Why 787 Slips Were Inevitable?

Yao Zhao, PhD

Associate Professor in Supply Chain and Project Management
Rutgers, the State University of New Jersey
[email protected]
Abstract: Boeing 787, the Dreamliner, was the fastest-selling plane ever in the commercial aviation
industry. However, its development was a nightmare – the first flight was delayed by 26 months and the
first delivery was delayed by 40 months with a cost overrun of at least $10 Billion. By a comprehensive
empirical study of the actual events and facts, we find strong evidence to suggest that a majority of the
delays were intentional. An analysis of economic drivers in joint development projects discovers that the
787’s risk-sharing partnership forced Boeing and its partners to share the “wrong” risk. This led the firms
into a Prisoner’s Dilemma where delays were in the best interests of these firms although doing so
drove them into a disaster. We reconcile the analysis with the empirical evidence to reveal the rationale
behind many seemingly irrational behaviors that delayed this program. Finally, we suggest a new “fair
sharing” partnership to share the “right” risk and greatly alleviate delays for development programs of
this kind.

Key words: innovation, joint ventures, product development, supply chain, manufacturing.

1. Introduction
On September 26, 2011, Boeing Company publicly announced the delivery of its first 787 Dreamliner to
its launching customer, All Nippon Airways, after a 40-month of agonizing delay. The actual
development cost of the program was estimated at about $40 billion and was “well more than twice the
original estimate” (Mecham 2011).

The Dreamliner is believed to be the most advanced commercial aircraft ever built and the most
efficient to operate. It was the fastest-selling plane ever in the commercial aviation industry (Tang and
Zimmerman 2009) with a total order of 800~900 planes before its 1st flight, which worth about $150
billion (Kotha and Nolan 2008). However, its development was a nightmare as it suffered repeated
delays and a significant cost overrun. This event has a widespread impact on the commercial aviation

1
Copyright @ 2012 by Yao Zhao. All Rights Reserved. This research is supported by the Career Award # 0747779
from the National Science Foundation (NSF). The article does not represent NSF’s opinion on this subject. Facts and
data come from publically available sources. The author avoided any financial relationship with the firms in this
study to stay objective and unbiased. No part of this paper may be reproduced without permission.

The author is indebted to seminar participants at IBM Watson Research Center, University of Chicago, MIT
Operations Research Center, Columbia University, Northwestern University, New York University, and Arizona
State University for their constructive comments and helpful suggestions.
industry and aroused the curiosity of the entire world. Naturally, people asked, what caused the delay?
How could it have been avoided?

In this article we analyze Boeing’s traumatic experience, discover what really happened, identify the
root causes, and offer ways to avoid similar failures in the future. We believe that such lessons can
provide valuable insights for large companies around the world to ensure future successes in complex
projects developed jointly with suppliers.

Our conclusion is simple. A majority of 787’s delays were intentional and thus could have been avoided.
The root cause of these delays is the risk sharing partnership which forced Boeing and its partners to
share the “wrong” risk and thus led them into a subtle but deadly trap where these firms are motivated
to delay in their own best interests. Properly distinguishing different types of risk and sharing the “right”
risk selectively can help aligning the interests of individual firms with that of the project and thus
significantly reduce or completely avoid such deliberate delays.

For our methodology we use an integrated empirical-analytical approach where we combine a

comprehensive empirical study of the actual events and facts with an economic analysis of financial
incentives, gaming and risk in joint development programs. Reconciliation between the empirical
evidence and the analysis reveals the true rationales behind many seemingly irrational behaviors that
delayed the 787 program, and enlightens the ways to avoid similar disasters in the future.

We start by describing the background and the 787’s development chain to find out how 787 was
developed and how the program was managed. This is followed by a thorough empirical study on the
delays where we match up pieces of fragmented information to constitute the whole picture on what
really happened. We then conduct an economic analysis to understand the firms’ financial incentives
and unveil the trap induced by the risk sharing partnership. The main sections of this article reconcile
the empirical evidence with the economic analysis to reveal the root cause for the delays, and suggest a
new partnership to avoid the trap by sharing various types of risk in development projects “fairly”. We
conclude by discussing what lessons large development programs could learn from Boeing’s experience
in collaborative innovations.

2. Background
2.1. 787 Unique Features

787, the Dreamliner, is Boeing’s next generation commercial aircraft targeted at the aviation market
segment of rapid, direct and point-to-point connections. The Dreamliner is unique in its extensive use of
the lightweight composite materials, which account for about 50% of the airplane by weight, and 80% by
volume (Teresko 2007). As a comparison, the Boeing 777 airplane has 12% of the composite materials by
weight. The composite materials provide the Dreamliner two distinct advantages: (i) light weight, which
means fuel efficiency, and (ii) easy maintenance. So the Dreamliner was designed to cost less to operate
and maintain than the current generation aircrafts.

