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Jaque QianUtkarsh SahuMark SzaboAnna Zhang. AnalysisRecommendationsFinancialsImplementationConclusion The 787 Dreamliner is expected to revitalise Boeing.

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Presentation on theme: "Jaque QianUtkarsh SahuMark SzaboAnna Zhang. AnalysisRecommendationsFinancialsImplementationConclusion The 787 Dreamliner is expected to revitalise Boeing."— Presentation transcript:

1 Jaque QianUtkarsh SahuMark SzaboAnna Zhang

2 AnalysisRecommendationsFinancialsImplementationConclusion The 787 Dreamliner is expected to revitalise Boeing Visionary Design Unparalleled Passenger Experience Environmentally Progressive Exceptional Value for Airlines Media Hype

3 AnalysisRecommendationsFinancialsImplementationConclusion The delivery of the 787 has been plagued with issues First 787 orders First delays Further delays due to supplier issues Third delay First order cancellation Final delay to date First successful test flight

4 We have identified two sets of recommendations Key Recommendations Short-term supply chain solutions Ensuring long-term competitive advantage

5 AnalysisRecommendationsFinancialsImplementationConclusion These recommendations will reduce supply chain problems when the 787 is in production in the short term Injecting ExpertiseExtend GoldCare 1 2

6 AnalysisRecommendationsFinancialsImplementationConclusion Pioneering an outsourcing strategy to produce the 787 Research & Development Parts Production Part Assembly Final Assembly Sales & Marketing Research & Development Parts Production Part Assembly Final Assembly Sales & Marketing 30% 70% Boeing – in-house functions Partner – outsourced functions

7 AnalysisRecommendationsFinancialsImplementationConclusion Boeing faces challenges in its own supply chain Research & Development Parts Production Assembly Final Assembly Sales & Marketing Issues Discontent labor force due to low job security Risks Further strikes Issues Product does not meet promised specifications Risks Customers may cancel further orders Boeing supply chain

8 AnalysisRecommendationsFinancialsImplementationConclusion The outsourced supply chain also faces numerous challenges Issues Limited R&D and production expertise Insufficient regulatory knowledge Risks Manufactured parts do not meet regulatory or Boeing specifications Incomplete or unsafe parts manufactured Parts Production Part Assembly Research & Development Partner supply chain

9 Title slide for RECO 1 HERE? Injecting Expertise

10 AnalysisRecommendationsFinancialsImplementationConclusion This recommendation identifies the underperforming suppliers who are most likely to threaten the 787 production schedule Use 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 process Identify and target strategic partners most likely to dishonour their obligations using fixed criteria

11 AnalysisRecommendationsFinancialsImplementationConclusion These recommendations alleviate the problems plaguing the supply chain in a timely manner Parts Production and assembly Key issues and risks Inadequate expertise Limited regulatory experience Risk of parts not meeting specifications Risk of Low quality products Sharing of expertise ensures suppliers are not at a disadvantage during production Ready access to Boeing experts will ensure issues are prevented or quickly resolved Presence of Boeing personnel will prevent low quality or non-compliant goods from being shipped

12 AnalysisRecommendationsFinancialsImplementationConclusion This recommendation makes good financial sense Cost savings arising from preventing a one- month delay $165 million Upfront investment required $50 million Ongoing yearly costs $18 million p/a Breakeven point: 1 month $

13 Extend GoldCare

14 AnalysisRecommendationsFinancialsImplementationConclusion Airlines pay an agreedupon per-flight-hour price Performs all maintenance and parts support, as well as track airplane conditions and configurations Boeing absorbs the risk and complexity of airplane maintenance Boeing leads and integrates a global team of partners This recommendation extends the GoldCare program to allow airlines to outsource plane maintenance to Boeing

15 AnalysisRecommendationsFinancialsImplementationConclusion The new incentive provides airlines the opportunity to reduce non-core overhead costs Focus on core competencies Simplifies aircraft ownership Reliable maintenance and monitoring

16 AnalysisRecommendationsFinancialsImplementationConclusion This initiative will convince customers that Boeing will deliver a quality product without further delays Confidence in planes - Breakdown and maintenance costs transferred to Boeing - Instills belief that Boeing guarantees performance Emphasize quality to customers Aligns Boeings long term interests - Provides customers with security that Boeing is willing to sustain involvement in plane performance even after sale.

