Boeing: Extracting Value from a Flat World
The Old Boeing
Boeing. Not my image of the progressive, nimble, adaptive company. Innovative, yes. Great products, yes. Insular and vertically integrated? Yes. Subject to booms and busts? Yes. My perceptions clearly relate to the Boeing of the 1990s, which got caught long on factories, long on inventories and long on staff, precipitating a massive melt-down that impacted both workers and stockholders alike:
Boeing, which is based in Chicago, is trying to avoid mistakes of the past. In the last aviation boom, in 1997 and 1998, Boeing gorged itself on orders, but its production lines could not keep up and ground to a halt.
Nevertheless, the company flooded the market with too many planes and ultimately had to sell them at cut-rate prices. Boeing’s write-offs came to more than $4 billion in 1997 and 1998, executives were sent packing and 20,000 workers lost their jobs. Boeing’s stock plunged, as did profits, and many wondered whether Boeing would ever regain its footing.
This was no way to run a company, and this reality was painfully reflected in the two places that really count: the market for their product and the market for their stock.
The New Boeing
Fast forward to today. The company could be a poster-child straight out of Thomas Friedman’s book The World is Flat. Basically, Boeing is focusing on what it does best - designing, engineering and assembling airplanes - and outsourcing everything else to high-value added suppliers across the globe. And the results of this corporate transformation have been staggering.
Boeing today has only about half the suppliers that it did a decade ago and has shifted more of the risk — and cost — of developing and building the airplanes to them.
Major parts of Boeing planes are built by suppliers in Japan and Italy and come to the Seattle area, where the commercial aviation division is based, only for final assembly. In the United States, its airframe manufacturing operation in Wichita, Kan., was sold to investors and now works for Boeing as a subcontractor, absorbing costs and risks Boeing once shouldered.
“The world has changed, and Boeing has changed with it,” said Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. “They’ve offloaded a lot of production. They are farming out everything to others so they don’t have to build it. ”
That future is perhaps best represented by the 787 Dreamliner. It will be the first commercial jet made in large part from composite plastics, rather than aluminum.
The wings are made by Mitsubishi, Kawasaki and Fuji Heavy Industries, all of Japan. Italian companies are building part of the fuselage, and Boeing has contracted with its former Wichita operation, now called Spirit AeroSystems, to make other parts of the fuselage.
If there is a downturn in orders, Boeing does not have to face the challenge of what to do with a permanent, unionized work force. It also means that fewer workers are needed in Everett since less of the work is done there.
Having components made in the places where they can be produced at the highest quality and at the lowest cost. Transferring a good portion of the financial risks of manufacturing from Boeing to its suppliers. Benefiting from a flexible, global supply chain that can react to changes in demand without causing massive layoffs and its repurcussions. This is good stuff. Friedman must be proud!
Adapting Culture and Mind-set for a Changed World
Boeing was once a company that couldn’t say no, pressing production to meet spikes in demand even if it meant massively ramping infrastructure and staff. This led to the inevitable busts when demand spikes abated and excess resources weighed heavily on the Company’s cost structure. So now the mind-set is, “Well, we may give up some sales today in exchange for long-term stability in costs, employment and profitability.” Sounds pretty sensible, but hard to implement in an old-line manufacturing firm like Boeing. But they’ve taken their bad-tasting medicine and done it.
Today, having learned its lesson, Boeing is adopting a polar opposite strategy as it faces a new wave of orders that, if not managed right, could swamp the company again.
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“In this hot market, it would be easy to be consumed with the desire to sell anything to people walking through the door who want to buy and push our production system to the point where you could break it,” said Scott E. Carson, the chief executive of Boeing Commercial Aviation. “It’s much harder to say, ‘I’m sorry, we’re sold out.’ ”
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“Frankly, we are much more disciplined than in 1997 and 1998,” Mr. Carson said in a recent interview. “The message is, Don’t get ahead of yourself; don’t go crazy about how we ramp up.”
He added: “We have to communicate that openly with customers and suppliers to be sure they understand why this is good for the industry. The role of the industry leader is to demonstrate discipline and restraint in the marketplace.”
Communicate openly with customers and suppliers? Display industry leadership? What is wrong with these people? What a breath of fresh air from a old-line company. While their pension obligations don’t rank up there with GM and Ford, there is a lot they are doing that Big Auto could learn from, no doubt.
There is Always Pain When Undergoing Change
Needless to say, Boeing’s onshore unionized workforce is none too pleased with this turn of events, notwithstanding the stellar performance of the company in both the marketplace and the stock market.
Not everyone is happy with this outsourcing — especially Boeing’s union work force, which numbers about 20,000.
“We have an issue with the vendors and the suppliers,” said Connie Kelliher, spokeswoman for Machinist Union District 751, the largest union at Boeing. “We are the smartest, most skilled work force in the world. If there is a problem with vendors, our workers make it right. Boeing is very public about wanting its suppliers to share the risk. But they’ve let go of core competencies. If we are good enough to bail them out, we are good enough to have the work left in our hands.”
Further, some real business risks arise when one is not in full control of the means of production:
All this outsourcing is not without business risk, as well. “The danger is that your supplier can become someone else’s supplier,” Mr. Boyd said. “There is no stopping Spirit or Vought from doing business for Airbus. When Boeing owned all the factories, it only did stuff for Boeing.”
While this point is certainly worth raising, “doing business” is very different than taking someone else’s proprietary designs. At the end of the day, who cares if a supplier is providing specific parts for different manufacturers? If Boeing has the better designs and more demand in the marketplace, should they care that Vought is making landing gear for both them and Airbus? I don’t think so. Now if there are global capacity constraints then this matters more. But I’d wager that such a shortage would be met by a rapid increase in supply by efficient offshore providers. Therefore, I think this point is valid but ultimately a red herring which represents little true business risk.
The Bottom Line
Successful utilization of offshoring, outsourcing and supply-chain management, as Boeing has done, can deliver a passel of valuable benefits for customers and shareholders alike:
- Less volatile earnings
- More predictable cash flows
- Smoother employment profile
- Lower fixed asset base
- More streamlined production process
- Quicker product development cycles
- Higher quality end-products
Concerning unionized employees who are mad that some of “their” jobs have moved offshore, would they and the community be better off if Boeing’s cost structure was appreciably higher, resulting in fewer sales, possibly triggering additional layoffs and production cuts? I’d say not. The bottom line is that Boeing is delivering a global product addressing the global demand of its global clients, so it is inconceivable to think that a solely local workforce would be best positioned to meet this need. This is the way the world is going and companies can either rise to the challenge or wilt in the face of painful yet necessary change. Boeing has showen its stripes by proactively determining its future by aggressively taking advantage of the flat world. I wish I could say the same for our friends in the auto industry. They clearly have a lot to learn.
