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by Gad Allon

Finally, after many delays, Boeing (NYSE:BA) delivered the first Dreamliner. The Wall Street Journal, which has been following the development closely throughout the years, had a nice article about the topic:

Boeing—eight years after it began developing the ultra-efficient jet—is still trying to prove it can make a success of both its innovative product and new approach to plane-making. For decades, Boeing designed and built its jets in-house, bearing the whole expense. In 2003, it embarked on the unprecedented step of outsourcing most of the Dreamliner’s manufacturing to far-flung suppliers.

The article is correct to point out the new approach to plane-making and the innovative product, yet, I think it is somewhat misleading to say that outsourcing the manufacturing was unprecedented. As we have written in several posts about the topic, Boeing chose to outsource not only the manufacturing, but also the design and management of sub-component suppliers. Many of the causes of delays can be attributed to the lost visibility brought by this model. It is true though, that under the new model Boeing has been reduced to a large-scale assembler, and suppliers will do most of the production. The lack of visibility and miscommunication regarding production responsibilities led to absurd situations:

When assembly of the first Dreamliner began in 2007, major problems arose. Mechanics at Boeing’s final-assembly plant opened boxes from suppliers containing thousands of brackets, clips and wires that already should have been installed on fuselage sections. Some plane components came with no paperwork…. One of the company’s first tasks is to make significant modifications to about 40 almost-finished Dreamliners that couldn’t be completed until designs were finalized. Boeing officials predict that reworking all those planes will take two years.

It is interesting to point out that the solution to many of the issues came from two classical operational changes: improving visibility throughout the chain, and the use of dual sourcing to hedge against risk:

Suppliers such as Goodrich are more confident now because many have clamped down on subcontractors to ensure their work meets expectations. Some have parked their own staffers at vendors’ facilities to monitor production. … Spirit AeroSystems Holdings Inc., which builds Dreamliner front sections and other major components, has started buying some “critical” parts from two vendors, said Terry George, Spirit’s executive program manager for the 787. Spirit moved to “a more conservative approach” in part to reduce risk, he said.

The article also focuses on the pressure at Boeing to ramp up production. While, as mentioned above, the first Dreamliner ever was handed over to a customer yesterday (Sunday), Boeing would like to reach an unprecedented throughput of 10 planes per month as early as 2013. Most observers are less optimistic:

Douglas Harned, an analyst with Sanford Bernstein, predicts Boeing will reach its 10-a-month target in late 2014, or roughly a year late. Mr. Harned estimated in a research report in August that Boeing will lose money, in total, on the first 1,000 Dreamliners, although he said the gap between the revenue and cost of each plane delivered should be “reasonably good” by the end of this decade.

To paraphrase a Chinese proverb: Even a journey of a thousand planes to profitability begins with a single plane.

Disclosure: No positions