Guy Norris/Seattle
What went wrong, and what action is being taken to make sure it never happens again? These are the questions being asked by Boeing and the investment community as the company begins recovering from a dire production crisis that continues to wreak havoc with its financial performance.
"We've dug our way through a lot of messes in the past, but when this went I've never seen anything go south so fast," says Boeing Commercial Airplane Group (BCAG) president Ron Woodard. As a result of his company's annus horriblis, Woodard vows that "-we will really learn from this and make sure we never, ever repeat this. It hasn't been a lot of fun".
The pain comes from several perspectives. Firstly Boeing, like Airbus Industrie, is still taking record orders and has been enjoying surging demand across most of its product line. It should be aiming for record profits, not facing big losses. Secondly, the Next Generation 737, with more than 1,000 orders, should be making significant margins quite early in its production life, but is currently not expected to start breaking even until around the 800th aircraft.
Thirdly, at a time when Boeing has been publicly trying to emphasise the goal of "customer first", it has actually been alienating them in larger numbers than even before. "We have damaged some customers and made them very unhappy. We have got to re-establish our credibility with those people," admits Woodard.
So what went wrong? Like most aircraft accident investigations, the post mortem reveals an unusual convergence of circumstances, many of which, in retrospect, were predictable, Woodard suggests. "A really basic one is you should never develop four new aircraft you've never done before while you are going through the biggest production build-up you have ever gone through," he says.
Not counting former McDonnell Douglas' 717-200, Boeing resources were stretched to the limit by the Next Generation 737, 757-300, 767-400 and 777-300 development efforts. With new business pouring in, Boeing simultaneously planned unprecedented production rate increases across the board.
The first rate increases were announced in March 1996, but within nine months it became clear that these would not be able to keep pace with demand. In December 1996 further increases were unveiled. As even more orders were taken, and ambitious delivery dates promised, the pressure mounted for even further rate increases. These duly came in May 1997, when the current rates were announced. The biggest rate increases were to the 737 line, which mushroomed from seven 737 Classics a month in March 1996 to a planned 24 a month (including three Classics) by October 1998.
Woodard singles out the Next Generation 737 programme for most of the blame. "We could not certificate the Next Generation 737 when we wanted to, so we ended up essentially missing the certification by five months. This got us then into a vertical build-up of all the change incorporation [revised horizontal stabilisers on early-build aircraft; engine strut and trim modifications and emergency exit revision on the -800], and suddenly we had something like 50,000h of change incorporation into aircraft that were already built up," he says.
The strain on the fast-paced 737-600/700/800 certification effort coincided with problems of parts shortages on the 747-400 line. "We got into a place where we were divergent on our building schedules. Before that, when we stopped the 747, we thought all our problems were with that line. Then that 'wall' of [737] change incorporation came on top of it while we internally, and our suppliers, were not able to meet our commitments to do the build-up. Everything built on top of it and now we are digging our way out of it," says Woodard.
LESSONS LEARNED
Keep a constant watch on commitments, says Woodard. "We go through a very disciplined exercise every time we do a rate increase, and there was a series of commitments made by Boeing people and suppliers that didn't come true. But you are doing these things two or three years in advance, and probably a lesson learned is that you've got to be able to keep revisiting those commitments because the environment changes. We had internal suppliers and external suppliers who, when the time came to do it, said they had other work to do, and yet they still said they could meet their original commitments when they often could not".
Woodard is careful not to put the blame squarely on the suppliers, or on any one group, however. "There were big changes going in the industry. Douglas Aircraft [before and during the merger] were getting into the same crucial problems on shortages and jobs behind schedule. It appears most of the industry was...I'd love to know how it affected our competitors [Airbus]," he adds.
Another lesson was the perhaps previously unsuspected vulnerability of modern, integrated production systems. "If 10 years ago you had one programme problem, then you had one programme problem and you could dig your way through it. Now all these things are so inter-related, if one gets sick, then everyone gets sick. This is the downside of 'just-in-time', low inventory levels, high returns and integrated production systems and all the other things that we have made so much better over the last 10 years," Woodard says.
The crisis has been a learning experience for all involved with BCAG's new methods of production, with several major initiatives now under way including Lean Manufacturing, Make/Buy and DCAC/MRM (Define and Control Airplane Configuration/Manufacture-ing Resource Management).
"We were using metrics that worked in the old way, but not in the new way. So we are learning and this is the first time our new management structure and process-driven production system has been under stress - and we really stressed it," he adds.
Woodard also believes that, in hindsight, BCAG's fortunes would be happier now if it had "-started the Next Generation 737 about two years sooner. If we could have had that thing developed, certified and had a nice, logical build-up rather than the problems we did have, it would have been wonderful to be building the 500th about now." Woodard realistically adds: "We wanted to build it sooner, but I don't know if the market would have ordered it sooner. It may also not have been as good an aircraft as we've got now. Besides, it is a particularly difficult thing for us to come out with a new product while you're making the one it will displace in record numbers. They are tough decisions, and you tend have to better margins on older products than brand new ones".
