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.

This is a brief update to our Supply Chain Matters and Expert Community commentary earlier in the week regarding aerospace supply chains remaining stressed, and specifically Airbus’s recently announced setback on its lighter weight and more fuel efficient multi-aisle aircraft, the A350.

In an interview which was published in the November 18 printed edition of the Financial Times, (paid subscription or free metered view) Louis Gallois, the chief executive of Airbus’s holding company EADS, expressed his personal apology for the announced delay of the A350.  He noted that Airbus made the decision to delay the introduction from late 2013, to the first half of 2014, because “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” The Times reports that Airbus concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

The FT interview coincided with Mr. Gallois’s attendance at the Dubai Air Show event, along with all other major manufacturers..  The big headline of that event has been the announcement from Dubai based airline Emirates of the single largest commercial aircraft order, ever.  The airline ordered 50 of rival Boeing’s 777-300 long range aircraft at an estimated list price book value of $18 billion, with an option for an additional 10 aircraft. Deliveries are planned to begin in 2015.  A separate FT published article quotes an aerospace industry analyst as noting that Emirates selected the 777-300 because of the announced delay of the rival Airbus A350-1000, where planned first delivery has slipped from 2015 to 2017.

The European focused headline from the show was the perceived public humiliation incurred by Akbar Al Baker, the CEO of Qatar Airways, directed at Airbus, also reflecting on the delay.  Qatar is the designated launch customer of the A350.  According to a separate FT article, Qatar accused Airbus of “still learning how to make airplanes.”

Tough words indeed, coming from your launch customer.

But reports indicate that Qatar, after some last minute negotiation with Airbus senior management, later unveiled an order for 55 aircraft at list value of $6.4 billion, with a provision that Qatar would be the designated launch customer of the highly popular and new to arrive A380 neo aircraft. That obviously equates to maximum leverage of customer power and bargaining chips.  It’s like the analogy of the enterprise software account manager who makes the largest sale of the year on the last calendar day of quarter or fiscal year-end, with a healthy discount and all sorts of added perks for the customer.

To our earlier commentaries, airline customers, especially the newly emerging and more powerful global high growth carriers, are aggressively augmenting long-term lift capacity and are highly sensitive to aircraft delivery windows. They also practice high energy, savvy negotiation skills that reflect their current presence as aerospace industry disruptors.

Supply Chain Matters offers two additional follow-up observations, post Dubai Air Show.

First, we believe that Airbus should be praised and not chided for its latest actions.  Citing lessons learned from previous public delays of the A380 super jumbo jet and perhaps unstated, Boeing’s current three year delay status with the 787 Dreamliner, Airbus felt it was far more prudent to fix potential supplier quality problems now, rather than later, when the stakes are higher. A public apology coming from the CEO of any company is a bold statement of acknowledgement and commitment to accountability.

Second, airline customers have been patient regarding numerous setback announcements, perhaps leaving their gripes behind closed doors. We get the strong sense, however, that this will change during 2012 and beyond.

It seems that every very passing week brings fresh reminders of added stress in aerospace supply chains. The transfer of supply chain learning and a renewed emphasis on agility, risk avoidance  and operational excellence are now new table takes for all aerospace value-chain participants.

Bob Ferrari

The following posting can also be read and commented on the Supply Chain Expert Community web site.

Supply Chain Matters has noted in previous commentaries that Aerospace supply chains are now under stress.  Many factors have led up to this condition. A significant recent uptick in airline customer orders for new and more fuel efficient aircraft is locking-up industry delivery  capacity for many years to come.  Increased outsourcing of major components to suppliers has precipitated significant program setbacks with major OEM’s Airbus and Boeing both struggling with aircraft programs that have experienced multiple year delays for customers. Boeing’s latest Q3 earnings report provided a specific  backdrop to the highly visible 787 Dreamliner program, which just entered operational service, but remains three years overdue in production and customer delivery fulfillment of over 800 aircraft.  Customers and suppliers now seek financial consideration for these delays while Boeing makes plans for a serious supply chain ramp-up in production and final assembly of 787’s.

But alas, Boeing is not the only OEM dealing with setbacks.  Last week, EADS, the parent for Airbus, announced its second delay associated with the new A350 passenger aircraft. Initial delivery will delayed by up to six months because of supplier issues, pushing the time window into 2014. EADS also incurred a €200 million ($271 million)direct  charge as an immediate result of this delay. The A350 is made with more lightweight composite materials and is the Airbus competitive alternative to Boeing’s 787.