17 AnalysisRecommendationsFinancialsImplementationConclusion This recommendation makes good financial sense Cost of providing discount is 141.2m per 30 planes Breakeven points 6/3 cancellations for 100/50% discounts

18 We have identified two sets of recommendations Key Recommendations Short-term supply chain solutions Ensuring long-term competitive advantage

19 AnalysisRecommendationsFinancialsImplementationConclusion From the 787 experience, Boeing has developed core competencies which can be leveraged to gain competitive cost advantages Global Supply Chain 1 Economies of scale Reduced risk of R&D investment Collaborative innovation Lean enterprise Technical, design and assembly expertise 2 Composite materials innovation Designing fuel efficient aircrafts Rapid 3 day snap assembly process CORE COMPETENCIES:

20 AnalysisRecommendationsFinancialsImplementationConclusion The 787 process caused much delay and sparked concern regarding the choice of supply partners

21 AnalysisRecommendationsFinancialsImplementationConclusion Problems were caused by insufficient criteria for partner selection Reasons for leak of IP to potential competitors Lack of communication and monitoring Overestimation of suppliers capacity Suppliers were in need of managerial and regulatory expertise Incentives were insufficient to ensure timely delivery Suppliers have long term objectives to enter the production market IP rights traded to gain shared R&D investments to decrease overall costs Reasons for the delay LESSONS LEARNT:

22 AnalysisRecommendationsFinancialsImplementationConclusion Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner Selection Selective Outsourcing

23 AnalysisRecommendationsFinancialsImplementationConclusion Choose partners with: A high level of managerial expertise Regulatory insight Adequately resourced to fund R&D A high level of logistics experience Boeing needs to reassess its partner selection criteria and work closely with partners to prevent future delays Avoid partners who are: Short term goal oriented Unskilled with production and delivery Eager to extract IP from collaboration

24 AnalysisRecommendationsFinancialsImplementationConclusion Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner Selection Selective Outsourcing

25 AnalysisRecommendationsFinancialsImplementationConclusion Boeing needs to strategically decide what can be outsourced to maintain their competitive design and IP advantage Keep core components in-house Outsource as much non-essential parts as possible Invest in in-house design capabilities Monitor wing component manufacturers Implement rigorous self assessment Rank components by IP sensitivity Rank partners according to competition risk Strategic placement of orders

26 AnalysisRecommendationsFinancialsImplementationConclusion Boeing will be relatively better placed in the market than competitors once it capitalizes on supply chain efficiencies Efficient integrated network IP risk mitigation + COMPETITIVE ADVANTAGE Low Cost = Innovation Production

27 AnalysisRecommendationsFinancialsImplementationConclusion Boeing will be relatively better placed in the market than Airbus once it capitalizes on supply chain efficiencies Boeing Partners absorbs non-recurring costs and risks of R&D Outsourced the entire wing design and manufacturing to external suppliers (75%) Long unparalleled dominance in Japanese market & strong presence in China Airbus Workshare arrangements Increased outsourcing but kept core technologies in house (50%) Relative newcomer to Japan & China Relative advantages are sufficient given the nature of the market

28 AnalysisRecommendationsFinancialsImplementationConclusion Aviation First is a joint industry research partnership with airlines to give Boeing first access to upcoming industry changes Boeing develop aircraft and services catering to needs Partnership with core customers who are the airlines Shared research to identify future needs and demand in industry Extension of research and development focusing on gauging industry demand

29 AnalysisRecommendationsFinancialsImplementationConclusion To innovate Boeing needs to have first access to important market information in order to produce aircrafts ahead of competitors Assemble team research with key airline customers Boeing keeps an internal database of findings Research commercial air travel with a broader scope using our combined expertise Researchers collaborate with internal engineers and designers to create the next aircraft or service Manufacture and produce aircraft or service according to future market needs and demands

30 AnalysisRecommendationsFinancialsImplementationConclusion Aviation First gives Boeing first access to information on industry trends and changing customer needs to develop innovate accordingly More intimate learning and understanding of our customers needs Accuracy in design specification to meet needs First in the industry to innovate and engineer the aircraft or service Predetermined customers with needs for new aircraft or service Key benefits Information ahead of competitors Innovate and produce ahead of competitors Aviation First

