Todd Penke, Juan Pablo Saldarriaga, Katlin Smith & Jon So
Vision 2025: The Premier Global Supply Chain Leader
2April 16, 2010
2 0 1 6 V I S I O N : People working together as a global enterprise for aerospace leadership
StrategiesRun healthy core businesses
Leverage strengths into new products and services
Open new frontiers
Core CompetenciesDetailed customer knowledge and focus
Large-scale systems integration
Lean enterprise
ValuesLeadership
Integrity
QualityCustomer satisfaction
People working together
A diverse and involved team
Good corporate citizenship
Enhancing shareholder value
www.boeing.com/vision
3April 16, 2010
Core CompetenciesDetailed customer knowledge and focus
Large-scale systems integration
Lean enterprise
Premier global supply chain leader
2 0 2 5 V I S I O N : A global enterprise that cultivates communication and cooperation with the worldwide network for aerospace leadership
StrategiesRun healthy core businesses
Leverage strengths into new products and services
Open new frontiers
ValuesLeadership
Integrity
QualityCustomer satisfaction
People working together
A diverse and involved team
Good corporate citizenship
Enhancing shareholder value
www.boeing.com/vision
4April 16, 2010
2003 2004 2005 2006 2007 2008 2009 2010
• 0.3 inch gap is found between the nose-and-cockpit section and fuselage (made by different suppliers)
Jun. 2007
2003 2004 2005 2006 2007 2008 2009
Takeaways from the Dreamliner
The Dreamliner has provided valuable lessons in global supply chain management
Source: http://seattletimes.nwsource.com/html/boeingaerospace/2010509566_787timeline15.html
2003 2004 2005 2006 2007 2008
• Boeing sets up team to design and sell the 7E7
• First flight: Aug. 2007• First delivery: May 2008
Jan. 2003
Additional oversight of large component manufacturing A
Guidance in detailed designs for inexperienced
global partners C
Consistent management during new product
development B
Jan. 2008• Further three-month delay
announced due to problems with suppliers and slow assembly process
• First flight: Jun. 2008• First delivery: early 2009
Dec. 2009• Dreamliner’s first flight• First delivery:
4th qtr. of 2010
• Boeing acknowledges a delay of up to six months due to unfinished work by global partners
• Head the Dreamliner project is replaced
• First flight: March 2008• First delivery: late 2008
Oct. 2007
5April 16, 2010
Supply ChainActivity in New ProductDevelopment
Responsible Party
The breakdown of Boeing’s systems integrator business model occurs at the detailed design and manufacturing stage
General Design Work
Final Assembly
Global Partners
Detailed Design Work
Global Partners
Large Component
Manufacturing
Inexperienced global partners cannot
handle detailed design work
Insufficient oversight of
manufacturing
Boeing SMaRtStrategically Outsource
Boeing PrecisionManufacturing
Oversight
6April 16, 2010
Supply ChainActivity in New ProductDevelopment
Boeing 2025
Precision and SMART will enable Boeing to become the premier global supply chain leader
Boeing SMaRtBoeing SMaRt
General Design Work Final Assembly
Detailed Design Work
General Design Work Final AssemblyDetailed
Design Work
Large Component
Manufacturing
Boeing PrecisionBoeing
Precision
General Design Work
Final Assembly
Large Component
Manufacturing
7April 16, 2010
Boeing SMaRtBoeing SMaRt
Supply ChainActivity in New ProductDevelopment
General Design Work Final Assembly
Detailed Design Work
General Design Work Final Assembly
Detailed Design Work
Large Component
Manufacturing
Boeing Precision
BOEING PRECISIONProduction of 787-8 & Long-Term Strategy
8April 16, 2010
Project team to divide and conquer 787 supply concernsM
Likelihood of delay occurrenceLow High
Lo wH
igh
12
34
Poss
ible
ext
ent o
f com
poun
d de
lays
5-10 Person Project team will place current 787 into four quadrants
depending on:
• Likelihood of delay occurrence
• Possible extent of compounded delays
Action for each supplier will be based on it’s sqare
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
9April 16, 2010
Risky suppliers with critical parts require alternative suppliers to mitigate risk
Hig
h
12
Lo w
34
Sq. 1: Develop Alternative Suppliers
Action Plans Based On Square
Poss
ible
ext
ent o
f com
poun
d de
lays
Likelihood of delay occurrenceLow High
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
10April 16, 2010
Alternate suppliers can help limit delays when problems occur for relatively low costsP
Source: “Develop a supplier contingency plan”: http://www.computerworld.com/s/article/76489/Develop_a_Supplier_Contingency_Plan, Case Materials
Square 1: Develop Alternative Suppliers
Example: Airplane Fasteners which caused over 6 months of delays in the 787. They were essential for production
and were being produced by a risky supplier.
Many recent delays have occurred due to upstream suppliers causing domino effects downstream
Can be achieved for low cost of $12-$15 million
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
11April 16, 2010
For suppliers that are at risk for delay or who are producing critical parts, Boeing should have on-site representatives
Hig
h
12
Lo w
34
Develop Action Plans Based On Square
Sq. 1: Develop Alternative Suppliers
Sq. 1, 2, and 3: Place Boeing employees in house
Poss
ible
ext
ent o
f com
poun
d de
lays
Likelihood of delay occurrenceLow High
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
12April 16, 2010
Close coordination can be kept with suppliers for $25 Million over 6 years
Squares 1, 2, and 3: Place Boeing employees in house
For suppliers with higher risk of delaying shipments (group 3), place 1-2 Boeing employees onsite for period of six months or longer if
necessary – approximately $20 millionN
For suppliers with critical components but less risk (groups 1 & 2), have traveling Boeing employees make on-site visits weekly
– approximately $5 millionO
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
13April 16, 2010
On-site representatives will enable early problem mitigation and therefore lessen impact of delays
Source: Case Materials
Squares 1, 2, and 3: Place Boeing employees in house
Boeing places order
Supplier begins design
Supplier begins production
Supplier sends product for delivery
Secondary supplier fails to deliver
Supplier is missing key technology
Supplier’s employees go on strike
Scaled production fails
Transport Labor in country go on strike
Best Case Scenario Problems Arise Boeing Mitigates Risk
Alerted to problem
Boeing has time to find another
supplier
Boeing can work with
supplier to solve problems
Boeing can plan production
around delays
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
14April 16, 2010
Even suppliers not at risk of delay should be incentivized to perform
Hig
h
12
Lo w
34
Sq. 1: Develop Alternative Suppliers
Develop Action Plans Based On Square
Sq. 1, 2, and 3: Place Boeing employees in house
Sq. 4: Incentivize continued performance
Poss
ible
ext
ent o
f com
poun
d de
lays
Likelihood of delay occurrenceLow High
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
15April 16, 2010
Significant incentives can cause spillover improvements in Supply ChainP
For 4: Incentivize continued performance
Current Rewards Suggested IncentivesE
• Give suppliers a larger number of products where possible• Allow greater control over second tier suppliers• Continue to allow design flexibility
• Continued purchasing• “Supplier of the Year” complete with press releases and award ceremony
Being further down the supply chain, incentives may cause firms to pressure their second tier suppliers
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
16April 16, 2010
Implementation can take place immediately and reduce further delaysL
Assign Quadrants
Identify Alternate Suppliers
Place Orders
Deliveries Occur
Apr
July
Oct Jan ‘11
Select Employees
Travelers Start Visits
Employees Depart for Sites
Choose Award Companies
Renegotiate Contracts
Apr
July
Oct
Sq. 1: Develop Alternative Suppliers Sq. 1,2,3: Place Employees in field Sq. 4: Incentivize performance
Total Program Cost: $54 mm
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
17April 16, 2010
Boeing PrecisionBoeing
Precision
Supply ChainActivity in New ProductDevelopment
General Design Work Final Assembly
Large Component
Manufacturing
General Design Work Final Assembly
Large Component
Manufacturing
BOEING SMaRtLong-Term Strategy
Detailed Design Work
Boeing SMaRt
18April 16, 2010
Supplier management may curb risks, but better appraisal & selection of suppliers is needed for prevention
Source: http://articles.chicagotribune.com/2007-12-08/news/0712070870_1_dreamliner-boeing-spokeswoman-suppliershttp://www.designnews.com/article/328736-What_s_Causing_Huge_Delays_for_the_Boeing_787_Dreamliner_.php
Supplier Delay Details Cause
Advanced Integration Technology
6 months Bolts were not ready by agreed deadline due to lack of necessary tools
Lack of supplier fit, supplier not researched
Vought 3 months Struggled to fabricate fuselage with wiring when second tier suppliers omitted parts
Second tier supplier fell through
Fuji, Mitsubishi, Boeing
1 month A 0.3” gap was created between nose and fuselage sections. Parts were created by multiple suppliers across the globe.
