2The 787 Dreamliner is expected to revitalise Boeing Visionary DesignUnparalleled Passenger ExperienceMedia HypeEnvironmentally Progressive*Exceptional Value for Airlines
3The delivery of the 787 has been plagued with issues Third delayFirst order cancellationFirst delaysFinal delay to dateFirst 787 ordersFurther delays due to supplier issuesFirst successful test flightBoeing drops its "Sonic Cruiser" concept, responding to airlines' calls for better fuel efficiency rather than extra speed.June Dubs its new, carbon-composite airplane the "Dreamliner"Dec Approves an initial version of the plane with the temporary name 7E7, the E standing for "efficiency"April officially launches the plane as Japan's All Nippon Airways (9202.T) (ANA) orders 50Dec Ends 2004 with 56 orders for the new plane, fewer than it had expectedJan Gives plane official designation 787Dec Ends year with 232 orders for 787s, for a running total of 288July Popularity of 787 design forces Airbus to go back to drawing board on its competing A350, relaunching it as A350 XWB (extra wide body)Dec Boeing ends year with 160 orders for 787s, for running total of 448Jan Unconfirmed talk of some 787 suppliers falling behind schedule sends Boeing shares lower. Boeing CEO Jim McNerney says plane on target for first test flight around end of August 2007 and first delivery May 2008May Starts to put together first 787 in Everett, Washington.June Reports surface at Paris Air Show that 787 is up to four months late. Boeing says first test flight may slip to September 2007, while still on schedule for first delivery in May 2008July 8, Gleaming shell of first 787 rolled out in front of 15,000 ecstatic employees and customers at EverettJuly 25, Boeing shares hit all-time high of $107.80, boosted by strong 787 orders. Company admits plane running slightly behind in certain areas but holds to scheduleSept Boeing puts back first test flight by about three months because of a shortage of bolts and problems with flight control software. Shifts flight target to mid-November to mid-December 2007; keeps May 2008 delivery targetOct Announces longer delay, due to continued production problems, pushing first test flight to end-March 2008 and putting back first delivery by about six months to late November or December 2008Oct program head Mike Bair replaced by Pat Shanahan from Boeing's defense unitDec Boeing says 787 sticking to revised schedule; ends year with 369 orders for the plane in 2007, for running total of 817Jan After two weeks of rumors, Boeing announces a further three-month delay due to problems with unnamed suppliers and slow assembly progress at Everett plant. Pushes back test flight to end-June 2008 and first delivery to early 2009, making plane about nine months behind original scheduleMarch Admits it had to redesign center wing box to make it strongerApril Announces third major delay due to continuing problems with unfinished work from suppliers. Sets first test flight for fourth quarter 2008 and first delivery for third quarter 2009, about 15 months behind original scheduleJune Boeing completes "power-on" testing on first Dreamliner, bringing the plane's electrical systems to life. It is the first public milestone the company has hit on the program.August - First cancellation of a 787 order, by Azerbaijan AirlinesSept 6, Boeing's assembly workers go on strike over contract terms, shutting down Boeing's Seattle-area plants. They return to work in early November after 58 days out. Nov 4, Boeing says first flight delayed by strike, will not happen until 2009Dec 11, Boeing announces fourth major delay, due to strike and continuing fastener problems. Says first flight now set for second quarter of 2009 and first delivery in first quarter of 2010, making plane about two years lateDec. 31, Boeing ends year with 93 orders for 787s, making a running total of 910Jan Russia's S7 becomes first major airline to cancel orders for 787, walking away from deal to buy 15 planes worth $2.4 billion. More cancellations followJune - Boeing reports 59 total cancellations for 787s, with net orders for 866 planes.June 23, Announces fifth delay due to side panel issueAug 27, Sets new timetable, with first flight by end of 2009 and first delivery in fourth quarter of 2010Aug 31, Boeing Commercial Airplanes chief Scott Carson announces retirement at end of the year, is replaced immediately by Jim Albaugh, head of Boeing's defense businessNov 12, Boeing completes installing reinforcements within the side-of-body section on the first 787 Dreamliner.Dec. 10, Boeing opens flight-test window starting Dec. 15. (Reporting by Bill Rigby and Kyle Peterson, editing by Gerald E. McCormick, Gary Hill)
