Sunday, June 29, 2014

The Engine Of 787 Profitability Synergies

There are considerable contributors for Boeing to make the 787 profitable and retire cost associated from its inception and production.  This, the goal of every venture, is the business of passing  break-even investment with its new product. At some point the financial unit of Boeing will continuously seek out its cost accountants for the summation of sunk cost into a project, and production cost for each unit comparing receipts of money from customers for each sold unit. The marketing arm of Boeing must sell enough units of the 787 to over-come all cost associated with R&D and production of the 787.  Currently, it is estimated, Boeing loses $49 million dollars for each 787 delivered. Out of a per unit loss is a number that it pays out, entertaining a split ratio for production sunk cost of building per unit, and its contribution  towards retiring the R&D expended on creating the 787 in the first place. Some of these R&D expenditures are ongoing even after the first 787 was delivered.

Those current R&D hits come from continuos recoding of computer systems, improving production methods, and changing 787 items within the airplane, which improve all current delivered and future airplane to be built. That would be a financial anchor towards break-even, where the delivered 787 would contribute a net profit for each unit delivered.

Here is the conundrum for Boeing, will the change management on the 787 and early production cost cause Boeing to not reach a Break-even point on this aircraft in the next five years or after its 1031st 787 is delivered? The answer is a four fold event.

  • Production cost drop and production efficiency increases.
  • Boeing has sold 1031 Aircraft which 159 have been delivered.
  • The 787-10 has not travelled out of the R&D hole in the pre-production state.
  • Supplier chain cost continue to shrink to a lower percentage of the 787 cost.
These four  items are very important for Boeing to report during 2015 in strong numbers. 

First up is the production cost and efficiency Delta (change). Boeing is quickly moving towards making Charleston a reliable participant with Everett. The corporate instinct is that if Boeing keeps going towards 14  a month goal by 2020, then that number indicates it will have succeeded in optimization of  both productions floors. It will make the 787 for the lowest cost it can from both those floors.  Since increasing deliveries rapidly, will create greater inflow of revenue receipts, it still needs to refine the cost of process to open up more sales to its customers with lower manfacturing cost of airplanes. 

This will be a bulleted item above that it can control towards shrinking the "under" Break-even amount towards profitability.

The second item listed is the long order book. But is it long enough that 1031 orders give it strength to reach profitability, then all is well? However, the 787-10 has not been built and is part of that order book strength. Customers, then become the team that will pull Boeing out of the "loss" ditch at this time. In comes from an unlikely term from the thesaurus, synergy. Boeing needs the synergy of its product and customers to pull it into Break-even and profitability. To explain this concept, the existence of two different participants combine to make a greater affective action than it could separatly, is called synergy. Bringing the force of a flying customers and over preforming 787's, synergises the  20% better fuel economy each time it does fly. Enriching the bottom line of customers, and is admired by other airlines that have 787 envy. Where it also buys more 787's in order to compete. Hence the synergy from a well built production unit, synergizes the sales arm to go beyond 1031 ordered to date. The synergy of placing 159-787's, during the last two and a half years, also synergizes and incentivize its customers to add on more orders as airlines buildits own business model, before its envious neighbor airline also react and order. All this synergy will realize in 2015. Production, sales and customers will meet in the perfect profit storm. 

A 787-10 anchor is coming where more R&D money will be spent getting this aircraft into customer production and delivery. This problem has been mitigated greatly by the 787-9 program that has perfected its roll-out to production with no stoppers, as it seamlessly flew its test period. The bar has been set high for the 787-10 and there no reason to expect anything but a flawless repeat for the 787-10 as the 787-9 performed in tests. The 787 genies have been put back into the bottle with a cemented cork.

The last underpinning supporting the cost margins are its 787 suppliers. Boeing has wrangled in the supply chain as customers have received lucrative cash flows with balanced rejections of under preforming parts. The Boeing supply chain is tightening and squeezing down cost in a methodical manner. Technological design change for more efficient parts contribute to part's costs reductions. Supply partners are very competitive for Boeing contracts, as they too want to build its own company through the Boeing relationship. The bullet points listed above do feed each others for more efficiency as the 787 gains consistency and reliability. The Boeing 787 will make a profit sooner rather than later through these competing synergistic forces.