Tag: Spirit Aerosystems

OM in the News: Boeing’s Vertical Reintegration

Witchita-based Spirit AeroSystems builds the fuselages for Boeing planes

Spirit AeroSystems is going full circle, from part of Boeing to independent supplier and now back to part of Boeing, reports The Wall Street Journal (July 3, 2024). It is the perfect example of a realization dawning on corporate America: Outsourcing isn’t all it was once cracked up to be.

The deal’s logic of vertical reintegration makes sense in light of recent history, with air-travel safety likely benefiting from centralized supervision and a simpler workflow between plants. Yet it is also an indictment of what executives in most industries have been doing for three decades.  When Boeing sold its Spirit fuselage operations in 2005, consultants and business schools had made outsourcing fashionable. Before the late 1980s it was unusual: Even 7-Eleven was vertically integrated with its own milk-producing cows and candy manufacturing.

Then, in 1989, Eastman Kodak pointed the way by tasking IBM with managing its data center. In 1996, GE showed how offshoring support jobs to low-wage countries such as India could help cut costs. Supply chains spread across the world.

At the core of the outsourcing trend, however, was the idea that an “asset-light” firm focused on intellectual property and its “core” expertise would be better run. With this mindset, jettisoning fuselage operations seemed like a no-brainer. It is a capital-intensive, competitive business that faces a lot of production pressure. It wasn’t just fuselages as we note in Chapter 2’s Global Company Profile: In the 2000s, Boeing outsourced more than 70% of the 787 Dreamliner program. But the problems with becoming an assembler of planes, as opposed to a true manufacturer, gradually became apparent. The company lost control of supply, resulting in years of delays, quality problems, and cost overruns.

Aerospace isn’t the only industry to revive vertical integration. Intel is beefing up chip manufacturing in the U.S., GM is building battery plants and Sweden’s IKEA is acquiring containerships.

One general flaw of the asset-light model is that, over time, firms can lose their innovative edge because a lot of “learning by doing” happens when production processes interact. Another is that low-margin bits of the supply chain get worn down to just a few sources. These may not have the financial muscle to make big investments in times of turmoil, or they may be geopolitically sensitive.

Classroom discussion questions:

  1. Why did Boeing outsource fuselage production in 2005?
  2. Why is it vertically reintegrating Spirit in 2024?

OM in the News: Behind Boeing’s Alaska Blowout

Just last week, we posted the story of Boeing’s intended takeover of its troubled fuselage provider, Spirit AeroSystems. Today’s post is a story of quality control at Boeing. You will recall that a door blew off an Alaska Airlines flight in January because a few bolts were not properly installed. Months before the 737 piece blew out midflight, the plane spent nearly three weeks shuffling down an assembly line with faulty rivets.

Traveled work—when work is completed out of the production line’s ordinary sequence—is a problem of Boeing’s safety culture.

In turns out that workers had spotted the bad parts almost immediately after the plane’s fuselage arrived at the factory from Spirit, reports The Wall Street Journal (March 12, 2024) . But they didn’t make the fix right away and the 737 continued on to the next workstation. (See the Chapter 9 photo on page 383 illustrating the assembly line process). When crews completed the repair 19 days later, they failed to replace four critical bolts on a plug door they had opened to do the job, leading to the accident.

At Boeing, there is a term for situations when work is completed out of the production line’s ordinary sequence: traveled work. This practice of completing work out of sequence is a liability when it comes to airplane quality. “The folks on the line, they know what it is,” Boeing CEO said. “It creates opportunities for failure.”  Yet, four years ago, Boeing laid out 5 values central to improving safety. Number 3 on the list: eliminate traveled work.

Doing work out of order complicates the intricate, taxing process of putting together an airplane. In the 737 factory, each plane moves its way through a series of stations, where crews are tasked with completing certain tasks. Those stations are equipped with tooling, platforms and crews trained to do the jobs designated for the site. Planes advance to the next station every 24 hours. Keeping production lines moving even when certain parts aren’t available for a given job helps avoid costly slowdowns.

When a missing part prevents workers from finishing, the plane still moves ahead and the part gets added or repair is completed somewhere down the line. Sometimes, the work isn’t done until the plane leaves the factory.  But the proper tooling may not be on hand there, leaving workers moving back and forth to get the necessary equipment.