2.2. The 787 Development Chain

The Dreamliner is unprecedented in the scale of development outsourcing – 65% of the development
work is outsourced to more than 100 suppliers from 12 countries (Horng and Bozdogan 2007, Exostar
2007). Tier 1 suppliers design and fabricate 11 major subassemblies, Boeing integrates and assembles.
Most notably, the nose-and-cockpit section was outsourced to Spirit, the forward fuselage was
outsourced to Kawasaki from Japan, the center fuselage was outsourced to Alenia from Italy, and the
after fuselage was outsourced to Vought. The wing and wing box were outsourced to companies from
Japan, Korea and Australia. Many smaller parts are also outsourced, such as the landing gear, fairing and
doors. Exhibit 1 provides details on tier-1 suppliers.

Vertical Fin – Aft Fuselage Center Fuselage Fixed Trailing Edge

Boeing-Fredrickson (S47, S48) – Vought (S44, S46) – Alenia – KHI

Horizontal Stabilizer Forward Fuselage

– Alenia (S43) – KHI

Forward Fuselage
(S41) – Spirit
Wing Tips
– KAL-ASD

Wing Box – Leading Edge – Main Landing Gear Center Wing Box
MHI Spirit Wheel Well – KHI (S11) – FHI

Exhibit 1: The 787 tier-1 suppliers.

The suppliers are responsible for both design and fabrication of the parts. Specifically, Boeing defines
the parts and interfaces, the leaves the detailed design to tier-1 suppliers who can optimize within each
work package, and must work with each other on the interfaces. In case of disputes, Boeing serves as a
referee to assist the suppliers; but in the end, the suppliers need to make the designs by themselves
(Horng and Bozdogan 2007).

787 747
Architecture Boeing Boeing
Parts design Suppliers Boeing
Interface design Boeing defines interface, suppliers Boeing
provide detailed design, Boeing serves as referee
Exhibit 2: Boeing and the suppliers’ role in the 787 development.

Development (design and fabrication) outsourcing provides Boeing significant benefits:

1. Market expansion. It is well known that developing a new airplane requires a significant up-front
investment for R&D, engineering, construction and testing. One has to recoup these costs from sales
 by spreading them among the planes sold. If one cannot sell enough planes, the unit cost would be
too high for any airline to afford it. The most effective way to sell the airplane to other countries is
to have manufacturers from those countries participate in the development, the so-called offset
deals. Development outsourcing is instrumental in making the Dreamliner the fastest-selling plane
ever in the commercial aviation industry.
2. Technology: Development sourcing enables Boeing to utilize the best in-class expertise and
knowledge worldwide, and thus reduces the technological risk.
3. Duration: Parallel development of subsystems can help Boeing reduce the total development cycle
time.

Because of these benefits, the trend of outsourcing (design, fabrication, or both) is irreversible in the
Aerospace and Defense industry. Besides 787, noticeable examples are Airbus 380 and the Global Hawk
(Ulder 2011). Statistics shows that, on average, about 50% of the revenue of Raytheon was paid to the
suppliers (Kamath 2010).

2.3. The Risk Sharing Partnership

While indispensable, global outsourcing introduces a significant new challenge – incentive and
coordination in a joint development project. Unlike the 1960s-70s when one firm did all, today different
tasks that constitute a project are performed by different firms who rely on each other to control their
cost and schedule (see Exhibit 3 for an example, where firm B can only start after firm A completes its
tasks, and may have to watch out for firm D’s completion time to determine its task duration).

Exhibit 3: A joint development project.

The most significant issue of a joint development project is that each firm ultimately optimizes only for
its own benefit rather than the benefit of the project. For instance, firms may put in less effort and slow
down their work, or even pass their incomplete work to others. Thus, the question is, how to align the
incentives in a joint development project?

To answer this question, we must understand the nature of development projects. Development
projects typically require iterations & integrations, thus it can be hard to estimate the total cost and
time for such a project. To coordinate the efforts in a development project, Boeing has to require the
suppliers to hold on to the end of the project and share the outcome. This requirement rules out the
fixed price contracts (as in subcontracting) where the suppliers are paid upon job completion, and thus
can walk away from future iterations. Second, Boeing must motivate the suppliers to work hard and cost
efficiently. This requirement rules out the time-material contracts (as in consulting), which may
encourage the suppliers to work slowly and inflate their cost.

Boeing understood these requirements well and came up with an ingenious idea – the risk-sharing
partnership, which makes the suppliers the stakeholders of the 787 program (Horng and Bozdogan 2007,
Tang and Zimmerman 2009). Specifically, Boeing asked the risk-sharing partners to bear the up-front
non-recurring R&D investment for their tasks, and wait until the plane is certified and delivered to get
paid. So the suppliers have to share the risk of program delays. The payment follows a pre-negotiated
price per unit, and so the more planes Boeing sells, the more money each supplier makes. To
compensate the suppliers for taking the risk, Boeing assigned them the intellectual property rights of
their parts, and so the suppliers have the assurance from Boeing that they will not be replaced down the
road. Exhibit 4 summarizes the risk sharing partnership.

