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Boeing's Chinooks Propose Solutions to Address Backlog
- 1. CHINOOKS February 10, 2017Boeing Business Case Competition BOEING BUSINESS CASE COMPETITION TEAM CHINOOKS AIMEE XU | ANAV SHARMA | CHRISTOPHER SCHUMACHER | NICHOLAS PIETROW | SHARON WANG
- 2. CHINOOKS February 10, 2017Boeing Business Case Competition Agenda I. Overview II. Demand Prioritization III. Expanded Production Capacity IV.Efficient Inventory Management V. Appendix
- 3. Overview
- 4. CHINOOKS February 10, 2017Boeing Business Case Competition Overview of Issues Demand Prioritization Issues Solutions New Contract Current Backlog Long Lead Times High Delinquency Rate at 3% Per Month Rigid Expectations of 20 Planes Per Year Heavy Backlog of Approximately 800 Aircrafts Growing Demand at 6% Per Year 12 to 15 Month Lead Times Varying Supply Chain Limitations Expanded Production Capacity Efficient Inventory Management
- 5. CHINOOKS February 10, 2017Boeing Business Case Competition Potential Approaches: Renegotiate or Prioritize Demand prioritization overcomes the risks of renegotiating but retains core benefits. • Potential damages to customer relations • Delayed revenue realization • Risk customer says ‘no’ • Does not address backlog • Unforeseeable outcomes with lack of guarantee Renegotiate Prioritize RisksOpportunities • Could lower delinquency rates • Less pressure on backlog • Common industry practice • Could decrease backlog customer satisfaction • Perverse incentive to increase delinquency rates for customers to receive priority • Eliminates delinquency rates • Maintains customer relations • Control on outcomes Short Term, Singular Benefit Renegotiation of Current Contract Long Term Precedent Demand Prioritization of Current Contract
- 7. CHINOOKS February 10, 2017Boeing Business Case Competition Demand Prioritization Rationale The high delinquency rate of the new contract incentivize producing planes for this customer with priority. Reasons Evidence • Escalating delinquency fees necessitate prioritizing the new contract • Failure to do so will result in the accumulation of nearly 80 billion dollars in penalty payments over 11 years Unfavorable Delinquency Rate • Terms of the contract do not align with industry standards • A late fee of $4.8mm per plane per month is significantly above average “Boeing 787 delivery penalties reach $5.1 billion” after 2.5 years of delay on 83 planes -- Aviation Daily “Supplier agrees to pay $5,000 for each day of delay subject to a max of 25% of price” -- Skift News High Delinquency Payments
- 8. CHINOOKS February 10, 2017Boeing Business Case Competition Risks of Demand Prioritization Through increased inventory management, Boeing can maintain and ensure positive customer relationships. More Efficient Manufacturing Risk 1: Increased Wait Times Risk 2: Adverse Impact on Corporate Image Mitigation: • Increase organization of prioritization strategy to ensure that customer orders are filled in financially efficient order • Improve efficiency through Just-In- Time inventory management Mitigation: • Limit visibility into internal operations • Seek opportunities to further increase efficiency to limit late fulfillment Potential Impact: Customer dissatisfaction due to increased wait times • Risk of customers increasing delinquency rates to gain prioritization • Damage to existing relationships • Possibility of further increased wait times from supplier delays due to projected increase in production from Charleston factory Potential Impact: Decrease in future customer contracts • Frustration due to potential increase in wait times • Questioning of prioritization of contracts with higher delinquency rates
- 10. CHINOOKS February 10, 2017Boeing Business Case Competition Examining Production Capacity Alternatives A second shift in Charleston proved to be significantly more beneficial with positive financial impacts. Third Shift in Seattle Second Shift in Charleston Strategic Considerations: • Easier access to skilled workers • Existing significant manufacturing presence in region • Physical capacity to increase production if requiring additional space Financial Considerations: • Higher labor costs due to higher cost of living in Seattle • Diminishing marginal returns • Employee wages for more hours than actual productivity given nature of third shift Strategic Considerations: • Hiring challenges due to smaller presence in Charleston • Smaller production facility • Potential difficulty in initiation of production of 787 Financial Considerations: • Significantly lower labor costs • Financial efficiency in full utilization of second shift
