599 Electronics outsourcing weakened Boeing’s control over 787’s crucial systems

Electronics outsourcing weakened Boeing’s control over 787’s crucial systems

Newsletter published on 17 July 2013

(1) Electronics outsourcing weakened Boeing’s control over 787’s crucial
systems
(2) What Went Wrong At Boeing? - by Steve Denning
(3) The Risks of Outsourcing - Dr. L. J. Hart-Smith
(4) Boeing rival Airbus scraps lithium-ion batteries after Dreamliner
safety scare
(5) Dreamliner sticks with lithium-ion battery
(6) Boeing, 787 Battery Supplier at Odds Over Fixes
(7) Boeing 787 Fix Has Layers to Prevent Fires, FAA Says
(8) 787 Dreamliner Battery design vulnerable to 'Thermal Runaway'
(9) Boeing rebuffs ELON MUSK's fix for 787 Dreamliner Batteries (Jan 30)
(10) Boeing declines offers of assistance from rival Elon Musk (of
SpaceX and Tesla Roadster)
(11) Boeing May Follow Elon Musk's Advice To Fix The Dreamliner's Battery
(12) Boeing Chose An Especially Dangerous Battery To Power The Dreamliner

(1) Electronics outsourcing weakened Boeing’s control over 787’s crucial
systems

http://seattletimes.com/html/businesstechnology/2021045270_boeingoutsourcingxml.html

Originally published Saturday, May 25, 2013 at 8:02 PM

Electronics outsourcing weakened Boeing’s control over 787’s crucial systems

Boeing once had a division that designed electronic controls and managed
suppliers of related components, but as the company geared up for the
787 it outsourced that work and weakened its control over crucial systems.

By Dominic Gates

Seattle Times aerospace reporter

Ten years ago, Boeing had a unit of 1,200 engineers in Everett designing
electronic controls for all its airplanes, and a plant in Texas where
another 1,200 people built the hardware.

The company created the unit in the early 1980s because all the systems
on a modern jet — including the electrical, hydraulics, engine, fuel,
cabin air and flight-control systems — are managed by electronics.

“It was a strategic move to control the electronics itself,” said Dwight
Schaeffer, a former senior manager at Boeing Commercial Electronics (BCE).

Yet as Boeing launched the 787 Dreamliner program in 2003, management
dispersed all those Everett engineers, outsourced their work, then sold
off the Texas plant.

Part of a broad handoff of control to airplane-systems suppliers, the
move was intended to cut Boeing’s costs.

On jets before the 787, BCE integrated components from many different
suppliers so they worked together properly. And if suppliers got in
trouble, BCE stepped in and got the job done.

“Now they don’t have that capability,” said Jerry Packard, another
former BCE manager. “That’s all lost.”

In contrast to Boeing’s well-known move to let “global partners” design
and manufacture the 787’s wings, tail and fuselage, the way it handed
design control to 787 systems partners, including management of
subcontractors, received little attention at the time.

After this year’s costly three-month grounding of the plane from
January’s battery problems, that approach is getting new scrutiny.

Longtime industry analyst Richard Aboulafia worries it may bring the 787
more grief in future.

“Without complete oversight of the subsystems, they might be finding
systems glitches for years,” said Aboulafia.

Stitching together

In the aftermath of a rash of 787 systems problems — in its electrical
power-distribution panels and generators as well as its battery system —
the dissolution of Boeing Commercial Electronics offers a case study in
how Boeing dealt away in-house expertise and relinquished control over
systems suppliers.

BCE designed and built electronic boxes and circuit cards that
controlled a multitude of crucial systems on all Boeing planes before
the 787.

As a senior manager at BCE, Schaeffer managed the budgets for about 230
employees and ran research and development, business development,
project management and product support.

He said BCE’s role as an integrator of different subsystems gave it a
clear overview of how a jet’s systems were coming together.

“No supplier would trust another,” said Schaeffer. “But the suppliers
would trust us not to give away their secrets.”

On the 777 program, for example, Honeywell supplied a system to detect
when the weight of the plane was on the landing gear; Allied Signal
supplied a smoke-detection system for the cargo hold; Hamilton Standard
(which later became Hamilton Sundstrand) supplied an electrical anti-ice
system; Fenwal Controls supplied a system to detect leaks in air ducts;
Walter Kidde supplied a fire-detection system.

These all fed into and were controlled by a single BCE-designed
electronics box, as were other systems designed and built by BCE itself
— including the hydraulics monitoring and the passenger cabin’s
environmental controls.

To make it all work together, BCE controlled both the physical format of
this vital communications nexus, as well as the electrical and software
standards for each system.

Another key BCE role was bailing out suppliers that got into trouble.

Lead engineer Ed D’Souza recalls the example of Vickers, a Grand Rapids,
Mich.-based supplier of the system for loading and unloading cargo for
the 767 freighter.

On previous contracts, Vickers had built only the hardware.

“Failing miserably” at designing the electronic controls, the company
appealed to Boeing for help, D’Souza said.

“They only wanted to do the mechanical stuff. They were more than happy
to turn the electronics over to us,” he said. “We essentially brought
the job back in-house and did the entire design and delivery ourselves.”

787 systems different?

Schaeffer, Packard and D’Souza, now all retired, trace some of Boeing’s
787 problems to a loss of control of systems design and the disbanding
of BCE.

It’s uncommon for retired Boeing managers to speak out publicly against
company policies, but they agreed to do so in hope that Boeing will
reverse direction for future jet programs.

As Dreamliners entered scheduled service in numbers last year, problems
surfaced initially with the 787’s electrical system.

At least four times, electrical arcing in circuit boards inside the
power panels caused airline-service disruptions, including a Dec. 4
flight diversion by United Airlines.

On Dec. 17, an electrical generator on a United 787 failed after a
flight attendant reported a loud bang under the floor.

