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RB/2019_SCM_Case Study/ CS2

Study material For Educational Purposes Only. Material from information derived from available Public domain.

Leveraging Supply Chain to Mitigate Product Development Cost in Large Manufacturing Projects

Rev 2

Invention & Innovation

RB/2019_SCM_Case Study/ CS2

Invention is defined as the creation of a product or the first time introduction of a process Innovation, on the other hand, occurs if someone improves on or makes a significant contribution to an existing

product, process or service.

Innovation creates value

Value that is useful and satisfies consumers’ needs. What made Apple innovative was that it combined all elements — design, ergonomics and ease of use — in a single device “IPOD”, apple created a platform and tied into it directly, the ability to effortlessly keep the device updated with music.

Inventor & Innovation

If invention is a pebble tossed in the pond, innovation is the rippling effect that pebble causes.

• Someone has to toss the pebble - That’s the inventor.
• Someone has to recognize the ripple will eventually become a wave - That’s the entrepreneur.

Shared thinking and informal collaborations as a key component of problem solving and accelerating change and to bring in Innovation. Which now stretches beyond corporate & geographic boundaries. Some of the most successful and celebrated innovations of the past decade center primarily on a new approach or a new way of using resources – internal or External.

Leveraging Supply Chain to Mitigate Product Development Cost in Large Manufacturing Projects

Creativity & Innovation

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“… creativity is the production of novel and useful ideas by an individual or a small group of individuals working together. This definition includes both the production of new ideas and the process of transformation of these ideas in useful products, services, processes, methods, procedures, etc.

• Technical expertise could be a skill formed by the accumulated

in‐depth experience in an organization over a period of time.

• Or an acquired expertise, rendered through a specialist agency
• Or could be a right combination of both of the above.
• Ms. Teresa Amabile who teaches

Entrepreneurial Management at HBS affirms that creativity arises at the confluence of three fluxes: knowledge, creative thinking and motivation The knowledge contributes to creativity through its two branches the technical expertise Ability to combine different elements in a new way The influence of knowledge on the creativity leads to the necessity of an interdisciplinary approach for each problem

+

More and more innovation spring, not from particular industries or disciplines, but rather across them – the so called Medici Effect. "When you step into an intersection of fields, disciplines, or cultures, you can combine existing concepts into a large number of extraordinary new ideas"

Leveraging Supply Chain to Mitigate Product Development Cost in Large Manufacturing Projects

RB/2019_SCM_Case Study/ CS2

Study material For Educational Purposes Only. Material from information derived from available Public domain.

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

The 787 Dreamliner story - Concept

RB/2019_SCM_Case Study/ CS2

After losing market share to Airbus (owned by EADS) in the late 1990s, U.S. commercial aircraft manufacturers faced major competition from European companies. Boeing was under pressure to decide between two basic competitive strategies:

• reduce costs (and the selling prices) of existing types of aircraft or
• develop a new aircraft to raise revenues through value creation.

Boeing needed something different to break away and create an innovative model – away from normally what it normally does. In 2003, Boeing decided to focus on developing an innovative 787 Dreamliner:

• To create additional value for its customers (airlines & their passengers) and
• To stimulate revenue growth & market response

Boeing decided its acquired technical expertise over the years of building aircrafts, incorporating path-breaking innovation, with a motivation to be the leader in the pack. Boeing decided to introduce 787 Dreamliner –

• incorporating the technical expertise it acquired over years of aircraft manufacturing,
• to introduce certain revolutionary concepts to enhance travel experience for passengers,
• through redesigning the aircraft and
• ffering improvements in comfort & benefit operators in increased haulage

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Boeing decided on a composite-intensive design

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The 787 Dreamliner story - Concept

Passenger Comfort: Composites allowed improved flying experience

• 787 has larger & innovative

windows,

• higher pressurization levels,
• higher humidity, and
• quieter engines. – due to Chevron

Nozzles with Serrated edges Cost-per-mile advantage: The weight advantage also allowed 787 Dreamliner

• to use 20% less fuel,
• carries 210 & 330 passengers
• Flies long range up to 8,500 nautical miles.

cost-per-seat mile is expected 10% lower than

• thers – shared between passenger & airline.

