《供应链系统设计与管理》课程教学资源（案例）10.2 outsourcing and its risk Boeing 787 Case

Managing New ProductDevelopment andSupply Chain Risks:The Boeing 787 CaseChristopher S.TangTostimulaterevenuegrowthandmarketresponse,Boeingdecidedtodeveloptheand JoshuaD.Zimmerman'787Dreamliner.The787Dreamlinerisnotonlyarevolutionaryaircraft,butitalsoUCLA Anderson Schoolctang@anderson.ucla.eduutilizes an unconventional supply chain intended to drastically reduce developmentjoshua.zimmerman.2009@anderson.ucla.educost and time.However,despite significant management efforts and capitalinvestment, Boeing is currently facing a series of delays in its schedule for the maidenCommented byflight and plane delivery to customers.This paper analyzes Boeing's rationale for theJamesI.NelsonM.S.787'sunconventionalsupplychain,describesBoeing'schallengesformanagingthisMBCP, CORPBusiness Continuity Servicessupply chain,and highlights somekey lessons for other manufacturers to considerwhendesigningtheir supply chains fornewproductdevelopment.Acknowledgments:We would like to thank WilliamSchmidt of theHaruard BusinessSchooland oneanonymousreviewer for their constructive comments on an earlier version of this paperthe passenger cabin, offering substantial improvementIntroductionto the flying experience. Also, the lightweight compositematerials enable the Dreamliner to take long-haul flights.Since the U.S. government deregulated air travel in 1977,Consequently, the Dreamliner allows airlines to offermore airlines have entered the market causing fiercedirect/nonstop flights between any pair of cities withoutprice competition.As airfarescontinued to decline,thelayovers, which is preferred by most internationaltotal number of U.S. passengers per year has risen fromtravelers (Hucko, 2007).Table 1 and Figure 1 (p.75)approximately240millionto640millionfrom1977tocompare the 787aircraft with other popular aircrafts1999.At the sametime,U.s.commercial aircraftmanufacturers have faced major competition fromSecond, Boeing's value-creation strategy for its keyEuropean companies.After losing market share toimmediate customers (the airlines) and its endAirbus (owned byEADS) in the late1990s, Boeing wascustomers (the passengers) was to improve flightundertodecidebetweentwobasicpressureoperational efficiency by providing big-jet ranges tocompetitive strategies: reduce the costs (and the sellingmidsize airplanes whileflying at approximatelythe sameprices) of existing types of aircraft or develop a newspeed (Mach 0.85).3This efficiency would allow airlinesaircraft to raise revenues through value creation.to offereconomicalnonstopflightstoandfrommoreand smaller cities. In addition, with a capacity betweenIn 2003, Boeing decided to focus on creating additional210 and 330 passengers and a range of up to 8,500value for its customers (airlines) and their passengersnautical miles, the 787 Dreamliner is designed to useby developing an innovative aircraft: the 787 Dreamliner.20% less fuel for comparablemissions than today's(Throughout this paper, we shall use the term"787similarly sized airplanes. The cost-per-seat mile isDreamliner,""787,"and"Dreamliner"interchangeably.)expected to be 10% lower than for any other aircraft.First,Boeing'svalue-creationstrategyfor.theAlso,unlikethetraditionalaluminumfuselagesthattendpassengers was to improve their travel experienceto rust and fatigue, the 787's fuselages are based onthrough redesigningthe aircraft and offering significantcompositematerials,whichreduceairlinesimprovements in comfort.For instance, relative tomaintenance and replacement costs (Murray,2007).other aircrafts, over 50% of the primary structure of theTable2provides a summary oftheDreamliner's benefits787 aircraft (including thefuselage and wing)would befor both the airlines and their passengers.madeof compositematerials (Hawk, 2005).Ascompared to the traditional material (aluminum) used inDueto theuniquevaluethatthe 787provides to theairplane manufacturing,the composite material allowsairlines and their passengers, the number of ordersfor increased humidity and pressure to be maintained inexceeded expectations. The Dreamliner is the fastest-I.This research is supportedby theUCLAEdward W.CarterEndowmentFund.国Supply Chain ForumAn International JoumalVol. 10 - N°2 -2009www.supplychain-forum.com

Introduction Since the U.S. government deregulated air travel in 1977, more airlines have entered the market causing fierce price competition. As airfares continued to decline, the total number of U.S. passengers per year has risen from approximately 240 million to 640 million from 1977 to 1999. At the same time, U.S. commercial aircraft manufacturers have faced major competition from European companies. After losing market share to Airbus (owned by EADS) in the late 1990s, Boeing was under pressure to decide between two basic competitive strategies: reduce the costs (and the selling prices) of existing types of aircraft or develop a new aircraft to raise revenues through value creation. In 2003, Boeing decided to focus on creating additional value for its customers (airlines) and their passengers by developing an innovative aircraft: the 787 Dreamliner. (Throughout this paper, we shall use the term “787 Dreamliner,” “787,” and “Dreamliner” interchangeably.) First, Boeing's value-creation strategy for the passengers was to improve their travel experience through redesigning the aircraft and offering significant improvements in comfort. For instance, relative to other aircrafts, over 50% of the primary structure of the 787 aircraft (including the fuselage and wing) would be made of composite materials (Hawk, 2005). As compared to the traditional material (aluminum) used in airplane manufacturing, the composite material allows for increased humidity and pressure to be maintained in the passenger cabin, offering substantial improvement to the flying experience. Also, the lightweight composite materials enable the Dreamliner to take long-haul flights. Consequently, the Dreamliner allows airlines to offer direct/nonstop flights between any pair of cities without layovers, which is preferred by most international travelers (Hucko, 2007). Table 1 and Figure 1 (p. 75) compare the 787 aircraft with other popular aircrafts. Second, Boeing's value-creation strategy for its key immediate customers (the airlines) and its end customers (the passengers) was to improve flight operational efficiency by providing big-jet ranges to midsize airplanes while flying at approximately the same speed (Mach 0.85).3 This efficiency would allow airlines to offer economical nonstop flights to and from more and smaller cities. In addition, with a capacity between 210 and 330 passengers and a range of up to 8,500 nautical miles, the 787 Dreamliner is designed to use 20% less fuel for comparable missions than today's similarly sized airplanes. The cost-per-seat mile is expected to be 10% lower than for any other aircraft. Also, unlike the traditional aluminum fuselages that tend to rust and fatigue, the 787's fuselages are based on composite materials, which reduce airlines' maintenance and replacement costs (Murray, 2007). Table 2 provides a summary of the Dreamliner's benefits for both the airlines and their passengers. Due to the unique value that the 787 provides to the airlines and their passengers, the number of orders exceeded expectations. The Dreamliner is the fastest￾To stimulate revenue growth and market response, Boeing decided to develop the 787 Dreamliner. The 787 Dreamliner is not only a revolutionary aircraft, but it also utilizes an unconventional supply chain intended to drastically reduce development cost and time. However, despite significant management efforts and capital investment, Boeing is currently facing a series of delays in its schedule for the maiden flight and plane delivery to customers. This paper analyzes Boeing's rationale for the 787's unconventional supply chain, describes Boeing's challenges for managing this supply chain, and highlights some key lessons for other manufacturers to consider when designing their supply chains for new product development. Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 74 www.supplychain-forum.com Christopher S. Tang and Joshua D. Zimmerman1 UCLA Anderson School ctang@anderson.ucla.edu joshua.zimmerman.2009@anderson.ucla.edu Commented by James I. Nelson M.S. MBCP, CORP Business Continuity Services Acknowledgments: We would like to thank William Schmidt of the Harvard Business School and one anonymous reviewer for their constructive comments on an earlier version of this paper. 1. This research is supported by the UCLA Edward W. Carter Endowment Fund

