Outsourcing is not always good for products that require complex integration of different subcomponents.
In the past, many business consultants and companies have touted the virtues of outsourcing, that is, outsourcing internal services to external companies. Outsourcing may reduce costs and capital intensity, which are desirable goals for all companies in a competitive world. Many organizations, including Apple and Dell, have outsourcing operations that have achieved great business and financial success.
Boeing, the world's largest plane maker, has long used outside suppliers. Boeing's usual practice is for engineers to design an airplane and then send detailed blueprints to suppliers, a process they call a "build-to-print" system. This process allows Boeing to control key design and engineering functions while reducing overall costs. But for the 787 Dreamliner, Boeing opted to have suppliers design and manufacture the aircraft components at the same time, leaving only the final assembly to its own mechanics. The company wants to go to market two years early and plans to assemble a 787 in three days, 1/10 the normal assembly time for an aircraft of this size.
This project was a disaster. The plane's launch date has been pushed back repeatedly, despite the plane's best-sellers, with nearly 900 orders. The problem was that suppliers couldn't hand over the plane's full functional components to Boeing for final assembly. Although Boeing designed the production system to integrate 1,200 parts, the first plane had a total of 30,000 parts and had to redesign the design in-house, costing a lot of time and money.
The Boeing 787's problem is a manifestation of a decision error: accepting a strategy without fully understanding its success or failure. Outsourcing is not always good. For example, for a product that requires complex integration of different sub-components, outsourcing will not work. The reason for this is that coordination costs are high, so just getting the product to work is a challenge.
Outsourcing is feasible for industries where subcomponents are modules. In these cases, the performance of the subassembly is well defined and the final assembly is simple. Today, you can build a personal computer yourself out of standardized modules. Once an industry has defined modules, it makes more sense for a supplier to focus on one component rather than trying to manufacture them all. An assembler like Dell could then specialize in design, marketing and distribution.
Boeing embraces outsourcing as an attribute, but doesn't fully recognize the conditions under which outsourcing can work.
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