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Sunday, March 9, 2003 - Page updated at 12:00 AM

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Boeing buzzes about 'source' of work

Seattle Times aerospace reporter

Points on paper


Summarized below are key points made by Boeing engineer John Hart-Smith in an internal paper, and some of his specific comments:

When work is outsourced, profits also go to outside contractors instead of the original manufacturer.

"Is it really all that difficult to comprehend that, along with the work involved, the revenue and profit associated with it have also been outsourced?"

Subcontracting of higher-level design work means partners may end up with the specialized knowledge they need to supersede the prime manufacturer.

"One must be able to contribute in some way to products one sells to avoid becoming merely a retailer of other people's products."

Financial performance measures encourage companies to discard assets such as factories in favor of outsourcing production. But extra costs from overseeing suppliers' work then are accounted as part of the overhead of the remaining, smaller company, making it appear less cost-effective.

"RONA (return on net assets) might be a worthy overall goal, but as a performance metric, it is usually meaningless — and a serious threat to the survival of any organization."

Main recommendation for Boeing:

"Retain sufficient in-house production manufacturing that it is possible for future engineers to acquire the skills needed to develop new products, without which all businesses will fail."

As Boeing quietly plans its next new airplane, executives have already made clear that the company will rely more than ever on external partners and suppliers to design, develop and produce it.

But concern over just how much of the work on the new 7E7 will be contracted out — outsourced — isn't confined to Puget Sound factory workers worried about their jobs.

A controversial internal paper warns that excessive outsourcing could lead to the loss of the company's profits, its core intellectual assets and even its long-term viability.

"The most important issue of all," the paper reads, "is whether or not a company can continue to operate if it relies primarily on outsourcing the majority of the work that it once did in-house."

The author is John Hart-Smith, a senior technical fellow at the Phantom Works research unit in Southern California and one of Boeing's most eminent engineers.

Though Hart-Smith has climbed out on a limb far removed from the company's executive leadership, his paper was well received by the engineers and managers who first heard it in a February 2001 lecture at the company's Leadership Center in St. Louis. Subsequently, it stirred a whirlwind inside Boeing.

The paper was e-mailed furiously around the company's intranet, leaked to the unions and posted on factory noticeboards in Everett, but details haven't been discussed publicly until now.

With the 7E7 now on the drawing board, and jobs dwindling throughout the region, the issues Hart-Smith raised two years ago are more relevant than ever. A high-level Boeing team is preparing a detailed manufacturing plan, due next year. The success of the new jet, expected to go into service by 2008, is key to the future of Boeing's struggling Puget Sound-based commercial-airplanes unit.

"(Hart-Smith's) paper is a way to formulate the question everyone is asking," said Charles Bofferding, executive director of the engineers' union, SPEEA. "Is our best business model to distribute our expertise around the world, having it flow out from Boeing? That's disturbing. How can that be a sustainable business model?"

Boeing officials declined to respond directly to Hart-Smith's paper but agreed to discuss their outsourcing strategy: Boeing, they argue, brings together the best technology from partners around the world. And as it faces relentless competition from European rival Airbus, Boeing has no choice but to manufacture planes more efficiently — which means letting suppliers build more complex components.

Hart-Smith, however, argues that even if outsourcing makes sense in some circumstances, Boeing's reliance on it is excessive. "Outsourcing all of the value-added work is tantamount to outsourcing all of the profits," his paper concludes. "It is time for Boeing to reverse this policy."

His argument has created "a lot of buzz" inside the company, according to a senior program manager who asked not to be named. But it has been largely dismissed by Wall Street.

Chris Mecray, an analyst with Deutsche Bank, called Hart-Smith's paper "more of a rant than anything."

Worldwide reputation

Hart-Smith, 62, came to the U.S. from his native Australia in 1968 to work for the Douglas aircraft company just as it merged to become McDonnell-Douglas. In 1997, Boeing acquired McDonnell-Douglas.

During 34 years in aerospace, Hart-Smith established a worldwide reputation as an expert in aircraft structural joints and bonding. He acted as a consultant on projects for NASA, Lear Fan and the U.S. Air Force.

Last year, Boeing completed tests on new fuselage structural features designed by Hart-Smith to reduce cost, save weight and prolong fuselage life. He is working with the advanced design group on the structure of the 7E7.

Hart-Smith's Douglas heritage is crucial to his paper, which repeatedly cites the case of the Douglas DC-10 as the apotheosis of outsourced aircraft manufacture.