ManagingNewProductDevelopmentandSupplyChainRisks:TheBoeing787CaseTableComparison of select Boeing and Airbus aircraftCruisingAirline FamilyMax,RangeMax.Empty WeightOperations(nautical(lbs)CapacitySpeed (mph)Strategymiles)(passengers)?Direct flights737-8003,00018991,000514to multiplecities467570747-88,000410,000Hub to hubDirect flights330561787-98,500254,000to multiplecities555561A380-8008,200610,000Hub to hublargest aerospace and defense contractor in the worldFigure1(behind Lockheed Martin),and the single-largestDreamlinerandA380sizecomparisonexporter in the United States. Sales in 2007 amounted to$66.4billionwithanetincomeof$4.1billionUp, Up and AwayWeighing in at 280 metric tons and with a wingspan as wide asaBesides sales,the stock market responded favorablyfootball field is long.theAirbusA380 is theworld'slargestpassenger jet,designedtocarryabout 850passengersbetweenwhenBoeinglaunchedits"game-changing"787hub airports.in contrast, Boeing says its smaller,fuelefficientDreamliner program in 2003.As shown in Figure 2,787Dreamlinerwillallowfordirectflightsbetweenmorecities even at great distances.between 2003 and 2007,Boeing's stock price increasedA380fromaround$30asharetoslightlyoversi00ashareAIRPUSANDHowever, Boeing announced a series of delays beginningin late 2007 and the market has reacted negativelyAirbusA380(Figure 2). The negative market response is somewhatexpected as publicity of Boeing's supply chain problemsBoeing 787havebecomeincreasinglyevident.AsshowninFigure2AirbussharedasimilarfateafterannouncingaseriesofDouble-decker busdelaysforthedeliveryofitsA380inearly2006(Raman—26-et al., 2008).Despite significant capital investment and182ftmanagement effort, Boeing is currently facing continual239#delays (for more than two years) in its schedule for theSource: Alibus, Boeingmaidenflight and planedeliverytocustomers as of thiswriting(Sanders,2009c).Afternumerousfailedsellingplane inaviationhistorywithcarriersattractedattempts to get its 787's composite rear fuselageto its new largely composite design and innovative next-supplier back on track, Boeing finally decided to acquiregeneration jet engines that will allow the wide-bodiedVought's South Carolina facility at a cost of sl billion on2009(Sanders,2009a).This occurrenceJuly8.planetoflyfurtheronlessfuel.TheDreamlinerprogrammotivated usto examine the underlying causes ofhasbeenconsideredamodelendeavorcombiningnoveltechnology and production strategies. As of NovemberBoeing's challenges in managing its 787's delivery16,2008,Boeing(Too earlyto talk about delayhere.)schedule.www.boeing.com)received orders from morethan 50895In this case study, we shall examine Boeing's rationaleairlinesfor.atotalofDreamliners.Thefor the 787's unconventional supply chain. The nextoverwhelming response from the airline industry aboutBoeing's 787 has forced Airbus to quickly redesign itssection presents our analysis of the underlying riskscompetitive wide-bodied jet, the A350, to make it evenassociated with its supply chain.Then we describewider, which was later re-released as theA350XWB as anBoeing's risk mitigation strategies to expedite itsdevelopment and production processes.We conclude"extrawidebody"(Wallace,2006).Boeing iscurrentlywith some key lessons for other manufacturers tothesecond-largestglobal aircraftmanufacturer(behindAirbus) in terms of revenue and deliveries (thoughconsider when designing their supply chains for newhaving received more orders than Airbus),the second-product development.2. Measured in terms of.typical seat configuration.For example, the total number of seats can be higher if more space is allocated to theeconomyclasscabinand less spaceto the first and business class cabins3.Other immediate customers include airfreight logistics service providers such as Federal Express orDHL andaircraft operators suchas Global Air[5]Supply Chain ForumAn International JoumalVolL. 10 -N°2-2009www.supplychain-forum.com

selling plane in aviation history with carriers attracted to its new largely composite design and innovative next￾generation jet engines that will allow the wide-bodied plane to fly further on less fuel. The Dreamliner program has been considered a model endeavor combining novel technology and production strategies. As of November 16, 2008, Boeing (Too early to talk about delay here.) www.boeing.com) received orders from more than 50 airlines for a total of 895 Dreamliners. The overwhelming response from the airline industry about Boeing's 787 has forced Airbus to quickly redesign its competitive wide-bodied jet, the A350, to make it even wider, which was later re-released as the A350XWB as an “extra wide body” (Wallace, 2006). Boeing is currently the second-largest global aircraft manufacturer (behind Airbus) in terms of revenue and deliveries (though having received more orders than Airbus), the second￾largest aerospace and defense contractor in the world (behind Lockheed Martin), and the single-largest exporter in the United States. Sales in 2007 amounted to $66.4 billion with a net income of $4.1 billion. Besides sales, the stock market responded favorably when Boeing launched its “game-changing” 787 Dreamliner program in 2003. As shown in Figure 2, between 2003 and 2007, Boeing's stock price increased from around $30 a share to slightly over $100 a share. However, Boeing announced a series of delays beginning in late 2007 and the market has reacted negatively (Figure 2). The negative market response is somewhat expected as publicity of Boeing's supply chain problems have become increasingly evident. As shown in Figure 2, Airbus shared a similar fate after announcing a series of delays for the delivery of its A380 in early 2006 (Raman et al., 2008). Despite significant capital investment and management effort, Boeing is currently facing continual delays (for more than two years) in its schedule for the maiden flight and plane delivery to customers as of this writing (Sanders, 2009c). After numerous failed attempts to get its 787's composite rear fuselage supplier back on track, Boeing finally decided to acquire Vought's South Carolina facility at a cost of $1 billion on July 8, 2009 (Sanders, 2009a). This occurrence motivated us to examine the underlying causes of Boeing's challenges in managing its 787's delivery schedule. In this case study, we shall examine Boeing's rationale for the 787's unconventional supply chain. The next section presents our analysis of the underlying risks associated with its supply chain. Then we describe Boeing's risk mitigation strategies to expedite its development and production processes. We conclude with some key lessons for other manufacturers to consider when designing their supply chains for new product development. Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 75 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Table 1 Comparison of select Boeing and Airbus aircraft Figure 1 Dreamliner and A380 size comparison 2. Measured in terms of typical seat configuration. For example, the total number of seats can be higher if more space is allocated to the economy-class cabin and less space to the first and business class cabins. 3. Other immediate customers include air freight logistics service providers such as Federal Express or DHL and aircraft operators such as Global Air

ManagingNewProductDevelopmentandSupplyChainRisks:TheBoeing787CaseTableDreamlinerfeatures with benefits forairlines and passengersValues to AirlinesValue to PassengersFeature(ImmediateCustomers)(End Customers)Composite material. Faster cruising speed, which? Faster cruising speed, whichenables city-pairnonstopflightsenables city-pair nonstop flights Fuel efficiency (lighter material·Higher humidity in the cabin air islowers operating cost)allowed.which increases comfortlevelCorrosionresistance(lowermaintenance cost)·Stronger components that requirefewerfasteners(lowermanufacturing cost)Modular design that allows· Cost savings with cheaper and:Flexibility to respond to futurefor two types of enginescircumstances (market demand) atfaster engine changeover may be(General Electric GEnx andareduced costpassed on to passengersRolls-Royce Trent 1000): Simplicity in design allows forrapid engine changeoverLarge and light sensitive·Lower operating costs due to less."Smartglass"windowpanelswindowsneed for interior lightingwork like transition lens-controlling the amount of lightautomatically—decreasing glareand increasing comfort andconvenienceRedesigned chevron engine.Reduction in community noise.Reduction in interior cabin decibelnozzle (serrated edges)levelslevelEasy preventive maintenanceBoeingprovides service so planesFewerdelaysduetomechanicalare in operationfor longer periodsproblemsoftimeFigure2Historicalstockpricesof BoeingandAirbus comparedtotheS&P500HistoricalStockPricesEAD.F-SP500-BA12020001001500806010004050020001/1/19959/27/199712/14/20059/9/20086/23/20003/20/2003Date[76]Supply Chain ForumAn International JournalVol. 10 -N°2 -2009www.supplychain-forum.com

Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 76 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Figure 2 Historical stock prices of Boeing and Airbus compared to the S&P500 Table 2 Dreamliner features with benefits for airlines and passengers

ManagingNewProductDevelopmentandSupplyChainRisks:TheBoeing787CaseThe787Dreamliner'sunconventionalFigureA traditional supply chain for airplanesupply chainmanufacturingTo reduce the 787's development time from six to fouryears and development costfrom $10 to $6 billion,BoeingdecidedtodevelopandproducetheDreamlinerby using an unconventional supply chain new to theSupplieraircraft manufacturing industry.The 787's supply chainwas envisioned to keep manufacturing and assemblycosts low, while spreading the financial risks ofSupplierdevelopment to Boeing's suppliers. Unlike the 737'ssupply chain,which requires Boeing to play theBoeingSuppliertraditional roleof akeymanufacturer who assemblesCustomersFinadifferentpartsandsubsystemsproducedbythousandsAssemblof suppliers (Figure 3),the787's supply chain isbasedSupplieronatieredstructurethatwouldallowBoeingto fosterpartnerships with approximately 50 tier-l strategicThese strategicpartnersserve asSupplierpartners."integrators"who assemble different parts andsubsystemsproducedbytier-2suppliers(Figure4).TheSupplier787supply chain depicted in Figure4 resemblesToyota's supply chain, which has enabled Toyota todevelop new carswith shorter development cycletimesFigureRedesigned supply chain for the Dreamliner programTier3:SupplieTier3SupplieTier2SystenpartneTierTier3:SupplierPreintegrationBoeing:Tier3:SupplierFinalAssemblyner2Tier3:SupplierStructurabartneCUSTOMERSTier3:SupplierTable3Comparison of Boeing's strategyfor its 737and 787programsComponent737Program787ProgramSourcing strategyOutsource35-50%Outsourced70%Supplier relationshipTraditional supplier relationshipStrategic partners with tier-1(purely contract based)suppliersSupplier responsibilitiesDeveloped and produced parts forDeveloped and produced sectionsBoeingfor BoeingNumber of suppliersThousandsApproximately 50 tier-1 strategicpartnersSupply contractsFixed-price contracts with delayRisk-sharingcontractspenalty30 days for Boeing to perform finalAssembly operations3-day assembly of completeassemblysections回VoL. 10 -N°2 -2009Supply Chain ForumAn International Joumalwww.supplychain-forum.com

The 787 Dreamliner's unconventional supply chain 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. The 787's supply chain was envisioned to keep manufacturing and assembly costs low, while spreading the financial risks of development to Boeing's suppliers. Unlike the 737's supply chain, which requires Boeing to play the traditional role of a key manufacturer who assembles different parts and subsystems produced by thousands of suppliers (Figure 3), the 787's 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 (Figure 4). The 787 supply chain depicted in Figure 4 resembles Toyota's supply chain, which has enabled Toyota to develop new cars with shorter development cycle times Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 77 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Figure 3 A traditional supply chain for airplane manufacturing Figure 4 Redesigned supply chain for the Dreamliner program Table 3 Comparison of Boeing's strategy for its 737 and 787 programs

Managing New Product Development and Supply Chain Risks:TheBoeing787CaseFiouresubassemblyplan(Source:,www.Boeing.comDreamlinePARTSNOT SHOWNTail finBoeing (Frederickon,Wash.)Landing gearWingtipsMessier-DowtyKAL-ASDHorizontal stabilizerV(England)(Korea)Alenia (Italy)Wing/bodyfairingForwardBoeing (Canada)Center fuselagefuselageLanding gear doorsAlenia (taly)KawasakiBoeing (Canada)(lapan)AftfuselageCargo access doorsVoughtForward fuselageSaab (Sweden)(Charleston, S.C.)Spirit (Wichita,Kan.)Passenger entryMain landing gear wheel welldoorsKawasaki (Japan)Latecoere (France)Fixed trailing edgeEnginesKawasaki (lapan)MovableGE (Evendale, Ohio)trailing edgeEnginesBoeing(Australia)Roll-Royce (England)WingEngine nacellesCenterwing boxMitsubishiFixedandmovableleading edgeGoodrichFuj (lapan)(Chula Vista, Calit)(lapan)Spirit (Tuisa,Okla.)and lower development costs (Tang,1999).Table3subassembly. However, unless the supplier relationshiphighlights the key differences between the 737's supplyis managed correctly, reducing the supply base canchain and the unconventional 787 supply chain.Forincrease supply risks because of the reduced bargaininginstance, under the 787's supply chain structure, thesepower of the manufacturer (Tang, 1999).The rationaletier-l strategic partners are responsible for deliveringbehind this shift is to empower its strategic suppliers tocomplete sections of the aircraft to Boeing,which woulddevelop and produce different sections in parallel so asallow Boeing to assemble these complete sectionstoreducethedevelopmenttime.Also,byshiftingmorewithin three days at its plant in Everett, Washingtonassembly operations to its strategic partners located in(Figure 5). We now explain the relationale behind thedifferent countries, there is a potential savings in787's supply chain as highlighted is table 3.development cost as well (Figure 6).OutsourcemoreReduce financial risksBy outsourcing 70% of the development and productionUnder the 787 program, Boeing instituted a new risk-activities under the 787 program, Boeing can shortensharing contract under which no strategic suppliers willthe development time by leveraging suppliers'ability toreceive payment for the development cost until Boeingdevelop different parts at the same time. Also, Boeingdelivers its first 787to its customers (slated to be ANAmay be able to reduce the development cost of the 787airlines). This contract payment term was intended tobyexploitingsuppliers'expertise.AsBoeingprovide incentives for strategic partners to collaborateoutsourced more, communication and coordinationand coordinate their development efforts.Although thisbetween Boeing and its suppliers became critical forcontract imposes certain financial risks for Boeing'smanaging the progress of the 787 development program.strategic suppliers if delivery deadlines are missed, theyTo facilitate the coordination and collaboration amongare incentivized by being allowed to own theirsuppliers and Boeing, Boeing implemented a web-basedintellectual property, which can then be licensed totool called Exostar that is intended to gain supply chainother companies in the future.Another incentive for thevisibility, improve control and integration of criticalstrategic partners to accept this payment term is that itbusiness processes, and reduce development time andallows them to increase their revenues (and potentialcost Manufacturing BusinessTechnology,2007).profits)by taking up the development and production ofthe entire section of the plane instead of a small part ofReduce direct supply base, delegate more,the plane.and focus moreIncrease production capacity without incurringTo reduce development time and cost for theadditional costsDreamliner, Boeing fostered strategic partnerships withDecentralizing the manufacturing process would allowapproximately 50 tier-l suppliers who will design andbuild entire sections of the plane and ship them toBoeing to outsource noncritical processes. TheBoeing. By reducing its direct supply base, Boeing couldintentionistoreducethecapitalinvestmentforthe787focus more of its attention and resources on workingdevelopmentprogram.Also,underthe787supplywith tier-l suppliers (pre-integration stages)rather thanchain, Boeing needs only three days to assemblewith raw material procurement and early componentcomplete sections of the Dreamliner at its plant.Relative[78Supply Chain ForumAn International JournalVol. 10 - N°2 -2009www.supplychain-forum.com

