Boeing's (NYSE: BA) teleconference on Tuesday reminded me of the old adage about banking: If a borrower can't pay back a million-dollar loan, the borrower is in trouble. If a borrower can't pay back a $1 billion loan, the bank is in trouble.
To try to keep down development costs for the groundbreaking 787 Dreamliner, Boeing has dramatically ramped up the amount of work it has outsourced to suppliers. If those suppliers were limited to just a handful and they failed to deliver, that would be the end of them. But if thousands of suppliers can't deliver because of the logistical nightmare Boeing faces in managing them, Boeing will be the one to suffer.
Boeing did its best to reassure analysts that it was making progress in straightening out the kinks in the supply chain. It remains committed to the schedule announced in October that calls for it to start deliveries in late 2008, and to have 109 planes delivered by the end of 2009.
One problem has been an industrywide shortage of fasteners. Boeing said it has consolidated and strengthened the supply chain for those, and now it's able to track where fastener inventories are in the production system. Another issue for suppliers, which include Spirit Aerosystems (NYSE: SPR), Honeywell (NYSE: HON), Goodrich (NYSE: GR), and GE (NYSE: GE), is incorporating late changes in design. Boeing said that it now has one board to approve changes, down from 13 earlier in the year.
But according to The Wall Street Journal, some suppliers are skeptical that Boeing will be able to deliver 109 jets by the end of 2009. As one supplier executive told the Journal, "From where we stand, it's still chaos."
Nevertheless, I think globalizing the supply chain is the wave of the future. Airbus, Boeing's only major rival, sees value in the model, and it's said that it will move to a global supply chain as well when it ramps up to produce a plane to compete with the Dreamliner. The outsourcing model, which also involves giving top-tier suppliers more responsibility for the manufacturing and assembly of whole components like a cockpit or a tail section, has been used by auto manufacturers for years.
Even with additional delays, Boeing has a huge head start on Airbus for this new, more fuel-efficient plane. Airbus won't have a comparable model available for another five years. And if you think Boeing has had problems with logistical delays, wait till Airbus, which is part Franco-German public company and part political football, tries to keep track of all those rivets.
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