Maintenance advantage: Unlike the traditional aluminum fuselages, Composites resist rust and fatigue, and results in 30% reduction in maintenance costs.

An example of how far polymer use in 787: Boeing 777- designed in 1990 is made up of 11% composites, predominantly in the tail section and fuselage largely

• f alloy

Boeing 787 is made up of 50% composites which also includes an entirely polymer composite skin (including fuselage & wing). Composites are carbon-fibre-reinforced plastics (CFRPs) which cannot be riveted in the way metal is. They are therefore held together by lock-bolts inserted through 10,000 specially drilled holes in the flanges where the sections overlap

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Weight advantage: Boeing 787 will use composite-intensive design – will offer up to 50% in weight reduction and reduces the number of fasteners required by 80% compared with the traditional aluminum structure.

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The 787 Dreamliner story

However, in late 2007 Boeing announced a series of delays and the market reacted negatively. To monetize rapidly, It became imperative

• to reduce the 787's development time from six to four years and
• development cost from $10 to $6 billion.

Boeing decided to develop and produce the Dreamliner by using an unconventional supply chain, new to the aircraft manufacturing industry and was a break from their past practice. The restructuring of Supply Chain of 787 was envisioned to keep manufacturing and assembly costs low, while spreading the financial risks of development to Boeing's suppliers. 787’s new supply chain is based on a tiered structure that would allow Boeing to foster partnerships with approximately 50 tier-1 strategic partners. These strategic partners serve as “integrators” who assemble different parts and subsystems produced by tier-2 suppliers.

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Here, Boeing modelled it with some changes, on the lines of Toyota's supply chain, which has enabled Toyota to develop new cars with shorter development cycle times.

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MORE ON DREAMLINER SUPPLY CHAIN STRATEGIES

Boeing in its unconventional Supply Chain followed the following strategies:

Outsource more : They decided to introduce multi-tiered supplier structure, modified version of Toyota Supply Chain to:

• Increase outsourced content from 2% in its earlier 727

(1960s ) to 30% in 777 (1990s) to 70% in 787.

• Parallelly- reduce development time & cost.
• By reducing direct supply base, Boeing could focus more
• f its attention and resources on working with Tier-1

suppliers (pre-integration stages) rather than with raw material procurement and early component, which were left to Tier 1 and tier 2 suppliers.

• They also introduced web-based tool EXOSTAR to

facilitate Coordination & Collaboration.

• Increase production capacity without incurring additional

costs by decentralizing the manufacturing process. Reduction of financial risks: Tier 1 suppliers will receive payment for the development cost only on Boeing delivering its first 787 to its first launch customer – ANA Airlines. This contract payment term is meant to incentivize the Tier1 partners to collaborate & coordinate their development efforts. Further incentives in terms of:

• Tier 1 suppliers would be allowed to own their

Intellectual Property, which allows these strategic partners non-exclusive rights and can be licensed to

• ther companies.
• production of the entire section of the plane instead
• f a small part of the plane, will enable these

strategic partners in future growth & increased revenue (spare part supply etc)

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

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BOEING - REDESIGNED SUPPLY CHAIN

Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 1

Boeing Final Assembly

Customer

Traditional Boeing Supply Chain

Tier 3 splr B Tier 3 splr C Tier 3 splr D Tier 3 splr E Tier 3 splr A

Customer

Tier 2- System Partner 1 Tier 2- System Partner 2 Tier 1 Pre- Assembly

Boeing Final Assembly

Re-designed Dreamliner Supply Chain

In its modified structure salient features of Boeing’s unconventional SC:

• Tier 1 strategic partners are responsible

 for developing & delivering complete sections of aircraft to Boeing  Coordinating & integrating, Tier 2 suppliers, who in turn manage their corresponding Tier 3 suppliers, etc.