4We have identified two sets of recommendations Short-term supply chain solutionsKey RecommendationsEnsuring long-term competitive advantageWe have identified 2 sets of recommendations have
5These recommendations will reduce supply chain problems when the 787 is in production in the short term12Injecting ExpertiseExtend GoldCareTwo recommendations will address short-term issues and risks in the 787 supply chainThe first will focus on the outsourced production part of the supply chain,The other will address issues in the Boeing Sales function
6Pioneering an outsourcing strategy to produce the 787 Boeing – in-house functionsResearch & DevelopmentParts ProductionPart AssemblyFinal AssemblySales & Marketing30%70%Partner – outsourced functionsResearch & DevelopmentParts ProductionPart AssemblyFinal AssemblySales & MarketingBoeing has employed a bold/unique outsourcing strategy to produce the 787Outsourced 70% of upstream functions, including R&D which was traditionally done in-houseWhat are the issues and risks in this supply chain?
7Boeing faces challenges in its own supply chain Boeing supply chainResearch & DevelopmentParts ProductionAssemblyFinal AssemblySales & MarketingIssuesProduct does not meet promised specificationsRisksCustomers may cancel further ordersIssuesDiscontent labor force due to low job securityRisks Further strikes- Boeing has experienced a couple of debilitating strikes in the last few years, which resulted in substantial delays for the 787.So the threat of strike is certainly a risk, but we feel that the latest union agreement has sufficiently mitigated this so we won’t be addressing it directly.More importantly – given the troubles experienced elsewhere in the supply chain, the Boeing sales function has experienced difficulties as the product did not meet promised specifications, and are therefore at risk of losing further orders.
8The outsourced supply chain also faces numerous challenges Partner supply chainResearch & DevelopmentParts ProductionPart AssemblyIssuesLimited R&D and production expertiseInsufficient regulatory knowledgeRisksManufactured parts do not meet regulatory or Boeing specificationsIncomplete or unsafe parts manufacturedThe key issue in the outsourced component of the value chain is the lack of technical expertise of certain partnersThis could result in parts that do not meet specifications
10This recommendation identifies the underperforming suppliers who are most likely to threaten the 787 production scheduleUse Boeing knowledge and experience pre-emptively as a tool to prevent any further delays.Boeing should utilize its production expertise to provide technical support to at-risk suppliers and partners to prevent further delays of production processIdentify and target strategic partners most likely to dishonour their obligations using fixed criteriaOur recommendation is to actively monitor and identify partners who are most likely to threaten the 787 production schedule, and deploy our technical expertise to ensure that delays are avoided
11Parts Production and assembly These recommendations alleviate the problems plaguing the supply chain in a timely mannerParts Production and assemblyKey issues and risksInadequate expertiseLimited regulatory experienceRisk of parts not meeting specificationsRisk of Low quality productsSharing of expertise ensures suppliers are not at a disadvantage during productionReady access to Boeing experts will ensure issues are prevented or quickly resolvedAddresses the key issues and risks in the outsourced production process –Bolsters the technical and regulatory expertise of those partners that require itEnsures any issues that come up are quickly resolvedAllows us to oversee the production process, ensuring the quality of the parts and that they meet specificationsPresence of Boeing personnel will prevent low quality or non-compliant goods from being shipped
12This recommendation makes good financial sense $Cost savings arising from preventing a one-month delay$165 millionUpfront investment required$50 millionBreakeven point: 1 monthOngoing yearly costs$18 million p/a
13Extend GoldCareFaced with 2 year delays in production and 10% cancellation in orders, Boeing is faced with the challenge of convincing customers that it can provide a quality product without further delay through its Sales & Marketing channel. To address this issue Boeing should extend its GoldCare service to its customers for free for a one year period.
