The current woes at Boeing tend to get lumped under the heading of ‘supply chain’. There are compelling reasons as to why they do. However, there are also good reasons – as some astute observers point out – as to why three signals (which I highlight later in this article) should not get buried under the mountain of supply chain noise. Hopefully, risk managers and risk carriers will not miss out on these subtleties.
The aircraft manufacturer’s supply chain woes did not commence with the 737 Max. In his 2020 article for SupplyChainDigital.com, The Boeing 787 Dreamliner: A tale of terrible supply change management, Freddie Pierce wrote: “Boeing’s production of the 787 Dreamliner is almost laughable. It has become such a mess, such a supply chain disaster, that it almost makes you think Boeing execs made Dreamliner decisions in some sort of strange alternative universe, like the Twilight Zone or something.”
Critical components get sourced from South Korea, Italy, Japan, Australia, China, Sweden, France and Canada. All have significant roles in the production of the 787 Dreamliner. The cogs turning to receive supplies from such a vast network of global vendors have taken their toll on Boeing, explained Pierce.
Brooke Sutherland is Bloomberg News’ Boston bureau chief. She has written several eye-opening features on what’s been recently going on at Boeing. Before a plugged door blew open on a 737 Max 9 Alaska Airlines flight in January, Boeing had disclosed two separate quality-control issues tied to Spirit AeroSystems: one involving incorrectly installed rear fittings and the other being improperly drilled fastener holes.
As the maker of the Max’s fuselage, Spirit would have been responsible for constructing the exit doors, both the useable ones and the plugged ones, although Boeing is meant to do quality-control checks on pressurisation and seals on the finished planes at its own factories, and the FAA was meant to be double-checking each 737 on its way out the door.
That the incident will trigger sweeping changes as to how Boeing will work with its suppliers to build aircraft is the prevailing wishful thinking. Among the astute observers is NYU Stern business ethics Professor Alison Taylor. “Boeing is paralysed, and this failing by its executives and directors is to blame. The problem isn’t a lack of controls, visibility or knowledge. It’s the lack of innovative thinking,” she asserts in a recent op-ed for MarketWatch.
Lest we miss the signal, let’s shortly return to ‘its corporate culture may be a big reason’.
Spirit was a part of Boeing until 2005, writes Brooke Sutherland, when the company sold the underlying assets of its aerospace structures business to private equity firm Onex Corp. The idea at Boeing was to boost profit margins by outsourcing the more capital-intensive fabrication work of aircraft manufacturing, to focus on design and final assembly.
The reason manufacturers outsource certain component work is because doing so makes the overall process more efficient and allows the companies up and down their supply chains to focus on their respective strengths. Boeing is never going to be the ideal manufacturer of nuts and bolts.
Spirit had “always been a cost centre that was forced to become a profit centre”, says Sutherland. In its quest to bolster earnings and reduce the company’s dependence on Boeing, Spirit signed contracts with Airbus SE and the defence industry on lopsided terms that ended up compounding forward losses on the Boeing 737 and 787 programmes. Both Boeing and Airbus have a keen interest in keeping Spirit alive because neither can produce airplanes without the structural components made by the supplier.
But the plane makers have historically not shown much interest in allowing Spirit to make the kind of profits that would allow it to be a successful and truly independent business. Spirit has relied on advances from Boeing and Airbus and a rejiggering of terms on the 737 and 787 contracts to stave off a potential cash flow crunch. This isn’t a healthy supply chain, reminds Sutherland.
Rather than regretting the hive-off or even wishing to reacquire Spirit, Boeing should be looking at the following risk triggers.
Corporate culture
Corporate scandals have a tendency to refocus us all on questions of corporate culture and governance, and Boeing is no exception. David Calhoun is the latest of a spate of CEOs to step down in disgrace, his fall cushioned by the usual golden parachute.
While some have been keen to frame Boeing’s problems around its equality, diversity and inclusion (EDI) efforts, this argument is wildly unconvincing, reminds Taylor. What Boeing’s problems actually illustrate is that despite corporations adding more women and minorities to boards and C-suites during the past several years, conformity of thought and the strength of social ties are more powerful.
Groupthink
Taylor quotes Nell Minow, a leading corporate governance specialist, about boardroom groupthink: “We take these people of extraordinary ability and achievement. We put them in a boardroom and there they suddenly become totally incompetent. Why is that? My answer is that these are people who have a genius for sizing up the norms of the room and adapting to them. And that is a fabulous quality to have. But unfortunately, you’ve got 11 people like that – and one very visionary, dynamic leader who controls their information, their access to other people in the organisation, and even their tenure and their compensation. That’s not a good system.”
Board selection criteria vary, but while efforts have been made to increase the independence of board members, personal and social connections still predominate. Many studies demonstrate that members tend to have similar backgrounds, political affiliations and even religious beliefs.
How is it that as Boeing and other companies have diversified in areas such as gender and race, they seem not to have diversified their perspectives, or become any better at preventing ethical scandals?
Research by professor in management at Vanderbilt University, Jessica Kennedy, has shed further light on Minow’s observations: the more senior you are, the more likely you are to justify what the group is already doing – for better or worse. Her study of 11,000 employees across US government agencies found that senior leadership was almost 64% less likely to speak up against unethical practices than the most junior employees were.
Speaking up
Even if leaders created the very systems they oversee, they become products of them over time. One useful mechanism to consider: give a group of younger employees and executives an assignment to innovate and challenge the existing board. Improved deliberation is certainly an asset, but a healthy group dynamic is needed to achieve the greatest advantage.
Efforts to solicit dissenting views from more junior employees should be deemed a priority. So far, this is still missing at Boeing. Until the company appreciates that safety is non-negotiable for all stakeholders, from investors to customers, Boeing will have to keep digging. A new CEO will not help. What is needed at Boeing is an entirely new mindset on core corporate governance topics.
Squeezing the supplier
If you develop a plan to squeeze your suppliers, you cannot just call it the ‘squeeze the suppliers’ programme. You need a nice name. Boeing calls it ‘Partnering for Success’, explains Guido Palazzo, ethics professor at the University of Lausanne. What it means in reality is that suppliers have to reduce their costs by 15% while producing more. The problem is that Orwellian newspeak does not keep doors falling off planes in the skies, he warns.
Profit over safety
Boeing’s acquisition of a struggling McDonnell Douglas in 1996 is identified by many old-timers “as the moment when Boeing went from being led by engineers to being led by business executives driven by stock performance”.
Boeing, the pride of American manufacturing, prioritised financial gain over safety, with the federal government as a collaborator, says Alec MacGillis in The New Yorker. He also quotes Gregory Travis, a software engineer and pilot, who calls this “a collision of deregulation and Wall Street”.
While the 737 Max disasters were caused by a software feature, Boeing and regulators initially placed blame on the planes’ pilots.
Do risk assessments unduly focus on the physics of risk dynamics and thus, chemistry becomes a blind spot? What were the considerations behind the McDonnell Douglas acquisition? Why was there reckless outsourcing of critical parts of Boeing 787? Many of these risks emanate not from the shop floor but the boardroom.
A fly on the Boeing boardroom wall could be just where to begin analysing the information supply chain and spotting the signs of groupthink, supplier squeeze and profit over safety – hopefully just in time.
