Boeing 737 under assembly;
Ed Kashi
By Shawn Tully
March 8, 1993

Just as Boeing (ba) reached the peak of the biggest boom in its history three years ago, CEO Frank Shrontz spotted trouble on the horizon. The company’s production methods, he warned managers, were lagging far behind those of the world’s best manufacturers. He predicted that the commercial aircraft business, upon which Boeing depends for 80% of its sales, was about to enter an era of price competition like none it had ever seen—one that would lead Boeing to disaster unless it drastically cut costs.

For his lieutenants, straining to keep up with a surging demand for planes, this came as a shock. Recalls William Selby, head of parts production: “We saw right away what he meant. If we failed to cut costs, we risked a fall in profits, then a decline in our ability to develop new products. It would be the beginning of a death spiral.” To protect Boeing’s future, Shrontz and his managers decided they need to chop the cost of building a plane by no less than 25% to 30%—a daunting task even for the company that brought the world the China Clipper and the jumbo jet.

At risk is more than the well-being of the company. America’s No. 1 exporter, Boeing has long been a mainstay of the nation’s high-tech competitiveness and a powerful motor of economic growth. One of the last great U.S. manufacturers with a chance to avoid humiliating decline, Boeing is still a standard-bearer of this export-led recovery.

The free-for-all Shrontz predicted didn’t take long to start. Last year orders for new planes plunged, and Boeing’s commercial revenues have begun losing altitude. According to Paine Webber security analyst Jack Modzelewski, by 1995 the company’s commercial aircraft sales could drop by 26% from their 1992 peak, to $17 billion. In January, Boeing announced plans to slow production on its four major models: the narrow-body 737 and 757, the jumbo 747, and the wide-body 767. Even though the company is gearing up to introduce its all-new 777 in 1995, it will drop at least 20,000 of its 130,000 workers in the next year or so.

Boeing faces an onslaught from Europe’s Airbus Industrie, the No. 2 planemaker, and has unexpectedly encountered another major threat: older airplanes—many of them Boeing products—that airlines refuse to retire. Such planes are cheaper to own and operate than the company’s expensive new ones.

For the unflappable Shrontz, 61, the fate of General Motors (gm) and IBM (ibm) carries a stern warning. “It could happen to us if we don’t do things differently,” he says, seated in his Seattle headquarters, a laminated ID tag dangling from his jacket pocket. He views the task of turning Boeing into an efficient manufacturer as the challenge of a lifetime. A 35-year veteran, he saw the company thrive during decades of cozy airline regulation, and subsequently triple in size during the postderegulation boom. For much of its history, Boeing was insulated from the competitive fires that forged lean companies in steel, paper, autos, and computers. No wonder Boeing’s warehouses bulge with inventories, while production often proceeds at the slow, zigzag pace of a crop-duster. To set itself right the company must overcome the drag of its hierarchy and reinvent the way it designs and builds its complex, customized, high-quality products.

The Airbus assault has only begun. Nourished by large subsidies Airbus has shrewdly focused on bringing advanced flight controls and avionics to the fast-growing heart of the market, medium-size planes. So far the consortium of state-owned Aerospatiale of France and CASA of Spain, and privately owned British Aerospace and the Deutsche Aerospace unit of Daimler-Benz, has grabbed market share chiefly from the No. 3 aircraft maker, McDonnell Douglas. Now Airbus is attacking two of Boeing’s strongest markets: long-range wide-body jets dominated by the 747, and small jetliners. In February, Airbus introduced the 350-seat A340, which will compete with Boeing’s highly profitable 400-seat 747. For the mid-1990s Airbus is developing the 130-seat A319 to chase Boeing’s popular 737-300. Boeing’s latest counterstroke made headlines in January. It preempted the development of another European model by going over the head of the consortium directly to the four owners, allying with them to study building a 600-to 800-seat superjumbo jet for the turn of the century.

“The idea was not to delay a plane for lack of a part. It was just-in-case inventory, not just-in-time.”

Even though Airbus’s costs are widely believed to be much higher than Boeing’s, the consortium has often undercut Boeing prices. A dramatic example came last July, when Airbus won a $1.5 billion order from one of Boeing’s best customers, United Airlines (ual). Airbus leased to United 50 narrow-body A320s. That is the equivalent of $28 million per plane, or some $4 million less than each plane costs to build, according to Mark Bobbi of Forecast International, a market research firm in Newtown, Connecticut. The slightly smaller 737-400 costs about 18% less per seat to build than the A320, he reckons. For Boeing, the moral is chilling: Subsidies can erase its cost advantage, tilting customers toward Airbus.