and lower development costs (Tang, 1999). Table 3 highlights the key differences between the 737's supply chain and the unconventional 787 supply chain. For instance, under the 787's supply chain structure, these tier-1 strategic partners are responsible for delivering complete sections of the aircraft to Boeing, which would allow Boeing to assemble these complete sections within three days at its plant in Everett, Washington (Figure 5). We now explain the relationale behind the 787’s supply chain as highlighted is table 3. Outsource more By outsourcing 70% of the development and production activities under the 787 program, Boeing can shorten the development time by leveraging suppliers' ability to develop different parts at the same time. Also, Boeing may be able to reduce the development cost of the 787 by exploiting suppliers' expertise. As Boeing outsourced more, communication and coordination between Boeing and its suppliers became critical for managing the progress of the 787 development program. To facilitate the coordination and collaboration among suppliers and Boeing, Boeing implemented a web-based tool called Exostar that is intended to gain supply chain visibility, improve control and integration of critical business processes, and reduce development time and cost Manufacturing Business Technology, 2007). Reduce direct supply base, delegate more, and focus more To reduce development time and cost for the Dreamliner, Boeing fostered strategic partnerships with approximately 50 tier-1 suppliers who will design and build entire sections of the plane and ship them to Boeing. By reducing its direct supply base, Boeing could focus more of its attention and resources on working with tier-1 suppliers (pre-integration stages) rather than with raw material procurement and early component subassembly. However, unless the supplier relationship is managed correctly, reducing the supply base can increase supply risks because of the reduced bargaining power of the manufacturer (Tang, 1999). The rationale behind this shift is to empower its strategic suppliers to develop and produce different sections in parallel so as to reduce the development time. Also, by shifting more assembly operations to its strategic partners located in different countries, there is a potential savings in development cost as well (Figure 6). Reduce financial risks Under the 787 program, Boeing instituted a new risk￾sharing contract under which no strategic suppliers will receive payment for the development cost until Boeing delivers its first 787 to its customers (slated to be ANA airlines). This contract payment term was intended to provide incentives for strategic partners to collaborate and coordinate their development efforts. Although this contract imposes certain financial risks for Boeing's strategic suppliers if delivery deadlines are missed, they are incentivized by being allowed to own their intellectual property, which can then be licensed to other companies in the future. Another incentive for the strategic partners to accept this payment term is that it allows them to increase their revenues (and potential profits) by taking up the development and production of the entire section of the plane instead of a small part of the plane. Increase production capacity without incurring additional costs Decentralizing the manufacturing process would allow Boeing to outsource noncritical processes. The intention is to reduce the capital investment for the 787 development program. Also, under the 787 supply chain, Boeing needs only three days to assemble complete sections of the Dreamliner at its plant. Relative Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 78 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Figure 5 Dreamliner subassembly plan (Source:,www.Boeing.com)

Managing New Product Development and SupplyChain Risks:The Boeing787Caseto the 737 supply chain, this drastic reduction in cycleallow airlines to use two different types of enginestime would in turn increase Boeings production(Rolls-Royce and GE) interchangeably. Due to recentcapacity without incurring additional investments.technical difficulties and part incongruity,it wouldtake 15 days to change engines from onemodel to theThe Dreamliner's supply chain risksother instead of the intended 24 hours (Leeham Co.,2005).Although the 787 supply chain (Figure 4) has greatpotential for reducing development time and cost, thereComputer Network Security Issues: The currentare various underlying supply chain risks.As describedconfiguration of electronics ontheDreamlinerputsin Sodhi and Tang (2009 a), there are many types ofpassenger electronic entertainment on the samesupply chain risks ranging from technologyto processcomputer network as theflight control system.Thisrisks, from demand to supply risks, and from IT systemraises a security concern for terrorist attacks (Zetterto labor risks. In this section, we shall present some of2008).the risks and actual events that caused major delays inthe Dreamliner's development program (Table 4).SupplyRisksThe787Dreamlinerinvolves the use of variousBoeing is relying on its tier-l global strategic partners tounproventechnologies.Boeingencounteredthedevelop and build entire sections of the Dreamliner thatfollowingtechnical problems thatled to a series ofare based on unproven technology. Any break in thedelays.supply chain can cause significant delays of the overallproduction.In early September 2007,Boeing announced.Composite Fuselage Safety Issues: The Dreamlinercontains 50% composite material (carbon fiber-adelayintheplannedfirstflightoftheDreamlinercitingreinforced plastic),15% aluminum, and 12% titanium.ongoing challenges including parts shortages andThe composite material has never been used on thisremaining softwareand systems integration activities.scaleandmanyfearthat creatingan airplanewiththisEven using Exostar, a web-based planning system,tomixture of materials is not feasible. Also, lightningcoordinatethe supplierdevelopmentactivities,strikesareasafetyconcernforwingsmadeoutofthiscoordination isonlypossiblewhen accurateandtimelycomposite material because a lightning bolt wouldinformation is provided by different suppliersjForpotentially travel through the wing-skin fastenersexample, one of the tier-l suppliers, Vought, hired(wallace, 2006).Advanced IntegrationTechnology (AIT)as atier-2supplier toserve asasystem integrator without.Engine Interchangeability Issues: One of the keyinformingBoeing.AlTissupposedtocoordinatewithbenefits of the 787's modular design concept was toTable4Boeing's 787 supply chain risks and conseuencesRisk FactorRiskausedbyths787Supply ChaiHappenInfeasibility of material in flightInvisibility of developmentTechnologytests, which is untested on thisissues with tier-I suppliersscalepartners resulting in majordelaysSupplyTier-I suppliers outsourceLack of knowledge aboutdevelopment tasks to tier-2supplier sclection by tier-1partners, which may not havepartner,delay in developmenttechnical know-howand manufacturingworkProcessOverreliance on tier-1 partnersNeed for increased coordinationtocoordinatetheirdevelopmentof supplier's activities requiredtasks with their suppliers furthertraveled work" by Boeingdown the supply chainpersonnelManagementInexperienced management teamManagement failure, need forreorganization at highest levelswithout supply chain expertiseLaborUnion dissatisfaction withUnion strike causing workBoeing's decision to outsourcestoppagemoreDelivery delays may causeDemand (Customer)Publicity of problems may causeproblems with airline andfinancial penalties andcancellation of orderspassenger perceptions of Boeing[Supply Chain ForumAn International JoumalVol. 10 -N°2 -2009www.supplychain-forum.com

to the 737 supply chain, this drastic reduction in cycle time would in turn increase Boeing's production capacity without incurring additional investments. The Dreamliner's supply chain risks Although the 787 supply chain (Figure 4) has great potential for reducing development time and cost, there are various underlying supply chain risks. As described in Sodhi and Tang (2009 a), there are many types of supply chain risks ranging from technology to process risks, from demand to supply risks, and from IT system to labor risks. In this section, we shall present some of the risks and actual events that caused major delays in the Dreamliner's development program (Table 4). The 787 Dreamliner involves the use of various unproven technologies. Boeing encountered the following technical problems that led to a series of delays. • Composite Fuselage Safety Issues: The Dreamliner contains 50% composite material (carbon fiber￾reinforced plastic), 15% aluminum, and 12% titanium. The composite material has never been used on this scale and many fear that creating an airplane with this mixture of materials is not feasible. Also, lightning strikes are a safety concern for wings made out of this composite material because a lightning bolt would potentially travel through the wing-skin fasteners (Wallace, 2006). • Engine Interchangeability Issues: One of the key benefits of the 787's modular design concept was to allow airlines to use two different types of engines (Rolls-Royce and GE) interchangeably. Due to recent technical difficulties and part incongruity, it would take 15 days to change engines from one model to the other instead of the intended 24 hours (Leeham Co., 2005). • Computer Network Security Issues: The current configuration of electronics on the Dreamliner puts passenger electronic entertainment on the same computer network as the flight control system. This raises a security concern for terrorist attacks (Zetter 2008). Supply Risks Boeing is relying on its tier-1 global strategic partners to develop and build entire sections of the Dreamliner that are based on unproven technology. Any break in the supply chain can cause significant delays of the overall production. In early September 2007, Boeing announced a delay in the planned first flight of the Dreamliner citing ongoing challenges including parts shortages and remaining software and systems integration activities. Even using Exostar, a web-based planning system, to coordinate the supplier development activities, coordination is only possible when accurate and timely information is provided by different suppliers]For example, one of the tier-1 suppliers, Vought, hired Advanced Integration Technology (AIT) as a tier-2 supplier to serve as a system integrator without informing Boeing. AIT is supposed to coordinate with Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 79 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Table 4 Boeing's 787 supply chain risks and consequences