Risk Sharing (787) Subcontracting (747)

Non-recurring Paid by suppliers Paid by Boeing
development cost
When a supplier When the project is done When the job is done
gets paid
Intellectual Property Owned by suppliers Owned by Boeing
Payment terms Fixed price per unit Fixed price per unit
Exhibit 4: The risk-sharing partnership.

Suppliers share more than half of the upfront non-recurring R&D investment (Lee and Anupindi 2009)
which can be broken down as follows: Alenia ($590 million), Japanese Heavies ($1.6 billion), Global
Aeronautica (GA), Spirit, Vought ($3.1 billion), and Boeing ($4.2 billion).

The risk-sharing partnership promised tremendous benefits to Boeing: first, it reduces substantially
Boeing’s upfront non-recurring investment. Second, it reduces Boeing’s exposure to financial risks
because if the project is ever delayed, Boeing only bears the loss of its own investment while suppliers
have to pay for theirs. Finally, suppliers may have an incentive to work efficiently and hard because they
are spending their own money and sharing the loss of delays.

The combination of development outsourcing and the risk-sharing partnership (dubbed “Build-to-
Performance”) looks like a wonderful idea. Boeing was so confident of the partnership that it left the
selection and control of the subtier suppliers to its risk sharing partners (Horng and Bozdogan 2007).

2.4. The 787 Disaster and Conjectures

In reality, the development of the Dreamliner was a disaster – the first flight was delayed by 26 months
and the first delivery was delayed by 40 months. Accompanied with the delays is the significant cost
overrun. Estimates vary by agencies; conservatively, the overrun of Boeing’s development cost is at least
$11 billion by the first delivery (Gates 2011), including, write-offs due to defects (~$2.5 billion), excessive
R&D costs, supplier support and buy-out ( $3.5 billion), customer contract penalty ( $5 Billion). In
addition, about 7% of the orders were cancelled before the first delivery (Xu and Zhao 2010).
It was truly a nightmare as compared to other programs recently launched in the commercial aviation
industry. Exhibit 5 provides a comparison among Boeing 777 (Lane 1995), Airbus 380 (Clark 2006) and
Boeing 787 programs (Xu and Zhao 2010).

Date of Planned Planned Actual Actual Delay of Total

Official
the 1st 1st program 1st program the 1st Development
launch
firm delivery duration delivery duration delivery cost (all firms
date
order date (months) date (months) (months) involved)
777 1/1990 10/1990 5/1995 64 5/1995 64 0 ~$6-7 billion
380 12/2000 12/2000 2/2006 62 10/2007 82 20 ~$13 billion
787 1/2003 4/2004 5/2008 64 9/2011 104 40 billion
Exhibit 5: Performance comparison among Boeing 777, Airbus 380 and Boeing 787.

The industry and academia were heavily debating on the causes of the delays. In the end, they came
down to three conjectures:

1. Union strikes (e.g., Kotha and Nolan 2008). The mechanistic unions are powerful forces in this
industry. But if we look at the actual events and facts, union strikes only delayed 3 out of the 40
months total (Turim and Gates 2009). So the unions had an impact but not substantial.
2. Technical issues. People argued that the composite materials have never been applied so
extensively to a plane of this size (e.g., Tang and Zimmerman 2009, Shenhar, et al. 2012). True, but
the composite materials were not new as they were applied to the 737 and 777 programs. In fact,
the 777 airplanes have 12% of composite materials by weight (Horng and Bozdogan 2007). Most
importantly, a comprehensive examination of the actual events and facts shows that only 3 out of a
total 7 major delays are probably due to unexpected technical issues.
3. Too much outsourcing. This is the most popular conjecture given the numerous lapses of the
suppliers in this program (see, e.g., Weitzman 2011, Hiltzik 2011, Kotha and Nolan 2008, Tang and
Zimmerman 2009). However, the claim is at best a speculation yet proven by the actual events and
facts.

3. The Empirical Study: What Really Happened?

In January 2003, Boeing set up a team of executives to design and sell a new plane, which was later
renamed the 787 Dreamliner. The original plan is to have the suppliers complete and deliver all
subsystems by June 2007. Boeing will integrate and assemble the plane in June-July 2007. The 1st flight
will be tested in August 2007, and the 1st delivery will be made in May 2008 (Turim and Gates 2009). The
planned duration for the 787 program is 64 months, comparable to the actual duration of Boeing’s last
mega project, the 777 program. In reality, the 1st flight was delayed to December 2009 (late by 26
months) and the first delivery was postponed to Sept. 2011 (late by 40 months). In the end, the total
development time of the Dreamliner is 104 months as compared to the 64 months of the 777 program.

