Where Boeing Went Wrong With Its 787 Dreamliner

| About: The Boeing (BA)

By Taras Berezowsky

Boeing's (NYSE:BA) 787 Dreamliner has done it again - proving it's not so dreamy after all.

At least, not its electrical systems and lithium-ion batteries.

After All Nippon and Japan Airlines gounded several 787s yesterday, Dreamliner fleets worldwide were grounded today until authorities deem the fire risk of the planes' lithium-ion batteries to be, well, extinguished.

But what does this mean from a supplier management standpoint? Boeing's relationships with their suppliers (mostly located in Japan as far as the Dreamliner's batteries, electrical parts and systems go) should equally be under scrutiny.

To get a deeper perspective on the supply risk management angle, we turn to MetalMiner's managing editor, Lisa Reisman:

How does a major OEM respond to its suppliers (e.g. GS Yuasa, Boeing's supplier of the lithium-ion batteries in the Dreamliners) when something like this happens?

Lisa Reisman: I think the story that doesn't get told involves what happens behind the scenes when any OEM launches a new product. I'm sure that Boeing has closely monitored 787 performance from the start. I'm also pretty sure that many of the key Tier 1 suppliers have also closely monitored all sorts of performance indicators and have worked closely with Boeing to conduct root cause analysis. At the end of the day though, testing pre-flight and monitoring during actual flight are two different things. Boeing probably knew a few weeks ago that the data started to move into negative territory and would result in the grounding of the Dreamliner until the issues could be effectively addressed.

What types of changes (if any) do OEMs such as Boeing make in the short-, medium-, or long-term in their supplier relationships after issues like these?

LR: That's a great question. You can be sure that there's a slew of engineers and analysts working on the "immediate fix," and I wouldn't be surprised if Boeing and the relevant suppliers aren't already deploying a number of different trials on alternative materials to address the "fix." They probably have a pretty good indication of the problem, but may not have had the opportunity to test the fix. I've looked at a number of comments that others have posted on various aviation websites. Many feel the problem stems more from Boeing and its leadership, organizational structure and moves toward outsourcing. That may or may not be true.

We'd argue that the financial demands of Boeing force a set of decisions and activities that have a longer-term detrimental impact on the product development process (that likely had to be truncated at the expense of more trials and testing). The competitive nature of every industry (aerospace in particular) forces these producers to really innovate. Innovation, we'd all argue, might be a good thing, but the reality is that the Dreamliner contains multiple new systems and new materials that simply don't have the performance history behind them (e.g. lithium-ion batteries, electrical systems, new power and distribution panels). So I think the story becomes a little less about the OEM/supplier relationships per se, and more about how a products company approaches the product development process given the competitive and pressure-filled environment companies like Boeing find themselves in.

Remember, Boeing has an enormous order book for the Dreamliner and has promised Wall Street positive financial results (and has even sought to speed up 787 production), but now much more is at stake. I think the outsourcing issue is actually more ancillary in nature. In other words, I don't think that the root cause issue has anything to do with outsourcing per se. Many will criticize the outsourcing process and ask whether the nature of the relationships ought to change, but to me, the issue appears more fundamental - Boeing has a product development process that has failed to deliver a problem-free safe plane, outsourced or not. Fix the product development process and you fix the company.

Some may wonder, "Can my company adapt any lessons from this for their own supplier relationships and the parts they source (even if we're not a household name and don't make ginormous planes)?"

LR: I think the lesson learned here is very basic: "Do it right the first time." You might have a delayed product launch, but it's far cheaper to be late on a perfect product than deliver early, suffer quality issues and potentially have a major branding problem. The most costly quality mistake to ever make is post-product launch. It's always cheaper and preferable to identify problems during the design phase, tweak and re-test before launching. So do it right the first time.