Boeing’s Balancing Act

Many of you probably saw Monday’s front page article in the Wall Street Journal on Boeing.  It describes a problem many companies wish they had and one I’ve personally experienced with the result that Boeing is very afraid of.  Because of this I’ve been mulling it over for several hours and still have no clear conclusion as to how I feel about it.

Basically Boeing has had a couple of really great years, to a significant part at Airbus’ expense. 

Boeing… won more than 2,000 jet orders over the past two years from airlines in fast-growing markets such as China, India, and the Middle East.  Without a major jump in production rates, it is largely sold out until 2011.

However domestic and European airlines haven’t placed orders yet, but they have a huge forthcoming need due to aging equipment.

Longtime U.S. and European customers are finally emerging from a slump that followed the Sept. 11, 2001, terro attacks.  They’re starting to shop seriously for new planes to replace hundreds of aging jetliners.

This creates a problem for Boeing.

Though they [U.S. and European airlines] previously canceled or delayed hundreds of orders, these arlines still feel entitled to priority treatment.  "If Boeing or Airbus wants our business, the can ramp up production," says Mel Fauscett, Delta Air Lines’ managing director of fleet planning.

So now what?  The typical response from a manufacturer would be to ramp up production to handle the increased demand and satisfy the customer.  But training people to assemble products as complex as airplanes is very time-consuming and costly, and Boeing got burned badly just a few years ago when they had a similar situation.

In 1996 Boeing won 712 aircraft orders by promising airlines they could have their planes in just a few months.  Of the next 18 months, the company hired 32,000 workers and set about doubling production to 43 airplanes a month by early 1998.  Top managers describe what happened next as a "train wreck."  Badly needed components were at such a  premium that they were rushed to the factories by private jet, helicopter, and even taxicab– and that was on a good day when there were parts to deliver.  Boeing ended up shutting down its 737 and 747 lines for almost a month.

The subsequent fallout led to thousands of layoffs… and the loss of a huge investment in training and the resulting employee knowledge and experience.  Those are lessons that stay with you for quite a while.

Mr. Jamieson, who now runs all of the company’s airplane factories, keeps a 1997 photograph of a row of unfinished planes sitting forlornly outside as a reminder of the perils of promising too much.  "I never, ever want to go through that again," he says.  The experience left an indelible mark on a generation of middle managers.

Boeing has learned a lot from the experience, and put in place processes and systems to prevent it from happening again.

The new No. 1 rule, he [Scott Carson, head of Commercial Airplanes unit] says: "We don’t sell airplanes on the assumption that the factories have infinite ability to produce them."  One of Boeing’s first steps was to require approval of major aircraft orders by a committee of high-level managers.  This team, which includes engineers and accountants, makes sure the factories can handle the work on the promised timetable.

Boeing keeps in touch with suppliers, monitoring their ability to deliver parts.

Just as crucial is to keep a close watch on the customers and their shifting needs.

Suppliers love the new disciplined and planned approach.  Boeing has also created new training methods and implemented new lean manufacturing initiatives to boost jet output by 41%.  The company recognizes that assemblers and knowledge workers can only be stretched so far before the system breaks.

The company demonstrated its restraint in 2005 when it refused to pile on overtime for workers after it fell behind.  A month-long strike by the machinists caused it to miss more than 30 deliveries.  Boeing chose to work the planes into the schedule over a period of a couple years, even though it meant making customers wait.

This commitment to and understanding of the factories comes straight from the top.

Mr. Carson makes a point of wandering each month through the factories looking for signs that the production system is under stress.  He keeps an eye on overtime and quality, and a key test is simply to count heads: A busy factory looks relatively empty.

But here’s the real problem: customers mean money, and money talks.  It will become very tempting to ramp up production, especially if Airbus does. 

I understand Boeing’s quandary at a deep and personal level, driven by experience.  A few years ago I was running a factory for a telecom photonics equipment company experiencing hyper growth… 25% per quarter.  We took the factory from 30 to 180 people in about six months.  We implemented lean manufacturing to create an even greater leap in productivity.  Even then we had a backlog greater than a year.  Then an industry analyst figured out that there was an extreme overage of fiber optic telecom capacity, and the bottom fell out of the industry.  Within six months we had laid everyone off and closed the plant.  The announcement was made on September 10th, 2001… and the next day put things back into perspective.

But what about the customer?  Delaying orders for many years isn’t exactly creating value from the perception of the customer.  It is protecting the factory and the workers, but does it truly protect the long-term health of the company if orders are lost?  Theoretically productivity and efficiency increases created by lean manufacturing will create more customer value, and more customer value will drive additional orders that fuels future growth.  This keeps the "excess" employees employed. 

Boeing has done a lot with lean.  They have also gone in the opposite direction, sometimes forced due to political considerations, with overly convoluted supply chains.  Single units of production take huge amounts of effort and hours.  A very difficult situation to level load.

It will be interesting to see if Boeing holds firm and doesn’t try to rapidly increase production, and if they lose orders by doing so.  Or perhaps they will rapidly increase production and then have unexpected quality and supply chain problems.

But hopefully they find a third way that increases output and improves customer value in terms of shorter lead times, while mitigating the risk of having to remove knowledge workers.