2 percent? The latter goal is a guarantee that there will not be sufficient cash generated to ever launch new products, not even derivatives that are perceived as costing less than new aircraft but which are often found to cost just as much, for a product for which passenger comfort or performance might have been constrained by legacy from the earlier design to be less than state-of-the-art. Is it really all that difficult to comprehend that, along with the work involved, the revenue and profit associated with it have also been out-sourced?
Recent Comments