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Boeing’s Billion-dollar Outsourcing Problem 1 Boeing’s Billion-Dollar Outsourcing Problem MGMT 6367 Section number University of Houston – Victoria Name Date 2 Abstract This paper considers an...

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Boeing’s Billion-dollar Outsourcing Problem


1
Boeing’s Billion-Dollar Outsourcing Problem
MGMT 6367
Section number
University of Houston – Victoria
Name
Date
2

Abstract
This paper considers an offshore outsourcing problem and how outsourcing may not be a
pleasant experience without proper research done in vendor selection. The Boeing Company lost
illions of dollars and was years behind schedule because of its outsourcing and vendor
decisions. Specifically, this paper delves into the problem itself, and provides suggestions on
what the company could have done differently from an operations management perspective. Two
methods are suggested: the Strategic Importance and Criticality Matrix to identify the candidate
components for outsourcing, and the Factor Rating method in vendor selection. Both methods
are explained and applied to Boeings specific issue. Furthermore, an analysis of the application
of these methods is made demonstrating how it would benefit the company.
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Background Information
Outsourcing is one of the most debatable issues that many multinational corporations
need to consider. There are many pros and cons when it comes to procuring from an external
source. The decision to outsource requires careful consideration of risks versus advantages. Not
only is outsourcing an ethical issue concerning the parent country, it is also an important
operations factor concerning the organization.
A business article titled 787 Dreamliner teaches Boeing costly lesson on outsourcing by
Michael Hiltzik, published in the LA Times, clearly illustrates what can happen when a company
does not invest enough time and research before executing the decision to outsource. Even the
most prominent of businesses can make mistakes resulting in devastating repercussions and
losses.
Boeing is the world’s largest leading manufacturer of commercial jetliners and defense,
space and security systems. The aerospace company is divided into two business units: Boeing
Commercial Airplanes and Boeing Defense, Space & Security. It has been a premier commercial
jet manufacturer for over 40 years. Boeing also produces military aircraft, satellites, weapons,
electronic and defense systems, launch systems, advanced information and communication
systems, and performance-based logistics and training. Boeing is a top US exporter and support
U.S. and allied government customers in 150 countries (Boeing in Brief, XXXXXXXXXXTheir corporate
offices are located in Chicago and they employ more than 170,000 people in the United States
and 70 other countries worldwide.
Problem Description
This paper considers an offshore outsourcing problem at Boeing. The cause of the
outsourcing failure in the Dreamliner project was the lack of planning and consideration before
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outsourcing. Because of this, they were billions of dollars over budget and about three years
ehind schedule. Their new plane model, the Dreamliner, boasted its low fuel consumption,
educed maintenance costs, and greater passenger comfort. It was one of the fastest selling jets
ever. Unfortunately, they could not deliver to their customers on time.
Boeing wanted to maximize profit by saving money through outsourcing. For their
Dreamliner 787 model, they outsourced their components from various countries like Italy,
Sweden, China, and South Korea. Even though it may have seemed cheaper to outsource at first,
other factors came in to play and proved that outsourcing was more expensive. As stated in the
Hiltziks article, Boeings experience shows that it’s a folly to think that every dollar spent on
outsourcing means a savings on the finished product. Thirty percent of their 787 models were
composed of foreign made content as opposed to a mere five percent for their other models
(Hiltzik, 2011)
Due to the increasing number of imported parts, their domestic aircraft factory in Seattle,
Washington seemed more like an assembly plant rather than a factory. One issue among many
that led the operations astray was the fact that Boeing did not provide its blueprints to its
contractors and expected them to develop their own. Not only that, these very same contractors
in turn hired subcontractors meaning an even further stretch for Boeing to oversee and control
what was going on. This made it more difficult to manage and supervise the design and
manufacture of its parts.
Some of their contractors did not have an engineering department, nor did they have the
expertise or experience. This would be a good indicator as to why a lot of the parts did not fit
together, and why a lot of the contractors did not meet their quotas. This in turn hindered the
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entire production schedule. Boeings aviation chief admitted that in hindsight, they spent a lot
more money trying to recover from the outsourcing than if they had done everything in-house.
One of Boeings contractors, Vought Aircraft Industries was bought out by Boeing
eventually because they were in charge of producing parts for the 787 and would be involved in
the manufacturing of spare parts for the life of the airliner even though they contributed to many