31 AnalysisRecommendationsFinancialsImplementationConclusion Aviation First Collaborative market research with our key customers First access to valuable industry projections Boeing has can be proactive in meeting future market needs ahead of competitors

32 AnalysisRecommendationsFinancialsImplementationConclusion Recommended a set of solutions for the short term Short-term supply chain solutions Injecting ExpertiseEnhance GoldCare

33 AnalysisRecommendationsFinancialsImplementationConclusion Recommended a set of solutions for the longer term Ensuring long-term competitive advantage Leveraging core competencies for competitive advantages Aviation First

34 Thank you!

35 Presentation 1 Revitalize Boeing 18 Future Competitive Advantage 2 Delivery of 787 plagued 19 What is Aviation First? 3 Pioneering outsourcing strategy 20 How is Aviation First implemented? 4 Challenges in Boeings Supply Chain 21 What are the benefits of Aviation First 5 Challenges in Boeings Partners Supply Chain 22Supplementary Slides 6 What is the Injecting Expertise recommendation? airplanes sold to over 56 customers 7 Benefits of IE Strategy 24 Condensed SWOT analysis 8 Financial Analysis: IE 25 Boeings core competencies for Injecting Expertise 9 What is the GoldCare recommendation? 26 Supply chain strategy 1 - Implementation details 10 Value proposition to Airlines 27 Supply chain strategy 1 - At-risk identification criteria 11 How GoldCare assures quality product? 28 Outsourcing in the future has many benefits 12 Financial Analysis: GoldCare 29 Supply chain strategy 1 – Financials 1 13 Core Competencies 30 Supply chain strategy 1 – Financials 2 14 Delays have sparked question over choice of partners 31 Union strategy – Financials 1 15 Lessons Learnt from 787 fiasco 32 Union strategy – Financials 2 16 Future Partner selection criteria 33 Justification for Q1 key issues and risks 17 Selective Outsourcing 34 Alternative recommendations considered for Q1

36 851 airplanes sold to over 56 customers Cancellations of over 90 aircrafts up to Dec 2009 Global coverage of delays have negatively affected our stakeholders

37 Condensed SWOT analysis Strengths -Fexible engine types *differentiation - World first of composite materials - Everett: 20-year tax break for aerospace companies - Greater economies -Greater market potential than airbus Weaknesses -Reputation damage for delays -Managing partners responsibilities -Ability to completely defend IP -Testing revealed discrepancy between projected specs and actual -No transparency of competitor knowledge and plans - Trial and error: testing uncovers new probs -Overlap 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 tomorrow -Kawaski aerospace unit and Japan -China foray into industry: cheaper costs, govt funding -Airbus: govt funding, design, future retaliation aircraft -industry questions Boes commitment to commercial aircraft -Increase variable costs in airline industry - further delay from partners -contractors with no industry experience - Press: industry reviews Opportunities - Entire worlds eyes on Success of 787 makes Boeing market leader - Marketable benefits: PR - Alternative sized 787 model: small, or big -Boeing trying to cater to smaller size to fit comp pricing industry

38 Boeings core competencies for Injecting Expertise - Human interface personal - Overcome certain communication barriers - Reduce intermediate communication delays - Human interface personal - Overcome certain communication barriers - Reduce intermediate communication delays -Vought example experience, proven - Global business competency - Experienced pool of Boeing staff -Vought example experience, proven - Global business competency - Experienced pool of Boeing staff Benefit Experience

39 Supply chain strategy 1 - Implementation details Identify at risk companies Identify key risks at partner company Deploy Boeing staff with relevant skills or experience On-site improvements and improving processes Ongoing feedback with Boeing for resources and skills On-time progress monitoring and updates with Boeing HQ Reflect on progress and additional assistance if needed HQ decision making for further assistance for high risk partners Production to specifics with onsite reviews Future relationships maintained

40 Supply chain strategy 1 - At-risk identification criteria Strategic importance Date of completion Supplier track record Aeronautical production expertise Firm selection criteria Level of completion Boeing skills required