- 11. CHINOOKS February 10, 2017Boeing Business Case Competition Expansion Through Charleston Factory By leveraging talent at nearby technical institutes, Charleston can successfully expand its production capacity. 2015 2016 2017 2018 Action Items: Begin sourcing labor from technical institutes for additional shift Train new employees in Boeing’s production methods Commence use of 2nd shift in Charleston Refine manufacturing processes continually Timeline Increased Supply Strategy • Offer hiring incentives such as insurance benefits • Advertise employees are paid during training • Create channels for upward mobility Hiring Strategy • Leverage current relationships with suppliers for parts required for increased production • Reduces risks of unreliability from seeking new suppliers • Lower opportunity cost due to trust established within current supplier relationships
- 12. CHINOOKS February 10, 2017Boeing Business Case Competition Output Timeline By fulfilling the minimum yearly production requirement, Boeing can avoid delinquency payments. Dec. 2018 Jun. 2019 Dec. 2015 Mar. 2016 Dec. 2016 Dec. 2017 Jun. 2018 Year 1 48 planes delivered First parts for Charleston production are ordered Year 3 48 planes delivered Charleston production begins 20 planes delivered to prioritized customer every June forward Year 2 48 planes delivered 55 additional planes delivered throughout each year moving forward to other customers Second 20 planes delivered to prioritized customer Dec. 2020 55 additional planes are delivered Production cycle continues Production Output Timeline Current Seattle Output: 48 planes/year Charleston First Shift Output: 20 planes/year Additional Charleston Second Shift Output: 7 planes/year
- 13. CHINOOKS February 10, 2017Boeing Business Case Competition Financial Implications The second shift at Charleston will provide significant improvements to gross profit. Without Additional Shift Additional Shift at Charleston Improvements CurrentBacklog Completion in December 2029 Completion in November 2028 13 month advance completion of current backlog FinancialAnalysis NPV of 10 Years Of Production $7.71bn NPV of 10 Years Of Production $8.28bn Increase in NPV $570mm 7.4% increase Annual Gross Profit by 2018 $1.44bn Annual Gross Profit by 2018 $1.59bn Increase in Annual Gross Profit $150mm 10.4% increase
- 15. CHINOOKS February 10, 2017Boeing Business Case Competition Outsourcing Considerations Outsourcing provides potential for some benefits, but would not be optimal for major aircraft sections. Outsourcing Considerations for Major Aircraft Sections Risks Benefits • Vulnerability to supply disruptions • Potential for decreased quality • Subcontracting • Union strikes • IP concerns • Diminishing returns • Potential for cost savings • Reduced lead times Current Boeing Outsourcing Assembly Work Outsourcing Insourcing 20 Operations: • Current Lead Time: 15 mo. • 20% assembly work outsourced • 787 aircraft: 30% outsourced LEAN and AGILE: • Strategic need for optimization • Minimize excess inventory but maintain flexibility of operations
- 16. CHINOOKS February 10, 2017Boeing Business Case Competition Just-In-Time and Just-In-Case Inventory A combination of Just-In-Time and Just-In-Case inventory management will bridge the LEAN and AGILE strategies. • Order parts only as needed • Minimize carrying costs • Ship finalized products immediately • Requires active management of supply procurement Just-In-Time Inventory: LEAN Strategy Just-In-Case Inventory: AGILE Strategy • Maintain excess inventory to ensure flexibility • Increase in carrying costs • Mitigates risk of supply chain delays Combined Strategy • Maintain minimum inventory of parts for two planes to ensure some degree of flexibility • Minimize excess inventory on hand
- 17. Summary
- 18. CHINOOKS February 10, 2017Boeing Business Case Competition Summary of Recommendations Through demand prioritization, expanded production capacity and efficient inventory management, Boeing can fulfill the new contract and address the current backlog as well as growing demand. Solutions Implications Decreased Risk of Delinquency Payments Demand Prioritization of Contract with Higher Delinquency Rate Ensuring Completion of New Contract Increased Production to Address Demand Expanded Production Capacity through Second Shift at Charleston Factory Expanding Presence around Charleston Factory Minimizes Carrying Costs Efficient Inventory Management through Just-In-Time and Just-In-Case Strategies Ensures Part Availability for Production
- 19. Appendix
- 20. CHINOOKS February 10, 2017Boeing Business Case Competition Appendix Table of Contents I. Supply and Demand Forecast Methodology II. Charleston Capacity Forecast Methodology III. Production Forecast: Without Second Charleston Shift IV. Production Forecast: With Second Charleston Shift V. Partial Pro Forma Income Statements
