The Mistake That Brought Down the Dreamliner

Boeing's (NYSE: BA  ) 787 Dreamliner has been a mess almost from the day the company began designing the aircraft. It was supposed to be the most technologically-advanced aircraft in the sky, but it's become a headache for engineers, investors, and customers around the world.

Yesterday's announcement that the FAA was grounding all 787 Dreamliners was the latest setback after a string of incidents for Boeing. No one knows when the Dreamliner will be up and running again, or how extensive the damages will be. We may be able to go back years to find the decision that led to all of these problems.

The decision that started it all
Boeing's old way of doing business was to design most of the parts, and do assembly in the U.S., with U.S. manufacturing partners. A total of 95% of the revolutionary 747's parts  are designed and made in the U.S., so the company had control over the design process when the aircraft was being designed.

When it began planning the Dreamliner, the company decided to outsource both design  and manufacturing to partners around the world. Boeing would act as a project manager and final assembly hub in its giant Washington plant.

The concept is easy enough on the surface. You send out manufacturing specs to suppliers, they come back with bids, and you choose the partners you want to work with. It's a fairly standard process that engineers across the country use when getting parts manufactured for everything from single parts to complex assemblies.

But the challenge that Boeing was facing in building an aircraft is far more complex than your standard outsourcing job. To make matters worse, Boeing outsourced not only manufacturing, but design, as well, for many components, so they were taking parts designed all around the world and trying to assemble them into one system that operates seamlessly. When you add on all of the technology available in the Dreamliner, this becomes a very, very complex problem.

Technology, outsourcing, and massive systems don't mix
When I was working at one of 3M's (NYSE: MMM  ) manufacturing  plants in the mid-2000s, I saw first hand how complex the process could be. Boeing planned to build the 787 with composites that, according to Boeing, make up 50% of the primary structure of the plane, and we were working on products that could make them stick together -- essentially, glue. Working with carbon fiber isn't the same as dealing with aluminum, which is what most planes are made out of, so instead of using rivets and bolts, you have to essentially glue a lot of pieces together. I helped work on the glue, and it was a manufacturing and technological nightmare, even for something so seemingly easy and far down the supply chain.

3M is an expert in tape and glue, so if that was a challenge, just imagine how it must have been working with hundreds of suppliers on new technology for composites, engines, batteries, window, etc. And Boeing was doing all of that while dealing with the challenges inherent with outsourcing.

Widespread consequences
The trickle down of Boeing's Dreamliner nightmare doesn't stop with Boeing. There's an entire supply chain that will be affected, especially by costs from capacity build-outs that have been delayed in being utilized.

General Electric (NYSE: GE  ) and Rolls-Royce are making engines for the Dreamliner and, while GE in particular may be a large conglomerate, the Dreamliner is a big program for the company. Delays will be a point of concern going forward.

Spirit AeroSystems (NYSE: SPR  ) is one of the major suppliers, supplying the front cabin and the leading edge of the wings to Boeing. The stock has been through the ringer in recent years as delays hit the Dreamliner and, today, the prospects don't look any better.  

The Dreamliner even goes down the supply chain to commodities like titanium. Titanium Metals, now a subsidiary of Precision Castparts (NYSE: PCP  ) , has built out supply for huge projects like the Dreamliner that were supposed to be the future for titanium, likely a big driver of the acquisition. The old 777 only used 59 tons of titanium, but the Dreamliner's advanced design bumped that up to 130 to 150 tons, and growth should have been imminent. But delays have struck the titanium market, too.

Boeing's problems are widespread and, depending on what the FAA finds, the financial ramifications could be, too.

Foolish bottom line
Boeing clearly made a lot of mistakes to get the Dreamliner to this point; but the biggest may have been the decision to outsource most of the design and manufacturing of such a technologically-advanced aircraft. Right now, that's coming back to bite them.

A deeper look at Boeing

With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multi-trillion dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial industry minds have collaborated to provide investors with the key, must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.

 

 

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  • Report this Comment On January 18, 2013, at 10:04 AM, SHFriendly wrote:

    With the crisis news at Boeing, it is interesting that Boeing has an active request to the SEC to exclude this proposal from a 2013 shareholder vote.

    Proposal 4 – Independent Board Chairman for Boeing

    RESOLVED: Shareholders request that our board of directors adopt a policy that, whenever possible, the chairman of our board of directors shall be an independent director. An independent director is a director who has not previously served as an executive officer of our Company. This policy should be implemented so as not to violate any contractual obligations in effect when this resolution is adopted. The policy should also specify how to select a new independent chairman if a current chairman ceases to be independent between annual shareholder meetings. To foster flexibility, this proposal gives the option of being phased in and implemented when our next CEO is chosen.

    When our CEO serves as our board chairman, this arrangement can hinder our board's ability to monitor our CEO's performance. Many companies already have an independent Chairman. An independent Chairman is the prevailing practice in the United Kingdom and many international markets. This proposal topic won 50%-plus support at three major U.S. companies in 2012.

    This proposal is important to focus our CEO on Boeing due to the size and complexity of our company and the challenges that our company faces – for example the 3-year delayed Boeing 787. In 2012 our CEO was potentially distracted by his responsibilities on the boards of Procter & Gamble and IBM, both rated “D” in governance by GMI/The Corporate Library, an independent investment research firm. Mr. McNerney was further overextended by his responsibilities on a total of three board committees at IBM and P&G.

    According to “P&G Directors Face Own Challenges While Keeping Tabs on McDonald” by Jeff Green of Businessweek, September 4, 2012, Procter & Gamble directors [including P&G Lead Director McNerney] are facing a time management challenge: monitoring CEO Robert McDonald’s turnaround plan while running their own companies. McDonald, who lowered P&G profit forecasts three times in a year at the world’s largest maker of consumer products, is trying to cut $10 billion in costs and restructure the company to focus on winning back market share. He also faces pressure from activist investor Bill Ackman, founder of Pershing Square Capital Management, who disclosed a stake in P&G in July 2012.

    No other company in the S&P 500 had more active CEOs than P&G. “This is probably not the kind of board you want for a company that’s about to face a crisis,” said Jay Lorsch, a management professor at Harvard Business School in Boston. “When you have directors who are busy with their own companies [like Mr. McNerney], that limits time they have for P&G and that can be problematic.”

    Mr. McNerney should follow the example of Netflix CEO Reed Hastings who left the Microsoft board in October 2012. “I’ve decided to reduce the number of boards I serve on, so that I can focus on Netflix," said Hastings.

    Please encourage our board to respond positively to this proposal to strengthen our corporate governance and protect shareholder value:

    Independent Board Chairman – Proposal 4

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