14This recommendation extends the GoldCare program to allow airlines to outsource plane maintenance to BoeingBoeing leads and integrates a global team of partnersPerforms all maintenance and parts support, as well as track airplane conditions and configurationsBoeing absorbs the risk and complexity of airplane maintenanceAirlines pay an agreedupon per-flight-hour priceLets first discuss what the GoldCare program is – The program offers airline companies with the opportunity to outsource plane maintenance to Boeing.We leads an internal service team integrated with out global partnerships to perform all maintenance and parts support as well as track plane conditions.We essentially, absorbs the risk and complexity of airplane maintenance for an agreed upon per-flight hour price.
15The new incentive provides airlines the opportunity to reduce non-core overhead costs Focus on core competenciesSimplifies aircraft ownershipReliable maintenance and monitoringThe benefits to our customers – the airlines is significant.Airlines are able to focus on core competencies, simplify aircraft ownership and are ensured reliable maintenance and monitoring of its planes.
16Emphasize quality to customers This initiative will convince customers that Boeing will deliver a quality product without further delaysConfidence in planesAligns Boeings long term interestsBreakdown and maintenancecosts transferred to BoeingInstills belief that Boeingguarantees performanceProvides customers withsecurity that Boeing iswilling to sustaininvolvement in planeperformance even after sale.But how does offering GoldCare to our customers for free for a one year period convince them of the quality in the 787 aircraft?Well firstly it instills confidence in the planes through the belief that Boeing guarantees performance as it is bearing the cost of breakdown if that were to occur.Secondly, it aligns our long term interests with aircraft long after the sale of the plane has occurred. This provides security to customers that Boeing is a sustained partner rather than simply a salesman.Several key customers have delayed/cancelled purchasing 787s because they do not want to be the first to fly them commercially.Alleviating the customers concern withEmphasize quality to customers
17This recommendation makes good financial sense Cost of providing discount is 141.2m per 30 planesBreakeven points 6/3 cancellations for 100/50% discounts**MARK WHAT ARE THE AXIS? & FACTS, GRAPH DOES NOT TELL US ENOUGH!
18We have identified two sets of recommendations Short-term supply chain solutionsKey RecommendationsEnsuring long-term competitive advantage
19From the 787 experience, Boeing has developed core competencies which can be leveraged to gain competitive cost advantagesCORE COMPETENCIES:Global Supply Chain1Economies of scaleReduced risk of R&D investmentCollaborative innovationLean enterpriseTechnical, design and assembly expertise2Large Scale System Integration & High end Design are our supply side competitive advantages => 787 Experience the key threats to our capabilities are delays and Knowledge loss => we need to work closely with our suppliers/select them carefully to ensure we deliver innovation rather than dream it or lose it to competitors => but be careful of creating competition from this (don’t out source certain things, think about IP) => thus negotiate contracts that mitigate these two risksWhich suppliers should we pick?Composite materials innovationDesigning fuel efficient aircraftsRapid 3 day ‘snap’ assembly process19
20The 787 process caused much delay and sparked concern regarding the choice of supply partners Two key issues emerge for consideration: Delay and Tacit Knowledge Transfer
21Problems were caused by insufficient criteria for partner selection LESSONS LEARNT:Reasons for the delayLack of communication and monitoringOverestimation of supplier’s capacitySuppliers were in need of managerial and regulatory expertiseIncentives were insufficient to ensure timely deliveryReasons for leak of IP to potential competitorsSuppliers have long term objectives to enter the production marketIP rights traded to gain shared R&D investments to decrease overall costs21
22Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner SelectionSelective OutsourcingTrend of the industry to outsourceKnowledge sharing inevitable but we don’t want to facilitate potential competitors too much22
23Boeing needs to reassess its partner selection criteria and work closely with partners to prevent future delaysChoose partners with:A high level of managerial expertiseRegulatory insightAdequately resourced to fund R&DA high level of logistics experienceAvoid partners who are:Short term goal orientedUnskilled with production and deliveryEager to extract IP from collaboration23
24Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner SelectionSelective OutsourcingTrend of the industry to outsourceKnowledge sharing inevitable but we don’t want to facilitate potential competitors too much24
25Implement rigorous self assessment Strategic placement of orders Boeing needs to strategically decide what can be outsourced to maintain their competitive design and IP advantageImplement rigorous self assessmentKeep core components in-houseOutsource as much non-essential parts as possibleInvest in in-house design capabilitiesMonitor wing component manufacturersStrategic placement of ordersRank components by IP sensitivityRank partners according to competition risk25
26Efficient integrated network COMPETITIVE ADVANTAGE Boeing will be relatively better placed in the market than competitors once it capitalizes on supply chain efficienciesEfficient integrated networkIP risk mitigationLow Cost+=COMPETITIVE ADVANTAGEInnovationProduction
27Boeing will be relatively better placed in the market than Airbus once it capitalizes on supply chain efficienciesBoeingPartners absorbs non-recurring costs and risks of R&DOutsourced the entire wing design and manufacturingto external suppliers (75%)Long unparalleled dominance in Japanese market & strongpresence in ChinaAirbusWorkshare arrangementsIncreased outsourcing but kept core technologies in house (50%)Relative newcomer to Japan & China• Boeing -- long unparalleled dominance in Japanese market & strongpresence in China• In Japan -- 80% of orders from Japanese airlines from Boeing during lastdecade; Japanese suppliers (“heavies”) account for 35% of 787 workshare(with subsidy from Japanese gov’t -- $3 billion)• In China -- activities range from subcontracting, joint ventures, technicaltraining and assistance for cooperative programs; visible support fromChinese suppliers (valued at $1.6 billion), supplying essential compositeparts and structures for 787 program• Airbus -- relative newcomer to Japan & China• In Japan -- facing difficulties in winning orders from Japanese airlines, buthas contracted work with Japanese suppliers• In China -- sales in China jumped to 219 aircraft in 2005 from 56, overtakingBoeing by delivering 6 more aircraft; committed to doubling procurement fromChinese suppliers to $120 million/yr by 2010; announced Tianjin will be sitefor Airbus’ first final assembly plant outside EuropeRelative advantages are sufficient given the nature of the market
28Aviation First is a joint industry research partnership with airlines to give Boeing first access to upcoming industry changesExtension of research and development focusing on gauging industry demandPartnership with core customers who are the airlinesShared research to identify future needs and demand in industryBoeing develop aircraft and services catering to needs“having learnt these iIssues slide link to the core competencies& CA“First mover advantage is important in an industry with low turnover and few substitutes”
29To innovate Boeing needs to have first access to important market information in order to produce aircrafts ahead of competitorsAssemble team research with key airline customersResearch commercial air travel with a broader scope using our combined expertiseBoeing keeps an internal database of findingsResearchers collaborate with internal engineers and designers to create the next aircraft or serviceWhy do thisManufacture and produce aircraft or service according to future market needs and demands
30Aviation First gives Boeing first access to information on industry trends and changing customer needs to develop innovate accordinglyKey benefitsAviation FirstMore intimate learning and understanding of our customers’ needsInformation ahead of competitorsAccuracy in design specification to meet needsInnovate and produce ahead of competitorsFirst in the industry to innovate and engineer the aircraft or servicePredetermined customers with needs for new aircraft or service
31Aviation FirstCollaborative market research with our key customersFirst access to valuable industry projectionsBoeing has can be proactive in meeting future market needs ahead of competitors
32Recommended a set of solutions for the short term Short-term supply chain solutionsInjecting ExpertiseEnhance GoldCare
33Recommended a set of solutions for the longer term Ensuring long-term competitive advantageLeveraging core competencies for competitive advantagesAviation FirstAlso the issue is how can we learn and leverage our experience – how can we prevent this from the future?
