Boeing Learns About High Cost of Outsourcing

link here to article

This article describes the huge cost over run and the delays in the 787 Dreamliner as a result of its decision to outsource a large share of production to US and international vendors. In essence, Boeing retained the assembly process, which is the least profitable part of the production process, while outsourcing the most profitable processes to external vendors. in addition, Boeing enabled its vendors to acquire and retain the technology and skills that they developed at Boeing's expense.

Boeing was warned about many of these problems by internal sources before making its decision to outsource much of the production. Certainly, others have learned similar lessons as well. It is said that experience is the best teacher. This may be true but in Boeing's case it was a billion dollar teaching experience. Curiously, Krugman has a post on Boeings experience that relates to economic theory which explains why many firms grow to be very large. There is a cost advantage in retaining control internally because of the higher costs associated with contracting out production to third parties.