Too many suppliers, too little collaboration
A system is needed to appraise suppliers’ abilities to procure necessary parts, design parts, and manage partial supply chains
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
19April 16, 2010
Supplier Manufacturer Rating (SMaRt) will qualify first-tier suppliers based on their capabilities
SS upplier Manufacture RatingS
All potential first-tier suppliers will be given a rating
Ratings are based on procurement capabilities &
ability to design large components
Suppliers must be a low-medium competitive threat
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
20April 16, 2010
SMaRt determines production roles of first-tier suppliers based on procurement capability and ability to design large componentsX
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
Proc
urem
ent C
apab
ility
Ability to Design Large Components
S
S
S
SE
SM
High
LowLow High
Production Role
SMaRt RatingDetailed Design
WorkManufacturing of
Large Component(s)
Independent Yes
Side-by-Side Yes
Side-by-Side (Engineers)
Yes
Side-by-Side (Managers)
Yes
None (design done in-house by
Boeing)Yes
S
S
SE
SM
S
21April 16, 2010
BOEING 2025
22April 16, 2010
Opportunity cost of manufacturing and micro-design has prevented Boeing from being able to focus intelligently on it’s supplier network
Source: Wouter A. Beelarts - The Lean Value Network System; Co-investment And Co-innovation As Drivers For A Sustainable Position In The Marketplace”
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
Boeing’s Traditional Role
Plane Design
Part Engineering
Supplier
Manufacturing
Final Assembly
Delivery
23April 16, 2010
Reducing the costs and inefficiencies of the entire network, Boeing will derive Competitive Advantage from organizing the value chain
Boeing’s Traditional Role
Plane Design
Part Engineering
Supplier
Manufacturing
Final Assembly
Delivery
Source: Wouter A. Beelarts - The Lean Value Network System; Co-investment And Co-innovation As Drivers For A Sustainable Position In The Marketplace”
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
Boeing’s New Role
Design
Supplier Network
Final Assembly
Delivery
24April 16, 2010
Efficiency leads to lower costs and higher revenues, widening the entire value chain
Boeing’s Traditional Role
Plane Design
Part Engineering
Supplier
Manufacturing
Final Assembly
Delivery
Source: Wouter A. Beelarts - The Lean Value Network System; Co-investment And Co-innovation As Drivers For A Sustainable Position In The Marketplace”
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
Boeing’s New Role
Design
Supplier Network
Final Assembly
Delivery
Lower Costs• No delay penalties• Efficient supply network
Higher Revenues• Shorter cash-to-cash
cycle for airplane development
• Provide value to customers
25April 16, 2010
Inability to produce on schedule results in both an increase in costs and a decrease in revenues
Source: Boeing order and delivery records for the 737 and 787 (http://active.boeing.com/commercial/orders/index.cfm)
1 2 3 4 5 6 7 80
200
400
600
800
1000
1200
1400
1600
1800
737 787
Year of Sales
Cum
ulati
ve S
ales
787 sales have leveled off in
comparison with the 737 which saw few delays
First 787 delays
*This does not include losses due to option cancellations**Losses in the chart to the left reflect cancelled agreements
Delays lead to cancelled agreements, cancelled
options and lower sales.
For 787, this has meant approximately 1,200
fewer 787 sales
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
26April 16, 2010
$(2,000,000,000) $- $2,000,000,000 $4,000,000,000
New projects managed right will produce results like optimum case for the Dreamliner
Source: Case Materials
Original ExpectationsQ
Current EventsU
Expectations with SMaRtAD
NPV of Dreamliner Project
(millions)
Significantly higher earnings result after a total implementation cost of approximately $300 million
| Boeing Precision | Boeing SMaRt | Boeing 2025 |
27April 16, 2010
Inexperienced global partners cannot handle detailed design
work
Insufficient oversight of
manufacturing
Supply ChainActivity in New ProductDevelopment
Boeing 2025
Precision and SMART will enable Boeing to become the premier global supply chain leader
Boeing SMaRt
General Design Work Final Assembly
Detailed Design Work
Large Component
Manufacturing
Boeing Precision
28April 16, 2010
Core Presentation Slide Deck Map
Core Slides# Section Title
3 Introduction 2025 Vision
4 Introduction The Dreamliner timeline
5 Introduction Boeing supply chain breakdown
6 Introduction Precision and SMaRT initiatives
8 Precision Precision Introduction and Project Team
9 Precision Develop Alternative Suppliers
11 Precision Place Boeing Employees In-House
14 Precision Continue to incentivize suppliers
16 Precision Precision Timeline
19 SMaRT SMaRT Introduction
29April 16, 2010
Appendix Slide Deck Map# Section TitleA Background Dreamliner
Lessons – oversight and control of global supply chainB Background Dreamliner Lessons – consistent management of new product development C Background Dreamliner Lessons – guidance in detailed designs for inexperienced global partnersD Background Outsourcing the manufacturing of the Dreamliner
E Vision Delay results: Cancelled OrdersF Vision Delay results: Loss of profitabilityG Vision 737 versus 787 SalesH Vision Results of Cessna and CollaborationI Vision Impact of Collaboration on Operational CostsJ Financials Boeing Income Statement 2009K Financials Production Delay ScheduleL Financials Production Delay Schedule AssumptionsM Financials Project Team Cost AssumptionsN Financials Permanent Team Cost AssumptionsO Financials Traveling Team Cost AssumptionsP Financials Alternate Supplier and Performance Incentiv
e Cost AssumptionsQ Financials Original 787 Net Present ValueR Financials 787 Original Income Inputs
# Section TitleS Financials Example of each year’s free cash flows broken d
own by QuarterT Financials COGs and General & Administrative Assumptions
U Financials 787 Income DelayV Financials 787 Income Delay AssumptionsX SMaRt SMaRt ScorecardY Situation Boeings Current Situation MethodologyZ Framing 5 Forces Analysis
AA Framing 2010 Market Share of Boeing’s CompetitorsAB Framing Airbus Competitor ProfileAC Situation Boeing SWOT AnalysisAD Situation Airbus SWOT AnalysisAE Situation Environmental ConcernsAF Project Risk Project RisksAG Situation Lean Value ChainA Addendum 787 Income RealisticB Addendum 787 Income Realistic Inputs
30April 16, 2010
Appendix A: Dreamliner Lessons – oversight and control of global supply chain
Sept. 2005 •Boeing says main features of the 787 airplane design are complete and sends detailed design work to the company's global partners on the plane: Mitsubishi, Fuji and Kawasaki, of Japan; Alenia, of Italy; Spirit Aerosystems, of Wichita, Kan.; and Vought, of Dallas. The Puget Sound region will manufacture only the vertical tail fin, built by Boeing near Tacoma.•The 787 manufacturing plan calls for Boeing's partners to pre-install all wiring and ducting, so that seven large, all-but-completed structural sections of the jet arrive in Everett for snap-together assembly.