According to a Federal Aviation Administration incident report,
mechanics found a flash mark behind a power panel.

The Wall Street Journal recently cited an internal Boeing report that
revealed a total of 350 Dreamliner service disruptions before January.
That figure is comparable to the incidence of glitches in the early days
of the 777 program, but a person with knowledge of the data said a
greater proportion of the 787 problems were electrical.

Then in January, problems with the battery system — a battery fire on
the ground in Boston and a smoldering battery in flight in Japan —
grounded the entire Dreamliner fleet.

Were these “teething problems” or signs of an underlying systems
vulnerability?

Boeing insists that the way it outsourced 787 systems was not
significantly different from what it’s done in the past.

Instead of relying on multiple suppliers sending in pieces Boeing
integrated, the jet-maker had its major systems partners “design, build
and integrate subsystems,” said spokesman Larry Wilson.

“We streamlined our approach,” Wilson said.

Mike Sinnett, Boeing senior vice president and 787 chief project
engineer, told a National Transportation Safety Board (NTSB)
investigative hearing into the battery failures last month that the
company maintained both tight oversight and overall control over its
systems partners.

Compared with the radically new role for 787 airframe suppliers,
Boeing’s relationship with 787 systems suppliers was “more traditional,”
he said.

Batteries, power panels

Some suppliers saw the changes as more radical .

Clay Jones, chief executive of Rockwell Collins, which supplies the 787
cockpit avionics suite, said in an interview last year that on the
Dreamliner “Boeing fairly dramatically changed its attitude of how to
work with suppliers.”

He said Boeing elevated the role of suppliers like his company to that
of “true partners.”

Some of those suppliers would have liked to work with BCE, said Schaeffer.

Before Boeing selected its systems suppliers for the jet, the Hamilton
Sundstrand division of United Technologies approached Schaeffer’s group
and asked to partner with BCE in making its bid for the electrical systems.

“They were weak on software, and we had helped them out before,”
Schaeffer said.

But with BCE already on the chopping block, Boeing’s leadership nixed
that idea.

Boeing ultimately chose Hamilton Sundstrand to design the 787’s
electrical system and to integrate subsystems such as the
power-distribution panels.

The panels, which have proved so troublesome on the 787, were designed
in-house on jets before the 787, said Schaeffer.

For the 787 battery system, Boeing selected Thales of France to do the
design and integrate subsystems built by subcontractors, including
battery-maker GS Yuasa of Japan, and Securaplane of Tucson, Ariz., which
made the charging system.

“That would never have happened in the old days,” Schaeffer said. The
battery-component suppliers “would have been contracted directly with
Boeing.”

At the NTSB investigative hearing, testimony revealed that information
from the subcontractors — such as the analysis and testing of certain
battery failures — for the most part flowed indirectly to Boeing,
through Thales.

“I’ve no problem with outsourcing the build portions,” meaning the
making of the hardware, said Schaeffer.

But he said he believes Boeing ought to have kept the design in-house
and be responsible for integrating the various components from suppliers
into a working system.

“When they outsourced that to the people that make the equipment, like
Thales, that’s what really broke the back,” Schaeffer said.

The 787 is the first Boeing jet with all its electronic components
sourced from outside suppliers.

Schaeffer said eliminating BCE from the supply chain meant many
subsystem suppliers were “out of sight, out of mind,” no longer working
directly with Boeing.

“Just by getting rid of us, Boeing outsourced its systems-design
responsibilities more on the 787 than on other airplanes,” he said.

Risk-sharing partners

At the start of the 787 program, Boeing’s leadership in Chicago insisted
on the need to reduce the development cost by bringing in “risk-sharing
partners” who would take on — and help pay for — more of the development
work.

Hans Weber, a leading aviation-engineering consultant, calls this the
“fundamental weakness in the 787 program from the start.”

This was “ultimately a financial invention. It’s not done for technical
reasons,” Weber said.

Internal documents obtained by The Seattle Times in the early days of
the program showed Boeing planned to spend just $5 billion to develop
the 787, a figure Weber calls “unrealistically low” and that later
ballooned to at least triple that as production problems mounted.

Once design work had been outsourced, Weber said, an inevitable
consequence was that in-house design expertise became surplus and “had
to go.”

“We know of the problems on the structures side. We are learning more
and more on the systems side,” said Weber.

“These are problems that could very well be traced to a lack of
sufficient oversight and inadequate transfer of corporate-engineering
expertise.”

Boeing has upgraded both the battery systems and the power panels on the
Dreamliners, and airlines around the world expect to resume their full
787 services by next month.

If more systems problems arise for Boeing in future, one mitigating
factor is that fixing them is generally much cheaper than making major
structural changes to the airframe.

Correcting systems faults may require only swapping out an electronics
box or making software changes.

More than ever, though, Boeing must look outside the company for that
expertise.

Dominic Gates: (206) 464-2963 or dgates@seattletimes.com

(2) What Went Wrong At Boeing? - by Steve Denning

http://www.forbes.com/sites/stevedenning/2013/01/21/what-went-wrong-at-boeing/

What Went Wrong At Boeing?

Steve Denning

  1/21/2013 @ 2:28AM

My article, The Boeing Debacle: Seven Lessons That Every CEO Must Learn,
elicited spirited conversation. Several commentators noted that, in
addition to the general lessons, Boeing made specific errors in the way
it handled outsourcing and offshoring. Let’s take a closer look at those
specifics.

Boeing enthusiastically embraced outsourcing, both locally and
internationally, as a way of lowering costs and accelerating
development. The approach was intended to“reduce the 787's development
time from six to four years and development cost from $10 to $6 billion.”

