Last week Boeing announced a tentative agreement with the International Association of Machinists & Aerospace Workers (IAM) on a four year labor contract extension with its union labor force.  Reports indicate that the deal involves concessions from both sides. According to an article appearing on the Wall Street Journal, (paid subscription required or free metered view) secret talks began in late October to lay the groundwork for replacing a contract scheduled to expire in September 2012.

A posting on the IAM web site indicates that if ratified, the terms call for annual wage increases of 2 percent, plus cost-of-living adjustments; an incentive program intended to pay bonuses between 2 and 4 percent; a ratification bonus of $5,000 for each member and increases to the formula for calculating pensions in each year of the pact. Boeing has further agreed to source the production of its new 737 MAX aircraft, the newest planned version of the 737, scheduled for initial first customer ship in 2017, within the union facilities in Renton Washington.  The agreement further calls for the establishment of high-level monthly committees that will provide the IAM and Boeing the opportunity to review and discuss issues including market conditions, quality, safety, productivity, schedule and cost. The IAM also tentatively agreed to drop its opposition to Boeing’s use of the Charleston North Carolina facility as the second final assembly plant for the assembly of some 787 Dreamliners.

Boeing was already embroiled in an unfavorable ruling by the U.S. National Labor Relations Board (NLRB) on opening the second facility in South Carolina.  The NLRB had accused Boeing of moving production to South Carolina in retaliation for previous labor strikes and union opposition and was blocking the ramp-up of that facility. Facing the threat of a prolonged appeals process laded with political overtones, it would appear that Boeing chose a prudent path to deal with its union directly to resolve the dispute.

With a current $332 billion order book and a 787 program that is seriously overdue in customer delivery, Boeing needs to quickly bring the new Charleston facility up to speed as well insure stability in labor agreements for the next four years as other programs ramp-up volume production. Boeing’s supply chain partners also gain the benefit of a customer that is focused on meeting consistent operational execution rather than more unknowns. Boeing’s current plans call for ramping 787 production volumes from a current 2.5 787 aircraft, to a target of 10 aircraft per month by the end of 2013.

An article in today’s Wall Street Journal quotes Boeing’s head of commercial sales for China and Korea has indicating that if the company could free-up more production volume capacity, it would sell more planes in a “blink of an eye”.

The big question mark is whether IAM members will ratify this new agreement.  Reports indicate that union members were naturally taken by surprise by the announcement, and have been given only a week to understand the terms and vote on ratification. The actual union detailed summary of the contract, calling for member ratification, can be viewed at this IAM web link. IAM members have previously rejected some agreements reached by union leadership.

For everyone’s sake, we trust that this watershed agreement will be ratified and that all parties move forward with the challenges and work ahead.  The U.S. economy and Boeing’s extensive supply chain network need this company to continue to be an engine for economic growth and jobs.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, All rights reserved.

Something interesting occurred this weekend, an announcement of an acquisition by SAP.  We note the term interesting because the announcement was made on a Saturday, a relatively non-news day for enterprise software companies in the U.S. as most people are busy with leisure and pre-holiday activity.  We were not even alerted by SAP Global Communications to the announcement.

In any case, the headline reflects SAP’s intent to acquire cloud-based human capital applications provider SuccessFactors for an estimated $3.4 billion. The deal includes an all-cash transaction and was priced at over 60 percent above SuccessFactors trailing 60 day trailing stock price and roughly 9.7 times current earnings.  The San Mateo California based company touts to have a Business Execution System that helps companies manage recruitment, assess human performance and accommodate other human resource process needs.   SuccessFactors boasts over 3500 customers and 15 million subscribers, a software licensing nirvana.  It also includes a rather top-heavy management structure for a mid-sized software services firm in the area of $400 million in revenues.

The deal comes on the heels of SAP’s October announced acquisition of Crossgate, a B2B cloud platform that helps companies to exchange data with their partners. Both announcements are sure raise more debates regarding SAP’s prior statements to follow an organic growth strategy.

It would appear that SAP has caught the HP tendency to significantly overpay in acquisitions, or is acknowledging that it needs to augment its current cloud services offerings.  A New York Times DealBook posting (metered view may be required) quotes a Forester analyst observing that the premium is an indicator of SAP’s struggle with its current cloud platform strategy along with its need to garner more future revenue from the cloud model for computing.   We tend to concur.

In its announcement, SAP indicates that SuccessFactors will remain an independent company, to be renamed SuccessFactors, an SAP Company. Of more interesting note, Lars Dalgard, the current CEO will be appointed to the SAP supervisory board and take on the broader role for providing leadership for SAP’s cloud business offerings.  Readers may recall a similar type of appointment when SAP acquired Business Objects in 2008 and its CEO, John Swartz was tapped to lead SAP’s business intelligence offerings. Swartz later departed SAP over presumed differences in strategy.

Supply Chain Matters wonders aloud whether SAP will be inclined to exercise further cloud related acquisitions in the specific area of supply chain, PLM and manufacturing management applications.

Bob Ferrari