Boeing's Big Supply Chain Wager

The success of Boeing's groundbreaking 787 Dreamliner hinges on a new business model and a multi-tier, collaborative global supply chain network. Will these massive process changes hold the new aircraft back or allow it to soar?


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Posted on Jul 23, 2007

Tim Opitz heaved a big sigh of relief on Jan. 15 when supplier Kawasaki Heavy Industries made its first delivery — on time — of a forward fuselage for Boeing's new 787 Dreamliner to Boeing's assembly facility in Charleston, SC. To Opitz, director of product operations and support at Boeing's Commercial Airplanes unit, the successful delivery from a key partner was one in a long series of tests that Boeing must pass in order to get the 787 off the ground. The three-model craft, designed for 210 to 330 passengers, is scheduled for first customer shipment late next year. And Boeing can't afford to have anything go wrong. The 787 program represents the company's best bet for regaining competitive territory lost to arch-rival Airbus, which, in 2001, surpassed Boeing as the world's largest manufacturer of commercial aircraft. Even before full production, the relatively light, fuel-efficient 787 — which is designed for long-range, point-to-point travel and sells for $160 million per plane — has attracted 514 orders from airlines around the world, making it the fastest-selling commercial airplane in history, according to Boeing. Airbus, the largest unit of European Aeronautic Defense & Space Co., meanwhile, has stumbled. The company, a consortium of European aerospace manufacturers, has suffered a two-year delay in getting its new A380 jumbo jetliner into production, partly as a result of design collaboration errors. Airbus, which is about two years behind Boeing in producing a model to directly compete with the 787, recently announced plans to cut 10,000 jobs across Europe. But it's not just the competitive opportunity that makes the 787 a critical roll of the dice for Boeing. The stakes have been raised considerably by Boeing's decision, with the launch of the program three years ago, to radically change the way it designs and manufactures commercial airplanes. Beginning with the 787, the $62 billion Chicago-based company has decided to transform itself from a vertically integrated enterprise that does most of its own product design, supplier management, manufacturing, and integration into a more virtual enterprise that relies heavily on partners and suppliers. That transformation, if successful, could help Boeing cut lead times while significantly reducing tooling, inventory, and other risks. It could also accelerate similar changes throughout the aerospace and defense industry. First, however, Boeing must successfully roll out a host of new processes and systems and, perhaps most challenging, persuade suppliers to transform the way they work with Boeing. "What Boeing is trying to do will really set the standard for how you reduce time to market, from design to implementation," says Pat Russell, director of global supply at Vought Aircraft, a key 787 partner that is designing and building the plane's center fuselage and other assemblies. "We cannot do things the way we used to. With technologies changing at the speed they are, we must get to market faster. If you don't, there's somebody else out there who will." Just about everything about the 787 program is different. Take the materials from which the airplane will be built. Rather than being composed primarily of aluminum, as most commercial aircraft historically have been, the 787 airplane is made mostly of composite materials, mainly carbon graphite. The new material will make the 787 lighter — up to 40,000 pounds lighter than Airbus' A330-200 model, Boeing estimates — and it will allow for larger windows and a more comfortable environment for passengers. Just as radically new as the 787's materials makeup, however, is the way Boeing works with suppliers in the program. Historically, like most aerospace companies, Boeing designed all critical airplane subsystems, such as wings and fuselages, itself, and contracted and dealt directly with suppliers. The company also tended to take delivery of parts directly from build-to-print (parts built according to standard specifications) suppliers, and assembled and integrated the final product itself. In recent years, however, Boeing has been forced — sometimes painfully — to face the limitations of that approach. As rising fuel costs and even terror attacks have impacted airlines, causing major swings in aircraft orders, OEMs like Boeing have realized that the up-front investments in tooling required to build a new plane represent growing financial risks. At the same time, experts say, aircraft lifecycles have begun to shorten, increasing the odds that Boeing's integrated approach to design and integration could create bottlenecks. So, with the 787, Boeing decided to spread the risk among