Does Boeing Have a Cutting-Edge Supply Chain?

The relationships between Boeing and its suppliers represent the future of aerospace supply chains, according to an analysis conducted at MIT.

            And what distinguishes those relationships, the analysis contends, is the increased risk-sharing and cost-sharing between the parties.

            It’s an interesting suggestion, but it raises some questions about what Boeing is doing and whether it makes sense from a lean standpoint.

            The analysis was conducted by Tzu-Ching Horng, a graduate student, and presented at the recent conference of the Lean Aerospace Initiative. Tzu-Ching Horng could not be at the conference, so the project advisor, Professor Kirk Bozdogan, presented the results.

            The analysis looked at the newest, biggest projects of Boeing and its chief competitor Airbus: Boeing’s 787 Dreamliner and the Airbus A380. Among the observations about Boeing’s supplier relationships on the 787:

 

• Boeing has asked all suppliers to carry all of the non-recurring costs; in return, gives back to risk-sharing partnering suppliers the intellectual property rights on the components or systems they provide.
  
• Contracts are so designed that if the aircraft does well in the marketplace, the risk-sharing partners derive direct benefits (revenues above amortized costs of non-recurring investments based on initially-agree-up expected unit sales volume).
  
• Major partnering suppliers (e.g., Hamilton-Sundstrand), with big “chunks” of the aircraft, can make design trades within each work package and across company units to find optimal system solutions.
  
• Boeing only provides high-level interface definition; the first-tier (major partnering suppliers) are responsible for the detailed interface definitions & designs.
  
• Suppliers work together and Boeing acts as referee in case of conflicts.

 

Boeing retains no more than 35 percent of the total 787 work share. In contrast, on the A380, Airbus has “risk-sharing partnerships” with suppliers who cover only 25 percent of total program non-recurring costs, though what that means is not entirely clear. Further, Airbus continues to exercise control over all system and detail engineering (component level) interface definitions. And Airbus, the analysis says, “has no strong partners” for major risk-sharing activities or as contributors to development spending.

The analysis goes beyond simply pointing out the differences between the two supply chains. It states:

 

Aerospace supply chain management will continue to evolve from a transactional or relational business model to one involving risk-sharing and cost-sharing prime-supplier partnerships, alliances & closely-knit collaborative relationships.

      Global outsourcing – aerospace supply chains are likely to be a lot more quite internationalized in the future.

 

And the analysis contends that “the Boeing model is about optimizing the total business, not just the supply chain in the traditional sense.”

Not everyone believes that Boeing’s development of the 787 involves true optimization. Major parts of the aircraft are built around the world and shipped to the Boeing facility in Everett, Washington, for assembly, a practice some see as very un-lean. Kevin Meyer at the Evolving Excellence blog, for one, has written about this in detail.

Generally speaking, I support the idea of supply chain partnerships (unlike certain Detroit automakers who believe suppliers are not partners, but companies to be squeezed whenever possible). Whether the degree of risk-sharing and cost-sharing attempted by Boeing makes sense is a separate issue, and I’m not sure it’s a lean issue. It is also a separate issue from whether work should be handed off to a partner hundreds or thousands of miles away.

One question might be whether these kinds of relationships create any obstacles to truly optimizing the entire supply chain. What do you think? Post your comments below.