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Boeing’s Latest Earnings Foretells Increased 787 Dreamliner Cost Pressures

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Boeing reported earnings for its September ending quarter this week that included some further information regarding the troubled 787 Dreamliner program. Air New Zealand 787-9

Revenues for the aerospace provider’s commercial aircraft division rose 15 percent as a result of stepped-up production deliveries.  However, operating margins dropped to 11.2 percent from 11.6 percent a year earlier.

In the earnings report, Boeing’s CFO again indicated that Boeing sells each Dreamliner for less than it costs to manufacture this aircraft, and that the program spending broke through the $25 billon milestone barrier this past quarter.  Boeing utilizes accounting measures that allow it to spread program costs and revenues for the 787 program over a longer multi-year horizon.

In its reporting, The Wall Street Journal characterized that development as suggesting that reducing costs on the program is taking longer than expected. This news calibrates with reports in June indicating that Boeing has re-negotiated certain long-term component supply agreements with major suppliers of the 787 and other aircraft.

Also noted by the WSJ in its reporting is that turning cash positive on the 787 program is central to Boeing’s efforts to boost shareholder returns through stock buybacks and higher dividends. In the earnings briefing, Wall Street financial analysts peppered questions regarding concerns that planned production increases across various aircraft programs would delay ramp-up in shareholder’s payments.

That is not a good omen for those participants in Boeing’s supply chain ecosystem who can anticipate further pressures for cost reduction and efficiency gains.

Bob Ferrari

 


Boeing to Increase the Pace of 737 Production

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Last week, commercial aerospace manufacturer Boeing announced an increase for its monthly production rate of 737 aircraft starting in 2018. The designated production rate will increase to 52 airplanes per month in order to sustain a production goal of 620 finished 737’s per year, the highest ever volume for this particular aircraft. This boost amounts to a near 24 percent increase from the current   737 MAX8pace of producing 42 of the 737 aircraft per month. Boeing is providing an ample two year notice to its supply chain and ecosystem partners in ramping the 737 supply chain to sustain this level.

With a reported 4000 unfilled orders for both the named Next-Generation 737, and even more fuel-efficient 737 MAX models, Boeing has to crank-up the pace in order to satisfy customer operational and business timing needs.  Once more, the global economic environment can change very quickly. We suppose our readers among other industries would relish a two-year window for planning.

Meanwhile, Boeing also announced its report of aircraft deliveries in Q3. Deliveries included 120 of the Next Generation 737 aircraft and 31 of the 787 Dreamliners, which reflect meeting current quarterly production goals. Year-to-date, Boeing has delivered 79 Dreamliners utilizing two final assembly sites with quite a ways to go in reducing the current backlog of that aircraft family.


First Airbus A320neo Completes Important Maiden Flight

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This week, a significant milestone occurred for the global supply chain ecosystem of the new generation Airbus A320 aircraft. The first Airbus A320neo completed its maiden flight at 2:22pm local time yesterday after its two-and-a-half test run flown by Airbus’s experimental test pilots over southern France. The maiden flight comes weeks ahead of prior program expectations. Video and a complete program overview can be viewed via the Airbus web site

Airbus A320neo

The Neo (new engine option) of the workhorse A320 includes newly designed more fuel-efficient aircraft engines with incremental innovations in aerodynamics and updated cabin features. That aside, the most significant customer feature for the Neo and its promised, more enhanced fuel burning efficiency expected to be upwards of 20 percent more efficient. The A320neo family will consist of A319 and A321 variants as well, the latter offering seating up to 240 passengers. Airbus touts the A320 as the globe’s best-selling single aisle aircraft and thus the program stakes are especially high. To date, the A320neo has garnered 3200 orders involving 60 customers and thus more innovative, stepped-up production cadence will be an important requirement for the end-to-end supply chain.

The aircraft for the maiden voyage was powered by two of the newest Pratt and Whitney PW1100G-JM engines which features that supplier’s new geared-turbofan technology. According to Pratt, the engine successfully completed its first development flight in May of last year and has completed 11,000 hours of testing across the supplier’s PurePower engine family. The stakes for Pratt are additionally high with its newest innovative geared turbofan technology. The Neo is also offered with CFM International’s LEAP-1A power plant as an airline customer option. The LEAP-1B engine was selected as the prime power plant for Boeing’s planned 737 MAX aircraft, which is the prime competitive offering in contrast to the A320neo. According to CFM, there are already orders amounting to 6770 LEAP family engines.

