Moving up the “value chain” — and taking selected suppliers along for the ride
“Offloading.” That’s what The Boeing Company (Chicago) calls it. Whatever the terminology–we’ll go with outsourcing–it’s a big trend in the aerospace industry. Boeing and other OEMs are not only farming out a big chunk of machined and sheetmetal parts production, but also expecting vendors to supply large aircraft subassemblies and even design expertise.
At Boeing, about 65 – 70% of the content for a given airplane is procured from outside sources, according to Chuck Agne. A director of supplier management for Boeing’s Integrated Defense Systems (IDS) business, he’s an 18-year veteran of both the commercial and defense sides of the business. Agne works out of Boeing’s Long Beach, CA, facility, which produces the C-17 Globemaster III cargo plane.
The business situation of Boeing and other aerospace manufacturers dictates the company’s evolution from machining, metal forming, and assembly operations, Agne says. “Our strategy is to become an integrator. It comes down to this: we take big pieces and assemble them, and build an airplane. We get anything from small to large subassemblies from suppliers. We expect suppliers to do more of the work.”
According to Agne, adopting this philosophy allows Boeing to “move up the value chain.” What does that mean? “We’re doing less in the detail and subassembly area, and more integration and assembly. We expect our suppliers to pick up the slack,” he explains.
Outsourcing at Boeing began with detail parts such as machined and stamped airframe components. “We decided that you just can’t be a huge company like Boeing and expect to be cost-competitive on detail parts,” Agne explains. “The overhead structure alone prevents that from happening. On the other hand, there are a lot of small, very competitive, very talented shops out there that can do that work faster, cheaper, and better than we ever did.”
As a result of this shift, Boeing now does relatively little metalcutting or forming. “On the C-17, for example, we have a small, quick-response shop,” Agne explains. “It does a little machining, a little tube bending, and a few other things to help us out in a jam, when we need to make something right away. Other than that, we don’t make anything. We rely on our subcontract base. For the C-17, we’ve outsourced basically all the machine and sheetmetal detail parts.”
The trend has continued with increased outsourcing of larger subassemblies. This increased reliance on suppliers for larger, more complex chunks of aircraft has resulted in challenges for Agne and his peers in Boeings supplier management organization.
“Outsourcing larger subassemblies requires, in some cases, a different kind of supply base than we previously had,” Agne says. “On the C-17, we made a decision about three years ago to offload all our tubing work. Aircraft tubing is very sophisticated in the bends, the fittings, the processing, and the quality required.
“Offloading that work requires a different kind of supplier,” he continues. “It requires the supplier to have a little more sophistication than if they were just making a detail part. There are bills of material involved, and there are layers of bills of material. Suppliers are doing assembly work, and they are required to schedule and manage, essentially, their own production process. Quite frankly, some suppliers who are used to producing detail parts are struggling to meet those new levels of sophistication.”
Automotive Model. The increase in outsourcing at aerospace OEMs like Boeing seems to be following a business model pioneered over the last decade or so by the automotive industry. Agne agrees that Boeing has learned lessons from watching automotive OEMs, and adapted some of them to its businesses.
“We can’t emulate automakers 100%, because our manufacturing models are very different,” he says. “Here in Long Beach, we build an airplane every 31/2 weeks. We really can’t use a “pull” inventory system for many of our components, but in some areas we can. For example, we are now in a significant movement to use just-in-time inventory for rivets, fasteners, and similar parts.”
And, like automakers, Boeing has consolidated its supplier base, although not to the extent that some automakers seem to be striving for. The C-17 program uses approximately 700 suppliers, while a commercial aircraft program might have thousands, he adds.
“Everybody in this company, in supplier management, is on a mission not necessarily to downsize the supply base but to find the right suppliers,” Agne says. “When you start looking at who really gives you the best value, you naturally end up concentrating work into those shops.
“But obviously you want to keep some sort of contingency to maintain a viable supply base regardless of market conditions,” he continues. “What we have found is, the suppliers we’re sticking with are the ones who are able to move up that value chain with us, as far as dealing with more sophisticated offloads.”
Also like automakers, Boeing is relying on suppliers to perform more design work in some areas. An example is avionics. “All the avionics systems on the airplanes are designed by the supplier,” Agne says. “We give them specifications–for example, we might specify required flow for the air conditioning system in an airplane–then the supplier comes up with a system. They design all the detail parts.”
Quality, as you might imagine, is the prerequisite for suppliers who want to do business with Boeing. “Quality is now a given,” Agne says. “It’s the minimum entry-level requirement.”
It’s also another area where vendors are supposed to manage themselves for the most part, he adds. Suppliers are required to comply with the Boeing Quality Management System, a blend of ISO 9001:2000 and aerospace quality standards.
“We used to have many hundreds of inspectors going to suppliers, inspecting everything they did before they shipped it,” Agne recalls. “That’s called source inspection. It’s very costly, and we’ve discovered that, if you do business with suppliers that have processes and procedures in place that ISO requires, you don’t need to have that. If we can be assured that a supplier has a good internal process and maintains quality standards, then as long as we are able to watch that process we don’t have to spend so much time watching the parts.