35Presentation1Revitalize Boeing18Future Competitive Advantage2Delivery of 787 plagued19What is Aviation First?3Pioneering outsourcing strategy20How is Aviation First implemented?4Challenges in Boeings Supply Chain21What are the benefits of Aviation First5Challenges in Boeings Partners Supply Chain22Supplementary Slides6What is the Injecting Expertise recommendation?23851 airplanes sold to over 56 customers7Benefits of IE Strategy24Condensed SWOT analysis8Financial Analysis: IE25Boeing’s core competencies for Injecting Expertise9What is the GoldCare recommendation?26Supply chain strategy 1 - Implementation details10Value proposition to Airlines27Supply chain strategy 1 - At-risk identification criteria11How GoldCare assures quality product?28Outsourcing in the future has many benefits12Financial Analysis: GoldCare29Supply chain strategy 1 – Financials 113Core Competencies30Supply chain strategy 1 – Financials 214Delays have sparked question over choice of partners31Union strategy – Financials 115Lessons Learnt from 787 fiasco32Union strategy – Financials 216Future Partner selection criteria33Justification for Q1 key issues and risks17Selective Outsourcing34Alternative recommendations considered for Q1
36851 airplanes sold to over 56 customers DELETE56 customers placed orders for 851 airplanes valued at $148 billion, making this the most successful launch of a new commercial airplane in Boeing's history.‘over 90’ amount of planes sold, record breaking. However, the delivery has not been on schedule. It is widely publisized and known that difficulties have been met during the production SUPPLY and process.Expectation are what Boeing makes them - we need to deliver to that.In spite of theCancellations of over 90 aircrafts up to Dec 2009Global coverage of delays have negatively affected our stakeholders
37Condensed SWOT analysis StrengthsFexible engine types *differentiationWorld first of composite materialsEverett: 20-year tax break for aerospace companies- Greater economiesGreater market potential than airbusWeaknessesReputation damage for delaysManaging partners’ responsibilitiesAbility to completely defend IPTesting revealed discrepancy between projected specs and actualNo transparency of competitor knowledge and plans- Trial and error: testing uncovers new probsOverlap of new costs to design wingbox (should have been partners job) Threats- exposing our competitive advantage: IP etc- Degree of outsourcing (35% now vs 30% industry)- IP lose and future competitor at Wichita- Partners today become competitors tomorrowKawaski aerospace unit and JapanChina foray into industry: cheaper costs, govt fundingAirbus: govt funding, design, future retaliation aircraft-industry questions Boe’s commitment to commercial aircraftIncrease variable costs in airline industryfurther delay from partnerscontractors with no industry experiencePress: industry reviewsOpportunities- Entire world’s eyes on 787- Success of 787 makes Boeing market leader- Marketable benefits: PRAlternative sized 787 model: small, or bigBoeing trying to cater to smaller size to fit comp pricing industry
38Boeing’s core competencies for Injecting Expertise ExperienceBenefit-Vought example experience, proven- Global business competency- Experienced pool of Boeing staff- Human interface personal- Overcome certain communication barriers- Reduce intermediate communication delays
39Supply chain strategy 1 - Implementation details Identify at risk companiesIdentify key risks at partner companyOn-site improvements and improving processesDeploy Boeing staff with relevant skills or experienceOngoing feedback with Boeing for resources and skillsOn-time progress monitoring and updates with Boeing HQHQ decision making for further assistance for high risk partnersReflect on progress and additional assistance if neededProduction to specifics with onsite reviewsFuture relationships maintained
40Supply chain strategy 1 - At-risk identification criteria Firm selection criteriaAeronautical production expertiseLevel of completionBoeing skills requiredSupplier track recordStrategic importanceDate of completion*logo of as many suppliers as possible*fade logos*criteria appears over faded logosSay: these 44 are all our tier one suppliers, this criteria will help us identify the underperforming or at risk companies