The end result was the opposite. The project is billions of dollars over
budget and three years behind schedule. “We spent a lot more money,” Jim
Albaugh, Chief of Commercial Airplanes at Boeing, explained in January
2011, “in trying to recover than we ever would have spent if we’d tried
to keep the key technologies closer to home.”

The right goal: add value for customers

Let’s start with what Boeing did right. After losing market share to
Airbus (owned by EADS) in the late 1990s, Boeing could have decided to
focus on reducing the costs (and the selling prices) of its existing
aircraft. That would have led inexorably to corporate death. Instead
Boeing decided—commendably—to innovate with a new aircraft that would
generate revenues by creating value for customers.

First, Boeing aimed to improve their travel experience for the ultimate
customers, the passengers. As compared to the traditional material
(aluminum) used in airplane manufacturing, the composite material to be
used in the 787 (carbon fiber, aluminum and titanium) would allow for
increased humidity and pressure to be maintained in the passenger cabin,
offering substantial improvement to the flying experience. The
lightweight composite materials would enable the 787 to fly nonstop
between any pair of cities without layovers.

Second, Boeing aimed to improve value for its immediate customers (the
airlines) by improved efficiency by using composite materials and an
electrical system using lithium-ion batteries. This would result 20
percent less fuel for comparable flights and cost-per-seat mile 10
percent lower than for any other aircraft. Moreover, unlike the
traditional aluminum fuselages that tend to fatigue, the 787's fuselages
based on composite materials would reduce airlines’ maintenance and
replacement costs.

All good stuff, if Boeing could deliver. Boeing’s customers apparently
thought they could. And the 787 became the fastest selling plane in
aviation history. The stock price popped and the C-suite received their
bonuses. But reality has since set in.

Overheating batteries

We have no way of knowing whether the cause of the current grounding of
all 787s—lithium-ion batteries that overheat alarmingly—is a narrow,
fixable manufacturing glitch or a serious design flaw that will put the
whole enterprise in peril.

It’s true, as CEO James McNerny pointed out in a letter to Boeing staff
on Friday, that “Since entering service 15 months ago, the 787 fleet has
completed 18,000 flights and 50,000 flight hours with eight airlines,
carrying more than 1,000,000 passengers safely to destinations around
the world.” But all that will mean nothing unless and until Boeing can
get to the root cause of those overheating Lithium-ion batteries.

What we do know is that the cost-cutting way that Boeing went about
outsourcing both in the US and beyond did not include steps to mitigate
or eliminate the predicted costs and risks that have already materialized.

The coordination risk

Even with proven technology, there are major risks in outsourcing that
components won’t fit together when the plane is being assembled. “In
order to minimize these potential problems,” wrote Dr. L. J. Hart-Smith,
a Boeing aerospace engineer, in a brilliant paper presented at a 2001
conference, “it is necessary for the prime contractor to provide on-site
quality, supplier-management, and sometimes technical support. If this
is not done, the performance of the prime manufacturer can never exceed
the capabilities of the least proficient of the suppliers. These costs
do not vanish merely because the work itself is out-of-sight.”
<http://seattletimes.nwsource.com/ABPub/2011/02/04/2014130646.pdf>

Boeing did not plan to provide for such on-site support for its
suppliers. In fact, it explicitly delegated this responsibility to
sub-contractors. When the subcontractors didn’t perform the necessary
coordination, Boeing had to provide the support anyway. “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 sub-assembly
process.” The result? Huge additional expense, that should have been
planned for and included in the project’s costs from the outset.

The innovation risk

The 787 involved not merely the outsourcing of a known technology. It
involved major technological innovations unproven in any airplane. Would
the carbon fiber composite survive the rigors of international flying?
Could lithium-ion batteries, which are notorious for overheating and
causing fires that are difficult to put out, be safely used? No one knew
for sure. The 787 also contains multiple new electrical systems, power
and distribution panels. The interactions among these novel
technologies, introduced simultaneously, also exponentially increased
the risk of innovation.

The innovation risk implied a greater involvement by Boeing in the
development and manufacture of the aircraft. Astonishingly, Boeing opted
for lesser involvement, delegating much of the detailed engineering and
procurement to sub-contractors. The result? Unexpected problems have
kept occurring that have delayed the project and increased its cost.

The outsourcing risk

Complicated products like aircraft involve a necessary degree of
outsourcing, simply because the firm lacks the necessary expertise in
some areas, e.g. engines and avionics. However Boeing significantly
increased the amount of outsourcing for the 787 over earlier planes. For
the 737 and 747 it had been at around 35-50 percent. For the 787, Boeing
planned to increase outsourcing to 70 percent.

Boeing didn’t approach outsourcing as a troublesome necessity. Instead,
like many US firms, it enthusiastically embraced outsourcing in the 787
as a means of reducing costs and the time of development. “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.”

In his 2001 paper, Hart-Smith had warned of the additional costs and
risks of large-scale outsourcing. Outsourcing didn’t cut costs and
increase profits, he wrote; instead, it drove profits and knowledge to
suppliers while increasing costs for the mother company. “Not only is
the work out-sourced; all of the profits associated with the work are
out-sourced, too.”

Hart-Smith argued that make-buy decisions should be based on complete
assessments of all of the costs: “make-buy decisions should not be made
until after the product has been defined and the relative costs
established.” Outsourcing requires considerable additional up-front
effort in planning to avoid the situation whereby major sub-assemblies
do not fit together at final assembly, increasing the cost by orders of
magnitude more than was saved by designing in isolation from the
work-allocation activities.

Boeing didn’t follow Hart-Smith’s advice and outsourced the engineering
and construction of the plane long before the product was defined and
the relative costs established. The results have been disastrous.
Boeing’s 787 project is many billions of dollars over budget. The
delivery schedule has been pushed back at least 7 times. The first
planes were delivered over three years late.