3.1. Actual Events and Facts: What Happened?

We shall start by examining the status of the first “assembled” Dreamliner (LN 1) rolled out for the 787
premiere in July 2007. Unknown to the public at the time, the plane was a hollow shell, even some of
the outer structure is fake, e.g., the wing slats are painted wood (Turim and Gates 2009). Let’s open up
the shell to see what was inside (Domke 2008, Kotha and Nolan 2008):

 After fuselage (by Vought) structure is 16% complete, systems integration 0%

 The nose-and-cockpit session and the forward fuselage (by Spirit & Kawasaki) sagged out of
shape in transit due to incomplete frame and floor beam installation
 Redesign for interfaces: Aft body joint S47/S48, Aft body joint S48/S48 (APU cone), and
center body joints S11/S44/S45/S46
 Due to a fastener shortage issue, temporary fasteners were used for the first few 787s. However,
the replacement of these temporary fasteners is hampered by a lack of documentation
 35 part numbers are still missing by July 2008
 LN1 primary structure is not completed by August 2008
Exhibit 6: LN 1 status upon entering the final assembly line, May, 2007.

Should you know what was inside LN 1, you won’t be surprised by the subsequent delays. The following
table summarizes each major delay by duration, direct causes, firms responsible and their explanations
(Xu and Zhao 2010).

# Time Duration Direct Causes Who Explanations

anno- Respo-
unced nsible
1 10/ 7 months on Parts shortage Alcoa Issues with production capacity & scale
st
(e.g., fasteners). economies.
2007 the 1 flight Vought
Defects. Alenia Lack of testing & Q/A equipment &
personnel, workers lack of training and
Unfinished work Spirit FAA compliance, had to use student
from suppliers.
GA inspectors.
Design issues Honey-well Vought had no engineering dept. when
selected
etc.
Missing Suppliers had to rush to meet the
Documentation. schedule, so … (Kotha & Nolan 08)
Flight control The supplier underestimated the time
software. (Kotha & Nolan 08)
2 1/ 3 months on Unfinished work Vought Suppliers: the same.
the 1st flight from the
2008 Alenia
suppliers.
GA
Slow assembly Boeing: “we underestimated how long it
progress at Boeing takes to do someone else’s work”
Boeing
3 4/ 6 months on Same as above Same as Same as above
the 1st flight above
2008
 4 12/ 6 months on Wrongly installed Boeing Poorly written instructions by Boeing
the 1st flight fasteners at engineers confused and misled its
2008
Boeing FAL workforce
5 6/ Indefinitely Defects at wing- Boeing Structural flaw in design and
on the 1st body joint engineering
2009 Fuji
flight
Mitsubishi
6 8/ 3 months on Uncontained Boeing Unknown
st
the 1 engine failure &
2010 Rolls Royce
delivery availability issue

7 12/ Indefinitely An on-board Hamilton Foreign debris in electric cabinets, and

on the 1
st
electrical fire Sundstrand more, …
2010
delivery
Exhibit 7: 787 major delays.

In summary, out of the 7 major delays, 3 may be caused by technical issues, 4 of them are caused by
some “irrational” behaviors of Boeing and its suppliers, as summarized below.

The “irrational” behaviors Why irrational?

Boeing selected Vought to design and How could Boeing select a firm with limited design
manufacture the world’s 1st all-composite aft- and engineering capability to design and fabricate
fuselage, but Vought had no engineering one of the most technical and novel parts?
department when selected
General Aeronautica used low-wage, trained- As a joint venture between two experienced
on-the-job workers with no previous aerospace aircraft manufacturers (Alenia and Vought), how
experience to assemble fuselage sections, and could GA not know the very basics – training its
didn’t train them for FAA compliance until the workforce for the FAA compliance?
job is past-due
Alcoa quoted a lead time of 60 weeks for  No matter how sophisticated the fasteners are,
fasteners, citing issues of capacity & scale they won’t take 60 weeks to make. Alcoa was
economies, contributing to the first delay. In bargaining for a better deal
response, Boeing aggregated fastener  Rather than giving Alcoa a better deal to reduce
procurement, ensuring favorable pricing the lead time, Boeing pressed Alcoa further on
pricing, which prolonged the lead time.
Tier-2 suppliers lack of Q/A equipment and What kind of engineering and manufacturing firms
personnel to do testing at component and will design and fabricate a new part without testing
subsystem levels. Tier-1 suppliers deferred it?
testing to FAL
Vought (Charleston, SC) had to use novice Using interns to assure the quality of the world’s
student inspectors because it had problems 1st all-composite aft-fuselage? No wonder why
attracting competent technicians numerous defects have gone unnoticed.
Production records on suppliers’ work were As experienced aircraft manufacturers, how is it
found incomplete or lost in transfer resulting in possible that they could forget production records
a loss of configuration control or have them lost in transit?
Poorly written instructions led to the How is it possible that Boeing, a company holding
embarrassing wrongly installed fasteners at such a high reputation in engineering, messed up
Boeing instructions for installing fasteners?
Exhibit 8: The “irrational” behaviors of Boeing and the suppliers.

3.2. Hypothesis Testing: What Really Happened?

Most people from either industry or academia believed that the delays were accidental, that is, Boeing
and its suppliers have good intentions but made some mistakes inadvertently. To put it formally, the
common null hypothesis (or belief) is

The opposite of this hypothesis (the alternative hypothesis) is,

To test these hypotheses, we examine the slips (due to human errors or mismanagement) and their
impact on program performance. If is true, then these slips should be rare and even if they occur,
their impact should be minimum as Boeing and its partners would do their best to mitigate it.

