The following entry is a record in the “Catalogue of Catastrophe” – a list of failed or troubled projects from around the world.

---

Boeing Commercial Aeroplanes – USA
Project name : 787 Dreamliner
Project type : Commercial aircraft development
Date : Jan 2003 – Jan 2013
Cost : Additional $12B to $18B on top of original $5B cost estimate

Synopsis :
For Boeing Commercial Aeroplanes the week of January 14, 2013  has been a bad one. Images of firefighters tackling a fire onboard a Japan Airlines 787 in Boston and pictures of an All Nippon 787 with its emergency exit slides deployed in Japan have flashed across the Internet. For the second time in a little over a week the meltdown of a lithium ion battery has resulted in an onboard emergency for one of the company’s flagship 787 aircraft. Combined with a string of other problems (787 problems info-graphic) media outlets have focused public attention by cataloguing problems with the aircraft type. In the interests of public safety, a Federal Aviation Authority (FAA) directive has resulted in a worldwide grounding of the 787 fleet (the first such grounding of a large commercial aircraft type since 1979).

The 787 has had a difficult birth. Plans to build the plane were first announced to the public in January 2003. At that time the development costs were projected to be $5B and the aircraft was to enter commercial service in 2008. While sales of the aircraft were strong, the development of the aircraft turned out to be significantly more challenging than anticipated. The use of composite materials instead of the traditional metals and decisions Boeing made about how to share the development of the aircraft’s with suppliers, resulted in a project that was considerably more complex than anticipated. More than 3 years late and many billions of dollars over budget, the 787 finally entered commercial service in Sep 2011.

As a bit of an aviation buff I’ve been watching the Dreamliner project unfold for many years. Assuming that the delays were simply a case of overly aggressive management publishing unattainable deadlines to help drive sales, up until now I had not included the 787 project in the catalogue of catastrophe. However, the latest battery incidents tweaked my interest again and I did a little digging into the history of the project to see if the problems were just another case of underestimation of complexity or if there was another assignable cause. In doing so I found an interesting article that reveals how a focus on the wrong financial measures resulted in key strategic decisions being made that put the project on the rocky road to cost overruns.

One of the most significant strategic decisions Boeing made in the 787 project related to out-sourcing. Historically Boeing had both designed and manufactured most of the parts for their aircraft. For the 787 project a decision was made to move further towards a systems integration model. In the integration model Boeing would partner with third party suppliers around the world who would help design, manufacture and supply components for the aircraft. Those components would be shipped to Boeing factories in the USA and assembled into the final product. On paper the decision to act as a “systems integrator” rather than manufacturer had appeal. It spreads the risk and moves costs to the suppliers while reducing the investment needed by Boeing. In financial language the out-sourcing of work can also increase “Return on Net Assets” (RONA), a measure of financial performance or efficiency for an organization. Increasing RONA is often regarded by senior leadership as a positive thing as it makes a company appear to be financially more efficient. According to available sources it was a desire to increase RONA that set the context within which the out-sourcing decisions were made.

What Boeing’s senior management failed to adequately take into consideration was the affect that the out-sourcing would have on the project and its overall lifecycle costs. Out-sourcing may eliminate some types of cost, but it introduces layers of additional costs (primarily the cost to coordinate all of the suppliers and integrate them into a single working whole). A major part of the project’s cost and schedule overruns were a direct result of the challenge coordinating the complex supply chain. Quality problems, communications problems and the challenge of making changes to components being made under contract rather than in-house, all added layers of cost. The problems also extended the project schedule by more than 3 years, which further increased costs. In the end Boeing had to buy out some of the partners and was forced to compensate customers due to the delivery delays.

In a candid moment, Boeing’s Commercial Airplanes Chief Jim Albaugh acknowledged that Boeing executives failed to understand the full cost implications of their out-sourcing strategy. In a January 2011 speech at Seattle University, Albaugh is quoted as having said “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home”.

I think many people in the project world have long suspected that some senior executives are making decisions using narrow financial metrics rather than a broader interpretation of cost and values. In fact, the 787 project has earned its place in the catalogue of catastrophe not for the meltdown of its batteries, but for the fact that Boeing’s senior management were warned well in advance that their ways of measuring cost were inadequate. John Hart-Smith, a world-renowned aeronautical engineer and a senior technical fellow at Boeing presented an internal paper entitled “Out-Sourced Profits – The Cornerstone of Successful Subcontracting” at Boeing’s annual Technical Excellence Symposium in February 2001. In the paper Hart-Smith outlined how the costs of out-sourcing were being underestimated and how the out-sourcing strategy could undermine the knowledge base upon which the organization was based. Based on his prior experiences working for Douglas Aircraft, Hart-Smith had witnessed first hand the effects of out-sourcing (including its effect on costs) and how it had seriously weakened the organization. Internally the paper struck a chord with Boeing’s middle management and engineering staff. Unfortunately for Boeing, Senior Management ignored the paper and the project took the road upon which billions in unanticipated integration costs surfaced as the project progressed.

The 787 project is one more example in which Senior Management failed to understand the costs, challenges and risks of their decisions and in which the sound advise of technical experts was ignored (see the Denver Airport Debacle for another good illustration). Granted it is hard for senior people to know what advise is good advise and which is not, but the fact that Boeing had purchased the Douglas Aircraft company meant that internally they did have a very good reference model against which to check.

Ultimately I think the 787 will go on to great success. The fact that sales have been excellent demonstrates that airlines see value in the product and Boeing’s focus on designing an aircraft that is comfortable for passengers should make it a winner with the public. Teething problems are to be expected on any major design project and with time, such issues will be addressed. Hopefully the lessons about out-sourcing and integrating will be taken to heart and the company will find an alternate approach for subsequent projects.

Contributing factors as reported in the press:
Financial considerations trumped sound advise from the technical experts involved (chasing a higher RONA value). Financial measures were too narrow to capture the full costs involved. Difficulty managing and integrating across a large supply chain and development partners.

Related posts:

1. The Bean Counter’s Blind Spot 
2. What is project success? – Hopefully the 787 will go on to be a great “product success”

Reference links :

1. Boeing buzzes about ‘source’ of work
2. Out-Sourced Profits – The Cornerstone of Successful Subcontracting – Excerpts from L. J. Hart-Smith’s original paper questioning the practice of outsourcing (as provided by the Seattle Times)
3. Quick fix for Dreamliner looks less likely, experts say
4. Dreamliner delays nothing new, former Boeing workers recall