* Jaque Qian Utkarsh Sahu Mark Szabo Anna Zhang

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

The delivery of the 787 has been plagued with issues Third delay First order cancellation First delays Final delay to date First 787 orders Further delays due to supplier issues First successful test flight 2002 - Boeing drops its "Sonic Cruiser" concept, responding to airlines' calls for better fuel efficiency rather than extra speed. June 2003 - Dubs its new, carbon-composite airplane the "Dreamliner" Dec 2003 - Approves an initial version of the plane with the temporary name 7E7, the E standing for "efficiency" April 2004 - officially launches the plane as Japan's All Nippon Airways (9202.T) (ANA) orders 50 Dec 2004 - Ends 2004 with 56 orders for the new plane, fewer than it had expected Jan 2005 - Gives plane official designation 787 Dec 2005 - Ends year with 232 orders for 787s, for a running total of 288 July 2006 - 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 2006 - Boeing ends year with 160 orders for 787s, for running total of 448 Jan 2007 - 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 2008 May 2007 - Starts to put together first 787 in Everett, Washington. June 2007 - 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 2008 July 8, 2007 - Gleaming shell of first 787 rolled out in front of 15,000 ecstatic employees and customers at Everett July 25, 2007 - 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 schedule Sept 2007 - 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 target Oct 2007 - 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 2008 Oct 2007 - 787 program head Mike Bair replaced by Pat Shanahan from Boeing's defense unit Dec 2007 - Boeing says 787 sticking to revised schedule; ends year with 369 orders for the plane in 2007, for running total of 817 Jan 2008 - 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 schedule March 2008 - Admits it had to redesign center wing box to make it stronger April 2008 - 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 schedule June 2008 - 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 Airlines Sept 6, 2008 - 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, 2008 - Boeing says first flight delayed by strike, will not happen until 2009 Dec 11, 2008 - 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 late Dec. 31, 2008 - Boeing ends year with 93 orders for 787s, making a running total of 910 Jan 2009 - 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 follow June - Boeing reports 59 total cancellations for 787s, with net orders for 866 planes. June 23, 2009 - Announces fifth delay due to side panel issue Aug 27, 2009 - Sets new timetable, with first flight by end of 2009 and first delivery in fourth quarter of 2010 Aug 31, 2009 - Boeing Commercial Airplanes chief Scott Carson announces retirement at end of the year, is replaced immediately by Jim Albaugh, head of Boeing's defense business Nov 12, 2009 - Boeing completes installing reinforcements within the side-of-body section on the first 787 Dreamliner. Dec. 10, 2009 -- Boeing opens flight-test window starting Dec. 15. (Reporting by Bill Rigby and Kyle Peterson, editing by Gerald E. McCormick, Gary Hill)

We have identified two sets of recommendations Short-term supply chain solutions Key Recommendations Ensuring long-term competitive advantage We have identified 2 sets of recommendations have

These recommendations will reduce supply chain problems when the 787 is in production in the short term 1 2 Injecting Expertise Extend GoldCare Two recommendations will address short-term issues and risks in the 787 supply chain The first will focus on the outsourced production part of the supply chain, The other will address issues in the Boeing Sales function

Pioneering an outsourcing strategy to produce the 787 Boeing – in-house functions Research & Development Parts Production Part Assembly Final Assembly Sales & Marketing 30% 70% Partner – outsourced functions Research & Development Parts Production Part Assembly Final Assembly Sales & Marketing Boeing has employed a bold/unique outsourcing strategy to produce the 787 Outsourced 70% of upstream functions, including R&D which was traditionally done in-house What are the issues and risks in this supply chain?