Managing New Product Development and Supply Chain Risks:TheBoeing787Caseexpertise on supply chain risk management. Without theother tier-2 and tier-3 suppliers for Vought (Tang.2007).Additionally, due to cultural differences, some tier-2 orrequisite skills to manage an unconventional supplytier-3suppliers donotoften enter accurateandtimelychain, Boeing was undertaking a huge managerial risk ininformation intotheExostarsystem.Asaresult,variousuncharted waters.tier-l suppliers and Boeing were not aware of the delayLabor Risksproblems in a timely fashion, which makes it difficult forBoeing to respond to these problems quickly.As Boeing increased its outsourcing effort, BoeingProcess Risksworkers became concerned about their job security.Theirconcernsresultedinastrikebymorethan25,000The underlying design of the 787 supply chain is likely toBoeing employees starting in September2008.Thecause major delays because its efficiency depends oneffects of the worker strike were also felt by Boeing'sthe synchronized just-in-time deliveries of allmajorstrategic partners.For example,anticipating thatthesections from Boeing's tier-l strategic partners. If thestrike at Boeingwouldtrigger ordercancellations anddelivery of a section is delayed, the delivery schedule ofdeliverydelayof certain Boeingaircrafts,Spiritthe whole aircraft is delayed. Unless Boeing keeps someAerosystems,akeysupplier ofBoeing,reduceditsworksafetystocks of different complete sections, it is likelyweek for employeeswho.develop andmanufacturevarious Boeing aircrafts. This reduced work schedulethat Boeing willfacelate delivery.Also, under the risk-sharing contract, none of the strategic partners will getcould potentially delay the delivery schedule of certainpaiduntilthefirstcompletedplaneiscertifiedforflight.fuselagepartsforthe787(Rigby&Hepher,2008).As strategic partners recognize the potential of beingpenalized unfairly if they complete their tasks beforeDemandRisksother suppliers,the risk-sharing contract payment mayAsBoeingannouncedaseriesofdelays,someactuallyenticethesestrategicpartnersto work slower,which undermines the original intent of the risk-sharingcustomers lost their confidence in Boeing's aircraftcontract (Kwon et al., 2009).development capability.In addition, there is a growingconcern about the fact that the first 787s are overweightManagementRisksbyabout 8%,or 2.2metric tons, which can lead to a 15%reduction in range (Norris,2009).In response toAsBoeing used an unconventional supply chainBoeingsproductionanddeliverydelaysandthedoubtstructure to develop and build its Dreamliner, it isabout787'slongrangecapability,somecustomershaveessentialforBoeingtoassemblealeadershipteamthatbeguncancelingordersfortheDreamlinerormigratingincludes some members who have a proven supplytowards leasing contracts instead of purchasing theairplane outright.As of July 2009,the orders for thechain management record with expertise to prevent andanticipate certainriskswellastodevelopDreamliner have been reduced from 895 (reported inascontingency plans to mitigate the impact of differentNovember 2008)to 850 (reportedinJuly2009)(seetypes of risks. However, Boeing's original leadershipSanders, 2009b,for details)team for the 787 program did not include members withTable5risk mitiigationstrateeoOOctERisk FactorReactive Risk Mitigation StrategyTechnologyModify designSupplyPurchase company at the bottleneck stage (Vought AircraftIndustries)ProcessSend hundreds of engineers to solve issues with underperformingpartners at their sitesManagementReorganize top management-replaced program manager withsupply chain expertLaborConcede to labor unions-increased pay and decreased outsourcingDemand (Customer)Paid penalties for delivery delays; public relations campaign toreassure customers80Supply Chain ForumAn International JoumalVol. 10 - N°2 -2009www.supplychain-forum.com

other tier-2 and tier-3 suppliers for Vought (Tang, 2007). Additionally, due to cultural differences, some tier-2 or tier-3 suppliers do not often enter accurate and timely information into the Exostar system. As a result,various tier-1 suppliers and Boeing were not aware of the delay problems in a timely fashion, which makes it difficult for Boeing to respond to these problems quickly. Process Risks The underlying design of the 787 supply chain is likely to cause major delays because its efficiency depends on the synchronized just-in-time deliveries of all major sections from Boeing's tier-1 strategic partners. If the delivery of a section is delayed, the delivery schedule of the whole aircraft is delayed. Unless Boeing keeps some safety stocks of different complete sections, it is likely that Boeing will face late delivery. Also, under the risk￾sharing contract, none of the strategic partners will get paid until the first completed plane is certified for flight. As strategic partners recognize the potential of being penalized unfairly if they complete their tasks before other suppliers, the risk-sharing contract payment may actually entice these strategic partners to work slower, which undermines the original intent of the risk-sharing contract (Kwon et al., 2009). Management Risks As Boeing used an unconventional supply chain structure to develop and build its Dreamliner, it is essential for Boeing to assemble a leadership team that includes some members who have a proven supply chain management record with expertise to prevent and anticipate certain risks as well as to develop contingency plans to mitigate the impact of different types of risks. However, Boeing's original leadership team for the 787 program did not include members with expertise on supply chain risk management. Without the requisite skills to manage an unconventional supply chain, Boeing was undertaking a huge managerial risk in uncharted waters. Labor Risks As Boeing increased its outsourcing effort, Boeing workers became concerned about their job security. Their concerns resulted in a strike by more than 25,000 Boeing employees starting in September 2008. The effects of the worker strike were also felt by Boeing's strategic partners. For example, anticipating that the strike at Boeing would trigger order cancellations and delivery delay of certain Boeing aircrafts, Spirit Aerosystems, a key supplier of Boeing, reduced its work week for employees who develop and manufacture various Boeing aircrafts. This reduced work schedule could potentially delay the delivery schedule of certain fuselage parts for the 787 (Rigby & Hepher, 2008). Demand Risks As Boeing announced a series of delays, some customers lost their confidence in Boeing's aircraft development capability. In addition, there is a growing concern about the fact that the first 787s are overweight by about 8%, or 2.2 metric tons, which can lead to a 15% reduction in range (Norris, 2009). In response to Boeing's production and delivery delays and the doubt about 787's long range capability, some customers have begun canceling orders for the Dreamliner or migrating towards leasing contracts instead of purchasing the airplane outright. As of July 2009, the orders for the Dreamliner have been reduced from 895 (reported in November 2008) to 850 (reported in July 2009) (see Sanders, 2009b, for details). Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 80 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Table 5 Boeing's reactive risk mitigation strategies