The risk of tiered outsourcing

Boeing further aggravated these risks by adopting a new outsourcing
model, along with the new technology. Unlike Boeing’s earlier aircraft,
in which Boeing played the traditional role of integrating and
assembling different parts and subsystems produced by its suppliers, the
787's supply chain is based on a tiered structure that would allow
Boeing to foster partnerships with around fifty Tier-1 strategic
partners. These strategic partners were to serve as “integrators” who
assemble different parts and subsystems produced by Tier-2 and Tier-3
suppliers.

In due course, Boeing discovered, as Hart-Smith had predicted, that some
Tier-1 strategic partners did not have the know-how to develop different
sections of the aircraft or the experience to manage their Tier-2
suppliers. To regain control of the development process, Boeing was
forced to buy one of the key Tier-1 suppliers (Vought Aircraft
Industries) and supply expertise to other suppliers. Boeing also had to
pay strategic partners compensation for potential profit losses stemming
from the delays in production.

The risk of partially implementing the Toyota model

Boeing’s outsourcing was modeled in part on Toyota’s supply chain, which
has enabled Toyota to develop new cars with shorter development cycle
times. Toyota successfully outsources around 70 percent of its vehicles
to a trusted group of partner firms.

However key elements of the Toyota outsourcing model were not
implemented at Boeing. Toyota maintains tight control over the overall
design and engineering of its vehicles and only outsources to suppliers
who have proven their ability to deliver with the required timeliness,
quality, cost reduction and continuous innovation. As Toyota works
closely with its suppliers and responds to supplier concerns with
integrity and mutual respect, it has established an impressive level of
professional trust and an overriding preoccupation with product quality.

By contrast, Boeing adopted the superficial structure of Toyota’s tiered
outsourcing model without the values and practices on which it rests.
Instead, Boeing relied on poorly designed contractual arrangements,
which created perverse incentives to work at the speed of the slowest
supplier, by providing penalties for delay but no rewards for timely
delivery.

The offshoring risk

Some degree of outsourcing in other countries—i.e. offshoring—is an
inevitable aspect of manufacturing a complex product like an airplane,
because some expertise exists only in foreign countries. For example,
the capacity to manufacture Lithium-ion batteries lies outside the US.
Boeing had no choice but to have the batteries made in another country.
More than 30 percent of the 787’s components came from overseas. By
contrast, just 5 percent of the parts of the 747, were foreign-made.

While there is nothing in principle wrong with necessary offshoring, the
cultural and language differences and the physical distances involved in
a lengthy supply chain create additional risks. Mitigating them requires
substantial and continuing communications with the suppliers and on-site
involvement, thereby generating additional cost. Boeing didn’t plan for
such communications or involvement, and so incurred additional risk that
materialized.

The risk of communications by computer

Rather than plan for face-to-face communications and on-site
communcations, Boeing introduced a web-based communications tool called
Exostar in which suppliers were supposed to input up-to-date information
about the progress of their work. The tool was meant to provide supply
chain visibility, improve control and integration of critical business
processes, and reduce development time and cost. Instead of people
communicating with people face-to-face, the computer itself was supposed
to flag problems in real time.

Not surprisingly, the tool failed. Suppliers did not input accurate and
timely information, in part due to cultural differences and lack of
trust. As a result, neither Tier-1 suppliers nor Boeing became aware of
problems in a timely fashion. Boeing’s reliance on computer
communications contrasts sharply with Agile practices of continuous
face-to-face communications to ensure that everyone is on the same page.

The labor relations risk

We do not know to what extent Boeing’s enthusiasm for outsourcing and
offshoring stemmed from a desire to circumvent difficult labor relations
in Seattle. We do know that instead of involving the employees in the
decision-making about outsourcing and offshoring, Boeing’s management
approached decision-making pre-emptively. The approach backfired, as
labor relations worsened as a result of the outsourcing decisions and a
costly strike ensued.

The project management skills risk

Given the extraordinary risks of the 787 project, one would have
expected Boeing to assemble a leadership team with a proven record in
supply chain management and diverse expertise to anticipate and mitigate
wide array of risks. Amazingly, this was not the case.

“Boeing’s original leadership team for the 787 program,” write Tang and
Zimmerman in an important case study, “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.”

The risk of a disengaged C-suite

The combination of the above risks constituted an existential threat to
Boeing as a going concern. Where then was the C-suite while these risks
were being incurred? An interview in 2011 with Philip Condit, who was
the richly compensated CEO of Boeing when the initial 787 decisions were
being made, is revealing.

In 2001, under Condit’s leadership, Boeing moved its headquarters from
Seattle to Chicago, a decision continued by Condit’s successor, James
McNerney. The ostensible reason for the move was to be neutral among the
various divisions of Boeing, which were scattered around the US. In the
interview, Condit makes no secret of another factor: as CEO, he didn’t
want to be bothered with tiresome “how-do-you-design-an-airplane stuff,”
or boring meetings with Boeing’s key customers (airlines) who came to
Seattle.

After the move, Condit says that he spent much of his time in the
Chicago business community, where he “encountered CEOs frequently
gathering to nail down civic goals ranging from landing new companies to
building world-class parks. ‘I was surprised by how much that happened,’
Condit said. ‘A meeting in which Starbucks, Microsoft, Costco, Boeing
and Weyerhaeuser and a bunch of small businesses are all in the same
place — rarely happens in Seattle,” he added. ‘It happened all the time
in Chicago.’”

So while Boeing’s CEO was in Chicago, strategizing about the future of
Boeing and discussing civic goals with CEOs from other companies, the
managers back in Seattle were making business decisions about tiresome
“how-do-you-design-an-airplane stuff” that would determine whether there
would be a firm to strategize about.