Jan. 2007 •A Wall Street analyst says the 787 program is running into delays and cost increases. CEO Jim McNerney says the plane is on target for its first test flight around the end of August 2007 and first delivery in May 2008.
Oct. 2007 •Boeing acknowledges a delay of up to six months — the worst delay to a jet program in the company's history — due to problems in unfinished work passed along by its global partners and delays in finalizing the flight-control software. The new schedule puts the first flight in March 2008 and the first deliveries late that year.
Jan. 2008 •A further three-month delay is announced due to problems with unnamed 787 suppliers and slow assembly progress at the Everett plant. First flight is moved to June 2008 and first delivery to early 2009, putting the plane about nine months behind its original schedule.
Apr. 2008 •Boeing confirms yet another six-month delay due to continuing problems with unfinished work from suppliers. The first delivery is pushed to the third quarter of 2009 — about 15 months behind the original schedule. Some of the largest 787 customers' planes will be at least two years late.
Dec. 2008 •Boeing acknowledges another six-month delay for the 787 and reorganizes management again. Shanahan is put in charge of all commercial-airplane programs and brings in Scott Fancher from Boeing's military side to take the day-to-day lead on the 787. The first Dreamliner is now scheduled to fly sometime between April and June of 2009, with first delivery to ANA sometime in the first three months of 2010.
Jun. 2009 •Boeing says it will acquire the 787 rear fuselage assembly plant in Charleston, S.C., buying out its partner Vought for about $1 billion.
Source: http://seattletimes.nwsource.com/html/boeingaerospace/2010509566_787timeline15.html
[Core Slide] [Deck Map]
31April 16, 2010
Appendix B: Dreamliner Lessons – consistent management of new product development
Jan. 2003 •Boeing sets up a team of executives to design and sell a new plane now officially dubbed the 7E7 (E for efficiency). First test flight is scheduled for August 2007, first deliveries for May 2008.•Headed by Mike Blair
Oct. 2007 •Mike Bair, 787 program head, is replaced by Pat Shanahan from Boeing's defense unit.
Aug. 2009 •Scott Carson steps down as chief executive, replaced by Jim Albaugh, previously chief executive of Boeing's defense and space division.
Source: http://seattletimes.nwsource.com/html/boeingaerospace/2010509566_787timeline15.html
[Core Slide] [Deck Map]
32April 16, 2010
Appendix C: Dreamliner Lessons – guidance in detailed designs for inexperienced global partners
May 2006 •Boeing says parts of its global supplier network won't be ready when the first 787s come together in just over two years, so mechanics in Everett will have to install some of the planes' electrical wiring and other systems.
Jun. 2007 •Boeing engineers assembling the forward section of Dreamliner No. 1 find a 0.3-inch gap at the joint between the nose-and-cockpit section and the fuselage section behind it, made by different suppliers. Engineers fix the distortion by disconnecting and reconnecting internal parts that brace the frame.
Jun. 2009 •Engineers begin work on a fix for the wing-body joint flaw.
Source: http://seattletimes.nwsource.com/html/boeingaerospace/2010509566_787timeline15.html
[Core Slide] [Deck Map]
33April 16, 2010
Appendix D: Outsourcing the manufacturing of the Dreamliner
Source: http://www.seattlepi.com/boeing/787/787primer.asp
[Core Slide] [Deck Map]
34April 16, 2010
Appendix E: Customers respond negatively to delays and need assurance their orders will be delivered in a timely manner
Source: Boeing order fulfillment records (http://active.boeing.com/commercial/orders/index.cfm)
2009
2008
2007
2006
2005
2004
2003
0 50 100 150 200 250 300 350 400
Orders
Announcement of the first 787 delay
Lost demand
Lost demand
Announcement of more 787 delays
• 81% of 787 orders were placed before the first delay was announced
• 96% of 787 cancellations occurred after delay announcements
35April 16, 2010
Appendix F: Customer worry over delivery timeline comes at a high cost for Boeing
• Boeing’s 787 is easily compared to the sales of the 737; however, the 737 saw few delays
• As a result, 737 sales continued at a constant rate while 787 sales have leveled off.
• This has meant approximately 1,200 fewer 787 salesG
*This does not include losses due to option cancellations**Losses in the chart to the left reflect cancelled
agreements
Source: Boeing order and delivery records for the 737 and 787 (http://active.boeing.com/commercial/orders/index.cfm)
1 2 3 4 5 6 7 80
200
400
600
800
1000
1200
1400
1600
1800
737 787
Year of Sales
Cum
ulati
ve S
ales
787 sales have leveled off in
comparison with the 737 which saw few delays
First 787 delays
36April 16, 2010
Appendix G: 737 versus the 787 sales
737 Orders
787 Orders
Year 1 63 24Year 2 28 94Year 3 122 369Year 4 283 160Year 5 235 235Year 6 340 55Year 7 232 -70Year 8 374 15Year 9 188 Year 10 162
Cumulative 737 Sales
Cumulative 787 Sales
737 to 787 multiple
Without delays
(*multiple)
Difference (737-787)
Year 1 63 24 0.38 Year 2 91 118 1. 30 Year 3 213 487 2.29 Year 4 496 647 1.30 Year 5 731 882 1.21 Year 6 1071 937 1387 Year 7 1303 867 1687 Year 8 1677 882 2172 1290
Average Multiple: 1.30
[Core Slide] [Deck Map]
37April 16, 2010
Appendix H: Collaborating with suppliers results in higher delivery performance and parts availability
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '070%
25%
50%
75%
100%
Cessna’s Rising Material Availability
Source: Purchasing.com, “Supplier Management Fuels Growth fro Cesna”, http://www.purchasing.com/article/213284-Supplier_management_fuels_growth_for_Cessna.php
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '070%
25%
50%
75%
100%
Cessna’s Supplier Delivery Performance
In past situations where an aircraft manufacturer (Cessna) implemented supplier relationship management processes, it saw improved supplier performance and materials it sought from its suppliers were increasingly available. To achieve these results, they focused on:
Building relationships Partnering with Suppliers Incentivizing Timeliness
38April 16, 2010
Appendix I: Collaborating with suppliers reduces various operational costs to the suppliers
Administrative Costs Cost of Delayed Orders Cost of Inventory Cost of Production Downtime0%
100%
Source: SAP “Improving supplier perfromance through collaboration”
Administrative Costs
Cost of Delayed Orders Cost of Inventory Cost of Production
Downtime
20%
85%50%
25%
Cost of disputes, backtracking, etc.