41Outsourcing in the future has many benefits Outsourcing to specialised companies allow economies of scaleShared R&D reduces risk of investmentAllows for more collaborative innovationLean enterprise allow effective distribution of assetEstablished partnersExperience in collaborative problem solvingGlobal partner portfolioLearning experience from partnersBoeing
42Supply chain strategy 1 – Financials 1 Estimation period (years)3Cost of delay penalty per month per plane0.5(Exhibit 2)Number of planes affected by delay90(Initial rate, 30 per year - first 3 years)Plane orders cancelled due to delays per month2(Cancellations: 93, Delays: 24 months = per month)Value of each plane order175(Range between 150 and 200m)Profit margin on each plane35Assumes 20% contribution marginWacc7%See WACC assumptions slideEstimated set-up costs50Initial investment:Includes labour to set up programme, developing communication systems and channels, clearing legal details of arrangement with supplier.Technical assistance costsNumber of suppliers identified20Number of technicians redeployed10(Jayco testing - 5)Average length of stay (years)0.6Opportunity cost of redeployment (salary) m0.1Travel expenses6.0Total cost of technical assistance per year18
43Supply chain strategy 1 – Financials 2 Delay prevented (Months)Penalty costPeriods to pay penaltyLost ordersValue of lost ordersPeriod to lost ordersPV of loss due to delayPV of costsNPV1.501.50.0097.24-97.241451.58270103.676.44901.674140206.89109.6531351.756210309.66212.421801.838280411.98314.7452251.9210350513.86416.622702.0012420615.30518.0673152.0814490716.30619.063602.1716560816.87719.6394052.2518630917.01819.77
44Union strategy – Financials 1 Strike cost per day100From caseNet strike cost per day10Assuming profit margin of 10%Average union wage (m)0.07(Case: 65,000, correcting for inflation)Number of protected jobs10000Latest union agreement protected 5100 jobs -Estimation period (years)5
46Justification for Q1 key issues and risks Labour force strikesMachinist strikes 2005Machinist strikes in 2008Cancelled orders93 orders cancelled to dateQuality concernsPartners – lack of technical expertiseIncomplete parts manufactured
47Alternative recommendations considered for Q1 Cross-shareholdingsToo long to implement, too long before results would be seenContract renegotiationLong timeframe to implement, costly, many suppliers are not due for renewal.Discharge suppliers who cause delaysSolution is Ex-post – Reliance on supplier for patented part design.
48What is GoldCare? A system of tools Airplane Health Management Monitors the health of an airplane in flight and relays that information to airline personnel on the groundMaintenance Performance ToolboxServes as a single location for operator maintenance and repair data.Electronic Flight BagDigitally stores all documentation and forms, including paper log books that pilots typically carry onto airplanesMaintenance & Engineering ManagementAllows dynamic planning and re-planning of maintenance tasks to optimize efficiency and keep airplanes in the airUses existing network of employees as well as partnerships with other support providing functions.Boeings attempt to capitalize on the attractive $60 billion commercial aviation service industry
49Enhance GoldCare: Focus on core competencies Simplified OperationsCustomers have a single provider – the GoldCare team – with extensive capabilities for managing and planning maintenance, material and informationMaintenances is a non-core cost for airlinesAdditional personnel costsTime spent on plane maintenance schedule by management.Allows management to focus attention to more critical areasSource: Bickers. C., “Good as GoldCare”
50Enhance GoldCare: Simplifies aircraft ownership Source: “GoldCare Enhances 787 Lifecycle Value”,Traditional costs of maintenance can be unpredictable, though the GoldCare program these costs can be made predictable for airlines. Thus the costs involved with ownership of planes are reduced.