Summing up the lessons learned so far, Woodard admits that "...in hindsight, we should not have committed to such an expansive build-up as we did. Even though that was driven by the marketplace, we obviously, in retrospect, over-reached".
CONTRIBUTING FACTOR
Although good news for the company in the long run, a factor contributing to the production crisis was the succession of enormous fleet deals secured with American, Continental and Delta Air Lines in 1996 and 1997. The sheer number of orders placed by the three carriers helped force the rush to higher production rates, but equally will help sustain stable production through to 2016.
The three airlines now hold combined firm orders for 372 Boeing "7-series" aircraft and a greater number of options and reservations. Of the firm order tally, some 234 are for NG737s, or almost 25% of the fast-growing orderbook. Another 55 are 777-200s and 47 are 767-400ERs, with the balance made up of 757-200s and 767-300ERs.
All but Continental's original NG737 order (18 -700s and 30 -800s) from July 1996 post-date the first big preferred supplier agreement, which was formally sealed with American in November that year.
The deal was concluded by Woodard and former American chairman Bob Crandall. "The whole American order swung around the 737-800 being better than a refurbished, hushkitted 727-200. Our challenge was to study what the value of the 727-200 really was and to convince American we had a better solution with the -800. We ended up doing the same thing for MD-80s and Fokker 100s. Ultimately, I believe we will see those sorts of numbers at American.
"So once we started talking about getting 777s in there we started talking about long-term arrangements. It soon became apparent that they were either going to go with a Boeing solution or we would end up working our way through a whole bunch of negotiations. So we said 'why don't we look at the whole thing?'" American wanted flexibility and guaranteed prices and got both.
"The more we kept looking at it, the more it made sense to look at flexibility and, once we'd made that possible, we got a business deal in place for each aircraft," he adds.
"I like the idea of having a known set of deals in place and the idea that a potent airline is going to be coming our way. Continental and Delta evolved along the same lines. Crandall understood the benefit of getting the whole thing sorted out and of not having to spend your time looking over your shoulders," Woodard says.
After the intervention of Airbus and the European Commission, Boeing has "-promised not to impose exclusivity" in the deals, which covers procurements for 20 years in the case of American. "Our job is to make sure we give them better value and that they always be comfortable with us. It certainly gives us a nice base across our production line to build on in the future," he adds.
Flexibility and tight price control, the two keys to the fleet deals, have been made possible by the manufacturing advances now coming on stream at Boeing. After five frustrating years, the benefits of DCAC/MRM are at last beginning to show, says Woodard. The "breakthrough" initiative is aimed at improving the way BCAG configures and produces aircraft and represents the biggest single chance for the company to cut costs, cycle time and defects (Flight International, 26 August-1 September). Woodard, who is recognised as the main driving force behind the DCAC/MRM initiative, is personally committed to achieving full implementation as quickly as possible.
"DCAC/MRM will be done by the end of 1999, and we're coming to the point where we'll see the benefits. It's been a marvellously executed programme when you look at the complexity of what we had to do," says Woodard, who was under no illusions about what life would have been like without major changes in the production processes. "We all knew if we didn't fix it we wouldn't be around to fix it because we would not survive another business cycle with the system we have."
Woodard is also convinced that the stress of introducing the initiatives at the same time as the production ramp-up did not contribute to the crisis. "I don't think it did. When we started it, we thought we could get it done before the production build up. There were a lot of people who said 'why don't we delay this thing for two or three years'. We have refused to do that, which probably made things a little tougher round here, but certainly didn't cause the production problems. In fact, I'm convinced the MRM part of it has helped us in the parts part of the business," he says.
The new systems cannot arrive quickly enough for Boeing, which is still coping with the legacy of the problems which peaked in late 1997. Despite recent assurances that the recovery is now under way, the company's stock price has continued to suffer as it raised the break-even on NG737 sales to 800 aircraft.
"We had to extend the block [from 400] because we were getting close to delivery beyond the block, but we're still assuming a no-profit 800 block. It's one of those areas we've got to go to and work like mad to make sure we get lots of profit," says Woodard.
He hints that, if the recovery speeds up, Boeing may well see break even before aircraft 800. "We are taking a prudent position, and one we could improve on".
INVESTMENT ANXIETIES
The action is a serious move for Boeing which is anxious to restore the faith of the investment community. "We have to show them some earnings, and exceed their expectations instead of under-running them," he adds. With expectations of significant improvement over the rest of 1998, Woodard is optimistic of better performance next year, when BCAG is scheduled to deliver a record 620 aircraft.
Another development he looks forward to, though perhaps not so obviously, is the forthcoming privatisation of Airbus Industrie. "I am so anxious for it to happen. The sooner it happens, the sooner they can start to feel the pressures of private ownership and the sooner, I believe, they'll start acting the way we act. We are 100% for it. We come from two different cultures, and we can't even talk to each other. They assume we do everything they do, because that's the way they do it, and we assume they should do everything we do because that's the way we think. Until we're driven by the same rules we will never be able to compete in a pure sense, so we welcome it."
Source: Flight International