Cost of delays upstream, costs of not planning for expected delays, cost of delays due to customer demand variability
Cost of safety stock and excess inventory
Cost to supplier of variable downstream demand
[Core Slide] [Deck Map]
39April 16, 2010
Appendix J: Boeing Income Statement
Source: Boeing 10-K Report 2009
Income Statement In Millions of the reported currency, except per share items.
For the Fiscal Period Ending 12 monthsDec-31-2008
12 monthsDec-31-2009
Currency USD USD Revenue 60,909.0 68,281.0 Other Revenue - - Total Revenue 60,909.0 68,281.0
Cost Of Goods Sold 50,129.0 56,365.0 Interest Expense - Finance Division 223.0 175.0 Gross Profit 10,557.0 11,741.0
Selling General & Admin Exp. 3,084.0 3,364.0 R & D Exp. 3,768.0 6,506.0 Depreciation & Amort. - -Other Operating Expense/(Income) - -
Other Operating Exp., Total 6,852.0 9,870.0
Operating Income 3,705.0 1,871.0
Interest Expense (202.0) (339.0) Interest and Invest. Income 470.0 574.0 Net Interest Exp. 268.0 235.0
Other Non-Operating Inc. (Exp.) 18.0 (351.0) EBT Excl. Unusual Items 3,991.0 1,755.0
Impairment of Goodwill - -Gain (Loss) On Sale Of Invest. - -Gain (Loss) On Sale Of Assets 4.0 (24.0) Legal Settlements - -Other Unusual Items - - EBT Incl. Unusual Items 3,995.0 1,731.0
Income Tax Expense 1,341.0 396.0 Earnings from Cont. Ops. 2,654.0 1,335.0
Earnings of Discontinued Ops. 18.0 (23.0) Extraord. Item & Account. Change - - Net Income 2,672.0 1,312.0
Pref. Dividends and Other Adj. - -
NI to Common Incl Extra Items 2,672.0 1,312.0 NI to Common Excl. Extra Items 2,654.0 1,335.0
Per Share ItemsBasic EPS $3.697 $1.849 Basic EPS Excl. Extra Items 3.672 1.881 Weighted Avg. Basic Shares Out. 722.8 709.6
Diluted EPS $3.665 $1.839 Diluted EPS Excl. Extra Items 3.641 1.871 Weighted Avg. Diluted Shares Out. 729.0 713.4
Normalized Basic EPS $3.451 $1.546 Normalized Diluted EPS 3.422 1.538
Dividends per Share $1.62 $1.68 Payout Ratio % 44.6% 93.0%
Supplemental ItemsEBITDA 5,196.0 3,537.0 EBITA 3,871.0 2,078.0 EBIT 3,705.0 1,871.0 EBITDAR 5,622.0 3,810.0 As Reported Total Revenue* 60,909.0 68,281.0 Effective Tax Rate % 33.6% 22.9% Current Domestic Taxes 64.0 13.0 Current Foreign Taxes 29.0 69.0 Total Current Taxes 93.0 82.0 Deferred Domestic Taxes 1,222.0 369.0 Deferred Foreign Taxes 26.0 (55.0) Total Deferred Taxes 1,248.0 314.0
Normalized Net Income 2,494.4 1,096.9 Interest Capitalized 99.0 90.0 Non-Cash Pension Expense (390.0) 131.0 Filing Date Feb-08-2010 Feb-08-2010Restatement Type NC OCalculation Type REP REP
Supplemental Operating Expense ItemsGeneral and Administrative Exp. 3,084.0 3,364.0 R&D Exp. 3,818.0 6,506.0 Net Rental Exp. 426.0 273.0 Imputed Oper. Lease Interest Exp. 264.7 147.4 Imputed Oper. Lease Depreciation 161.3 125.6
Stock-Based Comp., G&A Exp. 209.0 238.0 Stock-Based Comp., Total 209.0 238.0
Income Statement (continued) In Millions of the reported currency, except per share items.
For the Fiscal Period Ending 12 monthsDec-31-2008
12 monthsDec-31-2009
Currency USD USD
40April 16, 2010
Appendix K: Production Delay ScheduleL
2009 2010 2011 2012 2013 2014 2015 2016Current Production Planning7
Everett 8 38 88 84 84 96 96 96N. Charleston 0 0 0 36 36 57 60 60Total Total Produced 8 38 88 120 120 153 156 156 1514Delivery 0 46 88 120 120 153 156 156
Possible Delays8
Everett 0 30 80 87 84 93 96 96N. Charleston 0 0 0 27 36 54 60 60 Total 0 30 80 114 120 147 156 156Delivery 0 0 140 114 120 147 156 156
Cost of DelaysDelayed Deliveries 46 38 -6 0 6 12 12% of 787-8 75% 74% 70% 70% 70% 70% 70% Price of 787-8 $162 $162 $162 $162 $162 $162 $162 % 0f 787-9 25% 24% 20% 20% 20% 20% 20% Price of 787-9 $194 $194 $194 $194 $194 $194 $194 % of 787-3 10% 10% 10% 10% 10% 10% Price of 787-3 $148 $148 $148 $148 $148 $148 TotalDelay Costs (1.5)/Q $69.0 $228.0 $(36.0) $- $36.0 $72.0 $72.0 $810
7 source: http://www.flightglobal.com/articles/2010/01/05/336571/dreamliner-production-challenges-lie-ahead.html8 delays include quarter delay from testing, slower ramp-up of production, and 1 quarter delay from SC plant opening late
41April 16, 2010
Appendix L: Production Delay Schedule Assumptions
AssumptionsDelay Costs / Quarter1 $1.5 Month Delay (Yes or No) Yes Slower Prod. Ramp-up (Yes or No) No
Delay CostsCurrent Expected Delay Costs $4,000 Additional Backup Costs $810 Prevention Costs
Project Team2 $(0.404)Traveling Team3 $(4.152)Permanent Team4 $(20.246)Alternate Parts Costs5 $(13.790)Performance Incentive Costs6 $(14.493)
Total Cost of Program $(53.086)Total $4,810
Notes:1 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month2 See Project Team Cost Assumptions3 See Traveling Team Cost Assumptions4 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month5 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month6 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month
42April 16, 2010
Appendix M: Project Team Cost AssumptionsProject Team Cost Assumptions
Employee Tax Cont. 40%Misc. Costs 10%Research Budget ($k) $50 Number of Employees 7Project Length (Months) 6
Employee Costs Salary Taxes (0.4) Misc. Costs TotalProject Team Manager $82 $32.80 $8.20 $123 Employees 2-5 $70 $28.00 $7.00 $105 Employees 6-10 $55 $22.00 $5.50 $83
Project Length (Months) 4 5 6 7 85 Employee $181 $226 $272 $317 $362 6 Employee $209 $261 $313 $365 $417 7 Employee $236 $295 $354 $413 $472 8 Employee $264 $329 $395 $461 $527 9 Employee $291 $364 $437 $509 $582 10 Employee $319 $398 $478 $557 $637
Total Project Cost ($k) $404.0
NotesBoeing Project Manager has average annual salary of $70,228 (range from $55k to $82k from 16 voluntary entries); source: http://www.glassdoor.com/Salary/Boeing-Salaries-E102.htm
43April 16, 2010
Appendix N: Permanent Team Cost AssumptionsPermanent Team Cost Assumptions