However, our empirical study in §3.1 shows the opposite: numerous slips of both Boeing and its
suppliers accounted for a majority of the delays (at least 4 out of the 7 major delays, for at least 22 out
of a total 40-month delay) and are caused by such errors and mismanagement as unable to hire
competent technicians, cannot prepare well and keep safe production records and documentations,
forgot to train their workers for FAA compliance, and a lack of equipment and personnel to do quality
assurance, etc. (see Exhibit 8 for the “irrational” behaviors). These errors are trivial because they are at
the very basics of aircraft manufacturing. As well established and experienced aircraft manufacturers, it
is impossible for Boeing and its partners to not know these errors and their consequences.

In conclusion, these errors are so obvious and common sense that Boeing and its suppliers must know.
Thus, if is true, that is, Boeing and the suppliers were fully committed and really cared about the
delays, none of these errors (“irrational” behaviors) would have occurred! And even if they do, they
should have a minimum impact. However, in reality, they all happened and had a significant impact on
the program, which implies that cannot be true and must be true, that is, Boeing and the
suppliers were not committed and didn’t really care about the delays, contrary to their claims in public.
Thus, the question here is not about how to correct these errors, but, knowing it was wrong, why did
they still do it?!

4. The Economic Analysis: The Prisoners’ Dilemma

4.1. Project Cost Structure

To understand the financial incentives and economic drivers that led the firms willingly into these errors,
let’s first analyze the firms’ cost structure. Typically, there are two types of costs in a project (Nahmias
2004):

 Direct costs: including expenses spent on management organizations, workforce and training,
equipment, materials, and transportation. One can reduce the direct costs by delaying the task.
 Indirect costs: including overheads (utilities, facilities, and benefit), capital costs, contract penalty,
and order cancellations. One can reduce the indirect costs by completing the project earlier.

The direct and indirect costs move in the opposite directions as the project duration increases (Exhibit 9).

Exhibit 9: The direct and indirect costs.

Let’s now understand the risk-sharing partnership from the cost perspective. Under this partnership,
each firm pays the up-front investment for its task and gets paid when the whole project is completed.
Thus, if a firm delays its task, it saves on its direct cost but everyone suffers a higher indirect cost due to
the resulting project delay. Firms completed their tasks on time are penalized by the delayed firm, and
thus the latter is not fully responsible for the damage caused by its delay. Intuitively, if one firm can
benefit from a delay and have others share the damage, the firm tends to delay – this is the “moral
hazard” issue in the classical economic literature (Holmstrom 1982).

4.2. The Prisoners’ Dilemma

To understand the moral hazard issue and its potential impact in the project management settings, we
consider a simple example analogous to the Dreamliner’s workload distribution. In this example, we
have two sequential tasks, A and B, for which, the planned durations are, say, 9 and 5 weeks (Exhibit 10).
We can delay each task by one week, and save $900 (for A) and $1200 (for B) in the direct costs. But if
the project is delayed behind the delivery due date, which is 14 weeks, the project suffers an extra
indirect cost of $1600 per week.
 Exhibit 10: A simple example

In the “one-firm-does-all” model, one firm does both tasks. Then the firm would not delay any task
because the extra indirect cost of the project upon delay exceeds the savings in the direct costs of all
tasks.

In the outsourcing and risk-sharing model, let’s assume that firm A does task A, firm B does task B, and
upon each week of the project delay, firm A pays an extra indirect cost of $750 and firm B pays $850
(the total indirect cost is still $1600/week). Because the project duration depends on both firms’ efforts,
now each firm’s cost and schedule depend on the other firm’s action. To find out what firms A and B
would do in their best interests, we study four possible scenarios:

1. (Win-Lose) If firm A delays but firm B keeps its task duration, then the project is delayed by one
week. A saves $900 but loses $750 with a net gain of $150, while B suffers a net loss of $850.
Essentially, firm B keeps up its task duration for firm A’s benefit.
2. (Lose-Win) If firm A keeps its task duration but firm B delays, then the project is again delayed by
one week. Firm A suffers a net loss of $750, while firm B saves $1200 but loses $850 with a net gain
of $350. In this case, firm A pays a penalty for firm B’s delay.
3. (Lose-Lose) if both firms A and B delay, then the project is delayed by two weeks because the tasks
are sequential. Firm A incurs a net loss of $600 (= 2x$750 $900) while firm B suffers a net loss of
$500 (=2x$850 $ 1200).
4. (Win-Win) Firms A and B can negotiate a mutually beneficial deal, in which, both keep their task
durations and thus lose nothing.

Exhibit 11: The scenarios and pay-offs of firms A and B.

