By Yao Zhao
Reconciling an empirical study1 of 787 delays with an economic analysis of financial incentives, we reveal a subtle incentive trap in the risk sharing partnership that encouraged Boeing and the suppliers to delay deliberately despite the disastrous effect. We suggest a remedy to avoid the trap and greatly alleviate delays for joint development programs of this kind.
The Boeing 787 Dreamliner was the fastest-selling plane ever in the commercial aviation industry,2 but its development was a nightmare. In this article we analyse Boeing’s traumatic experience, discover what really happened, identify the root causes, and offer ways to avoid similar disasters in the future. We believe that such lessons can provide valuable insights for companies around the world to ensure successes in joint product development.
Our conclusion is simple. A majority of 787 development delays may be deliberate and thus could have been avoided! The root cause of these delays is a subtle incentive trap in the risk sharing partnership induced by the “wrong” risk shared among Boeing and the suppliers. This led the firms into a “prisoner’s dilemma” wherein delays were in their best interests even while they were driving themselves into a disaster. We reconcile an empirical study of the actual events with an economic analysis of financial incentives, and reveal the rationale behind many seemingly irrational behaviours that delayed the 787 program. We show that properly distinguishing different types of risk and sharing only the “right” risk can help aligning the interests of partners and thus significantly reduce or completely avoid such deliberate delays.
1.1 The 787 Development Program.
787, the Dreamliner, was believed to be the most advanced commercial aircraft ever built and the most efficient to operate, due to its unprecedented use of the lightweight composite materials.3 The Dreamliner is also unprecedented in the scale of development outsourcing – 65% of the development work is outsourced to more than 100 suppliers from 12 countries.4 Exhibit 1 provides details on tier-1 suppliers.
Tier 1 suppliers design and fabricate 11 major subassemblies, Boeing integrates and assembles. Specifically, Boeing defines the parts and interfaces, but leaves the detailed design to suppliers who can optimise within each work package, and must work with each other on the interfaces. In case of disputes, Boeing serves as a referee to assist the suppliers.5 Development outsourcing provides Boeing significant benefits:
1. Market expansion. Outsourcing workload to other countries helps to secure sales of the airplane to these countries before product launch. Development outsourcing is instrumental in making the Dreamliner the fastest-selling plane.
2. Technology. Development sourcing enables Boeing to utilise the best in-class expertise and knowledge worldwide, and thus reduces the technological risk.
787 does not stand alone in workload outsourcing. Other noticeable examples include Airbus 380 and the Global Hawk; statistics shows that, on average, about 50% of the revenue of Raytheon was paid to the suppliers.6
About the Author
Dr. Yao Zhao is a professor in supply chain management at Rutgers Business School. His research focuses on supply chain and project management interfaces, and socially responsible operations. His works are published in leading operations management journals and he is the recipient of the NSF Career Award on project-driven supply chains.
1. This research was supported by National Science Foundation (NSF) Awards No. 0747779 and No. 1537591.
2. C.S. Tang, J.D. Zimmerman, “Managing new product development and supply chain risks: the Boeing 787 case,” Supply Chain Forum: an International Journal, 10/1 (2009): 74-86; S. Kotha, R. Nolan, “Boeing 787: the Dreamliner (B),” Case study, the Foster School of Business at the University of Washington (October 14, 2008).
3. J. Teresko, “The Boeing 787: A matter of materials. Special Report: anatomy of a supply chain,” Industry Week, (December 2007), see http://www.industryweek.com/articles/boeing_787_a_matter_of_materials_–_special_report_anatomy_of_a_supply_chain_15339.aspx.
4. T.C. Horng, K. Bozdogan, “Comparative analysis of supply chain management practices by Boeing and Airbus: long-term strategic implications,” presented at the MIT Lean Aerospace Initiative, (April 18, 2007); Exostar LLC, “Boeing 787: global supply chain management takes flight,” Case study (2007).
5. Horng and Bozdogan, op. cit.
6. B. Ulder, “Global Hawk supply chain integration.” Presentation at the Aerospace and Defense conference hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2011; V. Kamath, “Key challenges for supply chain in A&D.” Presentation at the Aerospace and Defense conference hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2010.