This maiden flight milestone kicks-off 3000 hours of rigorous flight test process involving upwards of eight aircraft with various options and engine options. As Supply Chain Matters has noted in many prior aerospace industry highlighted commentaries, many things can be discovered in the flight testing process, some with reverberations up and down the supply chain. The A320neo with Pratt engines is currently planned to enter service in the fourth quarter of 2015, with the first airline customer being Qatar Airways.

Supply Chain Matters Tip of the Hat AwardOnce again, we tip our hat to the entire Airbus A320 supply chain ecosystem and team members for reaching this significant milestone.

 


Alcoa Announces Supply Deal with Boeing

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In our streaming Supply Chain Matters commentaries related to Boeing’s supply chain efforts in commercial aircraft production, we have highlighted that the global aerospace provider has been re-negotiating its key commodity and specialty supplier agreements in an effort to reduce long-term costs.

Last week, Alcoa announced a multiyear aluminum supply with Boeing’s Commercial Airplane unit valued to be more than $1 billion. According to the announcement, the agreement makes Alcoa the sole supplier for wing skins on its metallic structure commercial aircraft, while aluminum plate products used in wing ribs or other structural aircraft components.  The two parties indicate that they will continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications. This supply agreement represents nearly a 25 percent potential boost to Alcoa’s existing aerospace industry business unit. Details of the new supply agreement were not disclosed and thus how much Boeing was able to save remains an open question.

Earlier this year, Alcoa previously announced its intention to acquire United Kingdom based Fifth Rixson, a reported leader in aerospace jet engine components. The deal was reported to be approximately $2.9 billion.

In its reporting, The Wall Street Journal noted that Alcoa has been strategically targeting aerospace amid declining aluminum supplies amid a current glut in global aluminum supply, and a reduction of 1.2 metric tons of smelting capacity since 2007.  Combined industry production cuts have enabled to boost raw aluminum prices to above $2000 per ton for the first time in 18 months.


Supply Chain Matters News Capsule-August 29; McDonalds, Boeing, Oracle E-Business Suite

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It’s the end of the calendar work week and the prelude to the Labor Day Holiday weekend in the U.S… This commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following updates:

Report that McDonalds is Reevaluating its China Supplier

Boeing and a Major Supply Chain Partner Land a Big Order

Oracle Announces Release of E-Business Suite 12.2.4

 

Report that McDonalds is Reevaluating its China Supplier

A few weeks ago, Supply Chain Matters highlighted a Wall Street Journal report that indicated that in the light of China’s food regulators finding the existence of certain expired meat products within the McDonalds supply chain in China that the restaurant chain was going to give the benefit of doubt to its long-time supply chain supplier of 59 years, OSI Group, who’s China based subsidiary, Shanghai Husi Food Company was allegedly implicated in the expired meat mis-labeling investigation.

This week, the WSJ published a follow-up report that now indicates that McDonalds is reconsidering its prior relationship with OSI Group. The report quotes a corporate spokesperson as indicating that in the past six weeks, the OSI partnership for supply of China outlets has been suspended. After due-diligence investigation by McDonalds, the chain suspended all cooperation with Shanghai Husi as of July 20th, which precipitated a near three week shortage of meat products for outlets in China and Hong Kong. The chain is instead positioning alternative suppliers Cargill and Keystone Foods to increase supply capacity within China.

Considering both WSJ reports spanning a month, its somewhat confusing to ascertain if McDonald’s has indeed been standing by a loyal supplier. We can only speculate that due diligence either uncovered troubling labeling practices or the restaurant chain feels an entirely new supplier slate is needed for China and other Asia outlets.

 

Boeing and a Major Supply Chain Partner Land a Big Order

In our ongoing Supply Chain Matters commentaries directed at commercial aerospace supply chains, we have echoed the new buying influence of airlines and leasing operators supporting emerging market regions such as China and greater Asia.