51Enhance GoldCare: Reliable maintenance and monitoring Minimize RiskGoldCare is provided at an agreed cost per flight hour, with guarantees for schedule-reliability and parts-availability service levelsBoeing knows 787 planes and its part suppliers wellGoldCare’s ability to monitor the airplane closely means its asset value may be better preserved over its life cycle.Boeing’s team has the tacit knowledge to solve complex problems efficiently given there are the manufacturer.Source: Bickers. C., “Good as GoldCare”
52Why is the threat of strikes no longer an issue in the short term? Job security was the central reason why unions are protesting. They believed that payroll benefits were no good if they themselves were not on the payroll.This sense of loss in job security came from dispersion in Boeing’s supply chain globally in the production of the 787 airplane.After 58 days of protesting Boeing renegotiated a 4 year agreement that allowed for wage increases as well as:1. Expanding job protection for 5100 people.2. Restriction on vendor delivery locations, except for 787 (legality)3. Workers gain expanded subcontracting review, including the ability to compete for work that moves from one Boeing facility to another.Source: (2/11/2008 )
53What if the risk of strikes develops in the short term? If strike action is taken once again in the short run with regard to job security, literature suggests that it will be with the unhappiness of 787 “global supply chain” production method.Our recommendation is to construct a opportunity cost vs. flexibility lost analysis that determines the level of assembly we maybe able to bring in house i.e. we will have to concede part of our global supply chain functionality.Ultimately, the argument boils down to the sustained losses Boeing can sustain if production is stopped at its final assembly plant in Washington State.Low risk given litigious nature of 787 agreement that already existsSource: International Association of Machinists and Aerospace Workers
54Will everyone get the Gold Care package? First 30 planes in the first year of productionFurther details in financial calculation
55Boeing needs to reassess its partner selection criteria and work closely with partners to prevent delays for future projectsProduction ExpertiseEfficiencies in production that achieve economies of scaleReliabilityHistory of minimal delayAvailable CapitalFinancial history and standingCooperationWillingness to work consultativelyNegotiation AttitudesFlexible & open with long term horizons55
56Boeing needs to strategically decide what can be outsourced to maintain their competitive design and IP advantageStrategic analysisIdentify key designsExpertiseRetrain design and technological expertsProductionRetain production facilitiesAdvantages to keep some design capabilities inhouseFuture criteria for outsourcingWhat more we can outsource?Added NPV, slight editingOutsourceReduce supply chain by outsourcing non-key componentsLogisticsImprove logistics design and cost56
57Market Analysis Airplane Production Market Outsourcing Supplier Market Competitive advantage based on low costs and high innovationIndustry trend towards outsourcing and Boeing focusing on ‘Snap’ assemblySuppliers are developing into long term partners for ‘system integration’Outsourcing Supplier MarketTrend towards greater specializationContinued consolidation of suppliersStronger financial backbone to make the necessary investments to enhance core capabilitiesThe main reason is that the market is just too small. The current point in the market is not stable, so this leads to speculation that in the future, there will be change. Airbus cannot effectively compete against Boeing, so it may have to expand or find a partner to merge with. Alternatively, other companies such as Bombardier and Embraer, which are already starting to compete at the small aircraft level with Boeing and Airbus may enter the market.