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

The outsourced supply chain also faces numerous challenges Partner supply chain Research & Development Parts Production Part Assembly 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 The key issue in the outsourced component of the value chain is the lack of technical expertise of certain partners This could result in parts that do not meet specifications

Title slide for RECO 1 HERE? Injecting Expertise

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 Our 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

Parts Production and assembly 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 Addresses the key issues and risks in the outsourced production process – Bolsters the technical and regulatory expertise of those partners that require it Ensures any issues that come up are quickly resolved Allows us to oversee the production process, ensuring the quality of the parts and that they meet specifications Presence of Boeing personnel will prevent low quality or non-compliant goods from being shipped

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

Extend GoldCare Faced 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.

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

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

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

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 **MARK WHAT ARE THE AXIS? & FACTS, GRAPH DOES NOT TELL US ENOUGH!

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

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

The 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

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

Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner Selection Selective Outsourcing Trend of the industry to outsource Knowledge sharing inevitable but we don’t want to facilitate potential competitors too much 22

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

Two recommendations to minimize delays and mitigate the risk of aiding potential competitors Effective Partner Selection Selective Outsourcing Trend of the industry to outsource Knowledge sharing inevitable but we don’t want to facilitate potential competitors too much 24

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

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

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 • Boeing -- long unparalleled dominance in Japanese market & strong presence in China • In Japan -- 80% of orders from Japanese airlines from Boeing during last decade; 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, technical training and assistance for cooperative programs; visible support from Chinese suppliers (valued at $1.6 billion), supplying essential composite parts and structures for 787 program • Airbus -- relative newcomer to Japan & China • In Japan -- facing difficulties in winning orders from Japanese airlines, but has contracted work with Japanese suppliers • In China -- sales in China jumped to 219 aircraft in 2005 from 56, overtaking Boeing by delivering 6 more aircraft; committed to doubling procurement from Chinese suppliers to $120 million/yr by 2010; announced Tianjin will be site for Airbus’ first final assembly plant outside Europe Relative advantages are sufficient given the nature of the market

Aviation First is a joint industry research partnership with airlines to give Boeing first access to upcoming industry changes Extension of research and development focusing on gauging industry demand Partnership with core customers who are the airlines Shared research to identify future needs and demand in industry Boeing develop aircraft and services catering to needs “having learnt these i Issues slide link to the core competencies& CA “First mover advantage is important in an industry with low turnover and few substitutes”

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 Research commercial air travel with a broader scope using our combined expertise Boeing keeps an internal database of findings Researchers collaborate with internal engineers and designers to create the next aircraft or service Why do this Manufacture and produce aircraft or service according to future market needs and demands

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

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

Recommended a set of solutions for the short term Short-term supply chain solutions Injecting Expertise Enhance GoldCare

Recommended a set of solutions for the longer term Ensuring long-term competitive advantage Leveraging core competencies for competitive advantages Aviation First Also the issue is how can we learn and leverage our experience – how can we prevent this from the future?

Thank you!

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 22 Supplementary Slides 6 What is the Injecting Expertise recommendation? 23 851 airplanes sold to over 56 customers 7 Benefits of IE Strategy 24 Condensed SWOT analysis 8 Financial Analysis: IE 25 Boeing’s 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

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

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 Boe’s commitment to commercial aircraft Increase variable costs in airline industry further delay from partners contractors with no industry experience Press: industry reviews Opportunities - Entire world’s eyes on 787 - 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

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

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

Supply chain strategy 1 - At-risk identification criteria Firm selection criteria Aeronautical production expertise Level of completion Boeing skills required Supplier track record Strategic importance Date of completion *logo of as many suppliers as possible *fade logos *criteria appears over faded logos Say: these 44 are all our tier one suppliers, this criteria will help us identify the underperforming or at risk companies

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 Established partners Experience in collaborative problem solving Global partner portfolio Learning experience from partners Boeing

