Are Boeing’s supply chain cuts worth it?
In class we’ve discussed how supply chain design can make or break the efficiency and profit of an organization or company. Simpler doesn’t always mean better or faster, but Boeing has chosen to cut various management layers in attempt to better its supply chain design. The article that first announced these cuts was published by The Seattle Times in November 2017. The cuts were made in the hope that “any non-management employment cuts can be achieved through attrition or reducing contract labor, not layoffs.” Boeing planned to use attrition and reduction of contract workers to reduce managers and overlap within its supply chain layers. The charge was primarily lead by Chief Executive Kevin McAllister and Jenette Ramos, the senior vice president of supply chain and operations. Boeing spokesperson Jessica Kowal explained the decision by saying, “It’s figuring out how do we operate more efficiently and improve performance and affordability in Boeing’s supply chain.”
From the donut activity in class, we have all experienced first-hand how a company’s relationship with its supplier or suppliers is of the utmost importance. It was reported in October of 2017 that a supplier of Boeing, Spirit AeroSystems, Inc., “had fallen behind on deliveries of the 737 fuselages it builds locally.” The company struggled with the increased production demands, which challenged its own labor base and supply chain. Spirit has worked on all Boeing commercial programs and builds about 70 percent of every 737 aircraft delivered.
Boeing received roughly 1 billion parts each year, which presents a large problem when attempting to synchronize its own supply chain. Only then will it be able to address issues with the supply chains of its partners. Boeing also recently set up an in-house supplier (Boeing Avionics) to increase profit margins.
Today, Wichita business journal followed up on Boeing’s decision to streamline production in November. The article reports that, “Despite recent difficulties in the supply chain of its workhorse 737 narrow-body, the Boeing Co. on Tuesday reported an overall increase year over year for commercial deliveries in the first quarter.” Boeing’s monthly production rate is currently 47 with a forecasted 52 products per month, resulting in an average monthly delivery of 44. Therefore, Boeing came in just under production rate.
What were the specific supply chain difficulties? Are they only from the suppliers, such as Spirit AeroSystem, or form Boeing’s internal supply chain? Was the decision to streamline its supply chain result in more harm than success, despite the slight increase in commercial deliveries? What does the rest of the first quarter report look like? Do you agree with Boeing’s decision to streamline its supply chain?
It is very interesting to read about the supply chain cuts that Boeing had to make. Between Boeing and Airbus, the two companies have a large market share in the aviation market as a whole. According to a report from AviationDaily, Boeing has a 38% market share and Airbus has a 28% market share, the next largest competitor has an 8% market share and this trend is projected to continue, if not shift even more heavily toward Boeing and Airbus (http://aviationweek.com/site-files/aviationweek.com/files/uploads/2016/06/17/avd_06_20_2016_cht1.pdf). It is always interesting to hear about a company that makes a product that is necessary and has such a large market share struggling for some reason. One would think that Boeing would have a very large revenue stream and would fall behind on deliveries. However, as Liza has shown, this happened with Boeing. I think it was a good idea for Boeing to make some changes in their supply chain if they are having trouble being as efficient as possible. CNBC reported that Boeing’s deliveries year over year rose 9% (https://www.cnbc.com/2018/04/10/boeing-deliveries-rise-9-percent.html). If this is the case, hopefully they have made the necessary changes to their supply chain and their management in order to streamline operations and keep up with the demand they receive.
Throughout the past two weeks, much of the news has been covering the possible trade war and commerce friction between the United States and China. China has threatened to place heavy import restrictions on US aircraft exports. Specifically, “China said it would slap tariffs of 25 per cent on 106 US products, including aircraft weighing between 15,000kg and 45,000kg when empty,” which would hinder Boeing delivery of aircrafts to China significantly (Financial Times). Even just after a few conversation notes from US and Chinese officials, Boeing’s stock price has declined substantially on the rumors of the tariffs. Communications between the two super powers have begun to unwind and become more friendly, but analyst say there is still severe potential for intense tariffs. If this is the case, I think Boeing will have to further adjust their supply chain to account for the refreshed amount of production demand. The Chinese aircraft market is one of the biggest in the world and contributes tremendously to Boeing’s global market share. If this tariff is put into ratification, Boeing will have to further make similar supply chain cuts that were discussed in this blog post. I am curious and look forward to learning how the company will go about this and how it will affect their production schedules.