(3) The Risks of Outsourcing - Dr. L. J. Hart-Smith

http://seattletimes.nwsource.com/ABPub/2011/02/04/2014130646.pdf

OUT-SOURCED PROFITS – THE CORNERSTONE OF SUCCESSFUL SUBCONTRACTING

by Dr. L. J. HART-SMITH

BOEING PAPER MDC 00K0096

presented at Boeing Third Annual Technical Excellence (TATE) Symposium
St. Louis, Missouri
February 14-15, 2001

ABSTRACT

The purpose of this paper is to describe and explain some highlights
associated with the contemporary business practice of out-sourcing more
and more of a companies’ activities in the belief that doing so will
increase profitability. A strong case is made that it will not always be
possible to make more and more profit out of less and less product and
that, worse, there is a strong risk of going out of business directly as
a result of this policy. The point is made that not only is the work
out-sourced; all of the profits associated with the work are
out-sourced, too. The history of the former Douglas Aircraft Company is
cited as a clear indication of what these policies have done – and as a
warning of what more may be done. The subcontractors on the DC-10 made
all of the profits; the prime manufacturer absorbed all of the
over-runs. The circumstances under which out-sourcing can be beneficial
are also explained. They involve better access to improved facilities
with which to make more precise detail parts to reduce the cost of final
assembly. A strong warning is included about the perils of sub-optimum
solutions in which individual costs are minimized in isolation. Indeed,
the importance of thorough planning, accounting for all
interdepartmental interactions, cannot be over-emphasized. A case is
made that it is better to fill up “excess capacity” with additional
work, even if unrelated to the core business, rather than to close it
down and sell it off. Such practices can even be necessary for retaining
the skills and facilities required to produce the prime products, but
which would otherwise be under-utilized and become targets for
elimination. The inherent traditional imbalance between budgets and
head-counts can be resolved in this manner. The paper includes some
observations about European experiences, good and bad, with
out-sourcing. It closes with a list of recommendations by the author
about how to operate and maintain profitable businesses.

INTRODUCTION

Out-sourcing is commonly looked upon by management as a tool for
reducing costs. But the unresolved question is “which costs?”. In
addition, there is the matter of “what is the effect on overall costs?”.
The most important issue of all is whether or not a company can continue
to operate if it relies primarily on out-sourcing the majority of the
work that it once did in-house. The experiences of the former Douglas
Aircraft Company would suggest that, in the context of the aerospace
industry at least, it cannot! In the more general context, it should be
obvious that a company cannot control its own destiny if it creates less
than 10 percent of the products it sells. One purpose of this paper is
to explain why selective out-sourcing can be beneficial to all
concerned, and why out-sourcing as a supplement to sales activities may
be justified but needs to be recognized, on average, as an added cost,
not a cost reduction.

[...] A second objective is to discourage wholesale out-sourcing by
highlighting the misleading cost-accounting procedures that have
concealed its true cost for so many years. The hope is that, in future,
make-buy decisions will be based on complete assessments of all of the
costs – and that, in future, make-buy decisions will not be made until
after the product has been defined and the relative costs established.

The third objective is to ensure that, if out-sourcing is to be
employed, it is understood to be absolutely necessary that detail parts
and subassemblies be designed with that process in mind. This requires
considerable additional up-front effort in planning to avoid the
situation whereby major subassemblies do not fit together at final
assembly, increasing the cost by orders of magnitude more than was saved
by designing in isolation from the work-allocation activities.

The inescapable problem with outsourcing work that could be done
in-house is that it necessarily increases the tasks and man-hours to
carry out the work way above those needed to perform all assembly,
including most subassemblies, at one site. Experience in the electronics
industry has shown that out-sourcing work to regions of low labor rate
is only a transitory phenomenon. The reason why the rates were low was
that there had previously been no work there. Once the work became
available, hourly rates increased, so that the primary electronic
companies kept moving the work to yet another as-yet-under-developed
area, and the cycle was repeated. This may be cost-effective for small
items, with production lives of only a few years at most, but it is
inappropriate for large aircraft that may need spare parts throughout a
service live in excess of 50 years (80 or more for some military
aircraft) and for which the manufacturing program itself may last 40 or
50 years. [...]

The correctness of the author’s position1 on these matters is easily
confirmed by two facts. It was the suppliers who made all the profits on
the extensively out-sourced DC-10s, not the so-called
systems-integrating prime manufacturer. (The same thing has happened on
aircraft assembled by Boeing, in Seattle, too.) Also, when plans were
being formulated for the proposed MD-12 very large transport aircraft,
almost all potential suppliers indicated a preference for being
subcontractors rather than risk-sharing “partners”. Could they have
known more about maximizing profits, minimizing risk, etc., than the
prime manufacturer who sought their help even though it could borrow
money at lower rates of interest than potential suppliers could? The
DC-8 was manufactured and assembled almost entirely within the Long
Beach plant, with only the nose coming from Santa Monica. That policy
was changed after the acquisition of the former Douglas Aircraft Company
by the former McDonnell Aircraft Company, but the change did not improve
the company’s profitability. It is time for Boeing to reverse this
policy.

WHO BENEFITS MOST FROM OUT-SOURCING?

Given that modern management seems to believe that more and more
out-sourcing is a necessary step to becoming a systems integrator, and
that this is presumably more profitable than being involved in the
manufacturing work, one is entitled to ask who receives the greatest
largesse from extensive outsourcing. History suggests very strongly that
it is the supplier, not the prime manufacturer, who has benefited the
most, with no indication that the trend would ever change.