The pressure on prices is bound to intensify. Strapped for cash to develop new planes, McDonnell Douglas is searching for a foreign company to pump capital into its commercial aircraft division. By the turn of the century, newcomers could crowd the skies. Aviastar, the company recently formed around Russia’s most modern jetliner plant, wants to become a big exporter. Taiwan Aerospace, part-owned and heavily supported by the government, covets a commercial aircraft business; it has formed a joint venture with British Aerospace to produce small jets. And Japan may not be far behind.

Even if Boeing outpaces its rivals, its toughest test will be to make its new planes cheaper to own and operate than the older ones glutting the market. The useful life of a plane is being stretched far beyond the traditional 20 years. For one thing, almost all the airlines are cash starved and are cutting their capital budgets. Also, the balance between operating costs and capital costs has swung decisively in favor of older planes. In the 1980s new plane prices rose faster than inflation; they now range from $29 million for a 737 to $165 million for a 747. Meanwhile, the airlines found that the value of savings from fuel-efficient new planes declined as the price of jet fuel dropped. Even though they need heavier maintenance, burn more fuel, and require larger flight crews, fully depreciated older planes became a relative bargain. In 1991, Boeing projected that 300 airplanes a year on average would leave the world airline fleet. In 1992 the actual number was 91—a minuscule 1% of the world’s total.

Boeing’s 25% to 30% cost-reduction target isn’t guesswork. It’s the precise saving needed to drive out the old planes—and propel sales back to the heights of recent years. Shrontz & Co. plan to use the savings to substantially lower prices and to fund innovations that will help airlines reduce their maintenance and fuel costs. Example: lighter-weight airframes. The airlines are cheering. Says Kenneth Raff, managing director of fleet transactions for American Airlines: “If Boeing can cut its costs 25%, a lot of old planes will turn into beer cans.”

Where will Boeing find $5 billion of savings, the amount Modzelewski estimates the company must cut to reach its target? Shrontz recently showed his skill at wielding conventional cost-cutting tools in Boeing’s other business, its $5.4-billion-a-year Defense & Space Group. Reductions in the B-2 bomber program badly damaged the unit in 1989; by late 1991 it had accumulated more than $1 billion in operating losses. Shrontz resolutely went to work, shedding costs and focusing on programs that had escaped the congressional ax. The unit eliminated 16,000 of its 53,000 employees—almost all by attrition or transfer to the now beleaguered commercial side—and lowered annual overhead by $700 million, or 25%. It currently shares in the development of two major weapons systems scheduled for production in the mid-1990s, the Comanche helicopter and the F-22 jet fighter. Last year the division posted operating earnings of $204 million; analysts say it should do far better in 1993.

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The most obvious place for managers to find savings in Boeing’s commercial aircraft operation: its nearly $8 billion of inventory. Boeing turns over its stock a little more than twice a year, compared with ten times a year or higher for worldclass manufacturers in other industries. By streamlining work flows and eliminating excesses, Boeing aims to shrink the time needed to manufacture a plane from more than a year to just six months by 1998. If inventories are cut in half as a result, by Fortune’s estimate based on current production levels that would translate to an annual saving of $400 million in financing costs and as much as $600 million in storage, handling, and transportation.

The company used to rationalize its bulging warehouses by invoking the incredible complexity of its products; each 747 has more than three million parts, not counting fasteners. What’s more, no two orders are exactly alike. Each airline insists on its own custom layouts for seats, galleys, and lavatories, and has its own preferences in engines, air conditioning systems, and avionics gear. Boeing prided itself on being able to satisfy each buyer. Explains Patrick Day, head of the plant that makes ducts for pneumatic, hydraulic, and fuel systems: “In the past, the idea was not to delay a $100 million plane for lack of a $2,000 part. It was just-in-case inventory management instead of just-in-time.” Managers had no incentive to watch stocks. Inventory costs were billed to corporate headquarters, not to the divisions or plants. If their plants were well run otherwise, managers with overstuffed warehouses often pocketed bonuses for good performance.

No more. Inventory management is now a major factor in gauging plant performance, and managers have become inventory hawks. A leading zealot is Day. Last year he moved duct manufacturing from an antiquated factory south of Seattle to a new plant nearby. The old plant turned over its inventory less than once per year and was rife with other inefficiencies. Its 500 workers booked heavy overtime and spent 5% of their hours fixing mistakes. The production flow was meandering: Each duct, for example, traveled back and forth to a nearby factory to be heat-treated.

When the design team decides to alter a major part, it has the authority to make the changes itself.