Exhibit 11 summarizes the scenarios and the pay-offs of both firms. Clearly, the “Win-Lose” and “Lose-
Win” scenarios are not feasible because no firm would sacrifice itself for the other’s benefit. From the
project’s perspective, the “Win-Win” scenario is the best outcome because this is what a firm would do
in the “one-firm-does-all” model. Under risk sharing, however, this scenario is unstable because each
firm can be better off by delaying its task regardless of the other’s action. Thus, each firm will find every
excuse to delay. Although the “Lose-Lose” scenario is the worst outcome for the project, it is indeed
stable and the final outcome (as in the Prisoner’s Dilemma). This simple example reveals a deep insight:
the risk sharing partnership can put the firms into a Prisoners’ Dilemma – although keeping the planned
duration benefits the entire project, it can be in each firm’s best interests to delay. The same insight
holds true in general systems with more realistic project networks and cost structures; see Xu and Zhao
(2013) for a rigorous mathematical analysis.

5. Reconciliation: What Caused The Delays?

The 787 Dreamliner program resembles the simple example in §4 where the suppliers first develop
subsystems and then Boeing assembles and integrates. Our analysis shows that the risk-sharing
partnership may motivate the firms to delay their tasks against the best interests of the project. To
reconcile the analysis with practical evidence, let’s recall the “irrational” behaviors in §3.1. We shall first
reveal the rationale (the ugly truth) behind the suppliers’ behaviors by discovering what they really
wanted to say (Exhibit 12).

Suppliers’ “irrational” behaviors What did the suppliers Reasoning

(excuses for delays) really say?
 Lack of testing and Q/A I don’t want to spend  If you paid the salary of an
equipment and personnel money on it intern, you only get interns.
 Used low-wage, train-on-the-job  If the suppliers really cared
workers to assemble fuselages about their work, they
 Inability to attract competent shouldn’t have saved money
technicians, have to use novice from necessary equipment
student inspectors and qualified personnel.
 No inventory oversight I don’t care much to The FAA compliance training only
 Workers lack of training & FAA manage it well takes a couple of days (Gates
compliance 2008). Even the documentation
 Incomplete documentation or was lost in transit, how careless
lost in transit they were!
 Vought waited till nearly the last I wish I could delay it Vought took 2 ½ years to build
moment (5/2006) to build the more the plant, only left itself 1 year to
plant (job assigned 11/2003, due build the part. Recall that the
5/2007) part is only 16% complete (§3).
 Alcoa quoted a 60-week lead I only care about my Alcoa was reluctant to speed up
time for fasteners, citing thousand $ setup cost but production without obtaining a
capacity issues & scale your million $ plane better volume and price deal
economies. from Boeing (Lee and Anupindi
2009)
Exhibit 12: The truth behind scenes for the suppliers.

The reconciliation clearly shows that the delays occurred not because the suppliers weren’t able to do
their jobs well but because they just didn’t want or care enough to do it well. What happened is that
these suppliers were delaying their jobs as much as possible and doing it in the cheapest possible way!
Let’s now reveal the rationale behind Boeing’s “irrational” behaviors by discovering what Boeing really
wanted to say (Exhibit 13).

Boeing’s “irrational” behaviors What did Boeing really Reasoning

(excuses for delays) say?
Alcoa quoted a 60-week lead time I care more about the If Boeing cared more about the
for fasteners, citing issues of prices than the delays of delays than the prices, it should
capacity & scale economies, the fasteners have encouraged the fastener
contributing to the first delay. In suppliers to reduce lead time by
response, Boeing consolidated its making a better volume and/or
fastener procurement, directly price commitment, rather than
negotiated with suppliers, for discouraged them by squeezing
favorable pricing them more on price.
Boeing selected Vought who had no I need someone to share Had Boeing not known Vought’s
engineering department to develop the cost and risk more engineering capability (as a long
the world’s 1st all-composite aft- than getting the project collaborator) and the damage of
fuselage. done on-time using a firm with limited technical
capability? Negative, but the need
of risk sharing dictates.
“We underestimated how long it  We estimated delays, Boeing was expecting delays but
takes to do someone else’s work” – but underestimated nothing so bad. Why should
slow progress at FAL to fix the them. Boeing work hard to catch up the
traveled work.  We don’t have to schedule so that the suppliers can
hurry up to save reap the most benefit?2
someone else’ money
Embarrassing wrongly installed I don’t care much to If Boeing were more committed,
fasteners – poorly written doc. by manage it well such low-level mistakes should
Boeing Engr. misled its workforce have been avoided.
Exhibit 13: The truth behind scenes for Boeing.

The reconciliation demonstrates that Boeing was really just concerned about its own cost and risk rather
than the delays of the 787 program.

These irrational behaviors (that led to a majority of the 787 delays) are detrimental to the 787 program,
but they can be rational to each individual firm, because what is the best for the program isn’t the same
as what is the best for each firm. What happened is that each firm tried to delay behind the schedule or
passed its unfinished work to others because by doing so, it can save its direct costs, and have the
damage, the extra indirect cost incurred by the delay, shared by other firms (i.e., the moral hazard issue).

