Boeing outsourced design and manufacturing to slash development costs for the 787 Dreamliner, which features all-new technology. One crucial problem has been that some of the suppliers have delivered parts that were not up to spec or failed critical testing, which further postpones the already delayed delivery of the aircraft.

A story that ran the other week on The Wall Street Journal’s Digital Network (WSJDN), reports that while Boeing’s customers remain flexible while they wait for the 787 aircraft, the company’s investors are still awaiting details of financial penalties that the company may face after a nearly three-year delay in its first delivery. Reparations, the story reports, are likely to involve a mix of cash penalties and nonfinancial “credits” such as subsidized freighter conversions or guaranteed future delivery slots.  And a more recent report in the Seattle Times indicate that Boeing management is telling Wall Street that the two-dozen 787 Dreamliners already rolled out onto Paine Field are “in various stages of final assembly” and their delivery “will take longer than expected, particularly those with the Rolls-Royce engine.”

That’s all interesting enough, but there’s something else that caught my attention. An Associated Press (AP) story reported that Boeing says it has now stopped receiving deliveries of big pieces of the 787 jetliner at its Everett, Wash., plant from a supplier in Italy. According to the story, the two-week pause is meant to give the supplier, Alenia, time to fix gaps in horizontal stabilizers it makes.

This is the third time this year that Boeing has suspended shipments of 787 parts because of problems with components. It’s important to note, however, that Boeing has also asked other suppliers to slow their deliveries while Alenia gets back up to speed.

What’s intriguing about this latest development isn’t Boeing’s woes, but rather instead, the ramifications for other members of the supply chain. Since Boeing asked other suppliers to slow their deliveries, those companies may now need to revise their own production accordingly—and also perhaps ask their suppliers to temporarily slow delivery of parts or components as well.

I have to wonder if these other companies are now slowing or stopping production, or simply continuing on as originally planned? The answer, I suppose, will hinge to a certain extent on two key factors. The first is what they produce, and the second factor is  whether they manage their supply chain using Excel spreadsheets, an ERP solution’s SCM suite or a comprehensive supply chain management application that enables them to effectively coordinate internal and outsourced operations. That type of comprehensive application makes it possible to create a supply chain plan, actively monitor performance to that plan and immediately coordinate a response when the plan is at risk.

Again, depending on what they produce and the length of their lead times, this may also be an ideal opportunity to use what-if? simulation technology. That will allow, for example, simulating the outcome of potential reactions to their customer’s request. Those simulations can then be quickly analyzed to determine which response—if any–best matches the operational and financial objectives. This type of simulation should be based on current MRP and MPS data from throughout the extended supply chain to ensure accuracy. Furthermore, including internal and external participants will ensure complete stakeholder input on the simulations and end-decisions.

What do you think? Are you involved in this situation? If so, how have you and your company been effected?

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Nobody likes to receive parts, sub-assemblies or assemblies that aren’t up to spec from their suppliers or partners. It becomes a critical issue, however, for companies that have outsourced much of their production, such as those in the in the aerospace & defense industry.

Consider, for example, the case of Boeing. At the end of August, the aircraft manufacturer announced that its first 787 Dreamliner aircraft will not be delivered in December as scheduled—the project has already been delayed by more than two years. Instead, Boeing has now pushed delivery of its first Dreamliner back until the middle of the first quarter of 2011.

A story that ran in The New York Times, a couple of weeks ago reported that the latest setback came after a Rolls-Royce engine failed during a Boeing test earlier in August. Rolls-Royce—which is a separate company from the carmaker of the same name—says it can fix the problems. But, a Boeing spokesman says the company had been counting on using that particular engine in a Dreamliner making test flights this fall.

Unfortunately, Boeing’s supply chain problems extend to other aircraft. The company is updating its old 747 jumbo aircraft with new, fuel-efficient engines, but there are outsourcing problems with that program as well as well.

A story that ran in the ChicagoTribune earlier this week reports that as the 747-8 undergoes flight testing needed to gain certification from federal authorities, technical issues continue to become evident. What’s more, Boeing concedes it is now unlikely that the process will be completed this fall, as it had earlier predicted.

Many of the technical issues originated with contractors, say union leaders. For example, one recent cause for concern is whether air-bleed ducts that feed compressed air from the engines into the plane’s cabin pressure system will meet certification standards, Tribune sources said.

