22-09-2012, 03:55 PM
Managing New Product Development and Supply Chain Risks: The Boeing 787 Case
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ABSTRACT
To stimulate revenue growth and market response, Boeing decided to develop the
787 Dreamliner. The 787 Dreamliner is not only a revolutionary aircraft, but it also
utilizes an unconventional supply chain intended to drastically reduce development
cost and time. However, despite significant management efforts and capital
investment, Boeing is currently facing a series of delays in its schedule for the maiden
flight and plane delivery to customers. This paper analyzes Boeing's rationale for the
787's unconventional supply chain, describes Boeing's challenges for managing this
supply chain, and highlights some key lessons for other manufacturers to consider
when designing their supply chains for new product development.
Introduction
Since the U.S. government deregulated air travel in 1977,
more airlines have entered the market causing fierce
price competition. As airfares continued to decline, the
total number of U.S. passengers per year has risen from
approximately 240 million to 640 million from 1977 to
1999. At the same time, U.S. commercial aircraft
manufacturers have faced major competition from
European companies. After losing market share to
Airbus (owned by EADS) in the late 1990s, Boeing was
under pressure to decide between two basic
competitive strategies: reduce the costs (and the selling
prices) of existing types of aircraft or develop a new
aircraft to raise revenues through value creation.
In 2003, Boeing decided to focus on creating additional
value for its customers (airlines) and their passengers
by developing an innovative aircraft: the 787 Dreamliner.
(Throughout this paper, we shall use the term “787
Dreamliner,” “787,” and “Dreamliner” interchangeably.)
First, Boeing's value-creation strategy for the
passengers was to improve their travel experience
through redesigning the aircraft and offering significant
improvements in comfort. For instance, relative to
other aircrafts, over 50% of the primary structure of the
787 aircraft (including the fuselage and wing) would be
made of composite materials (Hawk, 2005).
The 787 Dreamliner's unconventional
supply chain
To reduce the 787's development time from six to four
years and development cost from $10 to $6 billion,
Boeing decided to develop and produce the Dreamliner
by using an unconventional supply chain new to the
aircraft manufacturing industry. 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. Unlike the 737's
supply chain, which requires Boeing to play the
traditional role of a key manufacturer who assembles
different parts and subsystems produced by thousands
of suppliers (Figure 3), the 787's supply chain is based
on a tiered structure that would allow Boeing to foster
partnerships with approximately 50 tier-1 strategic
partners. These strategic partners serve as
“integrators” who assemble different parts and
subsystems produced by tier-2 suppliers (Figure 4).
Reduce financial risks
Under the 787 program, Boeing instituted a new risksharing
contract under which no strategic suppliers will
receive payment for the development cost until Boeing
delivers its first 787 to its customers (slated to be ANA
airlines). This contract payment term was intended to
provide incentives for strategic partners to collaborate
and coordinate their development efforts. Although this
contract imposes certain financial risks for Boeing's
strategic suppliers if delivery deadlines are missed, they
are incentivized by being allowed to own their
intellectual property, which can then be licensed to
other companies in the future. Another incentive for the
strategic partners to accept this payment term is that it
allows them to increase their revenues (and potential
profits) by taking up the development and production of
the entire section of the plane instead of a small part of
the plane.
Supply Risks
Boeing is relying on its tier-1 global strategic partners to
develop and build entire sections of the Dreamliner that
are based on unproven technology. Any break in the
supply chain can cause significant delays of the overall
production. In early September 2007, Boeing announced
a delay in the planned first flight of the Dreamliner citing
ongoing challenges including parts shortages and
remaining software and systems integration activities.
Even using Exostar, a web-based planning system, to
coordinate the supplier development activities,
coordination is only possible when accurate and timely
information is provided by different suppliers]For
example, one of the tier-1 suppliers, Vought, hired
Advanced Integration Technology (AIT) as a tier-2
supplier to serve as a system integrator without
informing Boeing.
Boeing's reactive risk mitigation strategy
To manage various disruptions as presented earlier, we
now present Boeing's reactive response for reducing the
negative impact of the current problems and for
avoiding further complications resulting in additional
delays (Table 5).
To improve the safety of its composite fuselage, Boeing
is redesigning its fuselage by using additional material
to strengthen the wing structure; however, this
additional material will increase the aircraft's overall
weight. Boeing management has continued to assure its
customers that it will work diligently to reduce the
weight of the final version of the plane. Boeing is
redesigning its installation process with the hope of
reducing its changeover time from one engine model to
the other. Finally, to ensure that the computer network
is secure, a proper design is being required that allows
for the separation of the navigation computer systems
from the passenger electronic entertainment system.
Proactive Labor Relationship Management
Dissatisfaction among Boeing's machinists was caused
by Boeing's strategy to increase its outsourced
operations to external suppliers. Had the union's
general disapproval of Boeing's outsourcing strategy
been taken into account, Boeing may not have decided
to outsource 70% of its tasks. Even if this outsourcing
strategy was justified financially, Boeing could have
managed its labor relationship proactively by discussing
the strategy, by offering job assurances, and by
obtaining buy-in from unions. This proactive labor
relationship management would have created a more
mutually beneficial partnership, which could have
avoided the labor strikes.
Conclusion
Boeing's Dreamliner program involves dramatic shifts in
supply chain strategy from traditional methods used in
the aerospace industry. In addition, Boeing boasted
about its novel manufacturing techniques and its
technological marvels. Such dramatic shifts from
convention involve significant potential for
encountering risks throughout the process. Boeing's
ongoing issues with meeting delivery deadlines are a
direct result of its decision to make drastic changes in
the design, the development process, and the supply
chain associated with the Dreamliner program
simultaneously without having the proper management
team in place. Further, this team did not proactively
assess the risks that were later realized and did not
develop coherent strategies for effectively mitigating
them. Although it may be impossible to identify all
potential risks and create contingency plans for all
eventualities before a project begins, Boeing could have
done many things differently.