787 Dreamliner teaches Boeing costly lesson on outsourcing (plus Krugman's commentary)

[ProSense]

787 Dreamliner teaches Boeing costly lesson on outsourcing

The airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the company's farming out work to suppliers around the nation and in foreign countries.

By Michael Hiltzik

The biggest mistake people make when talking about the outsourcing of U.S. jobs by U.S. companies is to treat it as a moral issue.

Sure, it's immoral to abandon your loyal American workers in search of cheap labor overseas. But the real problem with outsourcing, if you don't think it through, is that it can wreck your business and cost you a bundle.

Case in point: Boeing Co. and its 787 Dreamliner.

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Paul Krugman

Thank You, Boeing

For providing such a clear illustration of the forces driving the theory of the firm.

Oliver Williamson shared the 2009 Nobel mainly because of his work on a question that may seem obvious, but is much less so once you think about it: why are there so many big companies? Why not just rely on markets to coordinate activity among individuals or small firms? Why, in effect, do we have a lot of fairly large command-and-control economies embedded in our market system?

Williamson answered this in terms of the difficulties of writing complete contracts; when the tasks that need to be done are complex, so that you can’t fully specify what people should do in advance, there can be a lot of slippage and strategic behavior if you rely on market incentives; in such cases it can be better to do these things in-house, so that you can simply tell people to do something a particular way or to change their behavior.

In Boeing’s case, they outsourced far too much, only to find that they were getting parts that didn’t do what they were supposed to — and also to find that the subcontractors were seizing a lot of the rents. They discovered, in effect, that there are times when it’s better to rely on central planning than to leave things up to the market.

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[MannyGoldstein]

1. Great post, thank you! nt

[jody]

2. If outsourcing is bad for big business it's worse for the biggest business of them all, government

services including tasks formerly performed by the military.

[Tatiana]

3. K&R. Perfect illustration of how outsourcing destroys American jobs and business. n/t

[ProSense]

4. Yes, it is.

This should become a case study.

[Kdillard]

5. Wow. I hope they learned a lesson but I doubt it.

[ProSense]

6. This is the

"efficient" private sector some people like to boast about. Between outsourcing and obscene executive compensation, it's no wonder workers are getting screwed.

[Populist_Prole]

8. I agree

Doesn't restore my faith in a company's product when they let ideology cloud their judgement. Sounds like they are steadfastly determined to become a virtual A/C maker. I've read where Airbus was taking heat from Wall St ( well, the financial sector, collectively ) for not doing the same. They have huge China sales but the pinstriped pinheads were getting grumpy they weren't building it there too.

Say what some may, but at least Europe looks out for it's citizens.

[Joe Bacon]

7. Paul the K hits another one out of the park!

Yet none of the corporate controlled conservative presstitutes will pick up what Paul says.