“There’s a lot of dreadful work coming out of the partners the company is working with and also some great work,” Ray Goforth, executive director of the union representing 21,102 Boeing engineers, told the Tribune. “But they’ve really saddled themselves with some partners who are just not capable of doing the job. Unraveling those relationships is going to take time and money.”

There are numerous benefits to outsourcing. In Boeing’s case, outsourcing design and manufacturing initially slashed development costs for the 787 Dreamliner, which features all-new technology.

The problem at Boeing, as the Tribune article points out, is that Boeing executives have admitted the company didn’t have adequate oversight in place. Additionally, engineers said the 787 and 747 problems were slow to be addressed by senior officials who often didn’t want to hear bad news.

So it sounds like Boeing—and I suspect there are numerous other companies in a similar situation—really has two problems to address. One certainly is to improve the way the company responds to disruptions – both in terms of how quickly they find out about a problem, and how quickly they can react to it. But it’s the second issue that is more challenging. That is: How can Boeing change corporate culture?

To be fair, Boeing has taken steps to remedy the situation. First of all, the company has taken direct control of more of the 787 process to limit how much work is outsourced. Boeing bought Vought Aircraft Industries’ 787 operation and its stake in Global Aeronautica, two early supply-chain bottlenecks for the Dreamliner. It’s also rumored, the Tribune reports, that additional work on the 787 and future programs will be “in-sourced” to Boeing’s factories.

More importantly, Jim Albaugh, who stepped in as president of Boeing’s commercial airplane business last fall, has hired a consulting firm to deal with cultural and communication problems. That, to this observer anyway, is the pressing concern. It’s one thing to receive a critical part or assembly that fails during testing. But when that does occur—especially given a time-sensitive production schedule—action needs to be taken quickly. That type of response requires senior management to be both receptive to hearing bad news and capable of acting quickly.

What do you think? Does product you receive from suppliers and partners meet your expectations? If it doesn’t, is senior management receptive to hearing about it?

Unlike traditional pirates, today’s pirates don’t want the cargo…in most cases they don’t even care what the cargo is.  The purpose of the attack is to hold the cargo and crew hostage.  For example, in January 2010, somewhere between 5.5 and 7 million dollars was paid to release an oil tanker containing 28 crew and 2 million barrels of oil.   More recently, pirates struck a Panamanian freighter, the MV Suez carrying…you guessed it…bags of cement.  The goal again was ransom, not the cargo. 

It seems that piracy even has a well defined business model, which includes staffing levels, equipment requirements, supplies, investor profiles and profit distribution plans.  Those guys are organized…which means you need to be too.  The SupplyChainBrain article describes several best practices for ship owners to avoid the risk of shipments being attacked;

1. When travelling through the Golf of Aden (the region notorious for piracy) travel the Internationally Recommended Transit Corridor
2. Maintain lookouts to provide warning of approaching small boats
3. Use of non-lethal deterrents such as water sprays and horns
4. Protect logical boarding points with plywood and razor wire.

These best practices are not fool proof, however.  The MV Suez had employed all of the above and was still boarded.

While the protection of a ship from pirates is not directly applicable to the readers of this blog, I found it interesting to see what shipping companies were doing to avoid this risk.   What is applicable, is how you can protect your supply chain from the impact of one of these attacks.  If a ship carrying your cargo is attacked, the best of possible outcome is that your shipment is recovered with no loss of life.  However, your shipment will still likely be tied up for weeks, possibly months.  That can be a disaster for a lean supply chain.  What can you do to reduce this risk?  Back to the SupplyChainBrain article…

The article points out that a supplier in poor financial shape may be tempted to route shipments through dangerous waters to minimize cost.  Further, insurance companies are starting to respond to the additional risk by doing what insurance companies always do in these situations; charge more.  These additional costs could be enough to sink (pardon the pun) a struggling supplier.

So it really comes down to a supplier management issue;  identify the suppliers at risk. Look at the parts they supply. If the part is critical to your business, make sure that you have mitigation strategies in place.  If you have options with respect to suppliers and routes, identify those sources and routes that avoid high risk areas.

Funny titles and supply chain issues aside, the real tragedy is the risk to the lives of the  brave crew members of these ships. As I write this post, the crew of the MV Suez has still not been released, crews from other ships are also missing and some crews have been killed.  Our hopes and prayers go out to them and their families.

