Wednesday, October 22, 2014

Recogition, Self Awareness, and Boeing Production Increase

Long ago, Boeing made thirty-two 737's a month, and was satisfied with that number. Mean while back at the Airbus barn, they produced near forty of its type for its customers. Boeing gave a big yawn in those days, satisfied with its own play book of 747, 767, and 757 churning out the door.  A main problem existed with the Boeing yawn. The backlog was coming to an end! Boeing needed a "Sea Change" as it was about collapse under the weight of its own lethargy. That change flew in the face of Boeing conventional wisdom. The only big back log was with the 737 and 777 models. Both were cash cows for the company. Boeing needed cash quickly if they were going to turn this company around and beat Airbus. To do so, they needed a new aircraft family, a refreshed 737 Max and a mini Jumbo that would slice up the airline dichotomy with an award winning 777X. Money, Money, and more Money was needed.

The playing cards were on the table and they were just a few to play. A 737 and 777 backlog as the other models were dying. Boeing had to liquidate back log for cash in order to build the 787. It had to increase its order book to survive. Boeing needed a game changer and difference maker. It also needed to recharge its order book. The order is like charging the production battery. But at this point, in 2004, Boeing had to power up that order book with an older offering of aircraft. The 737 NG, a waning 767, and the 777 300-ER. The 747 was slim in the order line and it needed a boost itself with orders.

Orders ultimately equal cash flow and "profits". Excessive cash margins are  relative to profits when delivering airplanes. Boeing needed to install new profit gears like the 787, 747-8i, and 777X. It needed  to reinvent the 737 into the Max. All taking capital investment or cash. It, Boeing needed sales. Two thousand two hundred Max later, Boeing resupplied the order book. Boeing needed deliveries (cash). Hence the forty - two 737's a month. Now its looking at 52 a month. It also went deep into the play book with one hundred 777-300ERs a year, with no help coming from the 747-8i, or a 767 cadre of tankers yet to be accounted for in a tangle of production slots.

Boeing has pulled its lethargic dilemma from 2004, shrinking it's backlog as if pulling itself up from its bootstrap. It has essentially caught Airbus, and made a pass on the fast production track. Not only has Boeing met and exceeded expectation in marketing, but in customer satisfaction, using its hold card from increased production while it still had a back log to draw from. Now its backlog has grown by 14% this year over last year. A remarkable gamble paid off as sales are spurred on from increased delivery.

Customers can now count on receiving product when they need and are ordering with confidence where Boeing will meet its promise. Customers are planning fleet renewal and expansion around that promise of timely delivery. The 737, the littlest engine, that could, is chugging up the hill for Boeing opening doors with new customers. During 2014 it surpasses the NEO 2014 orders at this time. A strong part of the catching and passing process against Airbus. The 777X promise has stemmed the tide against the Airbus A350 Family. The 787 remains a cost pig.

This cost pig marks its line at 22.5 billion in the hole. Boeing says the tide will turn at half past 25 billion, and start a profitability binge. If Boeing is correct then its robust effort on efficiency will pay dividends from the production floor as suppliers as well as builders will hone the cost downward for each 787 made. Boeing is losing money on each 787 delivered at this point. It assumed it would not go past twenty billion sunk, but has already eclipsed the number by more than two billion and will dig a little deeper when it reaches past twenty-five billion sunk. What is Boeing doing to squeeze down towards a profitable 787, is all the predictable actions.

  • Factory design efficiency and production floor renewal
  • Supplier streamlining
  • Boeing recapture from under performing suppliers (bringing some assembly home)
  • The Learning Production Curve is Maximized
All of these points have been enacted since the first 787 flew out from the doors. It's the always improving model.  There is still some inefficiency margin remaining, and it's open for leaning out towards profitability. Boeing is reluctant to increase prices for its customers, but it will have to consider some price adjustments in sales round two. Sales round one sold one thousand or more 787's. Now Boeing has invested a great amount of capital on 787 improvements, and must recall that investment expended on improvements through price adjustments. It's simply stated that the current production craft are better than first delivered aircraft, where the 787 should cost more in the second round of sales after 1,000 units ordered are delivered.

The Boeing increase production strategy has worked. It built past the naysayers when the backlog started to shrink from increased production numbers. Because of that gamble, customers responded by ordering more aircraft. Boeing gained important cash infusion. It became a counter balance to the 787 program cost. The 747 hangs on by just an order thread. New life for its ilk are found in upcoming freighter orders, and some passenger slots, as airlines seek the sweet spot. If the 747 can find a customer sweet spot, then it will live another twenty years on the delivery block. The 787 becomes a Boeing tool purchased, not only for passenger travel, but as a follow-on play book for succeeding aircraft such as the the Max and 777X. The gamble won from increased production is pollinating Boeing's future aspirations through its many new commercial programs. The production floor has made this all possible, enabling Boeing moving forward with its engineering acumen and for its aviation grand play.