41 Outsourcing in the future has many benefits Outsourcing to specialised companies allow economies of scale Shared R&D reduces risk of investment Allows for more collaborative innovation Lean enterprise allow effective distribution of asset Outsourcing to specialised companies allow economies of scale Shared R&D reduces risk of investment Allows for more collaborative innovation Lean enterprise allow effective distribution of asset -Established partners -Experience in collaborative problem solving -Global partner portfolio -Learning experience from partners -Established partners -Experience in collaborative problem solving -Global partner portfolio -Learning experience from partners Boeing

42 Supply chain strategy 1 – Financials 1 Estimation period (years)3 Cost 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 plane35 Assumes 20% contribution margin Wacc7% See WACC assumptions slide Estimated set-up costs50 Initial investment: Includes labour to set up programme, developing communication systems and channels, clearing legal details of arrangement with supplier. Technical assistance costs Number of suppliers identified20 Number of technicians redeployed10 (Jayco testing - 5) Average length of stay (years)0.6 Opportunity cost of redeployment (salary) m0.1 =Boeing_Company,_The/Salary Travel expenses6.0 Total cost of technical assistance per year18

43 Supply chain strategy 1 – Financials 2 Delay prevented (Months) Penalty cost Periods to pay penalty Lost orders Value of lost orders Period to lost orders PV of loss due to delay PV of costsNPV

44 Union strategy – Financials 1 Strike cost per day100From case Net strike cost per day10Assuming profit margin of 10% Average union wage (m)0.07(Case: 65,000, correcting for inflation) Number of protected jobs10000 Latest union agreement protected 5100 jobs - ng-Strike-Poised-to-Disrupt-Deliveries Estimation period (years)5

45 Union strategy – Financials 2 Planned workforce reduction Total strike days avoided1%2%5%10%15%20%30%50%100%

46 Justification for Q1 key issues and risks Labour force strikes Machinist strikes Machinist strikes in ng29.html Cancelled orders 93 orders cancelled to date forums/general_aviation/read.main/ / Quality concerns 63_boeing180.html Partners – lack of technical expertise eston11.html Incomplete parts manufactured tribulations-and-restoring-the-dream/

47 Alternative recommendations considered for Q1 Cross-shareholdingsToo long to implement, too long before results would be seen Contract renegotiation Long timeframe to implement, costly, many suppliers are not due for renewal. Discharge suppliers who cause delays Solution is Ex-post – Reliance on supplier for patented part design.

48 What 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 ground Maintenance Performance Toolbox Serves as a single location for operator maintenance and repair data. Electronic Flight Bag Digitally stores all documentation and forms, including paper log books that pilots typically carry onto airplanes Maintenance & Engineering Management Allows dynamic planning and re-planning of maintenance tasks to optimize efficiency and keep airplanes in the air Uses 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

49 Enhance GoldCare: Focus on core competencies Simplified Operations Customers have a single provider – the GoldCare team – with extensive capabilities for managing and planning maintenance, material and information Maintenances is a non-core cost for airlines Additional personnel costs Time spent on plane maintenance schedule by management. Allows management to focus attention to more critical areas Source: Bickers. C., Good as GoldCare

50 Enhance 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.

51 Enhance GoldCare: Reliable maintenance and monitoring Minimize Risk GoldCare is provided at an agreed cost per flight hour, with guarantees for schedule-reliability and parts-availability service levels Boeing knows 787 planes and its part suppliers well GoldCares ability to monitor the airplane closely means its asset value may be better preserved over its life cycle. Boeings team has the tacit knowledge to solve complex problems efficiently given there are the manufacturer. Source: Bickers. C., Good as GoldCare

52 Why 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 Boeings 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 )

53 What 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. Source: International Association of Machinists and Aerospace Workers Low risk given litigious nature of 787 agreement that already exists

54 Will everyone get the Gold Care package? Further details in financial calculation First 30 planes in the first year of production

55 History of minimal delay Negotiation Attitudes Boeing needs to reassess its partner selection criteria and work closely with partners to prevent delays for future projects Efficiencies in production that achieve economies of scale Production Expertise Reliability Flexible & open with long term horizons Willingness to work consultatively Financial history and standing Cooperation Available Capital