“So basically, we check and validate processes and procedures. If a supplier complies with those, then you’ve pretty much guaranteed the output. In large part, that approach is pretty effective. There are obviously exceptions to that–critical stuff we’re always going to look at it. But, on the whole, our goal is to get out of detail part inspection and to rely on the supplier to do that.”
For example, the company specifies process capability for a machining process. An initial survey qualifies the processes a potential vendor can handle. Annual or semi-annual follow-up surveys conducted by quality directors in Boeing’s downsized supplier management organization verify continuing compliance.
Contracts and agreements make suppliers responsible for the quality of their sources of raw materials and parts, and Boeing approves the sources. “If I subcontract a large part–a wing skin, for example, that’s 90′ long and 15′ wide [27 X 5 m]–to be machined, I not only want to approve the house that’s doing that machining, I also want to approve the process that they use to treat the skin,” Agne says. “That’s a Tier-2 supplier, but we want to approve the Tier 2.
“Ultimately, everything is our responsibility, but the expectation is the supplier manages the performance of their subcontractors,” he concludes.
Agility is another primary criterion when Boeing selects suppliers. “It’s not just cost in going outside; agility is key,” Agne says. “A 15-man machine shop is a heck of a lot more agile than a 125,000-employee company. And that’s really important to us, because of changing requirements and conditions.”
Those changing conditions include downsizing of Boeing’s machining capability company-wide. “Fifteen years ago, before we merged with Boeing, McDonnell Douglas operated the largest machine shop west of the Mississippi in Torrance, CA,” Agne says. “Today, that shop doesn’t exist. So we don’t have a machine shop.”
The result is increased reliance on suppliers of machined parts and subassemblies. “We rely on them to be more responsive,” Agne explains. “In the past, we relied on ourselves for that responsiveness. And, as I said before, if we had a problem, we’d go to the machine shop and have them make something. Now we don’t have that so much. So the ability of a supplier to be responsive is very, very important to us.
To maintain that agility, Boeing’s approach is to slowly ramp up the amount of work given to a new supplier. “We generally go into a supplier with small amounts of work at first, before we really spool up,” Agne says. “Especially because–and this is a problem with offloads–when you are making something in-house you often use some ‘tribal knowledge’ to make that part.”
“Tribal knowledge is any trick, inside tip, shop aid, or bit of experience that helps someone produce a part,” Agne explains. “When you outsource, the supplier gets the drawings, the planning papers, and the tooling to make the part. But unfortunately, he doesn’t know about, for example, a shop aid that is critical to make the part. The only person who knows that is the guy that has been making it for 17 years. So there’s a learning curve involved. There’s a certain amount of knowledge that’s not reflected on the planning documents. It’s something that is lost and has to be regained, and we try to make suppliers aware of that knowledge before they start making parts.”
Agne says a new supplier of sheetmetal or machined parts may start by producing quantities as small as 10 or 15 parts. “We have suppliers that started with those quantities, and now make 2000 parts. It might take several years to get there–years of our having confidence in their ability to deliver, and their ability to demonstrate that they understand everything that is required.”
Other criteria include financial strength. They don’t have to be huge, but we want them to be relatively financially healthy,” Agne says. “It does us no good to partner with a supplier that can’t stay in business.”
Agne believes this is an especially important factor for smaller shops. “This is a tough economy for the small guys,” he says. “We are seeing small suppliers, who really are our bread and butter, fail with some frequency. We don’t worry about Northrop Grumman, but we sure worry about the companies that have delivered us a great product for 15 years and only have a dozen people in their shop.
According to Agne, Boeing is particularly interested in maintaining and adding to its roster of small suppliers for several reasons. “On the military side, doing business with small suppliers is a requirement,” he says. “And, smaller businesses are the ones that are the most agile and the most cost-competitive.”
Getting Started with Boeing
“One of the biggest obstacles to a new supplier with a company as big as Boeing is just learning the ins and outs of how you do business with us,” Chuck Agne says. “We can be pretty intimidating to a small shop. We’re like a huge flywheel. We’re almost impossible to get started in any one direction, and once we get started we’re hard to stop.”
So what advice would he have for shops that want to do business with Boeing?
“The hardest thing can be getting in the door, quite honestly,” Agne says. “It’s hard to get someone’s attention. So we have put together a way for suppliers to come in via electronically, via the Boeing website [www.boeing.com]. There you’ll find a ‘Doing Business with Boeing’ section. Potential suppliers tell us what they can do, and we tell them what we’re looking for. If there’s a match, we start a dialogue.”
That’s the formal way. Agne says Boeing supplier management personnel also have an internal network for sharing information on suppliers and potential suppliers. “We’ve got many different locations around the country where we do buying,” he explains. “We’ve formed what we call strategic sourcing teams, organized by commodities. There are teams for avionics, major structures, purchased parts, raw materials, sheetmetal and machine parts, castings, forgings.
Made up of representatives from all over the company, the teams identify suppliers Boeing wants to do business with, emerging suppliers, and emerging needs for the company.