The first issue to be examined, is precisely what is out-sourced and
what is inevitably retained. The superficial perspective might be that
every internal activity that used to be related to a task that has been
out-sourced is no longer necessary. Even that is not true but, worse, it
fails to acknowledge all of the new internal tasks that had not
previously existed. To add insult to injury, contemporary accounting
practices do not allow these unavoidable additional costs to be billed
against that particular item of work – because it is no longer
identified as an in-house task – so these charges are allocated instead
as overhead to any remaining in-house work. This misrepresentation of
true costs furthers the illusion that outside production is cheaper than
anything done inside, building the pressure to ship even more work
offsite, until there isn’t any left. The irony of this situation is that
it is so easy to understand in the extreme. Suppose that a manufacturer
had succeeded in out-sourcing all of the work that it wished to isolate
from the preferred task of systems integrator. The unallocatable costs
from the huge amount of out-sourced work will now appear as overhead on
the few remaining tasks, like sales and product support, confirming that
these were now even less profitable than manufacturing had been when the
spiral began!

“What are all of these additional tasks?”, one might well ask. The first
is the need to write a specification for the product, which must be more
complete and precise than would be needed for in-house production, for
which omissions, refinements, and improvements could have been
accommodated without the need for costly legal discussions. [...]

Having observed that the total number of man-hours involved in a task
will increase if it is outsourced, one needs to identify the
circumstances under which other factors over-ride the negative
influences. The most powerful one is automation. But why should the work
not be automated in-house instead? It should, if there is sufficient
work to keep the machines fully employed. But often this is not the case
and only by having multiple customers sharing such facilities owned by
an independent subcontractors can the benefits of automation be
achieved. Contrary to common perception, the true justification for
automation is NOT the elimination of jobs on which it is employed. It is
the precision it provides that is the primary benefit. [...]

CONCLUDING REMARKS

A strong case has been made that out-sourcing all of the value-added
work is tantamount to outsourcing all of the profits. It also increases
span time and the cost of inventory, as work is done earlier. There are
many additional internal costs associated with out-sourced work that are
not identified as such. As long as the additional internal work
associated with out-sourced activities is reported as extra overhead on
the unrelated remaining internal work, instead of being identified as a
cost of out-sourcing, the illusion will be created that the more work is
out-sourced, the greater is the case for out-sourcing the remaining
work. Eventually, when the entire corporate overhead is applied to the
sales department – because there is no other department left – sales
will be out-sourced, too, because that task will also have become too
expensive. Only a thorough assessment of all costs can distinguish
between work best out-sourced and best performed in-house. [...]

(4) Boeing rival Airbus scraps lithium-ion batteries after Dreamliner
safety scare

http://www.guardian.co.uk/business/2013/feb/15/dreamliner-rival-airbus-scraps-batteries

Airbus will use old-style nickel-cadmium batteries for new A350 after
grounding of Boeing 787 Dreamliner over safety issues

The Guardian, Friday 15 February 2013 20.08 GMT

Airbus has stopped using lithium-ion batteries of the type that forced
the grounding of Boeing's 787 Dreamliner and will use traditional
nickel-cadmium batteries in its crucially important next passenger jet,
the A350.

The European aircraft manufacturer said it had decided to adopt the
batteries used on existing models such as the A380 superjumbo in order
to prevent delays in the $15bn (£10bn) development of the A350.

Reuters had reported that Airbus was considering such a move to limit
the risks surrounding the development of its $15bn airliner.

"We want to mature the lithium-ion technology but we are making this
decision today to protect the A350's entry-into-service schedule [in
2014]," Airbus said.

Industry executives, insurance firms and safety officials said the
technology's predictability was being questioned at senior levels as
investigators struggle to find the cause of incidents that led to the
grounding of Boeing's 787 Dreamliner.

These included a fire on board a parked 787 in Boston and an in-flight
problem on a plane in Japan.

The A350 is due to enter service in the second half of 2014 compared
with an initial target of 2012 when it was launched as Europe's answer
to the lightweight 787 Dreamliner.

The industry's fear is that a failure to identify the root cause of the
burning batteries leaves too much uncertainty over whether regulators
will certify the aeroplanes as safe.

(5) Dreamliner sticks with lithium-ion battery

http://www.news.com.au/travel/news/dreamliner-sticks-with-lithium-ion-battery/story-e6frfq80-1226588260320

AFP

March 01, 2013  10:53AM

A SENIOR Boeing executive said he and Japanese government officials had
discussed a "permanent" solution to fix problems that have dogged the
grounded Dreamliner.

Raymond Conner, executive vice president of Boeing and head of
commercial aeroplanes, said they would not abandon the lithium-ion
batteries used in the planes which are at the centre of a worldwide
safety probe.

He also denied reports that the planemaker was at odds with its battery
supplier over how to fix the troubles, saying "we are great partners".

The next-generation 787 was ordered out of the skies in January
following a series of incidents.

"It is not an interim solution. This is a permanent solution," Conner
told reporters after meeting Transport Minister Akihiro Ota to discuss
problems that caused one battery to catch fire and another to emit smoke.

Asked if Boeing was considering ditching the Japanese-made lithium-ion
batteries from the 787, Conner said: "I see nothing in this technology
that would tell us it's the appropriate thing to do." ...

A probe has found short-circuits caused a rapid rise in battery
temperatures, but the search for the root of the short-circuit has so
far proved elusive. ...

(6) Boeing, 787 Battery Supplier at Odds Over Fixes

http://online.wsj.com/article/SB10001424127887323293704578330480004073900.html

BY ANDY PASZTOR AND JON OSTROWER

  * Updated February 27, 2013, 7:36 p.m. ET

Boeing Co. and the Japanese company that makes lithium-ion batteries for
Boeing's 787 Dreamliner are at odds over what should be included in the
final package of fixes intended to get the jets back in the air,
according to government and industry officials familiar with the details.

GS Yuasa Corp. has told the Federal Aviation Administration that while
it supports engineering and design changes Boeing has proposed to try to
end the six-week-old grounding of 787s, it believes the proposed package
is inadequate to mitigate all potential 787 battery hazards, the
officials said.