Employee Tax Cont. 30%Misc. Costs 40%Travel Costs ($k/yr) $150 Insurance Costs 10%Number of Employees 12Project Length (Years) 6
Employee Costs Salary Taxes (0.3) Misc. Travel Insurance TotalProject Team Manager $82 $32.8 $8.20 $150.0 $8.2 $281
Project Length (Years) 1 2 3 4 5 61 Employee $2,812 $5,624 $8,436 $11,248 $14,060 $16,872 2 Employee $3,093 $6,186 $9,280 $12,373 $15,466 $18,559 3 Employee $3,374 $6,749 $10,123 $13,498 $16,872 $20,246 4 Employee $3,656 $7,311 $10,967 $14,622 $18,278 $21,934 1 Employee $3,937 $7,874 $11,810 $15,747 $19,684 $23,621 2 Employee $4,218 $8,436 $12,654 $16,872 $21,090 $25,308
Total Team Cost ($k) $20,246
NotesBoeing Project Manager has average annual salary of $70,228 (range from $55k to $82k from 16 voluntary entries); source: http://www.glassdoor.com/Salary/Boeing-Salaries-E102.htm
44April 16, 2010
Appendix O: Traveling Team Cost AssumptionsTraveling Team Cost Assumptions
Employee Tax Cont. 40%Misc. Costs 10%Travel Costs ($k/yr) $50 Number of Employees 4Project Length (Years) 6
Employee Costs Salary Taxes (0.4)Misc. Costs
Travel Costs Total
Project Team Manager $82 $32.8 $8.20 $50.0 $173
Project Length (Years) 1 2 3 4 5 61 Employee $173 $346 $519 $692 $865 $1,038 2 Employee $346 $692 $1,038 $1,384 $1,730 $2,076 3 Employee $519 $1,038 $1,557 $2,076 $2,595 $3,114 4 Employee $692 $1,384 $2,076 $2,768 $3,460 $4,152
Total Team Cost ($k) $4,152
NotesBoeing Project Manager has average annual salary of $70,228 (range from $55k to $82k from 16 voluntary entries); source: http://www.glassdoor.com/Salary/Boeing-Salaries-E102.htm
45April 16, 2010
Appendix P: Alternate Supplier and Performance Incentive Cost Assumptions
Alternate Supplier Cost Assumptions
Plane Price2 $171.6 COGS(% of Sales)3 82%Relavant Parts 5%
2010 2011 2012 2013 2014 2015 2016Plane Sales 46 88 120 120 153 156 156
Total Revenues $7,894 $15,101 $20,592 $20,592 $26,255 $26,770 $26,770 COGs $(6,473) $(12,383) $(16,885) $(16,885) $(21,529) $(21,951) $(21,951)Relevant Parts $(323.64) $(619.13) $(844.27) $(844.27) $(1,076.45) $(1,097.55) $(1,097.55)Cost Differences (%) 2% 2% 1% 1% 0% -1% -1%
Excess Costs/Savings $(6.47) $(12.38) $(8.44) $(8.44) $- $10.98 $10.98
Total Costs/Savings $(13.79)
Performance Incentive Cost Assumptions
Plane Price2 $171.6 COGS(% of Sales)3 82%Relavant Parts 2%
2010 2011 2012 2013 2014 2015 2016Plane Sales 46 88 120 120 153 156 156
Total Revenues $7,894 $15,101 $20,592 $20,592 $26,255 $26,770 $26,770 COGs $(6,473) $(12,383) $(16,885) $(16,885) $(21,529) $(21,951) $(21,951)Relevant Parts $(323.64) $(619.13) $(844.27) $(844.27) $(1,076.45) $(1,097.55) $(1,097.55)Cost Differences (%) 3% 2% 2% 1% 0% -1% -2%
Excess Costs/Savings $(9.71) $(12.38) $(16.89) $(8.44) $- $10.98 $21.95
Total Costs/Savings $(14.49)
46April 16, 2010
Appendix Q: Original 787 Net Present ValueR
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Ideal Production ScheduleDelivery 37 75 132 164 164 164 164 164 164Earned Revenues5 $- $- $- $- $- $6,349 $12,870 $22,651 $28,142 $28,142 $28,142 $28,142 $28,142 $28,142 COGS $- $- $- $- $- $5,206 $10,553 $18,574 $23,077 $23,077 $23,077 $23,077 $23,077 $23,077
Gross Profit $- $- $- $- $- $1,143 $2,317 $4,077 $5,066 $5,066 $5,066 $5,066 $5,066 $5,066 Overhead Expenses
R&D6 $(500) $(1,000) $(1,000) $(1,000) $(1,000) $(1,500) $(800) $(800) $(250) $(200) $(200) $(200) $(200) $(200)
General & Admin7
$(231.00)
$(385.01
)
$(445.12
)
$(439.12
)
$(371.74
) $(324.68) $(354.16) $(372.58) $(391.95) $(412.33) $(433.77) $(456.33) $(480.06) $(505.02)Total Overhead $(731) $(1,385) $(1,445) $(1,439) $(1,372) $(1,825) $(1,154) $(1,173) $(642) $(612) $(634) $(656) $(680) $(705)
EBITDA $(731) $(1,385) $(1,445) $(1,439) $(1,372) $(682) $1,162 $2,905 $4,424 $4,453 $4,432 $4,409 $4,386 $4,361 Depreciation8 $(13) $(15) $(15) $(15) $(14) $(14) $(33) $(36) $(36) $(36) $(34) $(34) $(34)
EBIT $(731) $(1,398) $(1,460) $(1,454) $(1,387) $(696) $1,149 $2,872 $4,388 $4,418 $4,396 $4,375 $4,351 $4,326 Tax/Tax Shelter $292 $559 $584 $582 $555 $278 $(459) $(1,149) $(1,755) $(1,767) $(1,758) $(1,750) $(1,740) $(1,730)
Net Income $(439) $(839) $(876) $(872) $(832) $(417) $689 $1,723 $2,633 $2,651 $2,638 $2,625 $2,611 $2,596
PPE (CapEx)9 $-
$(250.00
) $(50.00) $- $- $25.00 $- $(387.50) $(50.00) $- $- $25.00 $- $- Free Cash Flows $(439) $(601) $(841) $(887) $(847) $(456) $675 $2,077 $2,647 $2,615 $2,602 $2,566 $2,576 $2,561 Discounted FCF's $(439) $(546) $(695) $(667) $(579) $(283) $381 $1,066 $1,235 $1,109 $1,003 $899 $821 $742
Net Present Value $4,048
5 Earned Revenues = weighted average plane price * planes delivered for the quarter6 Based on estimate of $8-10 billion development costs listed in case, $6 bn of which covered by Boeing7 See General & Administration Assumptions (First year costs based on half basis as R&D budget)8 Assumung Depreciation term = 20 years9 Based on note in 10-K which states reason for higher PPE investment due to factory growth
47April 16, 2010
Appendix R: 787 Original Income Inputs
Notes:1 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month2 $171.6 million = .7* $164 + .3* $194 to represent weighted average costs of 787-8 & 787-9 (exclusion of 787-3 due to later arrival)3 See Cost of Goods Sold Assumptions4 Found in Case A: pg 75 Discount Rate from CAPM using rf: .16%, Market Return: 8%, Beta: 1.31: sources; yahoo finance, http://www.ustreas.gov/offices/domestic-finance/
Assumptions:Delay Costs / Q1 $1.5 Plane Price2 $171.6 COGS3 82%Future Growth4 5.20%Tax Rate 40%Discount Rate 10%
48April 16, 2010
Appendix S: Example of each year’s free cash flows broken down by Quarter
2007Q1 Q2 Q3 Q4
0 17 10 10 $- $- $2,917 $1,716 $1,716 $- $- $2,392 $1,407 $1,407 $- $- $525 $309 $309
$(1,000) $(500) $(500) $(300) $(200)
