Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
Boeing’s Partnering for Success strains supplier relationship
Boeing officials reaffirmed the company’s drive for Partnership for Success, or PFS, during two appearances at conferences this month, adding that its supply chain was mostly on board, though some companies are now on a “no-fly list.”
.CEO James McNerney spoke at a Cowen Co. conference and in subsequent interviews, noting that some suppliers have greater margins than Boeing, which he termed “out of kilter.”
.Stan Deal, VP and GM for Supply Chain Management and Operations for Boeing Commercial Airplanes, told the Pacific Northwest Aerospace Alliance conference in Seattle last week that PFS is proceeding well, with cooperation of most suppliers.
.We were at the PNAA conference, and there isn’t one supplier we talked to who was happy with Boeing’s PFS program. To a supplier-none of whom would consent to be identified, for fear of offending the Big Momma-each complained that Boeing is being unreasonable in its asks: 15% to 25% cost reductions.
.Those suppliers who are on the 787 program are especially unhappy. Under the original 787 contracts, suppliers weren’t to be paid until the airplane was certified. Given a delay of nearly four years, and many parts or systems redesigns necessary, suppliers faced severe cash flow shortages and in some cases, nearly went bankrupt. Even major, well-heeled suppliers faced millions upon millions of dollars of cash-carrying costs, yet were and are asked by Boeing to give up margins.
.”Behind closed doors, they will tell you this is entirely about margin,” one supplier tells us.
.In response to our question at the PNAA conference, Boeing’s Deal said the company takes into account the pain inflicted by the 787 program on those suppliers it today asks for re-pricing. Later, suppliers in the audience expressed disbelief at Deal’s expressions of considerations for the struggling 787 suppliers.
.United Technologies, recently acquired Goodrich unit (since renamed) lost the landing gear contract for the 777X, and the 777 Classic (at a transition date in 2017), to Canadian company Héroux-Devtek, a move Teal Group analyst Richard Aboulafia criticized as unnecessarily risky. UTC’s relationship with Boeing, also a 787 supplier and one that was hard hit by the costly delays, is described as highly strained.
.Aboulafia also criticized Boeing’s hard-line approach, which he characterized as one that can harm its relationship with the supply chain in a manner similar to the toxic one with its International Association of Machinists District 751 touch labor membership.
.We certainly understand Boeing’s desire to shave costs in its supply chain, just as we understood the desire to control pension fund and medical costs with IAM 751. However, the rosy picture painted by Boeing officials is very much at odds with those suppliers we’ve talked with.
.The danger to Boeing is being penny wise and pound foolish, just as Aboulafia expressed at the PNAA conference. We also see the prospect of Boeing’s suppliers seeking to diversify with Airbus. This is a good thing for the supplier-having all your eggs in one basket is never a good thing-but Boeing’s penny-pinching ways has the potential of sending talent to its fiercest rival.
Boeing need to focus on their own execution – and their focus on margins and sales might come at the expense of engineering and quality.
Upper management would have moved on by the time this all comes home to roost.
The desire to “screw” suppliers is not an exclusive attitude being expressed by Boeing.
The problem for Boeing is maintaining credibility with their suppliers by crying poor yet publishing such rosy results continuously to Boeing shareholders!
Boeing should know they cannot to all the work provided by suppliers in-house. I can understand Boeing’s desire to cut costs. They have already cuts some costs significantly, but to ask suppliers to cut their costs by 15%-25% is not realistic. The time to ask for these types of cost cutting would be at the renewal of the contracts Boeing has with these companies, not now.
In cases like these for many suppliers Boeing must realize their PFS must be a two way street.
“some suppliers have greater margins than Boeing, which he termed “out of kilter.””
I always understood margins to be a result of risk and supply/demand.
B doesn’t have a lot of risk in it’s future – with huge backlogs and well diversivied customer base. Why is it “out of kilter” for some company to require an higher margin. Specially with the… erreatic treatment of some of their suplpiers?
It’s just corporate BS. Execs talking rubbish to each other, once everybody has repeated it at least once, it has moved from fairytale fiction to being a fact. They need to get out more.
The people in Toulouse must be smiling, and I am sure are on the horn to suppliers to talk about expanding their Airbus business right now, in anticipation of increased deliveries, and in a true partnership.
Never interrupt your enemy while he is making a mistake.
Boeing’s ineffective gyrations have incurred cost and risk for Airbus.
Should Airbus introduce “don’t go there” clauses with their bacon saved
suppliers ;-?
How has Boeing’s “Let me wet my Beak” campaign against suppliers
faired since its announcement some time ago?
“Spirit AeroSystems recorded a net loss of $587 million in the 4th quarter of 2013, in part because of additional charges on the Boeing 787 Dreamliner program”
That’s another example of not such a rosy picture…
All you need to do is multiply by that ‘-1’ or ask someone to type it in black instead of red, and it looks much better. There, that wasn’t so hard, now was it?