ManagingNewProductDevelopment and SupplyChain Risks:TheBoeing787CaseWhile this hands-on approach would certainly help theBoeing's reactive risk mitigation strategyprocess, it is very costly and time consuming, whichdefeats the underlying intents of the 787's redesignedTo manage various disruptions as presented earlier, wesupply chain as described earlier.now present Boeing's reactive responsefor reducing thenegative impact of the current problems and forMitigatingManagementRisksavoiding further complications resulting in additionaldelays (Table 5).Torestorecustomers'confidenceaboutBoeing'saircraftdevelopment capability and to reduce any furtherTo improve the safety of its composite fuselage, Boeingdelays, Boeing recognized the need to bring in someoneis redesigning its fuselage by using additional materialwith a proven record of supply chain managementtostrengthen the wing structure; however, thisIn response,the original 787programexpertise.additional material will increase the aircraft's overalldirector, Mike Bair (with proven marketing expertise),weight.Boeing management has continued to assure itswas replaced by Patrick Shanahan, who had provencustomers that it will work diligentlyto reduce theexpertise in supply chain management.Shanahan isweight of the final version of the plane.Boeing isnow responsible for coordination of all activities forredesigning its installation process with the hope ofBoeing's major plane families, which includes thereducing its changeover time from one engine model toDreamliner.Moreover, Boeing has changed it topthe other. Finally,to ensure that the computer networkleadership by replacing its interim CEO, James Bell, withis secure, a proper design is being required that allowsJim McNerney in 2005.for the separation of the navigation computer systemsfromthe passenger electronic entertainment system.Mitigating Labor RisksMitigatingSupplyRisksTo bring about an end to the strike after two months ofshutdown, Boeing made concessions that would giveAfter realizing that some tier-1 strategic partners did notworkers a 15% wage boost over four years. On the keyhave theknow-how to develop different sections of theissue of job security, which had been the majoraircraft or experience in managing their tier-2 suppliersimpediment to reaching an agreement, Boeing agreed toto develop the requisite components for the sections,limit the amount of work that outside vendors couldBoeing recognized the need to regain control of theperform. Therefore, Boeing's concept of outsourcing adevelopment process of the 787.For instance, knowingsignificant amount of work to global partners could bethat Vought Aircraft Industries was the weakest link inendangered and production costs could eventually rise.the Boeing's 787 supply chain, Boeing acquired one unitIn response to the wage increases and limits inof Vought in 2008 and then another unit in 2009 (Ray,outsourcing promised by Boeing,the machinists union2008; Sanders, 2009a).These two acquisitions provideconceded to withdraw chargesfiled withtheBoeing direct control of these two units of Vought andDepartment of Labor regarding allegations of unfairtheir tier-2 suppliers for the fuselage development.bargaining practices at Boeing (Gates, 2008).Further, as a result of continued production delays,some of Boeing's suppliers were in jeopardy of facingMitigating Demand (Customer)Risksmassiveprofit losses,which putcompletion of theentireDreamliner program at risk.For example, in response toAs customers had begun to cancel their787orders andthreats of work stoppage, Boeing paid its tier-1 strategicas the company's capability of developing the 787 waspartner Spirit Aerosystems approximately $125millionput into question, Boeing developed the followingin 2008 to ensure that this partner continued its vitalmitigation strategies.First, as awayto compensateitsoperations,Ray2008)customers'potential lossduetothelatedeliveries oftheir orders, Boeing is supplying replacement aircraftsMitigating ProcessRisks(new737or747)tovarious concerned airlinessuchasVirgin Atlantic (Lunsford October 11,2007: CrownAsa response to suppliers inability to meet production2008).Second, to restore Boeing's public image,Boeingdeadlines, Boeing decided that it must send keyhas improved its communication by sharing its progresspersonnel to sites across the globe to fill suppliersupdates on its website.In addition, Boeing ismanagement vacuum and address production issues inconducting a publicity campaign to promote theperson. This proved to be an expensive endeavor assuperiortechnologyofthe787andtheoverallvaluethatpersonnel was pulled from responsibilities on-site atthe airplane will offer to airlines and passengers (Crown,Boeing to address supply and manufacturing issues at2008).the sites of their outsourced partners.The strategy ofrelying on suppliers for subassembly proved to betooBoeing's potential proactive risk mitigationrisky for Boeing in certain circumstances and resulted instrategiesBoeing havingto perform the work themselves.Forinstance, Boeing sent hundreds of its engineers to theAs Boeing makes its best effort to restore confidence insites of various tier-l, tier-2, or tier-3 suppliersits capability of developing innovative aircrafts such asworldwide to solve various technical problems thatthe Dreamliner, there are certain risk mitigationappeared to be the root cause of the delay in the 787'sstrategies that Boeing could have embarked on at thedevelopment.Ultimately, Boeing had to redesign theoutset of the program to better manage potential risksentireaircraft subassemblyprocess (Gunsalus,2007)proactively (Table 6).81Supply Chain ForumVol.10 -No2 -2009An International Joumalwww.supplychain-forum.com

Boeing's reactive risk mitigation strategy To manage various disruptions as presented earlier, we now present Boeing's reactive response for reducing the negative impact of the current problems and for avoiding further complications resulting in additional delays (Table 5). To improve the safety of its composite fuselage, Boeing is redesigning its fuselage by using additional material to strengthen the wing structure; however, this additional material will increase the aircraft's overall weight. Boeing management has continued to assure its customers that it will work diligently to reduce the weight of the final version of the plane. Boeing is redesigning its installation process with the hope of reducing its changeover time from one engine model to the other. Finally, to ensure that the computer network is secure, a proper design is being required that allows for the separation of the navigation computer systems from the passenger electronic entertainment system. Mitigating Supply Risks After realizing that some tier-1 strategic partners did not have the know-how to develop different sections of the aircraft or experience in managing their tier-2 suppliers to develop the requisite components for the sections, Boeing recognized the need to regain control of the development process of the 787. For instance, knowing that Vought Aircraft Industries was the weakest link in the Boeing's 787 supply chain, Boeing acquired one unit of Vought in 2008 and then another unit in 2009 (Ray, 2008; Sanders, 2009a). These two acquisitions provide Boeing direct control of these two units of Vought and their tier-2 suppliers for the fuselage development. Further, as a result of continued production delays, some of Boeing's suppliers were in jeopardy of facing massive profit losses, which put completion of the entire Dreamliner program at risk. For example, in response to threats of work stoppage, Boeing paid its tier-1 strategic partner Spirit Aerosystems approximately $125 million in 2008 to ensure that this partner continued its vital operations, Ray 2008). Mitigating Process Risks As a response to suppliers' inability to meet production deadlines, Boeing decided that it must send key personnel to sites across the globe to fill suppliers' management vacuum and address production issues in person. This proved to be an expensive endeavor as personnel was pulled from responsibilities on-site at Boeing to address supply and manufacturing issues at the sites of their outsourced partners. The strategy of relying on suppliers for subassembly proved to be too risky for Boeing in certain circumstances and resulted in Boeing having to perform the work themselves. For instance, Boeing sent 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. Ultimately, Boeing had to redesign the entire aircraft subassembly process (Gunsalus, 2007). While this hands-on approach would certainly help the process, it is very costly and time consuming, which defeats the underlying intents of the 787's redesigned supply chain as described earlier. Mitigating Management Risks To restore customers' confidence about Boeing's aircraft development capability and to reduce any further delays, Boeing recognized the need to bring in someone with a proven record of supply chain management expertise. In response, the original 787 program director, Mike Bair (with proven marketing expertise), was replaced by Patrick Shanahan, who had proven expertise in supply chain management. Shanahan is now responsible for coordination of all activities for Boeing's major plane families, which includes the Dreamliner. Moreover, Boeing has changed it top leadership by replacing its interim CEO, James Bell, with Jim McNerney in 2005. Mitigating Labor Risks To bring about an end to the strike after two months of shutdown, Boeing made concessions that would give workers a 15% wage boost over four years. On the key issue of job security, which had been the major impediment to reaching an agreement, Boeing agreed to limit the amount of work that outside vendors could perform. Therefore, Boeing's concept of outsourcing a significant amount of work to global partners could be endangered and production costs could eventually rise. In response to the wage increases and limits in outsourcing promised by Boeing, the machinists union conceded to withdraw charges filed with the Department of Labor regarding allegations of unfair bargaining practices at Boeing (Gates, 2008). Mitigating Demand (Customer) Risks As customers had begun to cancel their 787 orders and as the company's capability of developing the 787 was put into question, Boeing developed the following mitigation strategies. First, as a way to compensate its customers' potential loss due to the late deliveries of their orders, Boeing is supplying replacement aircrafts (new 737 or 747) to various concerned airlines such as Virgin Atlantic (Lunsford October 11, 2007 ; Crown, 2008). Second, to restore Boeing's public image, Boeing has improved its communication by sharing its progress updates on its website. In addition, Boeing is conducting a publicity campaign to promote the superior technology of the 787 and the overall value that the airplane will offer to airlines and passengers (Crown, 2008). Boeing's potential proactive risk mitigation strategies As Boeing makes its best effort to restore confidence in its capability of developing innovative aircrafts such as the Dreamliner, there are certain risk mitigation strategies that Boeing could have embarked on at the outset of the program to better manage potential risks proactively (Table 6). Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 81 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case