Supply chain strategy 1 – Financials 1 Estimation period (years) 3 Cost of delay penalty per month per plane 0.5 (Exhibit 2) Number of planes affected by delay 90 (Initial rate, 30 per year - first 3 years) Plane orders cancelled due to delays per month 2 (Cancellations: 93, Delays: 24 months = 3.875 per month) Value of each plane order 175 (Range between 150 and 200m) Profit margin on each plane 35 Assumes 20% contribution margin Wacc 7% See WACC assumptions slide Estimated set-up costs 50 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 identified 20 Number of technicians redeployed 10 (Jayco testing - 5) Average length of stay (years) 0.6 Opportunity cost of redeployment (salary) m 0.1 http://www.payscale.com/research/US/Employer=Boeing_Company,_The/Salary Travel expenses 6.0 Total cost of technical assistance per year 18

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 costs NPV 1.50 1.5 0.00 97.24 -97.24 1 45 1.58 2 70 103.67 6.44 90 1.67 4 140 206.89 109.65 3 135 1.75 6 210 309.66 212.42 180 1.83 8 280 411.98 314.74 5 225 1.92 10 350 513.86 416.62 270 2.00 12 420 615.30 518.06 7 315 2.08 14 490 716.30 619.06 360 2.17 16 560 816.87 719.63 9 405 2.25 18 630 917.01 819.77

Union strategy – Financials 1 Strike cost per day 100 From case Net strike cost per day 10 Assuming profit margin of 10% Average union wage (m) 0.07 (Case: 65,000, correcting for inflation) Number of protected jobs 10000 Latest union agreement protected 5100 jobs - http://www.defenseindustrydaily.com/Boeing-Strike-Poised-to-Disrupt-Deliveries-05061  Estimation period (years) 5

Union strategy – Financials 2   Planned workforce reduction Total strike days avoided 1% 2% 5% 10% 15% 20% 30% 50% 100% -2.96 -5.91 -14.78 -29.55 -44.33 -59.11 -88.66 -147.77 -295.53 1 5.49 2.53 -6.33 -21.11 -35.89 -50.66 -80.22 -139.32 -287.09 2 13.93 10.98 2.11 -12.67 -27.44 -42.22 -71.77 -130.88 -278.65 3 22.38 19.42 10.55 -4.22 -19.00 -33.78 -63.33 -122.44 -270.20 4 30.82 27.86 19.00 4.22 -10.55 -25.33 -54.89 -113.99 -261.76 5 39.26 36.31 27.44 12.67 -2.11 -16.89 -46.44 -105.55 -253.32 6 47.71 44.75 35.89 21.11 6.33 -8.44 -38.00 -97.10 -244.87 7 56.15 53.20 44.33 29.55 14.78 0.00 -236.43 8 64.60 61.64 52.77 38.00 23.22 8.44 -227.98 9 73.04 70.08 61.22 46.44 31.66 16.89 -219.54 10 81.48 78.53 69.66 54.89 40.11 25.33 -211.10 11 89.93 86.97 78.11 63.33 48.55 33.78 -202.65 12 98.37 95.42 86.55 71.77 57.00 42.22 -194.21 13 106.81 103.86 94.99 80.22 65.44 50.66 -185.76 14 115.26 112.30 103.44 88.66 73.88 59.11 -177.32 15 123.70 120.75 111.88 97.10 82.33 67.55 -168.88 16 132.15 129.19 120.32 105.55 90.77 75.99 -160.43 17 140.59 137.63 128.77 113.99 99.22 84.44 -151.99 18 149.03 146.08 137.21 122.44 107.66 92.88 -143.55 19 157.48 154.52 145.66 130.88 116.10 101.33 -135.10 20 165.92 162.97 154.10 139.32 124.55 109.77 -126.66

Justification for Q1 key issues and risks Labour force strikes Machinist strikes 2005 http://www.businessweek.com/magazine/content/05_39/b3952115.htm Machinist strikes in 2008 http://seattletimes.nwsource.com/html/boeingaerospace/2008212140_boeing29.html Cancelled orders 93 orders cancelled to date http://www.airliners.net/aviation-forums/general_aviation/read.main/4460211/ Quality concerns http://seattletimes.nwsource.com/html/boeingaerospace/2003889663_boeing180.html Partners – lack of technical expertise http://seattletimes.nwsource.com/html/boeingaerospace/2004470059_charleston11.html Incomplete parts manufactured http://www.reinforcedplastics.com/view/4282/boeings-787-trials-tribulations-and-restoring-the-dream/

Alternative recommendations considered for Q1 Cross-shareholdings Too 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.

