I’ve been following the development of the Boeing 787 Dreamliner for five or six years now, wondering how a really great company could get so many things wrong. The battery debacle that has grounded all 50 planes delivered to airlines thus far is the latest and most highly publicized setback, but the truth is the 787 launch has been one big headache, not just for Boeing but for its airline customers such as United, JAL and ANA.

Watching the Dreamliner turn into a nightmare, I’ve often wondered how a company with a history of doing things right has bungled this launch so badly. A New Yorker report sheds a lot of light on why things went wrong. As it turns out, Boeing has been tripped up in the same way so many American companies have run into serious problems in the last couple of decades—it let the bean counters overrule the engineers. You can think of it as “design by accountancy.”

Airplane development is a highly scale-dependent business that has always been dominated by a handful of companies. At the start of the second half of the 20th century, there were four American aircraft manufacturers: Lockheed Corp., McDonnell Aircraft, Douglas Aircraft and Boeing. McDonnell and Douglas merged in 1967, and Lockheed dropped out of the business in 1984, when its L1011 TriStar, a competitor to the 747 and McDonnell Douglas DC-10, failed to produce enough sales. Boeing bought McDonnell Douglas in 1997. And that’s where the story of Boeing’s decline began.

As James Surowiecki explains in The New Yorker, Boeing acquired McDonnell Douglas but McDonnell Douglas’s management culture actually took over Boeing. Harry Stonecipher, McDonnell Douglas’s chairman at the time of the takeover, even became Boeing’s chairman when a bribery scandal forced out the existing chairman soon after the merger.

Boeing set the pace in commercial aircraft development. On at least two occasions, Boeing bet the company to develop groundbreaking planes in which it strongly believed. The first of those gambles, the 707, brought commercial air travel into the jet age. The second, the jumbo 747, introduced mass long-haul travel that gave us intercontinental tourism.

McDonnell Douglas, on the other hand, was highly risk averse and focused on cost-cutting. Its typical strategy was to wait until Boeing had proven an aircraft concept. It would then try to slip in a competitive plane.

The 787 was conceived in a bit of a panic in 2003. Long the world’s largest commercial aircraft company, Boeing delivered only 281 new jets that year. Airbus delivered 305. And, Airbus announced that development had begun on a jumbo jumbo plane, the A380, which could carry almost 800 passengers. Boeing experienced an existential crisis.

Boeing didn’t accept that the world needed planes as big as the A380. It was convinced that airlines really wanted more efficient aircraft offering better mileage and greater passenger comfort. So, the company made two major design changes. First, the plane would be made from carbon fiber composites instead of aluminum. Second, its braking, pressurization, and air-conditioning systems would be run not by hydraulics, but by electricity from lithium-ion batteries. Both choices represented major risks—a third bet-the-company gamble like development of the 707 and 747.

Carbon fiber is lighter than aluminum, allowing for better mileage. Carbon fiber is also stronger than aluminum, permitting bigger windows. And carbon fiber doesn’t corrode like aluminum, so cabin humidity could be roughly doubled to reduce the dryness passengers experience during flight. However, there was no experience with carbon fiber bodies.

Lithium-ion battery power also involved significant risks. Traditional jets use some engine air power to run some functions. The 787 would be entirely electrical, all the power coming from the advanced technology batteries.

Airlines loved the concept. Eight-hundred 787’s were ordered long before design was completed. But Boeing’s new management team was worried; betting the company was not part of the McDonnell Douglas DNA. The new management didn’t have the stomach for a big gamble.

Alan Mulally, then head of Boeing’s commercial aircraft division (and now president and CEO of Ford), pushed back hard, and the board finally agreed to put up half the development cost, $10 billion. The other half would be laid off on an international collection of more than 50 suppliers. As Surowiecki writes, “Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty ‘strategic partners.’ Boeing itself ended up building less than forty per cent of the plane.”

Boeing, which had traditionally fabricated and assembled most parts aside from engines and some electronics, became married to a supply chain. And, because the supply chain members were investors too, Boeing didn’t have the clout to which it was accustomed.

The experiment has been a failure. Fasteners were not installed correctly, and parts didn’t always mate. In one case, a 0.3-inch gap resulted when the nose-and-cockpit assembly was attached to the cabin. Deliveries were late. Technology proved more challenging than some of the suppliers could handle. Boeing engineers feared the suppliers were stealing Boeing’s intellectual crown jewels. The first plane was delivered three-and-a-half years late.

And then came the battery fire and smoke incidents that resulted in the grounding of the entire fleet and Boeing’s inability to deliver more. (Interestingly, the last time the FAA grounded a plane was in 1979 when a DC-10 cargo door fell off and the plane crashed. In other words, the last FAA grounding involved McDonnell Douglas, the company whose management set the ground rules for development of the 787.)

Late last year, the Seattle Times reported that Boeing is encouraging suppliers to move to Mexico:

“Boeing is actively encouraging its suppliers to outsource work to Mexico.

“Patrick McKenna, director of supply chain strategy and supplier management at Boeing Commercial Airplanes, has urged suppliers to attend a Nov. 15 workshop in Chicago to learn how to do business in Mexico.

“‘Several of our suppliers have successfully set up factories in Mexico because of the numerous advantages that Mexico offers to aerospace suppliers,’ McKenna wrote in a letter dated Oct. 17. ‘Boeing will be sending several people to this event, and we wanted to inform our supply base of this opportunity.’”

The part about this story that astounds me is that Boeing seems not to have learned that outsourcing is risky. And it becomes riskier when suppliers are not local. Mexico isn’t a world away, but it is a country into which many U.S. corporations will no longer send their own employees because of security risks. It also ticks me off that Boeing is in business in no small measure because of the U.S. taxpayer. Without Pentagon aircraft purchases, Boeing likely would not have survived the occasions on which it bet the company. In return, the company wants to export U.S. jobs.

Boeing’s focus on cost-cutting is far from unique. Much of my business involves saving electronics companies from the disastrous consequences of outsourcing production to Asian contractors. Manufacturing executives would do well to remember that the quoted piece price is only a portion of a product’s ultimate cost. Troubleshooting supplier problems on the other side of the world leads to:

• very expensive expeditions by American engineers to the Asian facilities.
• the inability to deliver orders on time.
• costly air shipping rather than sea transport.
• not infrequently, the development of the supplier into a competitor.

Boeing made a common mistake that has very high costs, given the nature of the company’s products. I can’t help wondering whether the delivery delays and groundings have voided the lower costs that Boeing hoped to get by outsourcing. And I am astonished that Boeing now thinks that moving its suppliers from the United States to Mexico is without serious risks.

What do you think? Does Boeing deserve its current pain? Do its purchasing executives need their heads examined? What would you have done differently?

Editor’s note: Before “Shipulski on Design,” “Leading Lean,” and “Uncommon Sense,” there was ASSEMBLY magazine’s longest running and most controversial back-of-the-book column, “Unconventional Wisdom” by Jim Smith. A nationally known expert on electronics assembly, Smith never hesitates to question the sacred cows of manufacturing and economics. You can read more from him at his “Science of Soldering” blog.