This week, Boeing and Singapore based BOC Aviation, a leading aircraft lessor in Asia, announced a near $9 billion order, at list prices, for a total of 82 new aircraft. The order includes 50 of Boeing’s 737 MAX 8s, 30 Next-Generation 737-800’s and two 777-300 Extended Range aircraft. These new aircraft are destined for expansion or replacement needs for a number of unnamed airline operators across Asia with deliveries spanning the time period from 2016 to 2021. According to a published report by Bloomberg and The Seattle Times, the estimated order is more likely to be $4.2 billion when discounting is factored. That is obviously a reflection of buyer power.

The Boeing order follows a mid-July announcement from BOC Aviation of an order from Airbus consisting of an additional 43 A320 and A321 series aircraft with deliveries extending through 2019. Airbus had additionally landed a sale of $11.8 billion of new aircraft from Japan based lessor SMBC Aviation. The Bloomberg report quotes a spokesperson as indicating that BOC Aviation projects receiving an average 27 planes a year starting in 2015, while also disposing of 20 to 30 annually.

In the adage that a rising tide raises all supply chain boats, another major beneficiary of the bulk BOC Aviation order involves the aircraft engine consortium of CFM International, the joint venture between General Electric and Safran.  CFM was the recipient for orders involving 100 LEAP-1B and 60 CFM56-7BE engines that is valued at $2 billion at list prices.  The engine orders additionally include longer-term, multi-year service and maintenance considerations.

 

Oracle Announces Release of E-Business Suite 12.2.4

Oracle recently announced the release of Oracle E-Business Suite 12.2.4. According to the announcement, this latest release provides an updated user experience, significant customer-driven enhancements across the applications suite, with added integrations to Oracle Cloud Solutions.

This particular release has many enhancements related to the support of various supply chain procurement and customer fulfillment technology enhancements. Highlights include:

Oracle Procurement: Web ADI–enabled spreadsheet creation and modification of purchase order lines, schedules, and distributions to improve buyer productivity when dealing with large orders.

Oracle iProcurement: A streamlined single-step checkout flow allowing employees to quickly complete shopping activities and initiate the requisition approval process.

Oracle Procurement Contracts: Improved buyer efficiency from auditing of contract documents by reviewing details of policy deviations and net clause additions.

Oracle Services Procurement: Enhanced capabilities provide buyers with greater flexibility to support a broad range of complex order scenarios.

Oracle Channel Revenue Management: Improved volume offer capabilities and a streamlined user interface enable users to quickly adapt to changing business conditions.

Oracle Order Management: A long overdue new HTML user interface addressing improved usability, greater flexibility, and a more modern user experience.

Oracle Yard Management: A new solution enables manufacturing, distribution, and asset-intensive organizations to manage and track the flow of trailers and their contents into, within, and out of the yards of distribution centers, production campuses, transportation terminals, and other facilities.

Oracle Manufacturing: Significant usability improvements in the Oracle Manufacturing Execution System (MES) help improve operator productivity by simplifying time entry and quality collection. New capabilities to manage the auto-de-kit (disassembly) of serialized products supports customer returns and internal reuse of component parts.

Oracle Enterprise Asset Management: Enhancements to support linear assets in industries, such as oil and gas, utilities, and public sector, help improve productivity and retire costly integrations and custom code.

Oracle Service: Enhanced spare parts planner’s dashboard provides rich user interaction to improve planner productivity.

Oracle Value Chain Planning: Numerous enhancements across multiple products include deeper industry functionality, such as minimum remaining shelf-life enhancements for the pharmaceutical and consumer goods industries, multistage production synchronization for process industries, and integration between Oracle Service Parts Planning and Oracle Enterprise Asset Management for asset-intensive industries. New promotions planning analytics in Oracle Advanced Planning Command Center improve business insight.

