Boeing's outsourcing is not what it seems
Sure Boeing's greed has made us all less safe, but it's also made us all poorer too.
Outsourcing, in principle, is simple. Find someone who is willing to do the same work for cheaper and then let them. Yet, after the low hanging fruit was scooped up back in the 90’s and businesses had completed outsourcing the simplest and most exportable aspects of their business, the implementation of such a practice has become demonstrably murkier.
Take for example, a company which has become everyone’s favorite punching bag lately, Boeing. Media coverage on their frequent and disastrous quality control lapses has zeroed in on outsourcing as a principal cause of the internal chaos leaking into their products. In the tradition of the many detractors of outsourcing, they allege that Boeing, in an overzealous attempt to cut costs and maximize profits, has sacrificed the quality and integrity of their business. The story is by now a familiar one in the American consciousness. A story of prioritizing short term interests at the expense of long term ones, of unscrupulous executives exploiting an increasingly distributed economy, and of unabashed greed running roughshod through entire industries.
Such a story is unlikely to draw much introspection or even interest. It took hundreds of people losing their lives and dramatic in-flight incidents before the public’s attention turned towards an especially egregious Boeing. That is because the story aligns remarkably well with our implicit understanding of how the economy operates, for better or worse. We expect companies to prioritize profits over all other motives. We are not astonished to hear about the cold callousness with which executives dis-invest in the same in house resources they outwardly declare to be their most valuable assets. Nor are we left scratching our heads when corporations shortsightedly take advantage of the trust of the consumer and choose to put out inferior products. It’s a natural, if unfortunate, consequence of the same system that otherwise provides abundance and materialistic wealth to us all, the consumer. We may lament such consequences, but ultimately, since none of our prevailing mental models about how our economy functions are challenged, our analysis stops at surface level observations, and since we have collectively accepted these economic tradeoffs to some degree as necessary evils, we sink, inexorably, into complacency.
Except that this story is woefully underwhelming in its ability to explain Boeing’s behavior. It’s a story that’s been recycled carelessly, plumbed from the depths of our collective minds without consideration as to its applicability.
Lost in the discourse on Boeing’s decades-long outsourcing efforts is a simple fact. While outsourcing has often been portrayed as an unwise tradeoff between quality control and profits, no such tradeoff has actually occurred. Certainly, quality control has degraded, yet while Boeing has been and remains an enormously profitable company, outsourcing has been decidedly counterproductive towards that goal.
For starters, quality control and cost control are not orthogonal concerns. At a rudimentary level, the production line freezes, FAA imposed groundings, and canceled orders were enormously expensive. But when you dig into the significant cost overruns and project delivery delays Boeing has incurred over the years, whether it be with the 787 Dreamliner, 747-8, 737 Max, or the Air Force One project, a common pattern emerges. The same issues that make quality control a demanding proposition are also making it exceedingly difficult to deliver products on time and on budget, namely issues with suppliers. As much has been admitted by executives within the company, up to and including CEO Dave Calhoun.
From a historical perspective, this makes complete sense. For any sufficiently complicated business process, outsourcing doesn’t work for precisely the same reason that vertical integration, a strategy once successfully employed by Boeing, does. Ford taught us the power of owning as much of the supply chain as possible back in the 1920’s, serving as a model for businesses around the world on how to cut costs effectively. Why would it be simpler or easier to coordinate and manage hundreds of suppliers building thousands of densely interconnected parts than it is to assemble such a system in-house? It isn’t. And it certainly isn’t cheaper.
Perhaps then, this is simply an optimization problem, balancing cost savings from lower labor costs with the higher overhead incurred from managing suppliers to achieve lower total costs. As was detailed extensively by a Boeing engineer named John Hart-Smith in an white paper written all the way back in 2001, this is a fallacy. In practice, there is no reason to believe suppliers enjoy any less leverage over the primary manufacturer than that of organized labor, except that their interests are even less aligned and oversight is even more difficult (Note that clever “risk sharing” contracts did not change the fortunes of Boeing’s 787 Dreamliner project). As Hart-Smith noted in his white paper, outsourcing doesn’t just outsource labor, it outsources profits too.
Yet despite this, we still frame Boeing’s failures as a consequence of reckless cost cutting. It’s as if we’ve been conditioned to blame profit seeking motives for our economy’s worst tendencies and behaviors, even if, as is the case of Boeing’s 20 year outsourcing effort, these tendencies and behaviors cannot possibly be justified as profitable. Continuing to do so not only creates the delusion that capitalism is more or less functioning as intended, but it’s also enormously convenient for executives who don’t have to justify to their customers or shareholders why they continue to pursue an expensive and inferior strategy for producing their products.
We must come to realize that it is dogma, not reasoning, and certainly not historical outcomes, that drives executives to insist on outsourcing in use cases where it is clearly not warranted. Dogma prevails wherever it achieves some other purpose, and that purpose is decidedly not profit. What remains then, is a business strategy that places an outsized importance on executive and administrative tasks while simultaneously de-emphasizing the worth of those on the production line, seeing them merely as a resource to be squeezed, not to save costs, but to enforce a hierarchy.
Managing suppliers becomes the central function of the company. In house expertise is discarded, keeping only the minimal amount that will allow the company to retain the facade of being the primary manufacturer. Such a system believes that it is better to give suppliers a large amount of money than it is to give workers a fair amount of money, lest everyone be given a share comparable to their worth.
For despite its many missteps, Boeing is still one of only two large jet manufacturers in the world, and can ultimately afford to manufacture aircraft in less than optimal ways if those inefficiencies allow executives to claim a larger share of the pie. The worst nightmare of the executive class is a self-empowered, vertically integrated, efficient production line free of any need for corporate meddling or process supervision. By complicating the manufacturing process with outsourcing initiatives, executives create an artificial demand for more administration and oversight and are able to secure a very privileged place within the company. Scores of middle management positions are created, rewarding those employees who are most sympathetic towards leadership’s cause to act as a helpful buffer between a class of people who have unilateral ability to enrich themselves via stock buybacks and those who are actually responsible for creating the value they exploit.
Such a hierarchy exists for the same reason any feudalistic system exists. To protect, justify, and perpetuate unequal wealth distribution. It is feudalism masquerading as capitalism.