First you have to decide where the concept can be applied.  This suggests that you examine your existing processes to determine where you can address a significant portion of the normal variation with a minimum of organizational effort.  That alone can be a major stumbling block and too often I’ve heard the comment “everything is an exception around here”.  So the challenge is identifying what constitutes a meaningful exception, and in my book, a sign of a good process is where something is an exception less than 10% of the time.  The next step is to identify who needs to act, how they will be notified, and what tools they will need to address the exception.  Not a trivial job, but well worth the effort.   

Let’s use a common administrative process as an example, committing to a sales order delivery date.  For this example, your business uses either a traditional ATP process, or perhaps product lead time to automatically establish a proposed commit date.  If in 90% of the cases this results in a date that is in alignment with the customer need date, then you have the basis for implementing an exception based process.  In this case, only those orders that do not meet the customer requested date would be identified as an exception and flagged for special consideration.  All other orders would be automatically committed and confirmed with the customer.  This might be refined further to establish tolerances where the exception is only in cases where the delivery date is more than 3 days later than the customer request.

Once the exception condition is defined, an effective process for dealing with them requires timely notification (alerts) to the people who must collaborate to establish an acceptable outcome.  In today’s largely outsourced supply chain, that can be both technologically and logistically challenging.  Not only do they need to be notified of the business condition requiring their attention, but given access to the tools and information that can lead to a rapid and reliable decision.  Using the order commit process as a further example, the ability to meet the customer request date might take one of several paths;

1. Product substitution (if availability exists)
2. Production acceleration (if capacity and material availability exist)
3. Order split (if a partial order can be delivered when the customer needs it)
4. Order prioritization

A well defined exception management process would consider options in a logical sequence and within a time frame that meets customer expectations for responsiveness.

Applying the concepts of exception management to ERP action messages is an area ripe with opportunity.  I’ve known organizations that get 30,000 or more action messages following an ERP regeneration.  In those organizations it is readily acknowledged that planners will never get through the action list.  Therefore, the real question is, “Are they working on the right actions?”  In one organization, a second level analysis was performed on the action queue to evaluate the messages and prioritize them with regards to their importance and impact.  This had a huge impact on planner productivity and overall business performance.  A well designed exception management system should have that effect where ever it is applied. 

The bottom line is that I strongly recommend examining if your organization has the tools to effectively implement exception management processes.  This requires the ability to generate alerts, identify the right participants, provide the right views of information, and facilitate collaboration where needed.  The investment to put this in place will typically yield returns that are often 10X within the first year.  With the economy now on the rebound, the time is right to better leverage your organizations human capital through the implementation of effective exception management processes.

Here’s the big question:  Will companies think differently after suffering the consequences of this natural disaster?  What will they do different?

I don’t think the answer is building more just in case inventory. In order to stay competitive supply chains have to be lean. (In fact, they are becoming even leaner with late stage postponement to satisfy increasing levels of customization on consumer goods.)

Here are some questions for consideration:

1. Can you proactively analyze and understand the risk of unplanned events?  This may be the upside or downside in demand or supply disruptions. This also includes the identification of sole sourced material.
2. Do you have the visibility and access to information in your supply network that you need? More and more companies are looking for a global view of all of their inventory with the need to rebalance as the demand and supply fluctuate
3. Do you know what to do when you have a problem that you just can’t solve?  When a volcano happens there is not much you can do about it. The question is are you making the best use of the supply that you have? How do you want to prioritize demand and allocate your supply? How quickly are you able to make these decisions?

While there may never be another volcano that disrupts the supply chain, there are daily disruptions that affect companies every day, and that taken in sum can have a material impact to the business. How do you deal with them?  Send in your stories!

The Toyota quality problems have disappointed me.   I learned about the Toyota production system when I was studying Industrial Engineering in college.  At that time, it was held up as the future in manufacturing - a model that other manufacturers around the world should follow. It still is.  At Toyota, defects are considered to be MUDA (waste) when they occur, the root cause is found and eliminated. This is the cornerstone of their system.   Since then, my studies in lean manufacturing have taken me deeper into the Toyota manufacturing system and my faith in the quality of their products has only improved.

I expect better from Toyota…and I suspect Toyota feels the same way.

Toyota has made mistakes: first the error that caused the problem in the first place, then the shoddy handling of the first incidents (which could be the result of disbelief that the problem could be caused by a manufacturing defect).  They seem pretty confident now that they have the problem figured out.  Let’s hope so.