I like the name, Partnership for Success. It has a “Ministry of Truth” ring to it. Did you ask the suppliers what “partnership” feels like? Or, indeed what “success” feels like?
With Airbus looking to increase rates on A320 and do 13 per month on the A350 program this is silly. Suppliers are the bottleneck and in the end will decide who gets to up their rates and who doesn´t. It only needs one or two tier major suppliers to decide it´s more profitable to spend their investment money increasing supplies for Airbus products rather than Boeing and then Boeing´s rate increases will go out the door.
Boeing has embraced the Wal-Mart business model, which emphasizes extracting gains from all stakeholders. In that context, executives have more influence and contribute more [short-term] value by making stakeholders feel precarious, isolated and contingent.
This is exactly what the Wal-Mart business model looks like. Washington State had its experience with this. The IAM had its experience; suppliers are getting their version. Whenever Boeing can achieve a peak of “leverage” they will wring out another round of gains.
This business model requires no expertise or appreciation of the complexities of building airplanes. At least in the short term.
IF TRUE, it is disturbing that a Company dependent on an efficient and coordinated supply chain would try to extract reductions which could ultimately damage their production and alienate their suppliers.
But I question the veracity of these reports. What goes on between a buyer and seller is called “negotiation” . Each side wrestles for the best arrangement and this process should ordinarily result in prices that are mutually satisfactory. Contracts are renewed and revised and limited to their duration
Boeing is not blind to the consequences described above and Suppliers are not forced to accept arrangements that hurt them financially. Many of these allegations are contrived and exaggerated .
The IAM contract is not exploitation and long term job security is highly valued. Long term supply contracts are also advantageous and trying to tighten up the margins is part of the process.
I suspect the usual amount of BA bashing will always take place on this site. I also believe that these reports are read and followed by many Boeing Executives and Investors, and serve as a way of adding to their perspective and understanding
Many exaggerated – but hardly all, and all tarred with the threat of having ‘too large margins’. As you imply Boeing executives are indeed following practises encouraged by the more conservative of American business schools, however they are conveniently (convenient for them as the consequences will tarnish Boeing after their bonus dripping resignations) forgetting that these may well be applicable to Asian shirt manufacturing where the choice is endless and the quality irrelevant but far less so when Airbus is also seeking the best and reliable to manufacture its sub-components. I do know that were I the CEO of such a company, having absorbed a missive that threatened no fly, I would have my sales office contacting Airbus and reviewing my investment for Boeing.
“But I question the veracity of these reports. What goes on between a buyer and seller is called “negotiation” . Each side wrestles for the best arrangement and this process should ordinarily result in prices that are mutually satisfactory. Contracts are renewed and revised and limited to their duration”
That is the dumbed down theory.
Reality is starkly different. There are lots of contracts signed where the stronger
side got its way ( on paper ) but created an unworkable situation in which both sides loose. ( Perfidy when only the more sensible but weaker side looses.)
This gets more pronounced in a culture of quarterly results. F*k the future I wanna have my cookie now. And so called “Investors” are instrumental in this.
( actually I would prefer to not call “share _traders_” investors. )
I had recently commentated on Boeings lack of expertise in outsourcing compared to Airbus, which its self is not perfection. With many suppliers currently forced into shaving margins to the bone, additional cost reduction demands will do nothing to encourage mutual trust & willingness to become involved in future product development.
An object lesson on how not to win friends & influence people.
Scott,
Were any of the suppliers you talked to at the conference so called “risk sharing partners” or were they traditional suppliers? No value judgement here, but in my view, Boeing is more justified in pressuring their risk sharing partners than their traditional suppliers. And one of the grievances you mention, not getting paid until 787 certification, I would consider expected for a risk sharing partner but a bit draconian for a traditional supplier.
UTC could be viewed as a risk-sharing partner. Others were further down the chain.
Lets see, who put Boeing into the hole on the 787
1. Union (nope)
2. Suppliers (no)
3. Management (Bingo)
So, the reason the margin for Boeing is so terrible (well the shareholders cut aside) is management foul ups of huge orders of magnitude.
Of course they don’t look at themselves, its someone else fault. Not sure what business school that comes from but they sure lay it on thick.
Obviously the way to increase Boeings margins is for the board to fire the entire management team, saves a lot of lip flapping and finger pointing in the wrong direction.
In the meantime they are firing the companies that got them where they are, landing gear is just the first salvo of taking the Mini Mac10 and milling their own foot off.
It is good to see Boeing be aggressive with suppliers for a change. They usually just bail a lot of them out for free when they underperform. Does anyone know which major suppliers have profit margins that are “out of kilter” with Boeing’s?