delays for the company. The time and trade secrets provided by Boeing to Vought was the main
eason Boeing had to buy out the company. Boeing thought that by outsourcing, they would
save money by asking their partners/contractors to make the investments that Boeing should
have made. “The company now recognizes that they needed to know how to do every major
system on their airplanes more than their suppliers do” (Hiltzik, 2011).
Proposed IOM Concepts/Tools
There are a few strategies that Boeing could incorporate when considering outsourcing in
order to lessen its losses and maximize its profit. As the author of the article stated in regards to
outsourcing, “If you don’t think it through, it can wreck your business and cost you a bundle”
(Hiltzik, XXXXXXXXXXThe analysis of what should be outsourced should be carefully considered
utilizing the Strategic Importance and Criticality Matrix as shown below as tool to determine
what should be produced in-house or by an outside vendor.
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There are two dimensions to this matrix that include the strategic value of the part itself,
and the criticality of the part to the final product (Dornier, Phillip-Pie
e, & Ernst, XXXXXXXXXXThe
strategic value is the value of the part based on the stand-alone criticality of that part in the
market. For example, the wing of the Boeing 787 Dreamliner would be considered to have low
value in the market place on its own since it is specific to the jetliner model and serves no
purpose by itself. “Some of the
oad indicators of strategic value include technological
complexity of the part, proprietary nature of the relevant technology, and where the part fits into
the products’ life cycle” (Dornier et al., XXXXXXXXXXThe criticality of the part to the final product is
the second dimension to consider and includes factors such as the percentage value of the part to
the final product, and the extent to which the quality and reliability level of the final product
depends on the part. In this case, the wing of the 787 Dreamliner model has a high level of
criticality to the final product- the airplane.
Components are divided into four categories based on the SIC matrix: novelty,
proprietary, commodity, and utility. The novelty category includes products that require
sophisticated technology but that are not essential to the functioning of the final product. The
proprietary category includes products that are the core of the company. According to Doriner et
al, commodities include products that have low technology and minimal contribution to the
principal functional aspects of the end product. Lastly, utilities are very critical to the final
product but are based on low or readily available technology. Because some of the outsourced
parts did not fit together, Boeing should have realized the criticality of these parts and decided on
a different method for manufacturing. Or in the very least, they should have realized that more
supervision would be necessary rather than having subcontractors come up with their own blue
prints to this specific product.
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Once Boeing figures out which parts to outsource and which parts to manufacture in
house based on the SIC Matrix, careful consideration should also be taken when evaluating
vendors. Factor rating is one of the methods we can use in vendor selection.
The first step to take in factor rating is to list the criteria that are critical to the particular
outsourcing activity. Next, an importance weight must be assigned to each of the factors.
Weights are assigned to the criteria based on importance to the firm. Rate each vendor based on
the criteria on a scale. A simple scale from 1-5 with 5 being the most satisfactory can be used.
For example, if vendor A has the best price, then they would receive a rating of 5 for price. If
they are also trustworthy, they can receive a 5. If their logistics system is poor, they could get a 1
for logistics and so forth. Once all vendors have been rated for each criterion, multiply those
atings by the criteria weight. Then sum those numbers for each vendor. The vendor with the
highest score is the best choice.
If Boeing had effectively applied the SIC matrix to its outsourcing decision, it would
have been clear that outsourcing its major, crucial components to various inexperienced vendors
in multiple countries would have been a poor choice. Secondly, after deciding to outsource
anyway, they should have used the factor rating method to help find more qualified vendors.
Unfortunately, due to poor outsourcing decisions, Boeing ran into many issues with their
vendors. Pieces manufactured did not fit together, some could not meet their output quotas, and
some didn’t even have an engineering department.
Application of IOM Concepts /Tools
The Boeing 787 Dreamliner model is no ordinary airplane. With the use of new materials,
the Dreamliner 787 uses less fuel, and has lower maintenance than other planes. Kesmodal &
Michaels state that it is the first big passenger jet built largely from plastics reinforced by ca
on
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fiber instead of aluminum. With this information, we know that the plane certainly includes
unique and specialized parts. Considering the parts that Boeing outsourced during the time of the
article, we will apply the SIC matrix to see if it should have been outsourced or
Answered Same DayMar 04, 2020MGMT 6367