(7) Boeing 787 Fix Has Layers to Prevent Fires, FAA Says

http://www.businessweek.com/news/2013-02-27/boeing-787-fix-has-layers-to-prevent-fires-faa-says

By Alan Levin on February 28, 2013

Boeing Co. (BA)’s proposal to get the 787 Dreamliner back in the skies,
while comprehensive, will require extensive testing even if approved
before regulators end the plane’s grounding, the top U.S. aviation
official said. ...

GS Yuasa told FAA officials the changes should go beyond Boeing’s
proposal, to include protections that ensure proper power levels go to
the batteries, said two government officials who asked not to be named
because they weren’t authorized to speak about Yuasa’s activities.

The Dreamliner’s original design included four separate circuits to
ensure the plane’s power system wouldn’t damage the batteries, Birtel
said in a statement.

Boeing is offering its fixes before safety investigators determine what
caused the battery incidents. The U.S. National Transportation Safety
Board found a short-circuit in one battery cell on a Japan Airlines Co.
(9201) 787 that caught fire Jan. 7 in Boston, Chairman Debbie Hersman
has said.

Boeing engineers attempted to determine every possible cause for that
incident and one aboard an All Nippon Airways Co. (9202) flight in
Japan, Huerta said. The firm’s proposal then included layers of
protection to prevent each of the potential causes, he said.

Safety Issue

There is precedent for fixing a safety issue without knowing what caused
an accident or incident, he said. The agency has ordered dozens of fixes
to wiring and fuel tanks following the July 17, 1996, explosion that
downed Trans World Airlines Inc. (TWAIQ) Flight 800, killing 230 people.

While the NTSB never established why that Boeing 747’s tank exploded,
the FAA went ahead with measures to ensure sparks wouldn’t ignite fuel
on aircraft. ...

(8) 787 Dreamliner Battery design vulnerable to 'Thermal Runaway'

http://www.forbes.com/sites/petercohan/2013/02/06/thermal-runaway-in-787-dreamliner-batteries-must-be-stopped/

'Thermal Runaway' in 787 Dreamliner Batteries Must Be Stopped

Peter Cohan

2/06/2013 @ 5:49AM

Boeing (BA) is certainly eager to get its 787 Dreamliner back into
service. Unfortunately, all 50 of the over 500,000 pound, $207 million
aircraft that it’s shipped — years late after at least seven missed
delivery deadlines – have been grounded.

And in a test of how much regulatory capture has taken place in the
airline industry, there is a war going on now between the needs of
Boeing and airline shareholders and those of people who fly on 787s.

The good news is that war could end shortly — all Boeing needs to do is
to change the two batteries that power the 787 so they don’t burn up in
a process dubbed “thermal runaway” — a chemical reaction in which a
rising temperature causes progressively hotter temperatures, according
to AP.

In January, the 787¢s lithium-ion batteries overheated on Boeing 787
flights in Japan and Boston. AP reports that investigators in Japan
found evidence of the same type of thermal runaway in the Japan
battery-burn-up as was found in the Boston one.

While Japan Transportation Safety Board investigators said they did not
find evidence of quality problems at GS Yuasa, that makes the 787
batteries, their “CT scans and other analysis found damage to all eight
cells in the battery that overheated on the All Nippon Airways 787 on
January 16? that prompted an emergency landing.

They also found signs of short-circuiting along with the thermal runaway.

As MIT professor, Donald Sadoway, explained to me in a January
interview, the photos of the batteries suggest that such thermal runaway
is practically designed into the 787 batteries. That’s because the eight
notebook-sized lithium-ion batteries are packed next to each other in a
sealed metal box.

Those batteries are prone to heat up and the 787 battery design makes it
difficult to vent that heat. Boeing told regulators that it had
implemented a computer controlled system to stop such overheating.
Moreover, if that system failed, Boeing’s system would channel the
resulting smoke and flames outside of the aircraft without getting into
the passenger cabin.

Needless to say, this system did not work with the flights that prompted
regulators to ground all 50 aircraft. But one thing seems to be emerging
from the efforts of U.S. and Japanese investigators — thermal runaway
was found on all the 787 batteries that burned up.

And if Sadoway is right, the two ways to make sure it does not happen
again are to change the design of the lithium-ion battery or replace it
with a safer, but less-powerful battery technology.

Weeks ago, the cost to Boeing of reimbursing airlines for the lost
revenue resulting from the grounding of the 50 787s was estimated at
about $550 million. The longer those aircraft are grounded and the other
roughly 800 orders for 787s are not shipped, the more it costs Boeing
shareholders.

It’s up to regulators in the U.S. and Japan to resist the pressure from
Boeing to pretend that the problem of self-immolating lithium-ion
batteries due to thermal runaway — and who knows what else — won’t
happen again.

Otherwise, the people who are flying on the next 787 that goes up in the
air may not be as lucky as the ones in Boston and Japan.

(9) Boeing rebuffs ELON MUSK's fix for 787 Dreamliner Batteries (Jan 30)

http://www.businessinsider.com/elon-musk-those-787-dreamliner-batteries-are-fundamentally-dangerous-2013-1

ELON MUSK: Those 787 Dreamliner Batteries Are Fundamentally Dangerous

Henry Blodget  |  Jan. 30, 2013, 6:33 AM

Tesla and SpaceX founder Elon Musk says the batteries that have burst
into flame on Boeing's new Dreamliners are "fundamentally unsafe."

Musk's electric car company, Tesla, specifically designed its batteries
to prevent this problem.

In an email to the aviation publication Flightglobal, Musk said the
following:

"Unfortunately, the pack architecture supplied to Boeing is inherently
unsafe. Large cells without enough space between them to isolate against
the cell-to-cell thermal domino effect means it is simply a matter of
time before there are more incidents of this nature."