• This allows Boeing to assemble these

complete sections within three days at its plant in Everett, Washington. This Reduction in cycle time, Boeing can use in increasing capacity without new investment .

• This also necessitated an overhaul of

communication, coordination, logistics and control procedure/s so far followed by Boeing.

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Boeing 787 – Composites supply chain (Representative)

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Tier 1 - Spirit Aero-Systems, Wichita, KS, US.

Tier 2 –Toray Composites (America) Inc. (Tacoma, WA, US)

• subsid. of Toray, Japan – Interwoven Wire Fabric (IWWF)

Tier 2 - Cytec Engineered Material’s (Tempe, Ariz.) . Spirit’s 787 work setup has a capacity of 14 shipsets – they had 30 workstations, and each one will hold a Section 41 structure in some state of assembly, and each section will leave Wichita ready for immediate integration at the Boeing FAL in Everett. Boeing currently builds 12 787s each month, and is committed to 14 per month by 2019 — an unusually large number for a widebody aircraft.

Tier 2 - NORDAM Struct Div. (Tulsa, Okla.) - Windows

Tier 3 – Hexcel Corp (Stamford, Conn.) .

• Resins & Structural Carbon Fabrics

Tier 2 - Latecoere (Toulouse, France) - passenger doors

Tier 3 – Gentex Corp. (Zeeland, Mich.) .

• PPG Aerospace’s interactive window systems

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

RB/2019_SCM_Case Study/ CS2

Spirit Aero-Systems manufactures entire forward fuselage — called Section 41 of The Boeing Co.’s (Chicago, IL, US) 787 Dreamliner at its Wichita, KS, US, facility

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

DREAMLINER SUB-ASSEMBLY PLAN

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BOEING – MATERIAL FLOW (REPRESENTATIVE )

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Dreamliner component Transit for Value addition Remark

Mid Fuselage sections from Japan, Centre Fuselage from Italy, Nose Landing gear from UK and Passenger door from France Delivered to Charleston for assembly, by air Mid & Centre Fuselage Assembly transferred to Everett by air Nose section, Engine pylons from Spirit, Forward cargo door from Sweden, etc Integrated at Wichita To Everett by rail road Wing tip pieces from S.Korea and Fixed edges from Tulsa, OH Delivered to Japan for integration with the wing by air Delivered for assembly with Wing Box at Everett Tail Cone Assy from Vought Aerospace, Dallas To Everett, US Vertical Fin & Rudder parts from China Vertical Tail section assembled at Frederickson Trucked to Everett Wing-to-Body Fairing from China moved to Winnipeg for value addition Moved to Charleston for integration with fuselage To Everett by rail road Pylon fairing from China & Main landing gear & door from UK Integrated at Winnipeg To Everett by rail road Trailing edges & Inboard flaps From Australia To Everett Horizontal Stabilizer From Italy To Everett by Air

NOTE: Major fuselage sections etc were air-lifted thru a modified 747 called “DreamLifter”

RB/2019_SCM_Case Study/ CS2

BOEING - REDESIGNED SUPPLY CHAIN

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

COMPONENT 787 PROGRAM

SOURCING STRATEGY SUPPLIER RELATIONSHIP SUPPLIER RESPONSIBILITIES NUMBER OF SUPPLIERS SUPPLY CONTRACTS ASSEMBLY OPERATIONS

737 PROGRAM

Outsource 35-50% Outsource ~70% Purely contract based (Traditional) Strategic partner with Tier 1 supplier Part- Developed & produced parts for Boeing Developed & produced sub-sections for Boeing Thousands

• Approx. 50 Tier-1

strategic partners Fixed-price contracts with delay penalty Risk Sharing Contracts 30 - 60 days from Boeing to perform final assembly 3 Day assembly of sub-sections

RB/2019_SCM_Case Study/ CS2

Study material For Educational Purposes Only. Material from information derived from available Public domain.

