This article presents the differences between the manufacturing strategies and global value chains of two aircraft manufacturers whose origins are quite different, Embraer and Boeing. While the first commands a value chain called Relational, the second leads a chain called Hierarchical, moslty due to a failed attempt to use the Relational type of value chain during the production of the 787 Dreamliner.
Global Value Chains
The globalization of the world economy, the increase of industrial capacity in emerging countries and the vertical disintegration of multinational companies are redefining the core competencies of corporations, which have to: (i) focus on higher value-added activities such as R & D, innovation and marketing management, and (ii) reduce its direct involvement in non-essential and low value-added functions such as standardized activities (link here). These two movements have generated various configurations of networks of manufacturing, the so-called Global Value Chains (GVC). Additionally, governance (or command) of these networks becomes an important discussion given that is necessary the coordination of the activities of each participant of the supply chain.
Gereffi, Humphrey and Sturgeon (2005) developed theoretical framework for the understanding of governance patterns of global value chains. The authors identified three important variables for determining the governance leadership of GVCs:
- Complexity of information and transfer of knowledge needed to support a transaction, particularly with respect to process and product specifications;
- Extension to which these transactions can be coded;
- Skills of current and potential suppliers in relation to the requirements of the transactions.
According to the authors there are five governance structures of global value chains, based on the three variables above, namely: market, modular, relational, hierarchical and captive. I present the characteristics of each of these chains in a recent article in this blog (link here).
Internationalization of Manufacturing
The process of integration of the world economies impacted not only the spatial distribution of factories of multinational companies, but also the scope of the activities performed by the production centers. First, the reduction of tariff barriers reduced the importance of plants as a way to overcome trade barriers. Second, the increasing sophistication of manufacturing and product development make multinationals put less emphasis on labor costs in choosing sites for international production. Third, the pressure to transfer ideas between departments of new product development and manufacturing forces companies to develop close relations between these two areas. Many corporations concentrate production and product development in the same geographical and organizational unit. This trend marks a distinction of traditional knowledge that the function of a plant is to produce what it was designed by the company’s headquarters.
Kasra Ferdows, in his article “Making the most of foreign factories” published in the Harvard Business Review in March, 1997, identified six profiles of factories presented by multinational companies: offshore, source, server, contributor, outpost and lead. The article “Internationalization of engineering and production: The factories are all equal” (link here) shows in details the characteristics of each type of plants; Table 1 presents the main activities of each unit and its main organizational competences.
|Type of plant||Activities||Production||Inovation||Marketing & Sales|
|Offshore||Production of low-cost items||YES||NO||NO|
|Source||Production of low-cost items but the Source plant executes more activities such as: purchase of raw materials and development of suppliers. Source plants use to be the best plant globally and in general is located in regions with low production cost, good infrastructure and access to well-trained workforce.||YES||NO||NO|
|Server||Serves specific national or regional markets; avoids trade barriers, reduces taxes, logistics costs and/or risks associated to exchange rates.||YES, but limited authority to change products and processes||NO||NO|
|Contributor||Serves specific national or regional markets; responsibilities include product innovation, process engineering and development of suppliers. Competes with other plants in the development of new technologies.||YES||YES||NO|
|Outpost||Colllect information about suppliers, markets, competitors and technologies||YES||NO||YES|
|Lead||Develops new processes, products and technologies for the entire company. Liason between company and end-users, laboratories and other knowledge centers.||YES, but is not its main capability||YES||YES|
Table 1: Typology of profiles of international plants
Established in 1969 as a state-controlled company, Embraer is the third largest manufacturer of commercial aircrafts in the world, behind only the US-based Boeing and European-based Airbus. The company operates in the following segments: business jets up to 130 passengers (which is the market leader), executive jets (in which ranked fifth), and defense and security, which is the largest and the main provider of aerospace solutions in Brazil.