At the new plant, Day has driven down stocks and tripled the speed of production. The factory takes deliveries of titanium, aluminum, stainless steel, and other alloys twice a day; at the old plant raw materials arrived once a week. Already inventory turns have multiplied to five per year; Day is aiming for ten by year-end. The plant turns out the same number of ducts as before but with 400 workers and minimal overtime; the other 100 jobs were eliminated and most of the workers transferred. Those who remain have been encouraged and trained to share responsibility for the production flow: The workers recently began videotaping their own routines in an effort to weed out wasted steps. Day estimates that his unit costs have fallen by 20% in three years, excluding depreciation of the new plant.

With hundreds of programs like Day’s, the inventory-cutting campaign, launched in 1990, has so far pared Boeing’s stocks by some $700 million, or about 9%. But proven, predictable methods such as lowering inventories won’t come close to generating the savings Boeing needs. For the bulk of them, it is counting on daring experiments to transform the way it designs and builds planes. It has ambitious plans to cut engineering hours, eliminate raw materials waste, and minimize expensive retooling.

Boeing’s traditional method for designing new aircraft is surprisingly primitive. The process consists of three phases. First, engineers design the plane’s shape and components. Then they hand the blueprints to manufacturing experts, who plan the production of components and final assembly. Finally the manufacturing plan goes to tooling specialists, who design specialized production machinery.

Since the phases are completed in sequence, they take a long time. Worse, the three groups have little contact until their initial designs are finished. As a result, tooling specialists often receive blueprints for parts that either can’t be manufactured or are too expensive to produce. In such cases they send blueprints back to the manufacturing engineers for revision. The system forces each group to turn out reams of corrections, consuming millions of hours a year in engineering time.

Once final drawings are ready, a crew of carpenters and artisans goes to work. They build a full-scale mock-up of the plane that incorporates replicas of every part, from support beams to flight controls. Translated for the first time from two-dimensional drawings into three-dimensional reality, the parts don’t necessarily fit. Electricians stringing mock instrument wires through the model, for example, may discover that a structural beam gets in the way. Result: more expensive changes, as engineers redesign the beam so it has a hole in the center and toolmakers reconfigure machines to accommodate the fix.

Similar mistakes inevitably plague construction of the first few planes. And since subsequent planes must be tailored to the customer, Boeing goes through a minor version of the same tortuous process with each order. The waste in raw materials alone is immense. Recalls an engineer who recently left the company: “We’d order a huge delivery of aluminum for a support beam, then decide to change the beam’s dimensions so the metal was no longer right. It would sit in a warehouse for months.”

Boeing hopes to capture huge savings by telescoping the work of its engineers, manufacturing experts, and tooling specialists so that they operate concurrently rather than in sequence. It is testing the new organization in designing a cargo version of the 767 that is scheduled for introduction in 1995. The project’s tooling experts have already shown the designers how to create a reinforced fuselage by using tools from the 767 passenger plane rather than building new ones. Program director Grace Robertson expects to slice 25% from Boeing’s standard design budget, chiefly by eliminating expensive redesign work. Boeing has also freed the team from bureaucracy: When the group decides to alter the design of a major part, it has the authority to make the changes itself, rather than waiting months for approvals from higher-ups. Preparations for production should take 33 months, down from the usual 47.

The company is innovating even more aggressively in its 777, a 375-seat wide-body jet due to appear in 1995. Aimed at the replacement market for the McDonnell Douglas DC-10, the 777 will be much less expensive to operate: It will fly on two engines instead of three and require two crew members rather than three in the cockpit. To make the 777 less expensive to produce as well as to fly, Boeing is mocking it up by computer, dispensing with full-scale models. On each feature, engineers brainstorm with representatives of airlines that have placed firm orders. Then the engineers design the part in three dimensions on computers that keep track of the plane’s components and their relationship to one another. If all goes well, the parts down to the last wire should fit perfectly when the plane goes into production. Boeing used 3-D computing to redesign the drinking water system in a batch of 737s for Delta Air Lines (dal). The job took only three months instead of the usual six, saving thousands of costly hours in drawing plans and building mock-ups.

Will such innovations give Boeing the billions in savings it needs? Says Robertson of her 767 project: “We expect a substantial reduction in design, development, and manufacturing costs. But we’re changing our budgets all the time, and we don’t know exactly how much we’ll save in total. We have 33 months to see.” Boeing’s prospects hang on the answer. If the innovations work—and if they can be applied across its entire product line—Boeing may be able to cut enough to reignite growth. For the company that launched the Jet Age, the key to the future is on the factory floor.

Reporter Associate: Wilton Woods

A version of this article was originally published in the March 8, 1993 issue of Fortune with the headline “Can Boeing Reinvent Itself?”


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