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Case Study:Boeing: The Fight For Fasteners
December 14, 2009Professor Ravi Anupindi is the Program Director for the Master of Supply Chain Management Program at the Ross School of Business at the University of Michigan. He is also an Associate Professor of Operations Management at Ross, and currently he is teachingmany courses in Operations Management, Supply Chain Management, and Strategic Sourcing.
Professor Ravi Anupindi recently completed a business case study on Boeing’s fastener problem. Boeing originally was scheduled to deliver the much anticipated 787 to airline customers in mid-2008. However, after five announced delays over two years, the company was forced to postpone the first test flight until December 2009. One driver for the delay was an industry-wide shortage of aerospace fasteners – the hardware that held the aircraft together. Engineers at Boeing never could have imagined that fasteners would become such an issue for the company.
We recently interviewed Professor Anupindi about the case study to better understand Boeing’s fastener issue and why he wrote the case study.
Question: Fasteners comprise approximately 3% of the value of an aircraft. Why do you think one small part became such a big issue for Boeing’s launch of the much anticipated 787?
Professor Anupindi: Several factors led to the Boeing’s crisis situation. First, after 9/11 there was a significant decline in aircraft demand, causing some upstream fastener suppliers to go out of business, while others consolidated through mergers. These forces ultimately squeezed out excess industry capacity. However, by the mid-2000s, aircraft demand unexpectedly picked up, creating a demand for fasteners that exceeded industry capacity; the swings of overcapacity and undercapacity followed the well known as the “bull whip phenomenon.”
Second, the design and the production process of the new 787 also contributed to the crisis. For the 787, Boeing decided to implement a new supply chain structure to produce the aircraft, which was built on new composite technologies. Under this new structure, design and manufacture of several large subsystems were outsourced to various partners across the world. The new supply chain structure meant that more of the components that were once procured directly by Boeing were now being procured by its partners (Boeing’s tier-1 and tier-2 suppliers). These partners used different sourcing methods to get their fasteners from the manufacturers. The fastener manufacturer now had to respond to the needs of many players and lacked visibility into the entire supply chain.
Although this is what happened, the real question is why did Boeing get caught off guard? Component shortage is a challenge for most large companies because they often have to deal with complicated processes that involve many “high priority” items. Total spend is often used as the criterion to determine priority. This stratification can be problematic because items such as fasteners, which only comprise 3% of an aircraft’s value, remain below the resource management “radar screen.” Because Boeing did not pay enough attention to fasteners, it found itself in a fastener predicament.
Question: In response to the fastener supply shortage, Boeing developed a Fastener Procurement Model (FPM). Do you think this is the long-term answer to Boeing’s challenges?
Professor Anupindi: On paper the FPM is a good design. However, the real challenge lies in implementation. There are many stakeholders in the fastener supply chain and getting buy-ins from all has been a challenge. To me, the FPM appears to be a good approach, and has already been implemented successfully in other industries, e.g., electronics.
Question: Many Tauber Institute alumni are now working at Boeing specifically on the FPM. What advice would you give them as they continue rolling out the program?
Professor Anupindi: Implementation of programs like FPM requires strong support from senior management, who set the tone for why a program is necessary. With respect to FPM, the focus should be on trying to solve fastener availability problem rather than cost savings. Implementation of programs with multiple stakeholders who have different interests and priorities need to be approached cautiously.
Question: As you were writing the case, was there anything that particularly surprised you?
Professor Anupindi: Going in, I thought that the FPM was a fascinating model that Boeing was trying to implement. I have seen similar approaches before within the electronics industry and it got me saying, “Wow, this is a great idea.” The combination of a leading company like Boeing making a product like the Dreamliner and the implementation of a new sourcing model with obvious challenges made for an interesting case study. While I anticipated pushback from some of the external stakeholders in acceptance of the model, I was surprised to see internal tensions on the purpose of the model.
Question: So why did you decide that this issue was worthy of a case, and why did you want to include it in your course?
Professor Anupindi: Well, first, this example revolves around a seemingly inconsequential item within a company’s bill of materials that could bring down an entire supply chain if not managed appropriately. To me, that is the fascinating part of this story. The central question of this case evolves from this concept, and asks readers the following question. “If low cost items also pose a large risk to your supply chain, how should you think about procurement?”
For Boeing, although its new plan appeared to be a great initiative, it was fundamentally re-engineering the procurement process for some of some of its inputs that resulted in a large implementation challenge. Do you, as an OEM (original equipment manufacturer), want to do the sourcing for everybody within the supply chain? Or do you want to let your supply chain partners do their own sourcing? Letting a small part affect the performance of your entire supply chain is also about managing risk. Boeing’s proposal would allow them to mitigate the risk but how do you implement such a program? These are fascinating issues that I teach in my new class on strategic sourcing.
Question: What concepts to do you hope students will learn from reading this case?
Professor Anupindi: The main idea is due diligence. How do you structure your sourcing decisions so that you are not caught off guard on the items that are critical to your processes? Risk management lies at the core here. A second important concept references how far back in the supply chain should you reach and what should you and your suppliers physically do. Finally, it is important for students to realize how to go about implementing such a complicated program.
Question: Do you see a lot of the same issues that Boeing faced in other large scale manufacturers? Is this something that is common to large organizations?
Professor Anupindi: I think a mistake similar to this one is easy to make. I will not say that Boeing is unique, as this does happen in other industries as well. Shortages of specific items that are critical to a particular manufacturer do happen and managers do get caught off guard. That is why a lot of companies are currently building better supply chain risk management engines.
To read the case study, click here.