The company underwent a major strategic overhaul, moving from a technology-driven organization to a market-oriented one. This change led to the development of risk-sharing agreements with four key suppliers, which culminated in the development of a new configuration of Embraer´s supply network and led to the development of the ERJ-145 regional jet, thus beginning a close race with the Bombardier, a Canadian competitor. This coordination model of the supply chain was consolidated and expanded to the development of new commercial aircraft (E-JETS models and most recently E-JETS E2) as well as the new aircraft defense and security KC-390. Therefore, the company can be classified as a Global First Mover (link here), as proposed by Ramamurti and Singh (2009). The company has expanded worldwide, as already mentioned, in order to access new markets and better understand customer needs.
Founded in 1916 in the United States, Boeing became the world leader in the production of military and commercial aircraft. Over time the company made a series of strategic mergers and acquisitions of various aerospace segments – North American Aviation, McDonnell Douglas, Rockwell International (space and defense sector), Hughes Space & Communications and Jeppesen – which enabled Boeing to become also the most diversified company in its sector. The company has customers in 150 countries, with total revenue of $ 86.6 billion, 70% of which coming from non-US clients. Boeing has currently contracts with more than 26,000 suppliers worldwide, with its 168,000 employees located in 50 US states and 65 countries. Boeing airplanes represent three quarters of the world fleet of commercial aircraft currently in service (BOEING, 2014).
Boeing´s main products are within the aircraft family 7 (737, 747, 757, 767, 777 and 787). In the development of the latest launched aircraft, the 787 Dreamliner, the company experienced a dramatic change in its management model. Because it is a new aircraft project, the company sought to reduce operating costs by outsourcing much of the aircraft production while introduced a number of innovations in the wings and the composition of the fuselage in order to reduce fuel consumption (responsible for most of the operating costs of the airlines). This business model, because of its high-dependence on the competence of suppliers, turned out to be unsuccessful, which resulted in delays, cancellation of orders and, more recently, critical operational failures.
Discussion and conclusion
Due to the difference of their backgrounds (Embraer was established during an import-substitution policy and was privatized while Boeing grew by acquisition and focus on commercial and defense aviation industry) and their sizes (Embraer earned $ 6.2 billion in 2013 while Boeing earned $ 86.6 billion over the same period), the two companies have factories with different profiles and very different configurations of their global value chains. Table 2 shows the profiles of its plants around the world. Notice that only the manufacturing units were considered in this analysis.
|São José dos Campos||Brazil||Responsible for design and manufacturing. Provides service support for the commercial aviation, executive and defense segments||Lead|
|Gavião Peixoto||Brazil||Production of wings for the Embraer 190 and Embraer 195, final manufacturing steps of Phenom, Legacy, military aircraft Super Tucano and military freighter KC-390. Responsible for the production and technological modernization of military aircraft such as the EMB-314, AMX and F-5; development and production of tactical freighter KC-390.||Source|
|Botucatu||Brazil||Manufactures and provides service support for the agricultural aircraft Ipanema. Produces components for Embraer 170, Embraer 190, Phenom 100 ePhenom 300, and parts of the Super Tucano, KC-390, Legacy 450, Legacy 500 and Legacy 650||Offshore|
|Taubaté||Brazil||Distribution Center Logistics and few industrial activities such as cutting of raw materials.||Offshore|
|Embraer-AVIC Harbin||China||Joint venture Embraer SA and Chinese AVIC for productionof Legacy 600/650 executive jets for the Chinese markets||Server|
|Melbourne||United States||Final assembly of Phenom 100 and Phenom executive 300; host of Engineering and Technology Center.||Outpost|
|Alverca – OGMA||Portugal||Maintenance, repair and overhaul of aircraft, engines and avionics. Manufacturing, assembly and modernization of aircrafts||Server|
|Évora||Portugal||Establisment of centers of excellence in Sept 2012, dedicated to the manufacturing of machined metal structures and assembly in composite materials.||Outpost|
Table 2: Tipology of Embraer manufacturing sites worldwide
Regarding Embraer´s global value chain, the company uses the so-called Relational value chain because the organization has developed risk-sharing alliances through partnerships with strategic suppliers inorder to manage the risk associated with complex projects.