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

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”

Enhance GoldCare: Simplifies aircraft ownership Source: “GoldCare Enhances 787 Lifecycle Value”, http://www.boeingcapital.com/p2p/archive/09.2006/r1v5y2006_11.htm 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.

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 GoldCare’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”

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 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: http://www.defenseindustrydaily.com/Boeing-Strike-Poised-to-Disrupt-Deliveries-05061 (2/11/2008 )

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. Low risk given litigious nature of 787 agreement that already exists Source: International Association of Machinists and Aerospace Workers http://www.iam751.org/2008Proposal/newfront.htm

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

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

Boeing needs to strategically decide what can be outsourced to maintain their competitive design and IP advantage Strategic analysis Identify key designs Expertise Retrain design and technological experts Production Retain production facilities Advantages to keep some design capabilities inhouse Future criteria for outsourcing What more we can outsource? Added NPV, slight editing Outsource Reduce supply chain by outsourcing non-key components Logistics Improve logistics design and cost 56

Market Analysis Airplane Production Market Outsourcing Supplier 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 The 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.

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

Supply chain efficiency goals Literature shows lean supply chain management practices represent critical source of sustained competitive advantage Supply chain efficiency goals 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 Room for Improvement Capability Responsibility Management Communicaton Iteration

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

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 100-120 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

Contract Specifications Boeing can renegotiate contract terms to minimize delay and mitigate risk of strategic knowledge transfer Contract Specifications 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

There will be a concurrent implementation of the strategies Timeline for Implementation 2010 2012 2014 2016 2018 2020 2022 Assign personnel to monitor Partners (PLM) Short Term Strategy 1 Deploy Boeing engineers to suppliers Align interests and build LT relationships GoldCare Discount Long Term Evaluation 2 Re-evaluate Partner Criteria Renegotiate with suppliers Innovate Assign personnel to monitor Partners (PLM) Launch next Boeing commercial plane 63

Analysis of airlines and relative to 787 offerings Benefits afforded by 787 to Airlines can reduce costs: 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 Format this into left feeds into right. 787 attributes  benefits/issues for airline

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

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

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

Further to markets for leveraging 787 competitive advantages 1 2 3 4 5 6 7 8 9 Passengers Range, 1,000 nmi 747-8 747-400ER 747-400 777-300ER 777-200LR 777-200 777-300 100 200 300 400 500 600 737-900ER 737-600 737-700 737-900 Three-class 787-8 767-200ER 767-300 767-400ER 737 Business Jet Two-class 787-3 737-800 787-9 The 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 craft Boeing could leverage 787 core competencies to create smaller or larger planes depending on market developments

Massachusetts Institute of Technology Bozdogan 04/18/07 - References Reference URL Tim Optiz, Director of Production and Support Systems, Boeing Commercial Airplanes (March 2007) http://glscs.texterity.com/glscs/200703/?pg=38&pm=2 Lockheed Martin revealed after the cessation of production for its L1011 http://www.airliners.net/aviation-forums/general_aviation/read.main/342184/ COE Newsnet - September 2002, issue 6 “Design Integration Across a Global Enterprise” by Jim D. Green http://essayinfo.com/sample/essay/1120/2/ Boeing Frontiers, “Helping shape markets of tomorrow”, November 2002, volume 1, issue 7 Massachusetts Institute of Technology Bozdogan 04/18/07 - http://18.116.0.58/index.php?option=com_docman&task=doc_download&gid=1478&Itemid=776