Time for Boeing to get back to the basics of experience and performance

EARLY this year, Boeing announced it was considering the option of opening a second 787 production line outside Washington state. The logic is the subject of intense public discussion. From the employees' perspective, splitting production between two regions would compound problems in a program that was deeply flawed from the beginning.

Boeing's new 787 airplane program makes an unusually heavy commitment to the global supplier network for design, manufacture and capital investment. Boeing retained responsibility for system integration and project management, while outsourcing much of the technical work of designing and building products.

The business theory holds that Boeing's strengths in system integration and project management were specialized work, justifying higher profit margins. On the other hand, the technical work of design and manufacture is less specialized, less profitable and therefore more suitable for outsourcing. Supply chain management techniques would squeeze suppliers and siphon future gains to Boeing and its shareholders.

Ironically, from 1998 to 2008, Boeing repurchased more than $20 billion in stock, consuming more than enough capital for an entire new airplane program. Boeing gets nothing of productive value for that $20 billion.

This approach was very attractive to the financial community, because it treats Boeing's financial risk as the primary consideration. Partners from Japan and Italy would contribute billions of dollars to the new program while tax subsidies from Washington and Kansas would bring in more billions. Boeing would minimize its financial risk and maximize the return on its limited capital investment.

This theory sounds familiar. The same misjudgment crippled the banking industry. Banks assumed that dividing risk would make the system stronger, because any failure would be shared among many parties.

The banking industry was shocked to realize the risks were strongly coupled together. When one investment failed, others failed at the same time for the same reasons. Sadly, the process of dividing the risk actually increased the likelihood the system would fail.

In this sense, the 787 global business model is actually sub-optimized around the interests of investors. By putting the interests of investors first, Boeing significantly magnified technical and production risk throughout the program.

From 1999 to 2004, the Society of Professional Engineering Associations in Aerospace (SPEEA) had many conversations with financial analysts and investors. We explained how we saw risk from a technical perspective. Very thoughtful and well-informed analysts in the financial community listened carefully, but disagreed. They explained to us that this business model had worked for running shoes, for ladies' garments, cellphones, hard drives and light bulbs. It worked for those industries and it would work for aerospace.

The 787 is the test case for that belief.

The aerospace business is risky and difficult on its best day. In our business, every part, every assembly, every supplier and every system must work together coherently to meet the customers' expectations.

Boeing is paying penalties to customers, has bailed out two major suppliers so far, and is setting industry records for misjudgment in the execution of a shaky plan.

Instead of reaping profits, Boeing inherits all the production problems. The ultimate resource for solving these technical and production problems is the remaining pool of experienced workers in Puget Sound, who are logging overtime measured in millions of hours.

Unable to manage the technical, production and supply-chain risks, Boeing would now consider a second production line out of state, in effect doubling down on its ill-conceived and poorly executed global supplier business model.

This experiment has failed, in dramatic proportions. Going forward, Boeing needs to get back to the basics of products, processes and customers. This is an industry where competence, experience and performance really do matter.