56 Boeing needs to strategically decide what can be outsourced to maintain their competitive design and IP advantage Identify key designs Retrain design and technological experts Retain production facilities Strategic analysis Expertise Production Reduce supply chain by outsourcing non-key components Outsource Improve logistics design and cost Logistics

57 Market Analysis Airplane Production Market Competitive advantage based on low costs and high innovation Industry trend towards outsourcing and Boeing focusing on Snap assembly Suppliers are developing into long term partners for system integration Outsourcing Supplier Market Trend towards greater specialization Continued consolidation of suppliers Stronger financial backbone to make the necessary investments to enhance core capabilities

58 Reduced IP rights Partners participating in R&D innovation Lower costs and risks Identify and preserve strategic IP Identify low risk market leaders Leverage negotiations Production at lower costs Ability to innovate new products Opens new markets at lower risk Risk Mitigation Market Leader TRADE OFF

59 Literature shows lean supply chain management practices represent critical source of sustained competitive advantage Early 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 improvement Supply chain efficiency goals Room for Improvement

60 How Boeing competes with industry players in the global aviation production market Airbus Bombardier Aerospace China and Japan (Kawasaki) DescriptionCompetitorBasis of Competition EADS Consortium Smaller Canadian Manufacturer Potential Entrants Cost and innovation (Time to Market) Brand, scale and networking Brand and Strategic IP Protection

61 Focusing on core competencies will allow Boeing to compete effectively despite transfer of IP knowledge China China 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 airbus Canada (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

62 Boeing can renegotiate contract terms to minimize delay and mitigate risk of strategic knowledge transfer Delay penalties Incentives to meet deadlines and work consultatively Relationship Enter into long term contracts Exclusivity clauses Mitigates direct competition for duration of partnership Restraint of trade clauses Prevents direct competition after partnership concludes Contract Specifications

63 Timeline for Implementation Long Term Evaluation Short Term Strategy Align interests and build LT relationships Renegotiate with suppliers 2022 Re-evaluate Partner Criteria There will be a concurrent implementation of the strategies Assign personnel to monitor Partners (PLM) Deploy Boeing engineers to suppliers GoldCare Discount Innovate Launch next Boeing commercial plane Assign personnel to monitor Partners (PLM)

64 Analysis of airlines and relative to 787 offerings less stopovers => reduced taxing costs less chance of delays (fines) less fuel use – world first. Innovation will increase current 15% saving, or potentially launch into alternative fuel sources increased cargo capacity – revenue source Benefits afforded by 787 to Airlines can reduce costs:

65 787 value to Airlines Airlines face fiercer price competition from increase competitors in the market Strong growth air travel particularly in the economy sector Reduced scope for competitive advantage in traditional airline markets Cost structure vital to survival offer new ways for them to reduce costs Differentiation in the economy airline industry better travel experience Rapid changes in global demand and supply for air travel places mounting pressure for airlines to economize

66 Current competitive advantages arising from 787 experience Competitive advantage arising from 787 Outsourcing expertise Management of partners Established network Logistic and communication Intimate lessons from outsourcing processes and partner selection Customer loyalty Innovation leader Dominate medium-craft long haul market Proven benefits of 787 create loyalty and leadership position First mover advantages

67 Reasons for having first access to market information Increasing competition from companies globally Decreased life span of tacit knowledge in industry First mover advantage crucial to secure first airline orders Exclusive and/or first access to industry projection and insights is first needed even before innovation can occur

68 Further to markets for leveraging 787 competitive advantages Passengers Range, 1,000 nmi ER ER LR ER Three-class ER ER 737 Business Jet Two-class Boeing could leverage 787 core competencies to create smaller or larger planes depending on market developments

69 References ReferenceURL Tim Optiz, Director of Production and Support Systems, Boeing Commercial Airplanes (March 2007) 38&pm=2 Lockheed Martin revealed after the cessation of production for its L1011 forums/general_aviation/read.main/342184/ COE Newsnet - September 2002, issue 6 Design Integration Across a Global Enterprise by Jim D. Green Boeing Frontiers, Helping shape markets of tomorrow, November 2002, volume 1, issue 7 Massachusetts Institute of Technology Bozdogan 04/18/07 - ocman&task=doc_download&gid=1478&Ite mid=776


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