What got me thinking is this…  Here is this vaunted company, renowned for the fine quality of its products, with systems specifically designed to prevent quality problems from happening and especially from getting out of the factory.   Yet, this company is running into some serious quality problems.

Think about Toyota and their processes.  Think about your company and your processes.  Which company do you think would be less likely to run into this type of problem? What processes do you have in place to ensure that this doesn’t happen?  Here’s something more interesting.  On February 1st, Toyota announced that they had figured out the gas pedal problem.  On February 11th, I had my car in for an oil change and they told me they had the kit to fix the accelerator pedal so they would do that while my car was in.  Toyota had the parts to address the sticking pedal recall days after announcing the fix.  How long would it take your company to respond?

I’m not trying defend Toyota.  Like I said, they made mistakes – and it’s costing them.  What I’m trying to do is to have us learn from what Toyota has done wrong, and from what Toyota has done right.   Who knows…  The next time it might be your company facing a problem of this magnitude.   Will you have the capabilities in place to respond?

What do you think?

I was asked by the site leader to assess exactly how much of our missed revenue was the direct consequence of the outsourcing predicament and what would our year-end performance look like if the situation didn’t improve.  Under normal circumstances, these questions would have been extremely difficult to answer given that the CCA’s were only a subset of the materials required for assembly and the low volume, high mix of our sales activity made general assumptions impractical.   Fortunately, we had recently invested in a response management tool that provided us with some very easy to use simulation capabilities.   In a matter of hours, I was able to not only identify all of the revenue that was impacted by late supplies from the subcontractor, but also create a range of scenarios with different assumptions concerning future performance.     These simulations helped us to rationalize priorities and additional investments in risk mitigation that proved to be instrumental in minimizing the impact to revenue and customer satisfaction.

While this experience made it easy to further promote the value of the simulation tool, many of my peers in supply chain management were significantly less enthusiastic.   They argued that our aerospace business was not very volatile and that we had been profitable and successful at managing the business without any simulation tools for years.

Much has changed in the business climate since those days, with much greater demand volatility driven by both the global market place and the speed of new product introductions.   The combination is the perfect storm for creating sales and operations plans that are quickly at odds with reality.   Never has the need for simulation capabilities been greater and yet I’m still surprised by the number of companies who have not made investments in this area.

In a survey by the Demand Management Solutions Group (DMSG) almost half of the 130 respondents said that less than 25% of the decisions related to demand exceptions were supported by technology solutions.    Other supply chain surveys have consistently highlighted simulation capabilities as one the key business technology gaps needed to improve S&OP performance.    In my experience, companies that are testing the various demand scenarios (and their supply chain risks and capabilities to support those scenarios) are more prepared to react when change does occur.

So when faced with questions about your organizations readiness to address possible variations in the demand or supply picture, if you haven’t yet invested in a simulation tool, you probably can’t fully appreciate  the performance improvements (or risk mitigation) that they can provide.

• Intellectual property infringement
• Product quality 
• Regulatory compliance
• Supplier Failure
• Commodity price volatility

The article goes on to point out that many companies are planning to increase on shoring activity (an interesting shift from a few years ago!). 

Supply chain risk isn’t the only issue driving this trend.  Over at the IBF Blog, Tom Wallace, in a recent post, discussed a Business Week article that identified that the China price advantage has eroded from 22% to 5% cheaper at the port of entry.  This is driven by the increase in prices China charges for their goods and increasing transportation costs.  As Tom points out, higher risks in addition to the reduced savings makes it difficult to rationalize the other costs of doing business in China; 

• Longer, more variable lead times (which drive the need for higher inventories)
• Quality concerns
• More complex engineering change logistics

In addition to Tom’s comments, what we’ve seen is that visibility and control over the supply chain can be a challenge and communication can be difficult due to language barriers.   And let’s not forget the “green factor”.  Moving goods around the globe simply isn’t environmentally friendly.  Also, China’s record on environmental issues isn’t exactly stellar either.

I have to admit, as an “old manufacturing guy”, I would be happy to see the on shoring trend continue.   While this may come with a slightly higher cost for our gadgets and clothes, I think it’s better for us, better for the environment and maybe even better for those living in China.

What do you think?  Do you currently outsource to China?  Have you been reviewing your outsourcing strategy?