$(371.74) $(81.17) $(81.17) $(81.17) $(81.17) $(1,372) $(581) $(581) $(381) $(281) $(1,372) $(581) $(56) $(72) $28
$(15) $(3) $(3) $(3) $(3) $(1,387) $(585) $(60) $(76) $24
$555 $234 $24 $30 $(10) $(832) $(351) $(36) $(45) $15
$- $(12.50) $(12.50) $(847) $(354) $(39) $(36) $24 $(579) $(220) $(24) $(23) $15
Ideal Production ScheduleDeliveryEarned Revenues5
COGSGross Profit
Overhead ExpensesR&D6
General & Admin7
Total OverheadEBITDA
Depreciation8
EBITTax/Tax Shelter
Net IncomePPE (CapEx)9
Free Cash Flows Discounted FCF's
5 Earned Revenues = weighted average plane price * planes delivered for the quarter6 Based on estimate of $8-10 billion development costs listed in case, $6 bn of which covered by Boeing7 See General & Administration Assumptions (First year costs based on half basis as R&D budget)8 Assumung Depreciation term = 20 years9 Based on note in 10-K which states reason for higher PPE investment due to factory growth
49April 16, 2010
Appendix T: COGs and General & Administrative Cost Assumptions
% Cost of Goods Solds (COGS) Assumptions1
Boeing COGS 2009 2008 2007Sales of Products $57,032 $50,180 $57,049 Costs of Products $(47,639) $(41,662) $(45,375)Average COGS (%)% COGS $0.84 $0.83 $0.80 $0.82
General & Administrative Cost Assumptions2
2004 2005 2006 2007 2008 2009Orders Per PlaneBoeing 717 8 0 0 0 0 0Boeing 737 152 574 733 850 488 197Boeing 747 10 48 72 25 4 5Boeing 767 9 19 8 36 29 7Boeing 777 42 153 77 143 54 30Boeing 787 56 235 160 369 94 24 % of Orders 20% 23% 15% 26% 14% 9%
Average % of Orders (exc. 2008, 2009)3…………………………………………… 21%
Total General & Administrative Costs4
G&A $3,657 $4,228 $4,171 $3,531 $3,084 $3,364 Commercial Shares (50%) $1,829 $2,114 $2,086 $1,766 $1,542 $1,682
787 Shares (21% of CA) $385 $445 $439 $372 $325 $354
1 Source: Boeing 10-K2 Sources: Boeing 10-K filings & company website3 Exclusion of 2008, 2009 data due to lower numbers after announced delays & economic crisis4 Source: Boeing 10-K
50April 16, 2010
Appendix U: 787 Income DelayV
Ideal Production Schedule 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Actual Delivery 37 75 132 164 164 164
Earned Revenues5 $ - $ - $ - $ - $ - $ - $ - $ - $ 6,349 $ 12,870 $ 22,651 $ 28,142 $ 28,142 $ 28,142
COGS $ - $ - $ - $ - $ - $ - $ - $ - $ 5,206 $ 10,553 $ 18,574 $ 23,077 $ 23,077 $ 23,077
Gross Profit $ - $ - $ - $ - $ - $ - $ - $ - $ 1,143 $ 2,317 $ 4,077 $ 5,066 $ 5,066 $ 5,066 Overhead Expenses
Planned R&D6 $ (500) $ (1,000) $ (1,000) $ (1,000) $ (1,000) $ (1,500) $ (800) $ (800) $ (250) $ (200) $ (200) $ (200) $ (200) $ (100)
Additions to R&D $ - $ (20) $ (50) $ (50)
Reconciled R&D $ (500) $ (1,000) $ (1,000) $ (1,000) $ (1,000) $ (1,520) $ (850) $ (850) $ (250) $ (200) $ (200) $ (200) $ (200) $ (100)
General & Admin7 $ (231.00) $ (385.01) $ (445.12) $ (439.12) $ (371.74) $ (324.68) $ (354.16) $ (372.58) $ (391.95) $ (412.33) $ (433.77) $ (456.33) $ (480.06) $ (505.02)
Total Overhead $ (731) $ (1,385) $ (1,445) $ (1,439) $ (1,372) $ (1,845) $ (1,204) $ (1,223) $ (642) $ (612) $ (634) $ (656) $ (680) $ (605)
EBITDA $ (731) $ (1,385) $ (1,445) $ (1,439) $ (1,372) $ (1,845) $ (1,204) $ (1,223) $ 501 $ 1,704 $ 3,443 $ 4,409 $ 4,386 $ 4,461
Depreciation8 $ (13) $ (15) $ (15) $ (15) $ (14) $ (14) $ (28) $ (31) $ (31) $ (31) $ (29) $ (29) $ (29)
EBIT $ (731) $ (1,398) $ (1,460) $ (1,454) $ (1,387) $ (1,858) $ (1,218) $ (1,251) $ 470 $ 1,674 $ 3,413 $ 4,380 $ 4,356 $ 4,431
Tax/Tax Shelter $ 292 $ 559 $ 584 $ 582 $ 555 $ 743 $ 487 $ 500 $ (188) $ (669) $ (1,365) $ (1,752) $ (1,742) $ (1,772)
Net Income $ (439) $ (839) $ (876) $ (872) $ (832) $ (1,115) $ (731) $ (750) $ 282 $ 1,004 $ 2,048 $ 2,628 $ 2,614 $ 2,659
PPE (CapEx)9 $ - $ (250.00) $ (50.00) $ - $ - $ 25.00 $ - $ (287.50) $ (50.00) $ - $ - $ 25.00 $ - $ -
Delay Penalties $ (750) $ (750) $ (750) $ (750)
Free Cash Flows $ (439) $ (1,101) $ (941) $ (887) $ (847) $ (1,854) $ (1,494) $ (1,816) $ (548) $ 974 $ 2,017 $ 2,624 $ 2,584 $ 2,629
Discounted FCF's $ (439) $ (997) $ (772) $ (660) $ (570) $ (1,130) $ (825) $ (909) $ (249) $ 400 $ 750 $ 884 $ 788 $ 727
Net Present Value $ (1,209)
51April 16, 2010
Appendix V: 787 Income Delay AssumptionsAssumptions: R&D Addition Assumptions:Delay Costs / Q1 $(1.5) 2007 $(50)Plane Price2 $171.6 2008 $(100)COGS3 82% 2009 $(200)Future Growth4 5.20% 2010 $(100)Tax Rate 40%Discount Rate 10%
Notes:1 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month2 $171.6 million = .7* $164 + .3* $194 to represent weighted average costs of 787-8 & 787-9 (exclusion of 787-3 due to later arrival)3 See COGs Assumptions4 Found in Case A: pg 7
5 Discount Rate from CAPM using rf: .16%, Market Return: 8%, Beta: 1.31: sources; yahoo finance, http://www.ustreas.gov/offices/domestic-finance/
52April 16, 2010
Appendix X: SMaRt Scorecard
Source: http://www.bmpcoe.org/bestpractices/internal/mdasl/grf_mdasl_39.html
Supplier Manufacturer Rating (SMaRt) Scorecard
PerformanceSecond-Tier Supplier Delivery
(Procurement Capability)Large Component Delivery to
BoeingCertification Design Capability On-Time Period On-Time Period Competitive
Level Assessment1 (%) Months (%) Months Threat Analysis2
Gold 4.5 - 5.0 100 12 100 12 LowMin 4.0
Silver 3.5 - 4.4 98 - 99 12 95 - 99 6 LowMin 3.0
Silver - E 3.0 - 3.4 98 - 99 12 93 - 97 6 LowMin - 2.6
Silver - M 3.3 - 3.7 98 - 99 12 91 - 95 6 LowMin - 2.9
Bronze 2.5 - 3.4 95 - 98 12 90 - 95 6 MediumMin 2.0
1 Assessment of capability of company engineers, facility equipment, and potential benefits of experience curve.2Boeing Representative should closely analyze the company for its competitive threat to Boeing. Analysis includes ability of current facility to manufactuer an aircraft, financial strength, government funding and company strategy.
