One of the most encouraging news concerning Boeing in 2011 came at the very end of the year.  An article appearing in the Wall Street Journal, Boeing Examines Supply Chain for Weak Links, (paid subscription required or free metered view) notes that as this aircraft manufacturer faces its biggest production ramp-up in years, it is actively practicing supplier outreach.

As we have noted in previous commentary that Boeing currently has a delivery backlog of 3500 commercial aircraft and needs to ramp-up its global supply chain to be able to sustain a 60 percent increase in production and customer delivery activity. The WSJ article notes that Boeing’s suppliers report that the company has become much more proactive in stress-testing supplier process and delivery capabilities, making recommendations where required. For its part, Boeing is investing in supplier assistance teams adding 200 engineers and supply chain specialists over the past 18 months. The Boeing executive responsible for the 737 program is quoted as indicating a “fundamentally different” approach. Rather than a tops-down approach to setting supplier requirements and milestones, the company is now regularly verifying that suppliers have the right skills, processes and capabilities.

Supply Chain Matters trusts that this article really reflects Boeing’s renewed sensitivity to its global supply chain ecosystem and not just another public relations outreach.  We would certainly appreciate hearing from Boeing supplier teams as to whether there is a more proactive outreach and fundamental change in philosophy.

The ultimate test however remains how Boeing actually ramps its internal and external supply chain capabilities in the coming months, without major supply chain glitches.  There is much at-stake, and we would certainly be looking toward a more proactive Boeing commentary in 2012.

Bob Ferrari

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.

The following commentary can also be viewed and commented upon in the Supply Chain Expert Community web site.

It is time to update our readers on Bombardier and its C-Series aircraft program.

Our last Supply Chain Matters and Supply Chain Expert Community update was in October 2010. We noted that Bombardier was taking a huge strategic gamble on the supply chain deployment and market launch of the new C-Series aircraft scheduled for 2013.  The C-Series is a 100-150 single-aisle passenger aircraft that is the cornerstone of the company’s plan to compete head-on with the likes of Boeing’s 737 and the Airbus A380 for advanced, lightweight commercial aircraft that can deliver compelling fuel efficiencies for airlines. This market segment has dominated aerospace headlines throughout the year.

In 2011, airlines were compelled to begin to open their wallets and place large amounts of replacement orders for more fuel efficient, narrow aisle aircraft, and the Airbus A380 Neo has been the prime beneficiary, followed by the 737. At the recent Paris Air Show, Airbus garnered one of the highest order volume rates in its history through customer orders of the planned A380 Neo. Thus far, Bombardier, and its China based rival COMAC, continue to compete for remaining customer orders.

In an interview published in the Wall Street Journal on November 21 (paid subscription or free metered view), Bombardier CEO Pierre Beaudoin remained upbeat, indicating that he was not too worried about uptake in new orders for the C-Series.  Thus far, Bombardier has 133 firm orders, which is supposed to place the manufacturer on-track to its target to have 200 to 300 orders between first maiden flight and first delivery in 2013. Mr. Beaudoin’s statement in the interview indicates that he would rather have his company concentrate on delivering the plane on time while maintaining its stated profitability goals than moving to discounting list price at this point. Further he states that the aircraft manufacturer has turned down prices that it did not like, and that its main market is China where anywhere between 20 to 30 percent of the global fleet could eventually be located.

Our reaction to the interview was of course, slanted toward a supply chain lens.  As more and more airlines weigh in with the current high rate of firm orders, the aerospace supply chain as a whole becomes committed to long-term capacity, and especially to the two current key players, Airbus and Boeing. Some of Bombardier’s C Series suppliers also cater to these current dominants.

Recall that the C series also features an outsourced global supply chain for many of its major components, allowing Bombardier to concentrate solely on innovation, design and final assembly needs.  Major components such as fuselage wings and tail are sourced in China, Ireland, Italy, and other countries.  All of the major components are to be shipped to Bombardier’s final assembly facility outside Montreal’s Mirabel airport for final integration. While profitability is certainly a very important goal, some aspect of volume scale is required to justify overcoming fixed supply chain material and transportation costs. There has always been a debate as to where the break-even point resides with this new outsourced major component and final assembly integration model. A review of Boeing’s 787 Dreamliner’s primarily outsourced supply chain provides ample evidence to this debate.

The second aspect for consideration is the stated goal competing for China’s aircraft business.  Aerospace is one of the key strategic growth industries identified by China’s political leaders in the current five year economic plan. In our November Supply Chain Matters commentary, China Takes Aim at Aerospace, we observed that China based, state-owned aerospace manufacturer COMAC has embarked on its own program of innovation and cost competitiveness for narrow aisle aircraft, and also features a C Series program. (Coincidental, of-course)  In order to insure strategic options are covered, major component aerospace suppliers such as General Electric and United Technologies have jumped-in with strategic development and relationship programs with COMAC and its other China based supplier partners. COMAC has already garnered orders from several of China’s state-owned airlines because of its unique role for contributing to China’s strategic plan for competiveness in aerospace, and continues its declaration that it will provide a compelling alternative offering for the global market.

Bombardier currently faces difficult headwinds with its C Series program, not all of which from its doing.  Aerospace industry events have been dramatic and far-reaching in 2011, and the industry is in both an enviable, and yet challenging situation.  Order volumes have been robust, but supply chains remain even more stressed to deliver capability and commitments for the next 5-10 years. The Bombardier C Series aircraft needs to find its place in this challenging environment, especially while customer buying motivations currently remain biased toward staying competitive in future aircraft operating efficiencies.

A highly uncertain global financial climate and industry that has supplier capacity increasingly being committed and internal dynamics within China’s airline operators may alter the widow of opportunity for Bombardier.

We wish Bombardier well and trust we can look forward to the inaugural flight of the C-Series.

Bob Ferrari