Before everybody goes all gung ho here on lambasting Boeing, or comparing it negatively to Airbus, it should be noted that Airbus has been increasingly and continuously tightening the financial finger clamps of their suppliers since at least 2006. Don’t forget the great sell off of some of their “non-core” locations in France and Germany so that they could negotiate new contracts with these “new” suppliers.
It’s also notable that Airbus in late 2011 or early 2012 was “forced” to buy a company that makes aerospace tubing and ducting in order to preserve Airbus’ supply of such products and to save the company from itself (my suspicion is that the only way it could have saved itself is not to have done work for Boeing on the 787 nor for Airbus on the A380, the A350 and the A400, all of which had large delays). It is now being gutted so that in some way it can be made to look profitable before selling it again in a year or so.
Many other companies doing work for Airbus were not so “fortunate” as to have been “saved” by Airbus and have either gone bankrupt or left the aerospace industry, assuming they had such an option.
Sure pressuring the suppliers is bad management culture. But realistically it is not very likely this will lead to a great fiasko and Beoing management starts to see sense again.
The automobile industry has a long history of screwing their suppliers, too. Ignazio Lopez was famous for beeing the hardest squeezer in the 90s at VW. From time to time the maufactorers had to “save” a brancrupt supplier but overall the strategy seems to work without great problems. At least as far as information in the press goes.
The only real risk may be quality. The automobile industrie has learnt to ensure a tough quality ensurance for supplier parts. Boing had great problems with that in the 787 problem. Maybe they have learnt enough from that, maybe not if suppliers start saving on quality ensurance.
You might look at the 787 program to see who messed up what. And what part of Boeing management and sense go together these days?
You might also note that VW has one of the worst quality issues in the industry. Car stalling vs an aircraft buggered up and the impacts of one vs the other are not remotely comparable
And a no name firm on landing gear on the 777X, whats not to like so far?
Or as the guy who jumped off the 100 story building said as he went by the 50th floor, so far so good (and we can always blame the union and the suppliers when the program t goes splat)
I agree with you on the 787 problem, thats mostly supplier issues.
Up to a point thats a learning process and surely Boing has learnt to manage suppliers better and have a stricter quality control for supplier parts.
Is Boings QA good enough to cope with new suppliers and old ones adjusting to work on razor-thin margins? Time will tell.
I was a supplier of GM Germany when Ignacio Lopez worked there before he went to VW for some months
He asked his purchasing people to ask for 50% from suppliers
Few years later
1- quality of Opel products went so bad, they loose their image as a good german automaker and were to close … Mme Merkel politically saved the factory
2- I stopped supplying the Starter factory who finally closed
3- My share to their competitor increased
This happened in the 1980’s Opel has not recovered yet his market share in Europe at least
Just the kind of scenario Boeing is entering instead of making all the bean- counters and other administrative people REDUNDANT thus taking their margin up
At the risk of breaching reader comment rules I wonder if Stan Deals nickname could be Paki?
Definitely not someone I would want to have a contract with.
Wonder if McNearny realizes the airlines could make the same “out of kilter” statement about their margins versus Boeing.
@Mark: Wonder if McNearny realizes the airlines could make the same “out of kilter” statement about their margins versus Boeing.
When American signed the 20 year exclusive contract with Boeing, then-CEO Bob Crandall was asked, “What does this cost Boeing?” Crandall didn’t hesitate: “I don’t care what it costs Boeing. I only care what it costs me.” It’s one of our favorite stories about Bob Crandall.
Airlines menetekel are the leasing entities.
All around the banking/capital ( including leasers ) sector is skimming off profits from productive entities by way of nonproductive capital cost.
Uwe, I follow you point but you could apply the same thinking to Banks. Leasing enables airlines to utilize their capital more efficiently and , hopefully, increase their revenue by producing more income. Cost of capital is just part of the formula that goes into decision making.
You define cost of capital as “skimming off profits” …cost of capital is the cost of borrowing capital FOR productive purposes
i am just happy that Boeing, Airbus and all the people in the network are reading these notes. This is a big think tank. I am sure that if the traditional partnership relations on reliability and trust will not prevail the smart MBA executives will pay the costs (detracted from their bonuses possibly) of the failure. Unless they will decide to return to the concept of manufacturing everything in house like in the pasts (the imploding concept of the outsourcing ) the way is leading to a quality reliability decay.
Airplanes are not Walmart like product for mass market, (BTW Walmart is what the americans wants “anything at the lowest price possible” therefore we should not demonize W. but us, hurray!)
SP (FLAPA)
…word of advice – don’t set foot on a 777 after 2017
I know I won’t be
Boeing’s Partners for Success: Sucking Up Cash Contributions for E-Series Sadists.
Every Boeing employee is now on notice that they are an individual profit center subject to outsourcing or “re-sourcing” at any moment. It is like Douglas Aircraft’s TQMS on steroids.