It’s 2003 and Boeing is in deep trouble. Their biggest client the Pentagon has suspended them from any Government work because of corruption and bribery scandals.

Harry Stonecipher came back to Boeing after retirement and guided them to get out of the Government suspension. He also announced the launch of the Boeing 787! He made Boeing a more lean and efficient company.

By the time he left 2 years later, Boeing was back to doing well. Their stock prices had gone up over 50% in 2 years.

So why is Stonecipher called the architect of Boeing’s downfall?

The Boeing screw falls out

It’s 20 years later. February of 2024. Boeing 737 Max is flying in the air. When suddenly its door plug falls out midair. Investigation shows that the bolts were loose and came off during low pressure.

Further investigation showed that this was a problem in multiple Boeing aircrafts!

Why were the aircrafts so shoddily made? Because when Stonecipher came back, in an effort to bolster Boeing’s balance sheets, he started selling off Boeing plants. And started outsourcing what Boeing did in-house.

But isn’t outsourcing good?

Don’t the management gurus teach about how you should only focus on your core competencies and outsource everything else? After all, humans don’t undergo photosynthesis and create their own food, do they? 

Stonecipher was inspired by Apple. How iPods were “Designed in California, assembled in China.” He sought to do the same thing. Keep the aircraft design inhouse. Outsource everything else.

So why did outsourcing work for Apple and not for Boeing?

The Boeing outsourcing mistake

There is this financial metric called the RONA. Return on net assets. It is calculated by dividing the net income of the company by its net assets. A good RONA shows that the company is efficiently run. Investors like the company more, improving its stock price.

Stonecipher focused on improving this metric. But instead of improving the net income – which would take years, he decided to reduce the denominator: and make Boeing a leaner company. He decided to sell off Boeing factories and reduce their assets. The less assets Boeing had, the better the RONA would be.

In one instance, he sold off a 75 year old plant in Kansas. The plant made everything from fuselages to cockpits for Boeing and had done so for 747, 757, 767, 777!

The plant, under new ownership – kept on struggling in providing quality material to Boeing after its sale. The defect rates went up. Assembling always had issues as different parts of the aircrafts now came from different factories. And the plant’s new owners filed for bankruptcy in 2023.

This was a pattern for all of Boeing’s many plants it had sold off. Because even after the sale, Boeing was still reliant on them for their many parts. Boeing’s supply chain was rigid. They could not switch suppliers very easily. In many instances, they only had one company they bought a particular part from.

Survival requires flexibility

Imagine humans surviving for so long and so well if they could only eat one type of fruit! Humans survive and thrive after outsourcing the making of food, because they have so many sources to select from. 

The giant Panda is on the brink of extinction because they rely on only bamboo for their survival. This lack of diversity is what made Boeing much like a Panda.

Outsourcing sounds good on paper. But outsourcing with a rigid supply chain means you’re simply paying more for what you made inhouse before. And for lower quality goods as well – as quality control is no longer under your supervision.

A Boeing engineer presciently predicted 20 years back. If all Boeing did was make airline stickers to put on the tail of the aircraft and outsourced everything else – their RONA would be 5000% – but they would not know how to build aircrafts anymore after a generation.

Action Summary:

• If you don’t have a wide choice to choose from, don’t outsource. Even if it seems inefficient, do things that are not your core competency.

• Relying on one of anything is one accident away from catastrophe.