its suppliers and to call on them to help shorten cycle times. Rather than designing all of the major subsystems itself, Boeing contracted with about 30 key suppliers, including Fuji, Vought, and Goodrich, to design and integrate entire subsystems, such as landing gear, fuselages, and engine housing systems. Boeing insisted that all of its design partners use common 3D design tools from Dassault Systemes. The tools — Catia V5 for CAD, Delmia V5 for simulation, and Enovia V5 for collaboration — would allow design partners to share digital design information and simulations, and support collaborative, concurrent design. And that, Opitz says, would help Boeing cut down design cycle times. At the same time, rather than manufacturing and integrating most of the major subsystems itself from bills of material, Boeing decided once again to call on its 787 suppliers to do so. Tier 1 partners such as Vought are being asked to receive parts from tier 2 and 3 suppliers, build them into subsystems, test them, and ship them to Boeing plants in Everett, WA, and Charleston for final assembly and test. The benefit for Boeing, Opitz says, is that this arrangement shifts some of the risk of up-front tooling and inventory investments to partners. "Now we don't have all our eggs in one basket," Opitz says. Three years into the 787 program, Boeing has demonstrated that it is well on the way to successfully deploying the collaborative, concurrent design approach needed to support the new business model. In December 2006, the company conducted a public demonstration of how, using the Dassault tools, it has been able to simulate and digitally test the 787 design composed of sub-assemblies created by several thousand designers at multiple partners. With the 787's first flight scheduled for later this year and first customer shipment expected in 2008, Boeing's next step is to prove that it can coordinate a multi-tier supply chain that it no longer directly controls. The essential problem, Opitz says, is that although the new business model spreads risk and new responsibilities among Boeing's suppliers, it also reduces Boeing's visibility into where inventories are, how well suppliers are executing against production plans, and how production delays might affect critical processes. That's because, although Boeing is contracting directly with 787 suppliers, tier 2 and tier 3 suppliers are shipping parts to Boeing tier 1 partners for assembly, rather than directly to Boeing as they have in the past. "Now our multi-level supply chain is being managed by someone else rather than us," Opitz says. "The challenge is: How do you coordinate and communicate supply chain data under those circumstances?" At the same time, Boeing had to figure out a way to make those supply chain data and processes visible to itself and its partners in real time on a 24-hour-by-seven-day-per-week basis because key partners are located around the globe, including in France, Israel, Japan, and the United Kingdom, Opitz says. Technology Selection Opitz and his team settled on a three-part strategy. First, they would create a set of data definitions, business processes, and procedures that Boeing and its 787 suppliers would use to execute and communicate activities, such as purchase orders, schedules, receipt of material, and payments. Second, Boeing would put in place a secure network and a set of easy-to-use common supply chain management applications that all partners could use. And third, Boeing would invest in aircraft that could be used to quickly transport key parts and subsystems around the 787 supply network, reducing potential ground transportation delays. To accomplish that last part, Boeing tore the seats out of three 747s and otherwise modified the aircraft, enabling them to carry cargo as large as a full 787 fuselage section. The company dubbed the planes the Dreamlifters. In order to create common supply chain processes, Boeing met with potential 787 partners even before the company finalized its supplier list. They discussed and debated how a collaborative, multi-level supply chain should work, and eventually began to agree on procedures, such as how Boeing would contract with suppliers, how partners would receive schedules and purchase orders from Boeing, and how partners would report the receipt of parts inventory. "Boeing did a really good job of involving partners in scoping out the processes," Vought's Russell says. "They brought everybody together, got their input, and tried to come up with a system that would meet everybody's needs. They called meetings constantly and tried to work out processes." Meanwhile, Boeing was deciding on the technology architecture that it would use with its partners to manage the global, multi-tier supply chain. Initially, the company considered building and deploying its own secure network and applications to link 787 suppliers, Opitz says. Boeing officials, however, worried about being able to get all of the program's key