The excessive use of subcontractors on the DC-10, Hart-Smith asserts, eroded most of the commercial-airplane unit's profits and thus its ability to fund new jets. By the time it merged with Boeing, McDonnell-Douglas had all but exited the commercial-airliner business in favor of building military aircraft.

Hart-Smith has not been cleared to discuss the details of his paper. Boeing allowed him to provide only a written response to e-mailed questions about his background.

"My motive," he wrote in a note accompanying his responses, "was simply to save Boeing suffering the same fate as befell Douglas. I became concerned about seeing too many of the same policies being advocated."

More outsourcing

Boeing outsources about 64 percent of the work involved in building current aircraft models, calculated by dollar value. (About half of that figure is for the engines alone.)

For the new 7E7, the proportion to be outsourced hasn't been determined, but it is likely to be an even bigger chunk. Industry trends are pushing aerospace suppliers to deliver more complete subassemblies rather than separate parts, increasing their slice of the pie and reducing Boeing's final assembly work.

"Suppliers are no longer being asked to produce widgets specified by Boeing," said Joel Johnson, vice president of international affairs with the Aerospace Industries Association. "They are being asked to design and produce systems and subsystems."

The introduction of design simplifications that dramatically reduce the parts count will amplify that trend.

Dan Becker, Boeing vice president for manufacturing and quality, cites the process used in Wichita for machining the bulkheads on the latest 737s from a single "monolithic" structure instead of the multiple parts in the original bulkhead.

"We're trying to simplify the design," Becker said. "It's taken 150 pieces and put it into one piece."

For the 7E7 program, Becker confirms, "It's safe to say that we'll continue to consolidate our supplier base. We'll have delivered to us fewer pieces more ready for assembly."

Jerry Ennis, an industry consultant and former vice president of prototyping and manufacturing technology in Phantom Works, expects process innovations carried over from Boeing's work on the Joint Strike Fighter prototypes to be implemented on the 7E7 program.

Tightly integrated product teams of engineers from both inside and outside the company will collaborate over the Web on a paperless, digital 3-D mathematical model of the airplane design; large composite parts will snap together in the factory. Labor, time and cost savings are major goals.

"The new processes are ready for prime time and easily transferable to the commercial unit," Ennis said. "The bottom line is that it'll take a lot fewer engineers to do this, a lot fewer tools, a lot fewer suppliers."

At the same time, expect more big global partners ready to buy their way onto the 7E7 program with hefty investments.

Becker says that at this bleak time in the industry, Boeing is seeking to slash its upfront development costs.

"My belief is that we'll have more risk-sharing partners on the 7E7," Becker said. "We want to dramatically reduce the cost of introducing an airplane."

Hank Queen, Boeing vice president of engineering and product integrity, estimates that development of the 7E7 will require half the number of engineers that worked on the 777.

Foreign sales

Sales to other countries also drive outsourcing. Becker, who sits on the leadership team of Boeing's commercial-airplanes unit, points to Boeing's strong market position in Japan and the longtime role of major Japanese companies in making Boeing widebody jets.

"Seventy percent of our products are sold overseas," he said. "We do have customers that ask for participation (in design and manufacture) as a condition of sale. It's a reality of the aviation business."

Becker believes Boeing can safely outsource large parts of its work and still retain its long-term future as airplane maker.

"We plan on retaining our core intellectual capabilities," he said. "We'll protect our ability to be the large-scale systems integrator."

The view from outside

Outside the company, some independent business analysts said they found merit in Hart-Smith's arguments.

"The argument is basically sound and I agree with (Hart-Smith's) recommendations," said Bob McGrath, assistant professor in the Aviation Business Administration department at Embry-Riddle aeronautical university in Florida. McGrath said there are pros and cons of outsourcing, but on balance it has been overdone.

Hart-Smith's analysis also has great resonance with the Boeing unions.

In 1989, about 27,000 hourly paid machinists produced 284 commercial airliners out of Renton, Everett and Auburn. With a similar number of planes projected to be built in 2003, there are now only 15,000 machinists in those plants. Design and production efficiencies are credited with some of that decline, but the machinists union attributes a sizable chunk of lost jobs to outsourcing.

Even if Boeing decides to do final assembly of the 7E7 here in Puget Sound — a decision that is up in the air — many fear the long hemorrhaging of production jobs will continue.

"The 7E7 will be heavily partnered with foreign suppliers. (Those suppliers) will do the investing in people, in infrastructure, in capital assets," said Stan Sorscher, an analyst with the engineering union SPEEA. "When they do it, we're not doing it.

"Sooner or later, Boeing executives will have to think about preserving the critical mass of assets of people and knowledge that represents their business," he said.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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