Managing New Product Development and Supply Chain Risks:TheBoeing787CaseastrategiesformitigatingprogramrisksAlterrRisk FactorRisk AffeetProactive ActionsSupply chain visibilityUse IT to ensure transparency of entireAvoided or reducedsupply chainStrategic partner selectionUse proper vetting of all strategicReducedand relationshippartners to determine their capabilityofcompletingtasksProcessDevelop better risk-sharingReducedopportunities and incentivesforstrategic partnersManagementAvoidedEstablish proper working team withexpertise in supply chain logisticsLaborAvoidedPerformoutreachand communicatewith unionheads about sourcingstrategiesDemand (customer)Treat customers as partners andAvoided or reducedcommunicate better the potential formissing delivery deadlinesthese delays, Boeing incurred millions of dollars inImprove Supply Chain Visibilitypenalties that it had to pay out to its customers (West,Asdescribed earlier, Boeingssupplyriskwascaused by2007).To properly align the incentives among allthe lack of supply chain visibility. Without accurate andstrategic partners, Boeing should have structured thecontracts with reward (penalty) for on-time (late)timely information about the supply chain structure anddelivery (Kwon et al., 2009)the development progress at each supplier's site, thevalue ofExostar hasbeen compromised significantly.ToProactive ManagementTeamimproveinformation accuracy,Boeing should haverequired that all strategic partners and suppliersBoeing should have chosen the right people for the jobprovide all information imbedded in the supply chainat the outset of the program, allowing them to anticipaterelationships instead of relying on alerts generated fromand avoid the risks associated with its novel supplythe program only after they were directly affected. Also,Boeing should provide incentives for all suppliers to usechain structure.Also,identifyingthe sourcessofpotential problems and having the right person (orExostar to communicate accurate information inateam) in place would mitigate many of the risks andtimely manner.allow Boeing to respond more quickly and effectivelywhen problems occurred.For example, Boeing couldImproveStrategicSupplierSectionProcessandRelationshipshave either avoided or anticipated various types ofsupply chain risks as described in Section 3 had theySpending moreeffortt on evaluating eachappointedpersonswith provensupply chainsupplier'smanagementexpertise to serve on the originaltechnical capability and supply chain managementexpertise for developing and manufacturing a particularleadershipteam.Byhavinga leadershipteam withallsection of the Dreamliner would have enabled Boeing torequisite skills, Boeing would have had the requisiteselect more capable tier-1 strategic suppliers, whichexpertise andauthorityto respond to the delaycould avoid or reduce potential delays caused byproblems more effectively.Also, Boeing shouldinexperienced tier-l suppliers.1Proactive Labor Relationship Managementrequire that they participate in the tier-l partner'svetting process of tier-2 (or tier-3) suppliers.Theadditional effort of properly vetting key suppliers wouldDissatisfaction among Boeing's machinists was causedcertainly enhance communication and coordination andbyBoeing's strategy to increase its outsourcedreduce the risks of potential delays, which would in turnoperations to external suppliers. Had the union'sgeneral disapproval of Boeing's outsourcing strategyreduce the development time and cost (Lunsford, 2007)been taken into account, Boeing may not have decidedModifytheRisk-SharingContractto outsource 70% of its tasks.Even if this outsourcingstrategy was justified financially, Boeing could haveAlthough the delayed payment term associated with themanaged its labor relationship proactively by discussingrisk-sharing contract was intended to reduce Boeingsthe strategy, by offering job assurances, and byfinancial risk, it did not provide proper incentives forobtaining buy-in from unions. This proactive labortier-l suppliers to complete their tasks early. If somerelationship management would have created a morestrategic partners are incapable of developing theirmutually beneficial partnership, which could havesections according to the plan schedule, the entireavoidedthelabor strikes.development schedule is pushed back.As a result of[82Supply Chain ForumAn International JoumalVol. 10 - N°2 -2009www.supplychain-forum.com

Improve Supply Chain Visibility As described earlier, Boeing's supply risk was caused by the lack of supply chain visibility. Without accurate and timely information about the supply chain structure and the development progress at each supplier's site, the value of Exostar has been compromised significantly. To improve information accuracy, Boeing should have required that all strategic partners and suppliers provide all information imbedded in the supply chain relationships instead of relying on alerts generated from the program only after they were directly affected. Also, Boeing should provide incentives for all suppliers to use Exostar to communicate accurate information in a timely manner. Improve Strategic Supplier Section Process and Relationships Spending more effort on evaluating each supplier's technical capability and supply chain management expertise for developing and manufacturing a particular section of the Dreamliner would have enabled Boeing to select more capable tier-1 strategic suppliers, which could avoid or reduce potential delays caused by inexperienced tier-1 suppliers. Also, Boeing should require that they participate in the tier-1 partner's vetting process of tier-2 (or tier-3) suppliers. The additional effort of properly vetting key suppliers would certainly enhance communication and coordination and reduce the risks of potential delays, which would in turn reduce the development time and cost (Lunsford, 2007). Modify the Risk-Sharing Contract Although the delayed payment term associated with the risk-sharing contract was intended to reduce Boeing's financial risk, it did not provide proper incentives for tier-1 suppliers to complete their tasks early. If some strategic partners are incapable of developing their sections according to the plan schedule, the entire development schedule is pushed back. As a result of these delays, Boeing incurred millions of dollars in penalties that it had to pay out to its customers (West, 2007). To properly align the incentives among all strategic partners, Boeing should have structured the contracts with reward (penalty) for on-time (late) delivery (Kwon et al., 2009). Proactive Management Team Boeing should have chosen the right people for the job at the outset of the program, allowing them to anticipate and avoid the risks associated with its novel supply chain structure. Also, identifying the sources of potential problems and having the right person (or team) in place would mitigate many of the risks and allow Boeing to respond more quickly and effectively when problems occurred. For example, Boeing could have either avoided or anticipated various types of supply chain risks as described in Section 3 had they appointed persons with proven supply chain management expertise to serve on the original leadership team. By having a leadership team with all requisite skills, Boeing would have had the requisite expertise and authority to respond to the delay problems more effectively. Proactive Labor Relationship Management Dissatisfaction among Boeing's machinists was caused by Boeing's strategy to increase its outsourced operations to external suppliers. Had the union's general disapproval of Boeing's outsourcing strategy been taken into account, Boeing may not have decided to outsource 70% of its tasks. Even if this outsourcing strategy was justified financially, Boeing could have managed its labor relationship proactively by discussing the strategy, by offering job assurances, and by obtaining buy-in from unions. This proactive labor relationship management would have created a more mutually beneficial partnership, which could have avoided the labor strikes. Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 82 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case Table 6 Alternative strategies for mitigating program risks