suppliers on a new network quickly enough. Ultimately, Boeing decided to use Exostar, a joint venture established in 2000 by five large aerospace and defense firms, including Boeing, as a secure exchange for enabling electronic commerce in the aerospace and defense industry. Key to that decision: Twenty-seven of Boeing's 30 key 787 suppliers already used Exostar for such tasks as sharing design information and procuring materials. Though Exostar was initially focused on executing procurement transactions among A&D partners, the venture in recent years has begun to enable a wider range of business processes, including supply chain planning and execution. In the summer 2005, Exostar allied with E2Open, a provider of multi-tier supply chain management applications (and a Managing Automation 2005 Company to Watch). (Read more about Exostar's evolution.) Boeing decided to use the E2Open applications, implemented as on-demand services on the Exostar network, for basic multi-tier supply chain functions, such as issuing purchase orders, invoices, and payments, communicating planning schedules, aligning order information and partner commitments against planning schedules, tracking inventory through the returns process, and key performance indicator reporting. And though Exostar was already well-established in the A&D industry, Boeing's selection of Exostar and E2Open to stitch together the 787 supply network was not without risks. For one thing, Opitz says, Boeing officials worried about whether the Exostar network could scale to meet the demands of the 787 program once it goes into production. While Boeing does not expect the number of transactions among 787 supply partners to grow much beyond 350 per day, those transactions are expected to generate lots of data that Exostar will need to secure and manage. "Where we and Boeing got a bit nervous was that a lot of the transactions come with big payloads of technical data," says Peter Scott, Exostar's vice president of marketing and corporate development. "It could easily get to terabytes of data that we must archive, back up, and provide disaster recovery for. That was a very real challenge." Following a detailed Boeing audit of Exostar's plans for expanding and securing its network, however, the company was satisfied that Exostar could keep up with the 787 program's data load, Opitz says. Another concern was whether the E2Open supply chain applications would be a good fit in a large, complex, multi-tier aerospace and defense environment, such as the 787 program. E2Open, like Exostar, was launched in 2000 as a joint venture. Its backers, however, were high-tech electronics manufacturers, including Hitachi, IBM, and Panasonic, which were interested in gaining visibility into inventories, schedules, and service levels as they increasingly outsourced production to partners around the world. Could E2Open work in an environment where hundreds of suppliers would collaborate to create a product as complex as a jetliner? Eventually, says Rob Barrett, a vice president at E2Open, the company and Exostar were able to convince Boeing that the multi-level supply chain processes in high tech were similar enough to those Boeing needed to put into place. Like Boeing, Barrett says, high-tech companies needed to generate schedules, load them into a shared platform that could be accessed by partners, let suppliers commit to a schedule, identify conflicts, issue purchase orders, and collaboratively manage inventory. E2Open lets high-tech manufacturers perform those tasks using EDI or Web interfaces, and it integrates tightly with manufacturers' ERP systems, such as Boeing's ERP LN from Infor Global Technologies. "In the end, it was a good fit because Boeing is going with someone that understands what it takes to run an outsourced supply chain," says Mike Burkett, a research vice president at AMR Research. While Boeing and its 787 partners have not yet put the Exostar platform and E2Open applications to the test of full production, all indications are that the experience so far has been positive. Exostar deployed the network and a basic set of supply chain management functionality 18 months ago in about 90 days. Since then, however, the scope of what Boeing expects from Exostar and E2Open has continued to expand. After the initial deployment, for example, Boeing decided it needed more detailed information on the exact time that parts are delivered to partners, Opitz says. Boeing also asked for more detailed, real-time analytics showing how well the 787 supply chain is performing at any given time, as well as real-time alerts in the event of problems, such as critical parts or subsystems not appearing on time. And Boeing asked for an easier way to change plans on the fly. Exostar's Scott says the company had expected the scope of the 787 implementation to expand once it was deployed, and that Exostar has kept up with Boeing's and its 787 partners' expectations. The partners seem to agree. "Exostar