[Core Slide] [Deck Map]
53April 16, 2010
Appendix Y: Methodology employed for assessing Boeing’s current situation
=
Competitive Advantage Analysis
Boeing Airbus
CRITICAL
RESOURCES & CAPABILITIES
THAT
GENERATE COMPETITIVE ADVANTAGE
XXxxxxxxxxxxxxxxxxxxx
Xxxxxxxxxxxxxxxxxxxx
XXxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxx
xXxxxxxxxxxxxxxxxxxxx
Xxxxxxxxxxxxxxxxxxxx
Xxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxx
x
Xxxxxxxxxxxxxxxxxxxx
Xxxxxxxxxxxxxxxxxxxx
TOTALxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxx
Porter’s 5 Forces Industry Analysis
& Other External Analyses
+
Margin
MarginInbound Logistics
Operations Outbound Logistics
Marketing & Sales
Service
Firm InfrastructureHuman Resource Management
Technology DevelopmentProcurement
Strengths Weaknesses
Threats Opportunities
Value Chain Analysis
SWOT Analysis
I/S B/S
Financials & Supplemental Information
&
&
54April 16, 2010
Threat of New Entrants
• Very Low.• Developing
airplanes is costly.
• Also due to a long lead time before a company will reach the break-even point (400-500 aircraft)
• However, the Chinese government has approved the launch of an aircraft manufacturer.
Supplier Power• Low
• Suppliers are less in this industry so Boeing has high control
• Now that Boeing is serving the market differently with a diverse supply chain, supplier power may increase since Boeing is so reliant on these parties.
Buyer Power• Low
• There are few choices available to buyers if they are unhappy with current aircraft manufacturer.
• “Family Concept” of multiple aircraft maintenance creates sticky features and increases switching costs.
Threat of Substitutes•Moderately
Low•Several substitutes are available such as cruises, buses, no traveling…etc. but often don’t solve customers problems in the way a plane would.• Surface transportation such as rail sometimes serves as a substitute.
Intensity of Rivalry
• High• Commercial
aircraft composes over 65% of revenue. Losing market share can have a large impact on profitability
Appendix Z: Porter’s Five Forces Analysis - Commercial Aviation Industry
Source: Datamonitor – Boeing Co. Company Profile (2009)
55April 16, 2010
Appendix AA: 2010 Market Share of Boeing’s Competitors
Source: IBIS Global Civil Aerospace Products Manufacturing Report 2010
34%
23%9%
7%
6%
5%
14%
2010 Market Share of Civil Aerospace Companies
European Aeronautic De-fense and Space CompanyThe Boeing CompanyUnited Technologies Cor-porationGeneral Electric CompanyBombardierRolls-Royce plcOther
56April 16, 2010
Appendix AB: Airbus Competitor Profile
Source: Airbus and Boeing Annual Reports for year ended December 31, 2009
AEDS (Airbus division)
YearMillion Dollars Revenue
% Change Growth
Million Dollars Operating Profit
2004 25154.6 24.9 2386.32005 27610.6 9.8 28722006 31646.2 14.6 -718.62007 34571.1 9.2 -1207.92008 40273.6 16.5 17902009 38360 -4.5 17000
Boeing (Commercial Aircraft Segment)
YearMillion Dollars Revenue
% Change Growth
Million Dollars Operating Profit
2004 19925 N/C 7452005 21365 7.2 14312006 28465 33.2 27332007 33388 17.3 35842008 28263 15.3 11862009 29400 4 -1800
2004 2005 2006 2007 2008 2009
-5000
0
5000
10000
15000
20000
Reve
nue
(in m
illio
ns o
f $)
Boeing’s Declining Profits
57April 16, 2010
Appendix AC: SWOT analysis reveals that Boeing must balance large payoff of the ‘systems integrator’ approach with the equally large potential risks
Strengths• Tier 1 supplier recognition in aerospace sector.• Outsourcing is giving Boeing more flexibility and
control in the design process• Designs products according to customer desires• Can implement large-scale implementation
systems• Unique contracts with NASA• Seemingly more operationally efficient than
competitors
Weaknesses• Tendency of Board of Directors to blame poor
results on external factors.• Many employees are angered over recent
outsourcing and present a risk for strike• Supplier structure presents significant risk in
production schemes
Opportunities• Gaining insight and combining experience from
current businesses in other industries - Inventory.• Consolidation of suppliers allows Boeing to spend
more time focusing on each supplier and work with those that provide the best value
• The Asia-Pacific markets for air transportation have allowed Boeing to capitalize on their growth
• Airbus has had many product delays including the A350
Threats• Complex proprietary spare parts market (lack of
consistent d/s data, commodity-type products)• Airbus has passed Boeing in sales in the early
2000’s and Boeing has yet to regain its ground• Outsourcing is being viewed negatively by many
because of job loss• Third parties who Boeing has worked with has
some of their proprietary knowledge and may decide to produce aircraft
58April 16, 2010
Appendix AD: Airbus S.A.S SWOT Analysis
Strengths• Leading market position• Strong support from strong parent company
(EADS)• Focus on technological innovation• Economies of Scale• Brand Equity & Reputation
Weaknesses• Delays in A380, and A350 launch• High delay penalty burden• High production costs• Slow learning curve• Operational Inefficiencies• Lower volumes and financial resources than rivals
Opportunities• Power8 restructuring plan• New projects in international markets• Growing demand for commercial airplanes
especially in Asia-Pacific region.
Threats• Complex proprietary spare parts market (lack of
consistent d/s data, commodity-type products)• Tight credit markets and possibility of ‘double
dip’ recession.• Threatens ability of customers to pay, risks
cancellations.
Source: Data Monitor – Airbus S.A.S Company Profile
59April 16, 2010
Appendix AE: General Environmental Analysis(STEEP) – Boeing Issues and Implications
Issue Implications to Airparts (specifically spare parts) Importance
Social Airlines are keeping their fleet in service for longer periods of time. At the same time, Airlines are increasingly conscious of their AOG (airline on ground) costs. Being an efficient and effective supplier is of increasing importance
High
Technological Changes in technology aren’t of immediate concern to Airparts. The process of fabrication and OEM won’t be changing in the immediate future.
Low
Economic As commodity prices, specifically aluminum and steel. fluctuate Airparts needs to be aware of the potential costs and hedging options available.
High
Environmental With a new generation of aircrafts and emissions standards becoming increasingly important Airparts needs to be aware of changes affecting the business and what demands airlines will impose.