ManagingNewProductDevelopment and SupplyChain Risks:TheBoeing787CaseProactive CustomerRelationship ManagementImprovingSupplyChain Visibilityto FacilitateCoordination and CollaborationRecognizing the risks associatedwithinnovativeBesides the need to perform due diligence in keyproduct development,proactive customer relationshipsupplier selection to ensure that the selected suppliermanagement is critical to help customers set properhas the requisite capability and the commitment forexpectations when placing their orders.Bettera company should considercommunication with customerssuccess,cultivatingthroughout thein exchange for accuratestrongercommitmentdevelopment process can enablea company to manageinformation in atimely manner.Overlyrelying on ITcustomers'perceptions throughout the entire productcommunication is highly risky when managing a newdevelopment process.Setting proper expectationsproject.Tomitigatetheriskscausedbypartnersfurtherabout the delivery schedules of its 787 Dreamliner mayupstream or downstream, companies should strive tohave encouraged the airlines to managetheir aircraftgain complete visibility of the entire supply chain.replacement schedule differently, say order more 737sHaving clear supply chain visibility would enhance theand 747s and fewer 787s.Without setting an aggressivecapabilityforacompanytotakecorrectiveactionmoredelivery schedule to its customers, it was plausible forquickly, which is more likely to reduce the negativeBoeing to reduce the penalty caused by the delayedimpact of a disruption along the supply chain. See Sodhidelivery schedule..Through continuous engagementand Tang (2009b)fora discussion of the importance ofand open communication about the challenges andtimely response to mitigate the negative effects ofBoeing'scontingencyplans, it would have beensupply chain disruptions.plausibleforBoeingtomanageits customersperception and its reputation better.ProactiveManagementof CustomerExpectationandPerceptionAfterthoughtsDue to the inherent risks associated with new productBy examining the inherent risks associated withdevelopment, it is critical for a company to help itsBoeing's supply chain and by analyzing Boeing'scustomerssetproperexpectationsproactivelyreactive mitigation strategies presented earlier,we haveespecially regarding the potential delay caused bydeveloped thefollowinginsightsthat othervarious types of risks as highlighted in Table 3. Settingmanufacturers may consider when managing theirproper expectations at the outset would reducesupply chains for efficient new product development.potential customer dissatisfaction down the road.Duringthedevelopmentphase,itis advisablefor theAssembling aLeadershipTeamwithRequisitecompany to maintain open and honest communicationExpertisewith its customers regarding the actual progress,technical challenges, and corrective measures. SuchOn the surface, it appears that Boeing's fundamentaleffortswould possiblygain customertrust,which wouldproblem was caused by its attempts to simultaneouslyimprove their loyalty in the long run.take on too many drastic changes.These changesConclusioninclude unproven technology,unconventional supplychains, unproven supplier's capability to take on newBoeing's Dreamliner program involves dramatic shifts inroles and responsibilities,and unproven IT coordinationsupply chain strategy from traditional methods used insystems.However, one plausible reason for Boeing tothe aerospace industry.In addition, Boeing boastedtake on so many drastic changes may be because theabout its novel manufacturing techniques and its787 leadershipteam underestimated therisksmarvels.Such dramatic shifts fromtechnologicalassociated with all these changes. Had Boeinginvolvesignificantforconventionpotentialconstructed a multi-disciplinary team with expertise toencountering risks throughout the process. Boeing'sidentify and evaluatevarious supply chain risks, it mightongoing issues with meeting delivery deadlines are ahavebeenpossibleforBoeingtoanticipate and avoiddirect result of its decision to make drastic changes inpotential risks, and to develop proactive mitigationthe design, the development process, and the supplystrategies and contingency plans to reduce the impactchain associated with the Dreamliner programof various supply chain disruptions.simultaneously without having the proper managementteam in place. Further, this team did not proactivelyObtaining Internal Support Proactivelyassess the risks that were later realized and did notdevelop coherent strategies for effectively mitigatingPartnershipsbetween management and labor arethem. Although it may be impossible to identify allessential for smooth operations for companies topotential risks and create contingency plans for allimplement any new initiatives including new producteventualitiesbeforeaprojectbegins,Boeingcouldhavedevelopment programs. Although their interests aredone many things differently. It is instructive foroften misaligned, better communication of businessmanagers in any industry to view the issues that Boeingstrategies with union workers is a proactive stepfaced and analyze how these issues were handled sotowards avoiding costly worker strikes. Also, aligningthat they can learn frommistakes that were made beforethe incentives for both parties proactively is more likelyengaging in similar supply chain restructuring.to reduce potential internal disruptions down the road83Supply Chain ForumVol. 10 -N°2 - 2009An International Joumalwww.supplychain-forum.com

Proactive Customer Relationship Management Recognizing the risks associated with innovative product development, proactive customer relationship management is critical to help customers set proper expectations when placing their orders. Better communication with customers throughout the development process can enable a company to manage customers' perceptions throughout the entire product development process. Setting proper expectations about the delivery schedules of its 787 Dreamliner may have encouraged the airlines to manage their aircraft replacement schedule differently, say order more 737s and 747s and fewer 787s. Without setting an aggressive delivery schedule to its customers, it was plausible for Boeing to reduce the penalty caused by the delayed delivery schedule. Through continuous engagement and open communication about the challenges and Boeing's contingency plans, it would have been plausible for Boeing to manage its customers' perception and its reputation better. Afterthoughts By examining the inherent risks associated with Boeing's supply chain and by analyzing Boeing's reactive mitigation strategies presented earlier, we have developed the following insights that other manufacturers may consider when managing their supply chains for efficient new product development. Assembling a Leadership Team with Requisite Expertise On the surface, it appears that Boeing's fundamental problem was caused by its attempts to simultaneously take on too many drastic changes. These changes include unproven technology, unconventional supply chains, unproven supplier's capability to take on new roles and responsibilities, and unproven IT coordination systems. However, one plausible reason for Boeing to take on so many drastic changes may be because the 787 leadership team underestimated the risks associated with all these changes. Had Boeing constructed a multi-disciplinary team with expertise to identify and evaluate various supply chain risks, it might have been possible for Boeing to anticipate and avoid potential risks, and to develop proactive mitigation strategies and contingency plans to reduce the impact of various supply chain disruptions. Obtaining Internal Support Proactively Partnerships between management and labor are essential for smooth operations for companies to implement any new initiatives including new product development programs. Although their interests are often misaligned, better communication of business strategies with union workers is a proactive step towards avoiding costly worker strikes. Also, aligning the incentives for both parties proactively is more likely to reduce potential internal disruptions down the road. Improving Supply Chain Visibility to Facilitate Coordination and Collaboration Besides the need to perform due diligence in key supplier selection to ensure that the selected supplier has the requisite capability and the commitment for success, a company should consider cultivating stronger commitment in exchange for accurate information in a timely manner. Overly relying on IT communication is highly risky when managing a new project. To mitigate the risks caused by partners further upstream or downstream, companies should strive to gain complete visibility of the entire supply chain. Having clear supply chain visibility would enhance the capability for a company to take corrective action more quickly, which is more likely to reduce the negative impact of a disruption along the supply chain. See Sodhi and Tang (2009b) for a discussion of the importance of timely response to mitigate the negative effects of supply chain disruptions. Proactive Management of Customer Expectation and Perception Due to the inherent risks associated with new product development, it is critical for a company to help its customers set proper expectations proactively, especially regarding the potential delay caused by various types of risks as highlighted in Table 3. Setting proper expectations at the outset would reduce potential customer dissatisfaction down the road. During the development phase, it is advisable for the company to maintain open and honest communication with its customers regarding the actual progress, technical challenges, and corrective measures. Such efforts would possibly gain customer trust, which would improve their loyalty in the long run. Conclusion Boeing's Dreamliner program involves dramatic shifts in supply chain strategy from traditional methods used in the aerospace industry. In addition, Boeing boasted about its novel manufacturing techniques and its technological marvels. Such dramatic shifts from convention involve significant potential for encountering risks throughout the process. Boeing's ongoing issues with meeting delivery deadlines are a direct result of its decision to make drastic changes in the design, the development process, and the supply chain associated with the Dreamliner program simultaneously without having the proper management team in place. Further, this team did not proactively assess the risks that were later realized and did not develop coherent strategies for effectively mitigating them. Although it may be impossible to identify all potential risks and create contingency plans for all eventualities before a project begins, Boeing could have done many things differently. It is instructive for managers in any industry to view the issues that Boeing faced and analyze how these issues were handled so that they can learn from mistakes that were made before engaging in similar supply chain restructuring. Supply Chain Forum An International Journal Vol. 10 - N°2 - 2009 83 www.supplychain-forum.com Managing New Product Development and Supply Chain Risks: The Boeing 787 Case