Outsourcing Changes the Face of Industry

Jan. 1, 2005
Cutting costs has become an obsession in the automotive and aerospace sectors, driven by intense competition, shorter product lifecycles and elements of a commodity business.

The mantra for production operations in these two vertical industries has become, “Reduce the cost of producing the product.” While optimization of production processes, including lean manufacturing methods and continuous process improvement, has long been the stalwart for cost savings, the emphasis has steadily been shifting to incorporate outsourcing as a key factor in the cost reduction equation. Auto and airplane makers are looking to global outsourcing—along with shared engineering and risk with their partners—to reduce costs.

Outsourcing the components and sub-assemblies that comprise the finished product is nothing new to the automotive and aerospace industries. The respective supply chains and outsourcing maps for these sectors represent some of the most diverse, global and complex value chains across all manufacturing sectors. An emerging trend has been to push aspects of the final assembly further downstream to sub-contractors, partners and tier one suppliers.

Reduce interruptions

The change is to have increasingly larger sub-assemblies or systems come into the final automobile or airplane assembly line rather than components and smaller sub-assemblies that require scheduling and inventory management. This significantly reduces the overall final assembly time and materials management. Because interruptions that occur on the production line are more costly than in any other area of the factory, fewer items to assemble translate to a reduction of resources, including humans, machines and equipment, with significant cost savings and faster delivery of the product.

Two of the factors contributing to increased outsourcing in the automotive sector are: the development of more modular designs, using self-contained functional units with standardized interfaces that can serve as building blocks for a variety of products; and common vehicle platforms, in which a common chassis and key components serve as a basis for multiple models. Once modularity is integrated into the product design and the manufacturing processes, outsourcing can become much more extensive and can effect a dramatic reshaping of the overall value chain and product lifecycle.

Some arguments have emerged against outsourcing, such as the potential to shift process expertise and associated product knowledge to competitors via shared suppliers, as well as the risk of shifting proprietary knowledge to suppliers who control key modules. As the automotive industry has steadily moved toward shorter product development lifecycles, globalization, optimized supply chains and common platforms, these arguments are dissipating.

The aerospace manufacturing industry has traditionally outsourced high percentages of aircraft sub-assemblies to suppliers, partners and sub-contractors. Outsourcing now represents up to 70 percent of the final aircraft for Boeing and Airbus. Boeing initiated shared risk manufacturing with major sub-contractors such as the Japanese Aerospace Consortium, consisting of Fuji, Kawasaki and Mitsubishi, on the 777 aircraft program. These sub-contractors build the major body sections that are then shipped to Boeing’s final assembly plant in Everett, Wash. This not only meant sharing engineering design specifications, but allowing the sub-contractors to develop their own manufacturing processes for producing the body assemblies.

Gambling the company?

Although some observers in the industry maintain that Boeing’s outsourcing strategy makes sense financially and from a manufacturing efficiency perspective, others contend the company is taking a significant gamble by sharing its manufacturing technology with outside partners.

Boeing rejects this notion of giving up technology. Although its supplier partners will have access to detailed specifications related to the wings on the new 7E7 aircraft, the overall designs for the airplane will be developed in-house and controlled by Boeing engineers. Further, Boeing has also said it would maintain a tight grip on two of its core competencies: aerodynamic design and large-scale systems integration, the latter being an essential core competency for building a product as complex as a large commercial jet liner.

Dick Slansky, [email protected], is a senior analyst at ARC Advisory Group.