Sources:
https://www.ft.com/content/c0faa6ea-3818-11e8-8b98-2f31af407cc8
This is a great example of the importance of a Supply Chain. I find it interesting that Boeing did not publicly address that the reason for their change in supply chain was likely because of the decreased supply they received from their supplier. Because of this shortage, a change in supply chain makes sense as they will be operating with fewer supplies. However, I wonder why they tried to forecast such a high production for the upcoming month knowing that they would have a reduced supply. Interestingly enough, Boeing is not the only airplane manufacturer facing supply chain issues. Airbus is currently facing backloaded deliveries in 2018. The backloading is expected to stretch to the end of the year and possibly beyond that. The backloading is a result of increased engine problems in one of their jets. As we saw from the class examples, backloading is the highest inventory cost and wreaks havoc on the rest of the supply chain. However, Airbus is sticking to their scheduled forecast for this specific type of jet, putting more pressure on Airbus to keep up. Their CEO said that it is possible to get their forecasted delivery by the end of the year but that it will be very difficult. Because of the massive strain backlogging can put on a company, I’m very interested to see if Airbus can keep up with their ambitious forecast.
https://www.reuters.com/article/us-airbus-agm/airbus-sees-backloaded-deliveries-in-2018-reaffirms-target-idUSKBN1HI1XD
I think making such severe cuts may not have been in Boeings best interest at this time. Especially when its supplier is already falling behind. I also find an article in the Seattle Times which wrote, “Boeing has been shedding jobs for five straight years in the Puget Sound region, but this year the cuts seem to have gone too far. Now the jetmaker finds it’s short of people and is scrambling to entice some 500 to 800 retirees back on a temporary basis.” They had to hire back retired machinists and are paying them bonuses. It is still unsure of whether or not this sudden rehire spree will continue, but one thing is for sure- Boeing cut too deep.
https://www.seattletimes.com/business/boeing-aerospace/boeing-reversing-tide-of-cuts-rushes-to-bring-back-retirees-as-temps/
I agree with Brianna and her research; it is clear that Boeing cut too deep. I believe that the firm tried to excessively cut costs within their business, but they did not fully examine and evaluate what the changes would do to the firm. When any company thinks about changing their processes, it is key for them to think about both sides of the situation. They need to think about both the costs and benefits to the firm.
The US-Chinese trade war increased the risk associated with steel and other commodities which seemingly will nullify supplier relationships. If the war escalates, governments on both sides will end up hurting domestic companies that rely on imports for supplying production. Boeing has reached a crucial junction where it has decided to contract its supply chain. While they are reducing contract layers and management levels, they will need to integrate the new supply chain in a way that the new costs from supplying its own production are smaller than the cost from buying from its current suppliers, such as Airbus Inc. Instead of continuing with suppliers in the hope that the relationships can weather the trade war, Boeing provide more production from in-house. This strategy will pay off if production levels and demand levels fluctuate heavily in the turbulence of the trade war, but will backfire if sticking with its suppliers can keep up with Boeing’s orders.
I think this is a clear example of a company attempting to cut cost without out fully evaluating if they had the ability to do it efficiently. Boeing has struggled since attempting to streamline their own supply chain service due to the many parts and performances that their business sector demands. The biggest problem with a mistake like this is the people it effects down the road. After already making labor cuts to attempt to cut labor cost, a failing supply chain will either lead to more cuts or a change in personnel. These actions will cause other companies to become skeptical about working with Boeing and will create a work environment that employees will not want to work for. They key for companies that are attempting to create their own supply chain service without the help of any other companies, is to not rush into ending relationships with their previous suppliers, but to slowly ease away from needing their products and begin to manufacture your own.
Liza,
This was such a great connection to the topic of supply chains, the article and the situation discuss challenges of supply chain integration and improving efficiency directly. Specifically, the aspect of cutting non-management employment through reduction of contract labor and attrition was Boeing’s attempt to reduce costs as well as increase performance. With a company as established as Boeing, I can ascertain that the number of inefficiencies related to a buildup of management layers, bureaucracy, and overall corporate policies is astronomical. In the Leeham article I found titled “Boeing’s 8,000 employee reduction isn’t nearly enough, it described the company as a “bloated organization.” This article went further on to talk about inefficient production and even the classic Boeing 747 is being discontinued due to the inefficiency in production. So, in total concordance with your sources, Boeing is making great strides to eliminate the resource-sucking inefficiencies that are disintegrating its production. I think a positive aspect is the fact that the company recognizes that the 1 billion parts it receives each year is unsynchronized in its supply chain. Also, the fact that the company has an in-house supplier directly increases efficiency in internal integration of production and distribution aspects of supply chain integration. I hope to see Boeing continue to produce its products while increasing performance because it is a crucial airline company that we use and trust.
https://leehamnews.com/2016/04/04/boeings-8000-employee-reduction-isnt-enough/
Many people, including myself have written about the aircraft industry in blog posts. Surprisingly, it isn’t just Boeing who is experiencing these types of supply issues. The other main commercial aircraft producer, Airbus is also facing some serious challenges when it comes to delivering aircraft on time. I believe this is attributable to a number of things. For one, the global economy is overall doing much better than it has been in the last 10 years. More people than ever are flying due to an increase in discretionary income as well as cheaper fuel prices leading to cheaper airplane tickets. Boeing and Airbus are receiving record high orders from airlines, as they look to refresh and expand their fleet. Both of these aircraft producers have hundreds of planes on backorder and it is difficult to see why Boeing would take steps that would negatively affect the efficiency of their production. Demand will certainly shape the way the suppliers operate, or else competition may lead to other alternatives.