has proven to be a useful tool for the partner-managed inventory stuff that we need to do on the 787 program," says Vought's Russell. The Big Bet While defining new supply chain processes and deploying a supporting technology architecture have turned out to be complex tasks, Boeing's biggest challenge has been getting buy-in and support from its suppliers for the changes they must make to conform to the new reality of the 787 program. Not surprisingly, executives at major suppliers had to look long and hard at the financial potential of participating in the program before agreeing to accept considerable new risks and investment. "We have a fixed contract with Boeing, but we had to design and buy all of the tooling up front for the program," Russell says. Long before receiving compensation from Boeing, for example, Vought had to invest in huge pieces of equipment needed to produce one-piece composite fuselages. "We bore much of the non-recurring expense up front," he says. That caused Vought to carefully crunch the numbers before buying into the program. Despite the large number of 787 orders to date, Vought still isn't sure what its payoff will be. "The program looks successful from a sales point of view, but it's too early in the program to understand what the end result will be for us," Russell says. Such concerns have been common among Boeing's 787 partners, experts say. "Nobody's bailing, but everybody's whining," says Jim Wojciehowski a senior aerospace industry adviser at Bearing Point. But in the end, many suppliers accepted Boeing's 787 business model rather than pass on participating in a major program. "You have only one window to get on a 40-year program like this," Wojciehowski says. "But in a case like this, when you sign the contract, you're betting a lot." At the same time, some suppliers — and Boeing itself — have struggled to master the new collaboration and work practices required by the 787 program. For example, Russell says, employees up and down Vought's organization have been forced to improve their communication skills, particularly those involving collaboration with Vought's 787 program suppliers. When working on past Boeing programs, Russell says, only Vought manufacturing engineers had to collaborate closely with suppliers' engineers when handing off design packages. "But now we have to work closely with them on materials, design, stress tests, and other processes," Russell says. "So interpersonal communication skills and building relationships have become more important than ever. We're not just throwing designs over the wall anymore." Add to that the language barriers presented by the fact that Vought's suppliers on the program are in Germany, Israel, South Korea, and elsewhere, and you get a major cultural change. "It's something we've really had to work on because engineers, by their very nature, are not necessarily the strongest when it comes to communication skills," Russell says. At the same time, employees at Boeing and its 787 partners have been forced to acclimate to the fact that they are now part of a 24-hour-per-day, seven-day-per-week global enterprise. Because 787 suppliers are operating around the globe — and in places such as Israel where businesses are open on Sunday — Boeing and its suppliers have had to make sure someone is on hand around the clock to answer questions and work through problems. No amount of technology can change that, Opitz says. "When you're ready to go home for the weekend, they're not," Opitz says. "We had to change the way we work to accommodate that." Given all of the new technology, process, and cultural changes needed to support the project, will the global, multi-tier supply chain perform well enough to enable Boeing's 787 business model? So far, so good, Opitz says. Already Boeing has shown reductions in supply chain flow times and flow days, goods moving through the supply chain at any given time, and supply chain operations cost, he says. Many of those improvements, however, are directly attributable to Boeing's use of the Dreamlifter craft to move parts and subsystems quickly among 787 partners. "We feel very good about hitting our inventory and cycle time targets," Opitz says. Even so, experts say, until Boeing gears up the 787 supply chain for real next year, the company won't know exactly what to expect. Will all suppliers — even smaller parts manufacturers — prove capable of using the Exostar and E2Open applications to manage and report on inventory? Will Boeing's larger suppliers be able to make the cultural shift to become full-fledged partners with design and supply collaboration responsibilities? "The fact is, they really won't know until they build the first aircraft," AMR's Burkett says. "They simply haven't run the supply chain in a production manner yet. Remember, Airbus didn't discover their design problems until they tried to bring everything together for the first time."

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