- 21. CHINOOKS February 10, 2017Boeing Business Case Competition Supply and Demand Forecast Methodology Projecting Cumulative Demand Projecting Cumulative Supply Utilize the existing backlog of 640 as a base Add 60 orders to demand for 2016 Compound prior year’s cumulative demand 6% annually Project until 2040 Utilize the existing capacity of 48 planes per year as a base Add 20 more planes to supply in 2018 to account for Charleston plant opening Include impact of new shift through expanding supply by 7 planes per year Project until 2040 Return to Appendix Table of Contents
- 22. CHINOOKS February 10, 2017Boeing Business Case Competition Charleston Capacity Forecast Methodology Step Outcome Find ratio of production workers in Seattle’s Second to First Shift 200 second shift 600 first shift .33 ratio Multiply ratio by number of production workers in Charleston’s First Shift .33 ratio 375 first shift 125 second shift Find ratio of aircrafts produced to total production workers in Seattle 48 planes 800 workers .06 ratio Apply ratio to production workers in Charleston’s Second Shift .06 ratio 125 second shift ~7 planes Return to Appendix Table of Contents
- 23. CHINOOKS February 10, 2017Boeing Business Case Competition Production Forecast: Without Second Charleston Shift Year Contract Other Backlog Additional Demand WA Supply SC Supply Total Supply Contract Supply Other Supply Cum. Backlog Supply 2015 160 640 48 0 48 0 48 48 2016 60 48 0 48 0 48 96 2017 64 48 0 48 0 48 144 2018 67 48 20 68 20 48 192 2019 71 48 20 68 20 48 240 2020 76 48 20 68 20 48 288 2021 80 48 20 68 20 48 336 2022 85 48 20 68 20 48 384 2023 90 48 20 68 20 48 432 2024 96 48 20 68 20 48 480 2025 101 48 20 68 20 48 528 2026 107 48 20 68 0 68 596 2027 107 48 20 68 0 68 664 2028 107 48 20 68 0 68 732 2029 107 48 20 68 0 68 800 2030 107 48 20 68 0 68 868 2031 107 48 20 68 0 68 936 2032 107 48 20 68 0 68 1004 2033 107 48 20 68 0 68 1072 2034 107 48 20 68 0 68 1140 2035 107 48 20 68 0 68 1208 2036 107 48 20 68 0 68 1276 2037 107 48 20 68 0 68 1344 2038 107 48 20 68 0 68 1412 2039 107 48 20 68 0 68 1480 2040 107 48 20 68 0 68 1548 Backlog Completion by December 2029 Return to Appendix Table of Contents
- 24. CHINOOKS February 10, 2017Boeing Business Case Competition Production Forecast: With Second Charleston Shift Year Contract Other Backlog Additional Demand WA Supply SC Supply SC 2nd Shift Supply Total Supply Contract Supply Other Supply Cum. Backlog Supply 2015 160 640 48 0 0 48 0 48 48 2016 60 48 0 0 48 0 48 96 2017 64 48 0 0 48 0 48 144 2018 67 48 20 7 75 20 55 199 2019 71 48 20 7 75 20 55 254 2020 76 48 20 7 75 20 55 309 2021 80 48 20 7 75 20 55 364 2022 85 48 20 7 75 20 55 419 2023 90 48 20 7 75 20 55 474 2024 96 48 20 7 75 20 55 529 2025 101 48 20 7 75 20 55 584 2026 107 48 20 7 75 0 75 659 2027 107 48 20 7 75 0 75 734 2028 107 48 20 7 75 0 75 809 2029 107 48 20 7 75 0 75 884 2030 107 48 20 7 75 0 75 959 2031 107 48 20 7 75 0 75 1034 2032 107 48 20 7 75 0 75 1109 2033 107 48 20 7 75 0 75 1184 2034 107 48 20 7 75 0 75 1259 2035 107 48 20 7 75 0 75 1334 2036 107 48 20 7 75 0 75 1409 2037 107 48 20 7 75 0 75 1484 2038 107 48 20 7 75 0 75 1559 2039 107 48 20 7 75 0 75 1634 2040 107 48 20 7 75 0 75 1709 Backlog Completion by November 2028 Return to Appendix Table of Contents
- 25. CHINOOKS February 10, 2017Boeing Business Case Competition Partial Pro Forma Income Statements Production w/o Contract 48 48 48 48 48 48 48 48 48 48 Production w/ Contract 48 48 48 68 68 68 68 68 68 68 Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Revenues $7.68 $7.68 $7.68 $10.88 $10.88 $10.88 $10.88 $10.88 $10.88 $10.88 Delinquency Deduction $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) Total Revenues $7.59 $7.59 $7.59 $10.79 $10.79 $10.79 $10.79 $10.79 $10.79 $10.79 COGS $6.60 $6.60 $6.60 $9.36 $9.36 $9.36 $9.36 $9.36 $9.36 $9.36 Gross Profit $0.99 $0.99 $0.99 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 (In billions) Without Charleston Second Shift: $7.71bn NPV Production w/o Contract 48 48 48 55 55 55 55 55 55 55 Production w/ Contract 48 48 48 75 75 75 75 75 75 75 Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Revenues $7.68 $7.68 $7.68 $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 Delinquency Deduction $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) Total Revenues $7.59 $7.59 $7.59 $11.91 $11.91 $11.91 $11.91 $11.91 $11.91 $11.91 COGS $6.60 $6.60 $6.60 $10.32 $10.32 $10.32 $10.32 $10.32 $10.32 $10.32 Gross Profit $0.99 $0.99 $0.99 $1.59 $1.59 $1.59 $1.59 $1.59 $1.59 $1.59 With Charleston Second Shift: $8.28bn NPV Return to Appendix Table of Contents
Editor's Notes
- Slide 5. based on google doc