What would you say if I told you the next airliner built by Boeing, the 787, will not be built by Boeing? That venerable American aerospace giant is outsourcing the entire operation to the Japanese Aerospace Consortium. Granted, Boeing will design the thing, but companies like Mitsubishi in the Consortium will actually build it.
Why?
Well, in this case, the Japanese government promised that Japanese airlines would buy a slew of 787s if Japanese aerospace companies built them. Quid pro quo-the Japanese learn how to build better planes; Boeing wins a guaranteed customer base.
This is an extreme example of a dominant trend: radical outsourcing by aerospace original equipment manufacturers (OEM). But it’s not all that extreme. According to Dick Slansky, Senior Analyst, Discrete Automation, ARC Advisory Group, “Aerospace represents, more than any other industry, a very extensive outsourced supply chain–about 80 percent of the airplane is now outsourced.” Aerospace firms do so little of their own manufacturing, in fact, that companies like Boeing think of themselves more as large-scale systems integrators than airplane manufacturers.
After all, airplanes are complex and comprised of thousands of sophisticated components from almost as many suppliers, so aerospace production lines are enormous, complicated, and populated by many specialized staff. Even several years ago, so much assembly had to be done on the main line that distinguishing parts of a plane like its tail section weren’t even recognizable for many months. A plane during assembly looked more like a plane after a crash.
This meant that the high cost of wages, plant operations, inventory storage, and so on was increasingly hurting profit margins. Slansky estimates all the costs to operate a final assembly line at $475,000 an hour. So it really behooves an OEM to cut the time it’s in use from months to days.
By enlisting suppliers to create and assemble sections of a plane, for example, rather than one component in a section, aerospace firms forced the complexity out of their production lines and back up the supply chain. A supplier that once made the aluminum skins for wings might branch out and also manufacture the struts for the wing’s frame. If it got really ambitious, it might subcontract creation of all electrical wiring for the wing, stuff the wing with it, and ship a completed wing to the main production line where it no longer needed to be built, but merely attached to the fuselage.
The result was that aerospace production lines no longer look like debris fields. As William Lewandowski, Vice President, Supplier Management, the Aerospace Industry Association, explains, they now look like “suppliers’ parts flying in formation” or, as Slansky puts it, “snap-together airplanes.”
The Offshore Advantage
Since World War II, aerospace firms outsourced some parts manufacturing and assembly but usually on the same continent. Two of the three largest aerospace OEMs still do: Airbus uses European suppliers and does final assembly in France, says Slansky, and Bombodier uses North American ones and does assembly in Montreal.
With the rise of offshoring, says Mike Burkett, Research Director, AMR Research, Boeing, has discovered the benefits of outsourcing manufacturing to lower-wage regions like Asia. Advances in telecommunications have certainly abetted this trend. Lewandowski reveals that first EDI, now the Internet, link personnel both in different countries on the same continent as well as intercontinentally. Design engineers at a US firm can work electronically with suppliers’ line managers in foreign plants so they can make modifications to components to improve performance or durability.
Designing In Savings
In a lot of cases, aerospace OEMs will also outsource independent design to suppliers. For instance, Slansky says it’s common practice for Boeing to provide suppliers with engineering drawings it’s created, state the price it will pay for the component to be created, and then let suppliers alter the design within reason to better meet that price and augment their profits. With virtual simulation packages like those from DELMIA, he explains, suppliers can design and stress-test the entire component in cyberspace before committing staff and plant resources to creating it and then virtually share the design with the OEM for approval.
Sophistication Requires Specialists
Airplanes have also gotten so sophisticated that it’s untenable for an OEM to have all the expertise in-house to design and build them. For instance, there are no longer dials and gauges in cockpits; data like airspeed appears on flat-screen displays because the plane’s avionics are computerized. Telematics in cars is child’s play compared to avionics in the modern jumbo jet. Pilots now rely on “mechatronics” (complicated intermediary technologies like hydraulics combined with computerized systems) to do much of their flying. So OEMs like Boeing outsource to suppliers like Collins and Hughes that specialize in such fields.
I Built It But You Fix It
Maintaining these complicated craft in the after market is not really OEMs’ core competence either. So, Burkett reports that “after market services are being pushed back down the supply chain to suppliers too. Maintenance, repair, and overhaul (MRO) is often done by another OEM or a third party who does nothing but service.” What’s more, he adds, service technologies have gotten so advanced that it makes sense to outsource to a specialist like Smart Signal, a company that makes systems that monitor the performance of plane engines to predict probable breakdowns. In fact, airlines have also adopted this practice.
Outsourcing in aviation has gotten so pervasive that it’s just possible American, United, and the rest will start outsourcing manufacture of their infamous airline food. Now wouldn’t it be wonderful if they did it right and gave the job to the French?
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].