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

OUTCOME & ANALYSIS

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CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

The outcome of Dreamliner Mega project by Boeing did not go as anticipated and the outcome as many conclude as disastrous.

Program cost: US$32 billion (as of 2011) against the original budget at conception - US$ 6 billion Number built: 918 as of November 2019. First flight: December 15, 2009 as against original end date envisaged as end Aug 2007 First delivery to customer (ANA) in End Dec 2011 The Dreamliner Mega project started as a tale of technology and innovation, of a long-overdue update to a vital niche in Boeing's stable of airliners. But ended proving more of the plane's design and construction, which has shifted from a bold experiment in

• utsourcing / off-shorin to a public debacle

In 2013, the first year of service for the Boeing 787 Dreamliner:

• at least four aircraft suffered from electrical system problems stemming from its lithium-ion batteries.
• Consequently, all 50 of the aircraft which were delivered till then were grounded.
• Boeing also announced that it was halting 787 deliveries until the battery problem was resolved.

This incident created a major debacle on reputation of Boeing.

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BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Outsourcing, Offshoring and the Estimation risk in a tiered structure.

Make-buy decisions should be based on complete assessments of all of the costs (TCO model) and to be made after the product has been sufficiently defined and the relative costs established. But all outsourcing decisions have to be taken very carefully. Especially, when:

• the development, design & engineering are to be outsourced, in a fragmented Supply Chain. Boeing had

not considered any on-site involvement in its estimation

• Outsourcing / Offshoring done (as in 787) good coordination procedure to be established – additional risks

appear, especially when there are:

• cultural and language differences
• physical distances involved in a lengthy supply chain and
• multiple inter-continental handling.

In complex manufacture of a product like aircraft some degree of offshoring is inevitable.

• some expertise and some precision skills of specialty manufacturers, costly to duplicate.
• Most of the true risks and cost of offshoring are hidden and need to be envisaged at the concept stage

and have to be properly estimated. Boeing failed to read the signals or listen to some voice of reason. Boeing had little experience in handling such a complex Supply Chain.

RB/2019_SCM_Case Study/ CS2

BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Boeing had a very complicated & innovative product in the Dreamliner 787. It also involved a lot of components, where Boeing had acquired proprietary technical & manufacturing knowledge over the years. Besides:

• Dreamliner contained 50% composite material, as yet unproven in flight tests (rather in Airliners, in all)
• Boeing unlike Apple had no prototype – as they outsourced development, engineering & manufacturing.
• the project suffered several design mismatch, re-work and on-site involvement causing repeated schedule &

cost over-runs. This was due to lack of experience in managing such a complex Fragmented supply chain

Risk of Out-sourcing / Off-shoring Mission Critical Components and mis-placed priorities

Mis-placed Priorities In the quest for reducing development cost upfront cost, it is believed that Boeing went in for Direct Industrial Offsets (IO) in production sharing (subcontracting), tech. transfer, workers training etc with offshore locations.

• Creating potential competitors in aerospace sectors, for LCAs in future
• In the course of the project Boeing lost its advantage in intricate advanced proprietary technologies involved in

advanced composites, glass, aluminum, titanium materials technology, etc in addition to precision tooling and machining.

• These are dual use technologies which could be used in the defense space too – created competition, where

there were very few.

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BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Risk in Supplier selection, inadequate training & onsite support process

The performance of Boeing on the 787 with its tiered supply chain is only as strong as the weakest link.

• Boeing’s selection of Tier-1 strategic partners who were inexperienced & incapable of performing such a

complex project in aerospace sector, created additional risk. More in-depth screening & selection of Tier-1 partners, could have mitigated some of the avoidable embarrassment and consequential damages.

• To compound this, Tier 1 supplier was allowed his choice of Tiered supplier structure, under him. Boeing

also had less control on Tier-1 partner’s stage-gate process, to ensure quality / performance.

