November 2009 | Commentary | Supply Chain Perspectives

The Intellectual Risk of Complexity

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The rules of business in a global world are thorny and often intractable. As supply chains grow more complex and outsourcing gains favor, long-range risks become harder to judge, or even understand. One consequence of a complex global supply chain is a subtle shift in the nature of intellectual property and how it factors into supply chain risk management.

What is intellectual property and why should we worry about it? Some see it as a way large organizations repress small organizations. Others see it as a monopoly of rights. Those in a more restrained frame of mind perceive it as a collection of existing laws, rules, and regulations that includes patents, trademarks, designs, and copyrights.

Breaching any one of these rights can lead an organization or individual to take aggressive action against another, making one believe that intellectual property was invented by lawyers. It is assumed that a company wants to protect its intellectual property as it might be, in fact, all that a company actually has.

How can outsourcing affect intellectual property? Let's look at Boeing and its suppliers as an example. Boeing's 787 Dreamliner project, which has been called the "UN of sourcing," seemed like a good idea when it started as aircraft development designation 7E7 in January 2005. As the aircraft was designed and contracts were inked, parts and sub-assemblies were sourced from here, there, and everywhere. The so far ill-fated 787 is two years behind schedule, and counting.

The Dreamliner's tails are being made in China, its ailerons are from Australia, and horizontal stabilizers come from Italy. Japan supplies the fuselages and wings, Canada the fairings, and passenger doors are manufactured in France. Sweden is creating the cargo doors, General Electric and Rolls Royce are building engines, and to keep it simple, floor beams are sourced from India. The nose sections are being made in Wichita, Kansas. Final assembly takes place in Everett, Wash.

When big and small parts are delivered from thousands of miles away and come from different cultures, mind sets, and political persuasions, fixing supply chain glitches is not easy. Nor is maintaining control over intellectual property and competitive intelligence.

When does knowing how to design and build a 787 tail become knowing how to design and build a plane? In order to manufacture the tail, Chinese suppliers have to know a few things about the plane in general and what the tail connects to in detail.

Boeing CEO Jim McNerney is hot on China as a supplier, and he is considering designing and building the next plane there. Such a decision would simplify the logistics process, but would also open up an intellectual property can of worms. Litigation may be a legitimate recourse in the United States, but it is assuredly more difficult elsewhere.

Here's the rub. Supply chains are complex. Why make what is complex more complex?

Boeing is learning this lesson the hard way with the long-awaited debut of its Nightmareliner. There are economical justifications for outsourcing complexity, just as there are competitive reasons for keeping suppliers and business intelligence close to the vest. Global companies have to factor in intellectual property risk as part of the total landed cost of orchestrating offshore supply chains. For many, that's an entirely new can of worms.

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