Boeing's 787 Outsourcing Problems

Yves Smith also covers Boeing's outsourcing difficulties:

Direct factory labor is typically just north of 10% of the cost of most manufactured goods; for cars, we are told it’s 13%. Even if you can extract meaningful savings there, you have significant offsets: the upfront cost of re-orgainzing production (which in the outsourcing scenario include hiring costly outsourcing “consultants” and paying attorneys to paper up the deals), higher ongoing managerial costs, higher shipping and related inventory financing costs. Yes, there are cases like Apple where outsourcing has been a big success, but there are also others where the benefits have been underwhelming and have come at considerable costs to US workers, communities, and the economy (see a very good long form discussion by Leo Hindery).

Moreover, these cost savings come with higher risk. The greater span of operations increases business system rigidity and creates more potential points of failure. It is likely to take longer to notice screw-ups and the odds also favor it taking longer to localize and remedy them. Longer lead times mean a manufacturer may wind up with far more unwanted inventory if the economy turns or customer tastes change. Currency price moves can undo much of the expected savings.

But even if outsourcing is only marginally successful, it serves as a transfer from US factory workers to the managers and executives. The top brass can benefit even more, since Wall Street analysts usually look approvingly of outsourcing (I’ve been told by C-level officers of one public companies that they outsourced only because the analysts wanted it; the business case did not support it).

The rush to Mexico, and then China, has reversed in some places, due to quality issues and the lack of significant real savings.