Boeing 787 delays highlight business model risk
Newly identified problems with fasteners will further delay the Boeing 787 Dreamliner program (full story here at WSJ). What does this story tell us about business models and strategic risk?
The Boeing 787 program has faced a series of setbacks due to supplier problems. Are these problems an indicator of strategic risk or operational risk? My view is that the primary risks are strategic and strategic risks can only be partially mitigated by operational processes.
The story notes that the 787 "already has been delayed nearly two years by manufacturing problems related to Boeing's decision to have suppliers in Japan, Italy, South Carolina and Kansas build the bulk of the plane without close enough oversight by the company. Boeing said it now has "better visibility" into its supply chain and that it has corrected the bulk of those problems."
Boeing's decision to build the 787 using a network of suppliers is a strategic decision about how to vertically integrate or not. Remember how Henry Ford built the Model T with a completely vertically integrated supply chain — including raw steel and railroads. He wanted total control.
When you outsource ANY aspect of your business, you gain flexibility but lose control. The outside supplier has their own P&L and their incentives are different from yours. They must manage their own risks, including customer diversification. As a supplier to Boeing, I would not want to be totally dependent on their business. The flip side of that for Boeing is that I have supplier who is not totally focused on me. If they were 100% focused on me and I accounted for all of their revenue, why wouldn't I just want to own them and have more control?
Outside suppliers also have incentives to overpromise in order to win business — especially promises about quality and lead time. Sure, they say, we can deliver the parts you need and we can scale rapidly to meet your production needs. Yet smaller suppliers rarely have the operational infrastructure in place to scale rapidly or to manage production lead times well.
Boeing has responded to these supply chain problems by changing its operational processes — more oversight. But these processes will only go so far, and they cannot eliminate the inherent business model risk that goes along with your decisions about how to vertically integrate your company.
Think about your own customer and supplier network. How do you see this issue impacting your relationships?