Following a worldwide trend of manufacturing, Boeing started to outsource of productive activities, both locally and internationally, in order to reduce costs and accelerate the development simultaneous of the various technologies necessary for the new aircrafts. Thus, the company chose to follow the relational type compared for the 787 Dreamliner project. As highlighted Hart-Smith (Hart-Smith, 2001), it is the project leader that need to support the development of technology and to manage the supply chain. However, the decision to incorporate many innovative technologies in the 787 project raised technological standards required of the value chain of suppliers of American company. However, the consortium of Boeing partners was unable to develop the subsystems without coordination and technical support of the leader company. In other words, the company assumed coordination and technological risks that proved harmful to the development of the aircraft. With delays and inadequate technology, the company had to provide emergency support the supply chain members by sending engineers and technicians and imposing greater control and coordination of the project. With this new global chain configuration value, Boeing abandoned the value chain of the Relational type and adopted the value chain called Hierarchy.
Regarding the responsibilities and capabilities of its plants, Boeing uses an approach that differs from the one used by Embraer. The north-american company concentrates all of its manufacturing activities in three sites, two of them with Lead profile and one with Source profiles, according to Table 3.
|Everett – Washington||US||manufactures all series of 747 to date, 767, 777, 7E7, 787||Lead (for product lines mentioned)|
|Renton – Washington||US||Produced series 707, 727, 737 and 757. Currently manufactures 737 Next-Generation||Lead (for product lines mentioned)|
|South Carolina||US||manufactures, assembles and installs systems for rear fuselage of the 787 Dreamliner and integrates fuselage sections. It also makes the final assembly and delivery of this type of aircraft||Source (for product lines mentioned)|
Table 3: Typology of Boeing´s plants
Therefore, we can say that the two companies differ substantially in two aspects related to their value chains, namely:
a) Regarding the profile of its plants, Embraer allocates more roles to plants than Boeing does. While the Brazilian company has facilities to reach specific markets (Harbin Embraer in the case of the Chinese market and OGMA in the case of the European market), Boeing assigns fewer roles to their plants.
b) Regarding the profile of their global value chains, both companies dominate their own supply communities. On the one hand, the Brazilian company uses Joint Ventures and complex risk-sharing partnerships partnerships. On the other hand, the US company seeks to control more intensely its key suppliers after the problems that occurred with the 787 Dreamliner project.
As usual, here comes a question for the most curious minds:
What are the profiles of the factories and the value chains of Airbus and Bombardier?
BOEING. Boeing Overview 2014. Available at: <http://www.boeing.com/assets /pdf/companyoffices/aboutus/overview/boeing_overview.pdf>. Access on: 15 December 2014.
EMBRAER. Annual Report 2013. Available at: <http://www.embraer.com.br/ Documents / RA13_Pt_Completo.pdf>. Access on: 15 November 2014.
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Ferreira, V. L .; M. S .; Salerno Lourenção, PTM Strategies in the relationship with suppliers: the case Embraer, Gestão da Produção, V. 18, no. 2, p. 221-236, 2011.
FLEURY, A .; FLEURY, MTL Brazilian multinationals: skills for internationalization. Rio de Janeiro: FGV 2012.
FLEURY, A .; SHI, Y .; FERREIRA JUNIOR, S .; LAMB, JHD International manufacturing networks: how changes at level strategic impact Their design and management. Cambridge International Manufacturing Symposium, 2014.
Gereffi, G .; HUMPHFREY, J .; STURGEON, T. The governance of global value chains. Review of International Political Economy, vol. 12, n.1, p. 78-104, 2005.
Hart-Smith, LJ Out-sourced profits – The cornerstone of success subcontracting, Boeing, Third Annual Technical Excellence (TATE) Symposium 2001.