Flightglobal's Zach Rosenberg explains this in more detail:

Both Boeing and Tesla use batteries fueled by lithium cobalt oxide,
which is among the most energy-dense and flammable chemistries of
lithium-ion batteries on the market. While Boeing elected to use a
battery with a grouping of eight large cells, Tesla's batteries contain
thousands of smaller cells that are independently separated to prevent
fire in a single cell from harming the surrounding ones.

"Moreover, when thermal runaway occurs with a big cell, a
proportionately larger amount of energy is released and it is very
difficult to prevent that energy from then heating up the neighboring
cells and causing a domino effect that results in the entire pack
catching fire," says Musk.

"They [Boeing] believe they have this under control, although I think
there is a fundamental safety issue with the architecture of a pack with
large cells. It is much harder to maintain an even temperature in a
large cell, as the distance from the center of the cell to the edge is
much greater, which increases the risk of thermal runaway."

Musk has offered to help Boeing fix the battery problem, and his offer
has been rebuffed.

A professor of electrical engineering at MIT confirmed to Flightglobal
that Musk's assessment of Boeing's batteries is sound. ...

(10) Boeing declines offers of assistance from rival Elon Musk (of
SpaceX and Tesla Roadster)

http://www.flightglobal.com/news/articles/elon-musk-boeing-787-battery-fundamentally-unsafe-381627/

Elon Musk: Boeing 787 battery fundamentally unsafe

By:   ZACH ROSENBERG WASHINGTON DC

11:19 29 Jan 2013

The lithium ion batteries installed on the Boeing 787 are inherently
unsafe, says Elon Musk, founder of SpaceX and owner of electric car
maker Tesla.

"Unfortunately, the pack architecture supplied to Boeing is inherently
unsafe," writes Musk in an email to Flightglobal.

"Large cells without enough space between them to isolate against the
cell-to-cell thermal domino effect means it is simply a matter of time
before there are more incidents of this nature," he adds.

Both Boeing and Tesla use batteries fueled by lithium cobalt oxide,
which is among the most energy-dense and flammable chemistries of
lithium-ion batteries on the market. While Boeing elected to use a
battery with a grouping of eight large cells, Tesla's batteries contain
thousands of smaller cells that are independently separated to prevent
fire in a single cell from harming the surrounding ones.

"Moreover, when thermal runaway occurs with a big cell, a
proportionately larger amount of energy is released and it is very
difficult to prevent that energy from then heating up the neighboring
cells and causing a domino effect that results in the entire pack
catching fire," says Musk.

An aerospace-capable version of Tesla's battery has been developed for
use in SpaceX's Falcon 9 space launch vehicle. SpaceX, also owned by
Musk, competes with Boeing/Lockheed Martin joint venture United Launch
Alliance for customers. Boeing has thus far declined offers of
assistance from Tesla and SpaceX, says Musk.

"They [Boeing] believe they have this under control, although I think
there is a fundamental safety issue with the architecture of a pack with
large cells," writes Musk in an email. "It is much harder to maintain an
even temperature in a large cell, as the distance from the center of the
cell to the edge is much greater, which increases the risk of thermal
runaway."

(11) Boeing May Follow Elon Musk's Advice To Fix The Dreamliner's Battery

http://www.businessinsider.com/heres-boeings-fix-for-the-dreamliner-2013-2

Alex Davies  |  Feb. 6, 2013, 7:37 PM

Boeing is considering a fix for the batteries in its Dreamliner jet that
appears to take into account criticism by Elon Musk, founder of Tesla
and SpaceX.

According to the Wall Street Journal, Boeing may increase the amount of
space between the cells in the lithium-ion batteries, as a way to limit
the spread of "thermal runaway," the term for when uncontrollable heat
damages the battery.

In a recent email to the aviation publication Flightglobal, Musk wrote:

Unfortunately, the pack architecture supplied to Boeing is inherently
unsafe. Large cells without enough space between them to isolate against
the cell-to-cell thermal domino effect means it is simply a matter of
time before there are more incidents of this nature.

In a Wall Street Journal video report today, Jon Ostrower reported
Boeing has told stakeholders and clients it hopes to have a fix for the
battery in place by the end of February, but that it is also focusing on
finding to root causes of the failures.

Meanwhile, the NTSB's probe of the lithium-ion batteries continues. The
Board is expected to announce Thursday that its investigation will turn
its focus to the initial decision by the Federal Aviation Administration
to approve the plane for flight. ...

(12) Boeing Chose An Especially Dangerous Battery To Power The Dreamliner

http://www.businessinsider.com/dreamliner-uses-lithium-battery-2013-1

Alex Davies  |  Jan. 17, 2013, 2:23 PM

Expect The Sequestration To Make Air Travel Even Less PleasantLast
night, the FAA issued an emergency airworthiness directive for Boeing's
787 Dreamliner, after a battery malfunction led an All Nippon Airways
flight to make an emergency landing.

The FAA review will cover the design and manufacturing of the aircraft,
and focus on its battery, which is believed to be the source of a fire
in a parked Dreamliner last week in Boston.

To deliver improved fuel economy, a key upside of the 787, Boeing uses a
powerful lithium ion battery and five times more electricity and
electrical systems than other jets.

The Dreamliner is the sole plane to use this kind of battery as its
primary backup power source, according to Wired, and the FAA only
certified its use under several "special conditions."

Lithium ion batteries generate more energy than other types of
batteries, which is why Boeing chose to use them. But they tend to
overheat, causing "thermal events" — like fires — according to Rick
Newman at US News.

University of Dayton professor Raul Ordonez told CNN, "These kinds of
batteries are slightly more likely to cause problems."

Dr. Eric Stuve, a professor of chemical engineering at the University of
Washington, told Wired, "These batteries have flammable components, that
it well known."