April 30, 2018, © Leeham News: The Wall Street Journal Friday reported Boeing was poised to purchase a supplier; a deal could be announced as early as today.
The acquisition, if it happens, will be a major step toward increasing the business at Boeing Global Services (BGS).
It will be another step in the vertical integration that recommenced under Boeing CEO Dennis Muilenburg, an outgrowth of too much outsourcing with the 787.
Coincidentally, the day before, Wendi Folkert, director for Supply Chain Propulsion Strategy for The Boeing Co., acknowledged that the growing BGS has to balance against competing with Boeing’s own suppliers.
Folkert made her remarks at the I-90 Aerospace Corridor Conference in Spokane (WA).
“We depend on three million parts a day coming into our factories,” Folkert said. The increased production rates put pressure on the factories that already supply these amounts.
The supply chain also is under pressure from Boeing’s Partnering For Success (PFS) program that began under former CEO Jim McNerney and continues with increasing demands for cost-cutting under Muilenburg.
PFS is the program in which Boeing demanded major cost cutting from its supply chain. This includes not only shaving prices but cutting costs through improved efficiencies, which may require capital investment in new equipment.
Boeing then advanced to PFS 2.0, rescheduling the payments to as long as 120 days.
Both PFS 1.0 and 2.0 brought howls from the supply chain. Some suppliers wouldn’t, or couldn’t, go along and were replaced by Boeing.
A new threat to the supply chain is Boeing’s decision to in-source work that had been out-sourced for decades or specifically for the 787 program. The 787 out-sourcing proved to be a major disaster in costs, design and production. Lessons learned resulted in the decision to in-source the wings, for example, on the 777X development.
Other outsourcing in place for decades has been in-sourced, reflecting a changing philosophy.
One of Folkert’s jobs is to determine what parts of the propulsion system can be brought back in-house. Boeing retains Intellectual Property rights and gains after-market services potential.
For example, after decades of out-sourcing the 737 nacelles, Boeing now produces these at its Charleston (SC) 787 plant for the 737 MAX.
Vertical integration was the focus of several presentations last February at the Pacific Northwest Aerospace Alliance (PNAA) conference in Lynnwood (WA).
Kevin Michaels, managing director of AeroDynamic Advisory, cited the benefits of vertical integration—but also the potential risk in a cyclical downturn.
“Vertical integration has been a hot topic within the entire aerospace industry in the last few years,” Folkert said. Boeing created a joint venture for seats and plans to re-enter the avionics arena for flight control systems.
“We have to balance that risk-reward,” she said. The costs for designing and building within Boeing and at the same time ensuring a healthy supply chain in what may now become competing sectors are debated internally, she said.
“There are definitely some pockets where we want to focus on that activity, but overall [risk-reward] has got to be on our mind.”
Folkert said Boeing doesn’t mind that some IP is owned outside the company, but other IP ownership and aftermarket potential is something Boeing wants to retain.
Another threat to the supply chain is the strategy, rolled out last year, to dramatically expand Boeing’s footprint in the aftermarket business. Boeing Commercial and Boeing Defense currently have less than $10bn in aftermarket business. Muilenburg wants to increase this to $50bn in 5-10 years.
One way is through acquisitions, such as the potential deal that might be announced today. Another is through the creation of joint ventures, such as the seating business, or expansion into sectors like avionics.
A this is simply to make a push to expand Boeing’s maintenance, repair and overhaul business that already exists through Aviall, a Boeing subsidiary. This aggressive push, along with in-sourcing and the other initiatives, directly compete with the aftermarket business its supply chain relies on for a source of profits.
How does Boeing do this without hurting its suppliers?
“There’s not necessarily an easy answer,” Folkert said. “We are trying to make ourselves, Boeing, as competitive as possible in [the aftermarket]. Our customers are demanding it. We’re trying to make sure how do we balance growing our supply chain while still having the ability to meet our own needs as well. It is a balance and we’ve got to find that fine line because we can’t afford to completely alienate all of our suppliers. That is not our mission. Sometimes they may think that, but that is not our mission.”