58‘Partners’ participating in R&D innovation TRADE OFFLower costs and risksReduced IP rightsProduction at lower costsAbility to innovate new productsOpens new markets at lower riskIdentify and preserve strategic IPIdentify ‘low risk’ market leadersLeverage negotiationsAdded NPV, slight editingMarket LeaderRisk Mitigation58
59Supply chain efficiency goals Literature shows lean supply chain management practices represent critical source of sustained competitive advantageSupply chain efficiency goalsEarly integration into design and development• Knowledge-sharing and fostering supplier-based innovation• Synchronized flow throughout the network• Transparency through open communications• Long-term, trust-based, mutually-beneficial relationships• Continuous supplier development & process improvementRoom for ImprovementCapabilityResponsibilityManagementCommunicatonIteration
60How Boeing competes with industry players in the global aviation production market CompetitorDescriptionBasis of CompetitionAirbusBombardier AerospaceChina and Japan (Kawasaki)EADS ConsortiumSmaller Canadian ManufacturerPotential EntrantsCost and innovation (Time to Market)Brand, scale and networkingBrand and Strategic IP Protection
61Focusing on core competencies will allow Boeing to compete effectively despite transfer of IP knowledgeChinaChina has successfully built a 105-seat regional commercial jet, the ARJ-21. The first passenger jet to be developed and manufactured in China.The ARJ-21 is about 15% cheaper than comparable Western airplanes and has an additional cost advantage- Chinese carriers that purchase it don't have to pay the 23% tax levied on foreign planes.They already build advanced military fighter planes and are aggressively investing in its space programs, which continue to be a source of important innovations for commercial airplanes.Brazil (Embraer)They already make airplane in the seat category.Third largest manufacturer of planes after Boeing and airbusCanada (Bombardier):More of a threat because they compete with Embraer and have the technological know-how as well.United Airlines has invited them to compete against the 737/A320 replacement programs when it gets launched.However, the CSeries remains below the 15% to 20% low-end 737 market
62Contract Specifications Boeing can renegotiate contract terms to minimize delay and mitigate risk of strategic knowledge transferContract SpecificationsDelay penaltiesIncentives to meet deadlines and work consultativelyRelationshipEnter into long term contractsExclusivity clausesMitigates direct competition for duration of partnershipRestraint of trade clausesPrevents direct competition after partnership concludes
63There will be a concurrent implementation of the strategies Timeline for Implementation2010201220142016201820202022Assign personnel to monitor Partners (PLM)Short TermStrategy1Deploy Boeing engineers to suppliersAlign interests and build LT relationshipsGoldCare DiscountLong TermEvaluation2Re-evaluate Partner CriteriaRenegotiate with suppliersInnovateAssign personnel to monitor Partners (PLM)Launch next Boeing commercial plane63
64Analysis of airlines and relative to 787 offerings Benefits afforded by 787 to Airlines can reduce costs:less stopovers => reduced taxing costsless chance of delays (fines)less fuel use – world first. Innovation will increase current 15% saving, or potentially launch into alternative fuel sourcesincreased cargo capacity – revenue sourceFormat this into left feeds into right. 787 attributes benefits/issues for airline
65787 value to AirlinesAirlines face fiercer price competition from increase competitors in the marketStrong growth air travel particularly in the economy sectorReduced scope for competitive advantage in traditional airline marketsCost structure vital to survival offer new ways for them to reduce costsDifferentiation in the economy airline industry better travel experienceRapid changes in global demand and supply for air travel places mounting pressure for airlines to economize
66Current competitive advantages arising from 787 experience Competitive advantage arising from 787First mover advantagesOutsourcing expertiseInnovation leaderManagement of partnersDominate medium-craft long haul marketEstablished networkLogistic and communicationCustomer loyaltyProven benefits of 787 create loyalty and leadership positionIntimate lessons from outsourcing processes and partner selection
67Reasons for having first access to market information Increasing competition from companies globallyDecreased life span of tacit knowledge in industryFirst mover advantage crucial to secure first airline ordersExclusive and/or first access to industry projection and insights is first needed even before innovation can occur
68Further to markets for leveraging 787 competitive advantages 123456789PassengersRange, 1,000 nmi747-8ERERLR100200300400500600ERThree-class787-8ERER737 Business JetTwo-class787-3787-9The demand and research from the customer ie virgin wants to offer new flight routes, this is something Boeing can cater for but do so with the competencies and the qualities for the 787 – to then offer it in a larger sized craftBoeing could leverage 787 core competencies to create smaller or larger planes depending on market developments
69Massachusetts Institute of Technology Bozdogan 04/18/07 - ReferencesReferenceURLTim Optiz, Director of Production and Support Systems, Boeing Commercial Airplanes (March 2007)Lockheed Martin revealed after the cessation of production for its L1011COE Newsnet - September 2002, issue 6 “Design Integration Across a Global Enterprise” by Jim D. GreenBoeing Frontiers, “Helping shape markets of tomorrow”, November 2002, volume 1, issue 7Massachusetts Institute of Technology Bozdogan 04/18/07 -