Classroom discussion questions:

  1. As the new OM head of the 737 line, what is your recommendation?
  2. Can an assembly line like this be stopped?

OM in the News: Boeing’s Outsourcing Strategy That Went Too Far

It appears that Boeing is about to acquire Spirit AeroSystems , the troubled jet-fuselage supplier that has been at the center of quality issues affecting 737 MAX jets, reports The Wall Street Journal (March 2, 2024).  Spirit, which makes 737  and 787 fuselages and other major components, was created when Boeing decided to outsource and sold some of its factories 2 decades ago. Boeing now accounts for nearly 2/3 of Spirit’s sales, and cannot afford to have Spirit fail.

But Boeing engineers warned back in 2001 that the company risked losing control of its manufacturing processes and hollowing out its internal capabilities. The move to reacquire Spirit comes after a long series of quality problems with the fuselage sections it supplies. Spirit parts frequently arrive at the factory with defects. Those caused repeated delivery pauses at Boeing’s final assembly plants.

The move concedes that the strategy went much too far and has damaged Boeing. Last year, Boeing sent “armies of people,” its CEO stated, to Wichita to help Spirit get its manufacturing processes under control. When asked about Boeing’s outsourcing strategy, he recently told CNBC, “Did it go too far? Yeah, it probably did. But now it’s here and now. And now, I’ve got to deal with it.”

A deal would be a strategic reversal. Boeing sold the Wichita plant in a push to focus on final assembly.  Acquiring Spirit would leave Boeing with the task of cleaning up its operations at the same time that Boeing’s own quality-control systems have been questioned by regulators. The FAA has just given Boeing 90 days to come up with a quality-improvement plan.

Boeing in the past few years had done everything short of acquiring Spirit to gain control over the supplier. Spirit has lost an average of more than $1 million per airplane on the nearly 1,200 fuselage sections it built for the 787, a cumulative loss totaling $1.4 billion.

Chapter 2 in your Heizer/Render/Munson text discusses the Theory of Competitive Advantage and the risks of outsourcing on pages 44-47.

Classroom discussion questions:

  1. Describe the risks of outsourcing in general, and then the particular risks Boeing faced.
  2. What are the risks Boeing faces as it reacquires Spirit?

OM in the News: An Inside Look at Boeing’s Outsourcing Mess

The site of this month’s midair door-plug blowout on this Boeing 737 is behind the wing, outlined in red

Long before the harrowing Alaska Airlines blowout this month, there were concerns within Boeing about the way it was building its planes. Like so many other manufacturers, Boeing was outsourcing more and more of the components.

Much modern manufacturing, of course, includes outsourcing, our topic in Chapter 2. From hot tubs to iPhones, machines are built in small pieces by different companies, then delivered to another factory for final assembly. The system has sliced costs from the process by letting production lines maximize output and eliminate waste. But the strategy also stretches oversight and adds risks, since the final product is only as good as the least-good supplier, writes The Wall Street Journal  (Jan. 13-14, 2024).

A Boeing engineer distributed a controversial report in 2001 warning of the risks of its subcontracting strategy, especially if Boeing didn’t provide sufficient on-site quality and technical support to its suppliers.  “The performance of the prime manufacturer can never exceed the capabilities of the least proficient of the suppliers. These costs do not vanish merely because the work itself is out-of-sight,” he wrote.

But Boeing doubled down on outsourcing in the 2000s with its 787, which was the first jet that was heavily designed by suppliers. To lower costs and risks of a new design, Boeing authorized dozens of suppliers to design and build major sections of the 787 (see text page 30), including mostly completed fuselage sections.

Now, Boeing is reckoning with the fallout from this strategy. Dozens of factories build key pieces of 737 and 787 models to be assembled by Boeing. One of the major subcontractors is Spirit Aerosystems, the sole supplier of the fuselages used in 737s and 787s. Spirit is heavily dependent on Boeing for revenue, and the two companies have often battled over costs and quality issues. The earlier 737 MAX grounding and pandemic sapped Spirit’s finances, and the company slashed thousands of jobs, leaving it short-handed and with inexperienced workers when demand recently bounced back.

Spirit employees said production problems are common and internal complaints about quality are ignored. In a given month, at a production rate of 2 fuselages a day, there are 10 million holes that need to be filled with some combination of bolts, fasteners and rivets. The result: a factory under pressure where workers rush to meet unrealistic quotas and where pointing out problems is discouraged if not punished. Increasingly, Spirit workers say, planes have been leaving the factory with “undetected defects.”

Classroom discussion questions:

  1. What are the advantages and disadvantages of outsourcing?
  2. What are Boeing’s options vis a vis Spirit?