2
If Boeing works slowly, it barely incurs any additional cost at that time because the customers are loyal and the
damage of contract penalty has already been done (LN 1 is in such a bad shape, there is little hope to get it done
within 12 months, and Boeing only has to pay contract penalty for the first 12 months (Wellsfargo 2009)). If Boeing
makes a significant effort to catch up with the schedule, the suppliers will reap the most of the benefit because at
that time, the suppliers were paying for a majority of the development operations.
Thus, knowing the “irrational” behaviors were wrong for the project, Boeing and its suppliers still did it
because it was in their best interests; that is why the delays were inevitable.

6. The Solution: Could It Have Been Avoided?

How could we avoid similar disasters in the future? Clearly it is impossible for Boeing and other large
aerospace manufacturers to return to the “one-firm-does-all” model due to the absolute necessity of
market expansion worldwide. Thus, the right question is perhaps on how to align the incentives in joint
development projects?

6.1. Controllable vs. Uncontrollable Delays

A frequently raised question for the Dreamliner program is why Boeing did not penalize its partners for
their delays? To answer this question, we must understand that there are two types of risk in
development projects: the risk of uncontrollable delays and the risk of controllable delays.

The uncontrollable delays The controllable delays

 Technical challenges  Careless lapse
 Natural disasters  Errors due to mismanagement
 Union strikes  Firm’s strategic behaviors
Unpredictable and unavoidable Predictable & avoidable by extra effort & commitment
Exhibit 14: The types of delay risk.

Boeing did not penalize the suppliers for their delays because Boeing doesn’t like to pay penalty to the
suppliers for its own delays! This is the essence of the risk-sharing partnership: if the delay is caused by
unpredictable and unavoidable events such as natural disasters and unexpected technical challenges
(the uncontrollable delays), no individual firm should be held responsible. In fact, sharing the risk of such
delays is fair because it allows the firms to avoid a completion devotion to one project and to spread the
risk among multiple projects to achieve the portfolio effect, much like investment diversification in
financial markets.

The risk sharing partnership, however, does not distinguish the types of risk but also force the firms to
share the risk of controllable delays, which is not fair because a firm should not be held responsible for
other firms’ mistakes. More importantly, sharing the risk of controllable delays encourages such delays
(due to the moral hazard issue) and thus leads to suboptimal project performance on both time and cost.
Thus, neither penalizing nor sharing all types of delays is fair and effective.

6.2. The Fair Sharing Partnership

To better align the incentives of firms in joint development projects, we propose a new partnership,
namely, “fair sharing”, which allows the firms to share the risk of uncontrollable delays but assumes
each firm the full responsibility for its own controllable delays. Specifically, upon a delay, the firms shall
first identify its type. In case of an uncontrollable delay, the damage is shared in the same way as the
risk sharing partnership. But in case of a controllable delay, the firm responsible shall pay not only for its
own damage but also for the damages of other firms caused by the delay. In this way, the firms can
share the risk of uncontrollable delays and achieve the portfolio effect; meanwhile, they can also
eliminate the moral hazard issue and align their interests with that of the project.

I must point out that the fair sharing partnership isn’t a panacea as its effectiveness relies on the firms’
capability to distinguish the types of risk, which is not always easy especially in projects involving
creative activities and substantial technical challenges. When such a project is delayed, it can be hard or
impossible to tell whether the firms involved haven’t tried their best or they tried but failed. Fortunately,
the fair sharing partnership applies to complex projects with minor or moderate technical advances,
such as extension, upgrading, or new combinations of existing technologies. These projects represent a
vast majority of the development programs in the Aerospace and Defense industry.

6.3. How Could It Have Been Avoided?

We now discuss how some of the delays could have been avoided in the Dreamliner program by
contrasting what Boeing did to what Boeing should have done (see Exhibit 15).

What Boeing did What Boeing should have done

Share both types of risk (the risk sharing  Distinguish between controllable and
partnership) uncontrollable delays in contracts
 Specify upfront which type of risk to or not to
share (the fair sharing partnership)
After the delays occurred, Boeing had to  Have suppliers fully responsible for their
assist/support the suppliers to controllable delays
 Keep them afloat upon Boeing’s delays  Fully responsible for its own controllable
 Keep them afloat upon other suppliers’ delays
delays  Share the damage of the uncontrollable
 Keep them afloat upon their own delays delays
Exhibit 15: What Boeing did vs. what Boeing should have done.

Had Boeing utilized the fair sharing partnership, the first four delays could have been avoided or at least
mitigated because both Boeing and the suppliers would have taken a much greater responsibility for
their delays and thus been much more committed than they were under the risk-sharing partnership.
That being said, there may still be delays, like the last three, but mostly due to unforeseeable technical
challenges.

On the implementation side, because the fair-sharing partnership requires a much greater responsibility
than the risk-sharing partnership, some suppliers may be reluctant to sign on. If Boeing must use a
supplier even if it declines the responsibility, then knowing the supplier’s financial incentives, Boeing
should closely control and monitor the supplier to prevent potential “irrational” behaviors.