• Boeing had to send hundreds of its engineers to the sites of various Tier-1, Tier-2, or Tier-3 suppliers

worldwide to solve various technical problems that appeared to be the root cause of the delay in the 787's development.

• Boeing had to redesign the entire aircraft sub-assembly process causing huge expense s & delay

Delays piled up as a domino effect when a supplier in the chain failed in the value chain.

• Due to the risk sharing contract conditions of payment, some suppliers seized up.
• To regain control of the development process, Boeing was forced to buy out one of the key Tier-1 suppliers

(Vought Aircraft Industries) at $ 1 Billion The grounding — an unusual action for a new plane — focuses on one of the more risky design choices made by Boeing, namely to make extensive use of lithium ion batteries onboard its airplanes

1

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BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Risk in inadequate Supply chain visibility & coordination

The supply chain visibility is essential to facilitate collaboration and coordination between the manufacturer and the value chain above and below him. The complexity increases with language and distance with a fragmented SC.

Boeing relied on a computer application “Exostar” to improve its visibility & promote communication between various elements of the supply Chain. It failed train the suppliers to input accurate information, promptly. Inducing lack of visibility across in the entire Supply chain – to be fore-warned of surprises. Delayed response resulted in further delays.

Risk of partially implementing the Toyota model

Boeing adopted the superficial structure of Toyota’s tiered outsourcing model without the values and practices

• n which it rests :
• Supplier selection based on track record and ability to deliver with the required timeliness, quality, cost

reduction and continuous innovation.

• On working closely with its suppliers and responding to supplier concerns with integrity & mutual respect.

Here establishing impressive level of professional trust & overriding preoccupation with product quality. Instead, Boeing relied on poorly designed contractual arrangements, which created perverse incentives to work at the speed of the slowest supplier, by providing penalties for delay but no rewards for timely delivery.

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BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

The innovation risk

The 787 involved not merely the outsourcing of a known technology. It involved major technological innovations unproven in any airplane. The innovation risk implied a greater involvement by Boeing in the development and manufacture of the aircraft. Astonishingly, Boeing opted for lesser involvement, delegating much of the detailed engineering and procurement to sub-contractors. Would the carbon fiber composite survive the rigors of international flying? Could lithium-ion batteries, which are notorious for overheating and causing fires that are difficult to put out, be safely used? No one knew for sure. The 787 also contains multiple new electrical systems, power and distribution panels. The interactions among these novel technologies, introduced simultaneously, also exponentially increased the risk of innovation.

RB/2019_SCM_Case Study/ CS2

BOEING - REDESIGNED SUPPLY CHAIN - ANALYSIS

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Risk in managing Stakeholder’s Expectation and Perception

Boeing could have been open and honest in its communication with its customers relating to the actual progress, what challenges the project is facing, and what corrective measures are implemented. In airline industry, many customers understand such communication as it is closely linked to their safe operations. Sweeteners could have worked in mitigating customer concerns. Managing Customer Expectations: Continued delays made Customers unhappy and caused many order cancellations. This got accentuated by mid- way design changes, safety issues and grounding. Some design changes Boeing announced mid-way worked against the USP of using 787 by its customers and affected their basis for the business case. Labor (Union) expectations: One of the reason Boeing resorting to outsourcing and offshoring stemmed from a desire to circumvent difficult labor relations in Seattle. Hence, Boeing approached decision on outsourcing pre-emptively, without taking into confidence the Unions. Unions reacted adversely and a costly strike ensued from Sept 7, 2008 on the issues of outsourcing, job security, pay and benefits. The strike affected manufacturing in the whole of Boeing covering its existing & newer models of aircraft. Strike lasted till 1 Nov, 2008, costing Boeing $ 100 Mill / day., besides schedule delays.

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Questions?

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Annexures

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BOEING - REDESIGNED SUPPLY CHAIN

CASE STUDY - SUPPLY CHAIN TO AID NEW PRODUCT DEVELOPMENT PROJECT – BOEING 787

Dreamlifter LCF -747 Boeing