Solution

Amar answered on Mar 09 2020
83 Votes
Running Header: International Operations Management: Toyota International Supplier Relationship Case Analysis            1
International Operations Management: Toyota International Supplier Relationship Case Analysis        14
International Operations Management: Toyota International Supplier Relationship Case Analysis
1. Abstract
TMC represents a Japan based multinational manufacturer of automobiles that is headquartered at Toyota, Aichi in Japan automotive. The specific problem that shall be the focus of this study concerns the supplier relations issues faced by Toyota Motor Corporation during the early 2000s. The details of the case has been used from the case study titled “Toyota Supplier Relations: Fixing the Suprima Chassis” from Fine et al. (2017). The study was undertaken with an aim to evaluate International Operations Management, evaluate the context of the Toyota case and determine suitable concepts / tools concerning International Operations Management to resolve the issue. The specific set of theories and tools discussed in this context concern human collaboration theory for supply chain, systems for information sharing and small sized batch form of production. The same has been presented in this report in a detailed and comprehensive manner.
2. Background Information
The specific problem that shall be the focus of this study concerns the supplier relations issues faced by Toyota Motor Corporation (“TMC”) during the early 2000s. The details of the case has been used from the case study titled “Toyota Supplier Relations: Fixing the Suprima Chassis” from Fine et al. (2017).
TMC represents a Japan based multinational manufacturer of automobiles that is headquartered at Toyota, Aichi in Japan automotive (Toyota Global, 2018a; Toyota Global, 2018b). During the year 2017 the corporate structure of TMC comprised of employees totalling to 364,445 across the globe as well as per the data available during the year 2016, the company was fifth largest in terms of revenue across the globe (Toyota Global, 2018a; Toyota Global, 2018b). During the same year, TMC represented largest in the world in terms of manufacturing of automobiles (Toyota Global, 2018a; Toyota Global, 2018b). Toyota become first in the globe for being automobile manufacturer in producing over ten million automobiles each year that the company has undertaken starting from the year 2012, while it was in addition reported that production at the company for the 200 millionth of the automobile (Toyota Global, 2018a; Toyota Global, 2018b). As of the year 2014, TMC was considered largest of the listed company across Japan in terms of market capitalization well as in terms of revenue (Toyota Global, 2018a; Toyota Global, 2018b). In recent times, TMC has turned out to be leader in the global market with respect to sales concerning hy
id form of electric automobiles, as well as one amongst the largest of companies in encouraging mass level of market adoption concerning hy
id automobiles across the world (Toyota Global, 2018a; Toyota Global, 2018b). The cumulative form of sales in the global level concerning TMC as well as Lexus
and hy
id passenger models attained the milestone of ten million during the year (Toyota Global, 2018a; Toyota Global, 2018b).
3. Problem Description
Problem Background
The contract for rear level suspension cradle with respect to Suprima from TMC was the first experience of ChassisCo in working with TMC (Fine et al., 2017; Toyota Global, 2018b). The personnel at TMC had not been familiar with respect to the way TMC undertaken purchasing, cost analysis or else engineering (Fine et al., 2017; Toyota Global, 2018b). The engineers, however, at ChassisCo seemed to be enthusiastic as well as technically superior manner (Fine et al., 2017; Toyota Global, 2018b). At that time, TMC had been impressed with respect to concerned plant managers in addition (Fine et al., 2017; Toyota Global, 2018b). The engineering team at TMC need to undertake hands hold approach with ChassisCo at the time of development stage and yet they had been enthusiastic form of learners with respect to the specific ways and approaches of TMC (Fine et al., 2017; Toyota Global, 2018b). TMC had even identified the experienced form of production manager at Kuzukanai plant within the Japan headquarters site for ChassisCo supplier relations during the year 1997 for an initial full year for production in mentoring the specific ways and approaches of TMC as well as supporting the interfaces as well as problem solving concerning TMC (Fine et al., 2017; Toyota Global, 2018b). TMC during the initial relationship with ChassisCo did not face any of the quality related problems during the launch time of the year 1997 and yet the people at ChassisCo continued to be over top of the things as well as overall managed in
inging the relevant processes in control (Fine et al., 2017; Toyota Global, 2018b). In this context, TMC offered ChassisCo a quality award during the year 2002, as well as later on undertook certain innovative work for applying the principles concerning Toyota Production System (“TPS”) for their respective inventory management (Fine et al., 2017; Toyota Global, 2018b).
Later on, immediately after these events, TMC planned the production and launch of the Suprima model (Fine et al., 2017; Toyota Global, 2018b). Naturally TMC assumed that ChassisCo shall possess the competence with respect to project management and on account of the same the supply order for such a large project was offered to ChassisCo (Fine et al., 2017; Toyota Global, 2018b). After this contract was offered over a period in time, TMC started to realize that ChassisCo failed to have required capacity for such project scope and size (Fine et al., 2017; Toyota Global, 2018b). In essence, ChassisCo had been responsible with respect to the entire second tier automobile parts related sourcing as well as development and yet they did not possess required systems with respect to tracking parts (Fine et al., 2017; Toyota Global, 2018b). TMC established the parts tracking systems specifically for tracking ChassisCo immediately TMC had started noting the various deficiencies. In the systemic form of approach, ChassisCo had not suitably organized for responding with respect to TMC’s need towards the integrated form of project management. The concerning organization silos had been very robust (Fine et al., 2017; Toyota Global, 2018b).
The key problem lied in the fact that TMC failed to completely realize overall extent concerning the gaps amongst the capabilities of ChassisCo ad well as what TMC has been seeking them in doing so (Fine et al., 2017; Toyota Global, 2018b). TMC had taken for granted which they can suitably develop overall supply with respect second tier automobile parts (Fine et al., 2017; Toyota Global, 2018b). Within the time the overall extent of problem had been realized, TMC in actual went as well as visited the suppliers by itself, as well as TMC clearly noted the extent to which ChassisCo behind schedule and the variance in quality (Fine et al., 2017; Toyota Global, 2018b). These problems further exace
ated over time and few months prior to the launch of the model, TMC realized ChassisCo cannot ensure supplies as per contract and there shall be significant delay with respect to the launch (Fine et al., 2017; Toyota Global, 2018b).
Problem Specification
One of the pitfalls of this whole debacle...
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