 

 


Supply Chain Matters News Capsule: August 15; Google, Airbus, Boeing, HP

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following updates:

Google and Barnes and Noble Partner to Take on Amazon

Airbus Completes Test Trials of the A350

Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain

Hewlett Packard Announces Smaller, Less Costly Cloud Platform

U.S. Job Openings at a Thirteen Year High

 

Google and Barnes and Noble Partner to Take on Amazon

Earlier in the week, the New York Times reported (tiered subscription) that Google and Barnes and Noble are joining forces on for fast, cheap delivery of books. According to the report, buyers in Manhattan, West Los Angeles and San Francisco Bay locales will be able to get same-day delivery of books from local Barnes and Noble retail stores via Google Shopping Express, beginning this week. The effort is billed as a competitive response to Amazon’s same-day delivery services.

Google Shopping Express already allows online shoppers to order products from 19 retailers including Costco, Walgreens, Staples and Target and secure same-day delivery. As noted in a previous Supply Chain Matters News Capsule, the Google Shopping Express strategy is to become an ally and complement a retailer’s local brick and mortar presence, relying on inventory from local retail outlets rather than the deployment of a larger network of fulfillment centers.

Airbus Completes Test Trials of the A350

Airbus completed the route-proving certification phase for operational testing of its new A350-900 model commercial; aircraft, approximately two months after completing the maiden flight of this aircraft. During this completed phase, engineers had to demonstrate to safety and regulatory agencies that the aircraft is ready for commercial service. A Vice president in charge of flight testing for Airbus declared; “The airplane is perfectly fit to go into service tomorrow.” The A350 was designed to compete against the current operational  787 Dreamliner and the 777 aircraft. Bookings for the A350 have surpassed more than 700 aircraft.

It has been noted that 7000 engineers worked on the development of the A350, with roughly half of these engineers stemming from key suppliers.  Important learnings have included the need for a singular Product Lifecycle Management (PLM) software system, creating a single electronic rendering of an aircraft that every program engineer can reference or modify when needed.

Administrative reporting to various agencies remains a milestone before this aircraft can be officially certified for commercial use.  Meanwhile, the Airbus supply chain ecosystem continues preparations and scaling to support planned production levels of 10 A350’s per month by 2018.

Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain

Supply Chain Matters has posted numerous commentaries related to Boeing’s commercial aircraft focused supply chain ecosystem, faced with a dual challenge of having upwards of 8-10 years of customer order backlogs while continually being challenged to reduce costs.

Boeing’s defense businesses have a far different problem. Cutbacks in military and government spending programs have led to declining business, and a supply chain oriented to engineer-to-order specialized aircraft and spare parts. Early this week the head of Boeing’s defense, space and security business unit called for an additional $2 billion in cost cutting, two-thirds of which is being targeted among suppliers. Boeing has already cut $4 billion in spending related to its defense businesses. The unit chief called on suppliers to note efficiencies that have been gained in Boeing’s commercial aircraft programs.

 

Hewlett Packard Announces Smaller, Less Costly Cloud Platform

Hewlett Packard announced what it is communicating as a less costly cloud based IT platform under the Helion brand name.

Helion Managed Virtual Private Cloud Lean is being targeted for use by small and medium sized businesses looking to move applications development, software testing and workplace collaboration onto a Infrastructure as a Service platform. According to HP’s announcement, the new service offering can further provide services around SAP’s HANA in-memory systems.

With the new service offering, HP’s goal is to provide the same level of large enterprise services but at a lower-priced alternative. Pricing for this announced service is noted as $168 per month for a small virtual service configuration. A pilot trial service also is available for customers who want to certify an application to run in the cloud with the full support of the HP team.

U.S. Job Openings at a Thirteen Year High

Talent management, retention and skills development has been a constant theme among supply chain management forums and indeed many Supply Chain Matters commentaries. Executives and team leaders constantly lament on how difficult it is to find people with the right level of skills. Current forces of supply and demand in the U.S. labor market are not going to help in overcoming this challenge.

The number of job openings across the U.S. reached a 13-year high in June with U.S. employers announcing 4.7 million job openings. Reports indicate that employers additionally hired 4.8 million workers in June; an indication that the U.S. labor market is showing new momentum. With this increased level of hiring activity, existing workers have showed increasing willingness to seek other opportunities, given the level of new opportunities. A reported 2.53 million U.S. workers quit their jobs in June, up from 2.49 million in May.

 


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