An article published last week in the Financial Times (paid subscription or free metered view) indicates that this latest Airbus delay was attributed to suppliers being late with planned delivery of key components. Of more concern, Airbus warned that some suppliers were struggling to renew bank loans in the midst of the current Eurozone debt crisis, and there are signs of a new credit availability crunch for European small and mid-range manufacturers. The article reports that EADS has started giving financial support to some subcontractors, and has had to acquire a German supplier, PFW Aerospace. At the height of Boeing’s issues with the 787, it was also forced to acquire some key suppliers.

In a mid-October commentary, Supply Chain Matters noted that that senior supply chain executives should be contemplating scenario plans and contingencies concerning the ongoing Eurozone crisis and its potential impact on global supply chain processes.  One of the outlined areas was the availability of credit to finance ongoing inventory and working capital needs.  A worsening of bank fragility or outright bank or country specific financial failures could cause an additional credit crisis to cascade across industry supply chains.  The latest Airbus announcement is evidence of this growing risk.  We suspect Boeing and other OEM’s are not immune since each has key suppliers located in Europe.

Within the aerospace industry there exists a paradox. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy.  Airbus alone now has an order book rate above €500 billion. Any company or industry would celebrate at having such a situation. On the other hand, supply chain process and program deficiencies, incidents of supply chain risk, and now the potential of financial crisis, are all compounding the ability to deliver the end product to customers in a timely fashion. This should be an industry humming on all engines, but success comes with a burden.

For aerospace supply chains, continuous scenario and contingency planning coupled with proactive response management may well be the S&OP agenda for many, many months to come.

Bob Ferrari

Yesterday, Boeing reported Q3-2011 revenues and earnings, but the real headline concerned a long awaited update on the company’s 787 Dreamliner and other commercial aircraft delivery schedules. Readers will recall that in late August, Boeing finally achieved its long overdue initial milestone for the 787, formal flight certification and first customer delivery.

While the Q3 financial headline was a rather respectable 31 percent increase in Q3 profits, far exceeding Street expectations, the grilling for Boeing executives during the earnings briefing concerned long-term outlook and commercial aircraft production volumes.  Boeing executives communicated production volumes that combine 787 and 747-8 deliveries, making it rather difficult for analysts to differentiate each.  In our July posting which reflected on Boeing’s Q2-2011 earnings report, we noted commentary from Flightblogger which speculated that Boeing’s new lumping of combined numbers just adds to additional speculation as to other stress points in the supply chain. At yesterday’s briefing, the number cited was 15-20 new deliveries of both 787 and 747-8 aircraft for this fiscal year.  Last quarter, that number was cited as a combined 25-30 aircraft this year, and thus a slowing has occurred for some obvious operational or design change reasons.  Another open question has been whether the devastating earthquake and tsunami that struck northern Japan had any previous supply impacts.

What was communicated is that Boeing management is observing “improvements to the quality, productivity and overall condition to the assembly within the production system.” Noted was that 787 production configuration has been finalized, and production volumes are about to transition to a rate of 2.5 airplanes, vs. a prior 2 airplanes per month. Production and delivery of 787’s is being planned to ramp to 10 aircraft per month by the end of 2013. First delivery out of Boeing’s planned second final assembly facility in Charlestown South Carolina was reported to be on-track for next year.

Boeing re-iterated that firm backlog for the 787 remains at 821 units, with an additional 200 contracted delivery options. Also noted was that initial gross margins on 787 program itself is now tracking to “low single digits”, which takes into account the cumulative impact of delays, tooling, and non-recurring costs. Boeing CFO James Bell estimated that the program would reach breakeven by 2021.  Read that statement once again- the 787 program will not reach breakeven for at least 10 years, with current numbers.

Of other interest for the Supply Chain Matters reading audience is that Boeing estimates that the addressable market for the 787 class of aircraft will be 5000 aircraft over the next 20 years.  The first 1100 aircraft represents approximately 10 years of that segment, which leads to the implication that the remaining 3900 aircraft will be produced and delivered in the latter 10 years of the program.  One could speculate that since current order volumes have plateaued, these numbers might be overly optimistic. In any case,  they represent quite a high volume milestone for Boeing and its associated supply chain partners to achieve, given past history.

One other item should be of supply chain community interest. Boeing’s overall inventory level increased by $1.8 billion to a current number of $18 billion.  The inventory rise was attributed to 787 work-in-process, supplier advances and tooling.

In our Supply Chain Matters Q3 Quarterly Newsletter scheduled for distribution later this week, we comment that aerospace supply chains remain under various forms of stress.  In the case of Boeing’s supply chain, there was celebration that after three years of delay and frustration, an important initial milestone has been reached.  Yet, when we examine the current backlog numbers for both Boeing and Airbus, and factor their combined needs to now ramp production levels to extraordinary volumes to meet airline delivery requirements, the notion of complete supply chain synchronization, agility and intolerance to disruption, adds so much more to the implications of that stress.

Bob Ferrari