7. Horng and Bozdogan, op. cit.; Tang and Zimmerman, op. cit.
8. M. Lee, R. Anupindi, “Boeing: the fight for fasteners,” Tauber Institute Case 1-428-787, (November 17, 2009).
9. Horng and Bozdogan, op. cit.
10. D. Gates, “Boeing celebrates 787 delivery as program’s costs top $32 billion,” The Seattle Times, (September 24, 2011).
11. P. Lane, “Delivery of the first 777: launching US into the 21st century – Boeing, United celebrate new era,” The Seattle Times, (May 17, 1995); N. Clark, “The Airbus saga: crossed wires and a multibillion-euro delay – business – International Herald Tribune,” The New York Times, (December 11, 2006); Gates, op. cit.; X. Xu, Y. Zhao, “Build-to-Performance – The Boeing 787 Dreamliner,” Case study, Rutgers Business School – Newark and New Brunswick, NJ, (2010).
12. Kotha and Nolan, op. cit.; D. Turim, D. Gates, “Building the 787 Dreamliner: a timeline,” The Seattle Times, (December 15, 2009).
13. Tang and Zimmerman, op. cit.; Horng and Bozdogan, op. cit.; A.J. Shenhar, V. Holzmann, B. Melamed, Y. Zhao, “The Challenge of Innovation in Highly Complex Projects: What Can We Learn from Boeing’s Dreamliner Experience?” Project Management Journal, 47/2 (2016): 62–78.
14. H. Weitzman, “Dreamliner lessons to shape Boeing direction,” Financial Times, (September 25, 2011); M. Hiltzik, “787 Dreamliner teaches Boeing costly lesson on outsourcing,” Los Angeles Times, (February 15, 2011); Kotha and Nolan, op. cit.; Tang and Zimmerman, op. cit.
15. Turim and Gates, op. cit.
16. B. Domke, “Boeing 787 lessons learnt,” Airbus, (October 20, 2008), <http://www.planebusiness.com/buzz/airbus2.pdf>; Kotha and Nolan, op. cit.
17. Domke, op. cit.; Kotha and Nolan, op. cit.; Xu and Zhao, op. cit.; Shenhar, Holzmann, Melamed, and Zhao, op. cit.; Lee and Anupindi, op. cit.; Turim and Gates, op. cit.
18. Domke, op. cit.; Kotha and Nolan, op. cit.; Xu and Zhao, op. cit.; Shenhar, Holzmann, Melamed, and Zhao, op. cit.; Lee and Anupindi, op. cit.
19. J.L. Lunsford, “Boeing Scrambles to Repair Problems With New Plane – Layers of Outsourcing Slow 787 Production; ‘Hostage to Suppliers’,” The Wall Street Journal, (Dec. 7, 2007).
20. S. Nahmias, Production and operations analysis 5th Edition (McGraw-Hill Irwin, Boston, 2004).
21. B. Holmstrom, “Moral Hazard in Teams,” Bell Journal of Economics, 13 (1982): 324-340.
22. D. Gates, “Boeing 787 supplier halts work for 24 hours after FAA audit,” The Seattle Times, (July 2, 2008).
23. S, Ray, “Boeing agrees to buy Vought aircraft 787 operations.” Bloomberg news, (July 7, 2009).
24. Lee and Anupindi, op. cit.
25. If Boeing works slowly, it barely incurs any additional cost at that time because the customers are loyal and the damage of contract penalty has already been done (LN 1 is in such a bad shape, there is little hope to get it done within 12 months, and Boeing only has to pay contract penalty for the first 12 months (Wellsfargo Securities, “Equity Research: Boeing Company,” (August 11, 2009).). If Boeing makes a significant effort to catch up with the schedule, the suppliers will reap the most of the benefit because at that time, the suppliers were paying for a majority of the development.
26. Exostar, op. cit.
27. Reuters, “A wing and a prayer: outsourcing at Boeing,” Special Report, (January 2011); Ray, op. cit.