In reality, Boeing fought the delays by first tightening its control of the suppliers (tiers 1, 2, and 3)
around the globe (Exostar 2007). Boeing built a high-tech operations center in a factory in 2008 to
monitor the suppliers in real time to ensure that the 787 components and modules are tested right
away at the original manufacturers before shipped out to the next level of integration (Xu and Zhao
2010). Second, Boeing acquired Vought’s interest in Global Aeronautica in June 2008, and bought
Vought’s 787 operations in South Carolina entirely in July 2009. After these acquisitions, Boeing’s share
of the delay damages increased considerably, and it tightened up its internal control. Consequently,
there are no more embarrassing mistakes since then, and the last three major delays are largely due to
unexpected technical issues.

7. Conclusion
Boeing’s experience in the 787 program provides a live example of how gaming behaviors in
collaborative innovation can bring a disaster to the development of a promising new product. The root
cause for the disaster was found to be the wrong risk shared by Boeing and its suppliers which give
these firms a wrong motivation. Specifically, sharing the risk of controllable delays encouraged such
delays because neither the suppliers nor Boeing was fully responsible for their delays, so all firms tend
to slow down their work and put in less effort than what is right for the project. Together with a poor
monitoring and control of the suppliers, the 787 slips are inevitable.

An important lesson learnt from Boeing’s experience is that distinguishing various types of risks in
innovation and sharing them selectively among partners are critical to success. Similar disasters can be
avoided or mitigated by a better designed relationship, such as the fair sharing partnership, which
allows the firms to share the risk of uncontrollable delays but assumes each firm the full responsibility
for its own controllable delays. Combining this new relationship with a closer control and monitoring of
the suppliers, innovation by collaborative is much more likely to succeed.

Reference

Nicola Clark, “The Airbus saga: crossed wires and a multibillion-euro delay – business – International Herald
Tribune.” The New York Times, December 11, 2006

Burkhard Domke, “Boeing 787 lessons learnt.” October 20, 2008. Airbus,
http://www.planebusiness.com/buzz/airbus2.pdf

Exostar, LLC (2007). “Boeing 787: global supply chain management takes flight.” Case study.

Gates, D. (2008). “Boeing 787 supplier halts work for 24 hours after FAA audit.” The Seattle Times, July 2, 2008.

Gates, D. (2011). “Boeing celebrates 787 delivery as program’s costs top $32 billion.” The Seattle Times, September
24, 2011

Hiltzik, M. (2011). “787 Dreamliner teaches Boeing costly lesson on outsourcing.” February 15, 2011, Los Angeles
Times.

Holmstrom, B. (1982): "Moral Hazard in Teams," Bell Journal of Economics, 13, 324-340

Horng, T.C., K. Bozdogan (2007). “Comparative analysis of supply chain management practices by Boeing and
Airbus: long-term strategic implications.” Presentation at the MIT Lean Aerospace Initiative, April 18, 2007.

Kamath, V. (2010). “Key challenges for supply chain in A&D.” Presentation at the Aerospace and Defense
conference hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2010.
Kotha, S., R. Nolan (2008). “Boeing 787: the Dreamliner (B).” Case study, the Foster School of Business at the
University of Washington. October 14, 2008

Lane, P. (1995). “Delivery of the first 777: launching US into the 21st century – Boeing, United celebrate new era.”
The Seattle Times, May 17, 1995

Lee, M., R. Anupindi (2009). “Boeing: the fight for fasteners.” Tauber Institute Case 1-428-787, November 17,
2009

Mecham, M. (2011) Aviation Week, September 26, 2011, p. 53.

Nahmias, S. (2004). Production and operations analysis, 5th Edition. McGraw-Hill Irwin. Boston.

Shenhar, A., Y. Zhao, B. Melamed, V. Holzmann (2012) The challenge of innovation in highly complex projects.
Technical Report, Rutgers Business School – Newark and New Brunswick, NJ.

Tang, C.S., J.D. Zimmerman (2009). “Managing new product development and supply chain risks: the Boeing 787
case.” Supply Chain Forum: an International Journal, 10(1), 74-86.

Teresko, J. (2007). “The Boeing 787: A matter of materials. Special Report: anatomy of a supply chain.” Industry
Week, December 2007, retrieved from http://www.industryweek.com/articles/boeing_787_a_matter_of_materials_--
_special_report_anatomy_of_a_supply_chain_15339.aspx

Turim, D., D. Gates (2009). “Building the 787 Dreamliner: a timeline.” The Seattle Times, December 15, 2009.

Xu, X., Y. Zhao (2010), “Build-to-Performance – The Boeing 787 Dreamliner.” Case study, Rutgers Business
School – Newark and New Brunswick, NJ.

Xu, X., Y. Zhao (2013), “Incentives and Coordination in Project Driven Supply Chains.” Working Paper, Rutgers
Business School – Newark and New Brunswick, NJ.

Ulder, B. (2011). “Global Hawk supply chain integration.” Presentation at the Aerospace and Defense conference
hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2011.

Weitzman, H. (2011). “Dreamliner lessons to shape Boeing direction.” Financial Times, September 25, 2011.

Wellsfargo Securities (2009). “Equity Research: Boeing Company.” August 11, 2009.