Medium
Political The FAA has consistently required higher standards for the airline industry. These stringent safety standards must be accounted for by the airlines, who, in turn will demand that their suppliers are compliant.
Medium
60April 16, 2010
Appendix AF: Outsourcing of the type Boeing has engaged in has several risk factors that need to be taken into consideration.
Risk Area Affected Rating Mitigation Strategy
Strategic Risks
Intellectual Property
Long-Run Competitive Advantage
In order to mitigate the risk of losing vital proprietary knowledge that might spawn future competitors and erode Boeing’s unique knowledge base
Boeing should bring manufacturing that involves critical proprietary parts, processes, and knowledge.
Operational Risk
Manufacturing Outsourcing activities in which outsourcing to strategic partners have more focused core competencies will result in a decrease in operational risks for
Boeing.
Human Capital Risk
R&D
Design
In order to mitigate the employee backlash that will come as a consequence of outsourcing Boeing should bring critical in-house jobs back. Also create
education programs to re-train employees such that they can be relocated to another division.
Financial Risk
Entire Company By outsourcing under a strategic partnership framework where suppliers have a direct financial stake, Boeing is lowering its risk. Suppliers now have
an incentive to be more cost efficient and perform better.
Reputational Risk
Entire Company To mitigate the degradation in customer relations and credibility Boeing should engage in an aggressive and active reassurance PR and Marketing
campaign aimed towards its customers, investors, and the general public by highlighting the corrective measures taken in our Vision 2025 plan.
X
X
X
X
Feasibility of Mitigation
Level of Impact
LOW
HI
HILOW
X
61April 16, 2010
Appendix AG: Boeing Commercial Airplanes ‘Lean’ Value Chain
Source: Wouter A. Beelarts - THE LEAN VALUE NETWORK SYSTEM; CO-INVESTMENT AND CO-INNOVATION AS DRIVERS FOR A SUSTAINABLE POSITION IN THE MARKETPLACE”.
MarginMargin
OperationsSupply Network Management
Technology Development
Firm Infrastructure
Human Resource Management
Inbound/Outbound Logistics
Marketing, Sales, & Logistics
• Market Research• Advertising• Promotions• Sales Force• Customer Relations • Material Mgmt• Maintenance Services
• Fleet Enhancement • Engineering Support
• Flight Operations • Service Manual & Procedures
• Supply Chain Integration• Strategic Procurement• Strategic Supplier Management• Balance Scorecard• Supplier Relationship Mgmt• Quality, Cost, and Delivery (QCD)
• Phantom Works• Electronic Data Interchange (EDI) • Enterprise Supplier Tool• Supplier Portal• Encrypted Email• Supplier Data Exchange Network
• Final Assembly• Fine Tuning & Testing• Facilities Operations
62April 16, 2010
Appendix AH: Through innovation, co-innovation and co-investment improve the classic value chain and lead to a sustainable position in the market.
Source: Wouter A. Beelarts - THE LEAN VALUE NETWORK SYSTEM; CO-INVESTMENT AND CO-INNOVATION AS DRIVERS FOR A SUSTAINABLE POSITION IN THE MARKETPLACE”
3 aspects drive the innovation process:
•Continuation: Demand where a company can add value.
•Conception: Unique technology or smart and original processes, supported by Intellectual Property(IP) in cooperation with co-innovation parties, based on the customer demand.
•Configuration: Formation of a chain, system or network of stakeholders that have interest in bringing the new product to market.
63April 16, 2010
Appendix AK: Lean Value Chain Concept
Source: Wouter A. Beelarts - THE LEAN VALUE NETWORK SYSTEM; CO-INVESTMENT AND CO-INNOVATION AS DRIVERS FOR A SUSTAINABLE POSITION IN THE MARKETPLACE”
•The ultimate lean value chain consists of 3 innovation drivers: continuation, conception, & configuration.
•As such one could argue that a sustainable position in the market can be obtained and maintained by continuous innovation. Innovation is a fundamental job for BCA.
64April 16, 2010
Appendix AL: Boeing Commercial Airplanes’ (BCA) Classic Value Chain
Source: Wouter A. Beelarts - THE LEAN VALUE NETWORK SYSTEM; CO-INVESTMENT AND CO-INNOVATION AS DRIVERS FOR A SUSTAINABLE POSITION IN THE MARKETPLACE”
•Six primary value activities have been identified. In addition to the traditional primary activities of Porter.
•Strategic procurement has become an activity that affects the company’s bottom line to such an high extent that it should be considered as a primary activity.
65April 16, 2010
Appendix: AM: The links among resources, capabilities, and competitive advantage
Robert M. Grant - Contemporary Strategy Analysis 7th Edition (Chapter 5 – Analyzing Resources and Capabilities)
66April 16, 2010
Appendix AN: VRIO Framework
Sources: J. Barney - Gaining and Sustaining Competitive Advantage (2002).
67April 16, 2010
Appendix AO: Assessing value chain partnerships in the Aerospace Industry
Source: A.T. Kearney - Integrated Value Chains In Aerospace and Defense: Managing relationships and complexity up and down the value chain
68April 16, 2010
Appendix AP: Aerospace Suppliers “Bullwhip Effect”
Source: A.T. Kearney - Integrated Value Chains In Aerospace and Defense: Managing relationships and complexity up and down the value chain
69April 16, 2010
Urgency
High
Low
Low High
Impo
rtan
ce
Loss of Credibility & CR
Loss of Industry Leadership
Traditional Customer Problems
New Product Development Overhang
Supplier Power & Dependence
High Jet Fuel Costs
Overly -Optimistic Forecasts
Concentration Risk for Customers
CEO Turnover & Transformation
Delays and Cancellations
New Long-Run Competitors
Proprietary Knowledge Loss
Supplier Problems“Critical Activities”
Appendix AQ: Boeing currently has 13 significant issues it must address to improve profitability. Management should focus on addressing the most urgent and important ones immediately, while keeping the other issues in perspective
Source: HBS – Boeing 787: The Dreamliner (June 21, 1005); Foster Business School – Boeing 787: The Dreamliner (B) (October 14, 2008)
“Important Goals”
“Distractions” “Interruptions”“Distractions” “Interruptions”
70April 16, 2010
Appendix AR: Business Evolution Matrix
Source: Wouter A. Beelarts - THE LEAN VALUE NETWORK SYSTEM; CO-INVESTMENT AND CO-INNOVATION AS DRIVERS FOR A SUSTAINABLE POSITION IN THE MARKETPLACE”
Volume Efficiency Differentiation
Mass individualized
Product/Market Companies
Capacity Companies
Capacity Economy
Industrial economy
Network economy
71April 16, 2010
Addendum A: 787 Income RealisticAE
Ideal Production Schedule 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Delivery 0 37 75 132 164 164 164 164 164
Earned Revenues6 $ - $ - $ - $ - $ - $ - $ 6,349 $ 12,870 $ 22,651 $ 28,142 $ 28,142 $ 28,142 $ 28,142 $ 28,142 COGS $ - $ - $ - $ - $ - $ - $ 5,206 $ 10,553 $ 18,574 $ 23,077 $ 23,077 $ 23,077 $ 23,077 $ 23,077
Gross Profit $ - $ - $ - $ - $ - $ - $ 1,143 $ 2,317 $ 4,077 $ 5,066 $ 5,066 $ 5,066 $ 5,066 $ 5,066 Overhead Expenses
R&D7 $ (500) $ (1,000) $ (1,000) $ (1,000) $ (1,000) $ (1,500) $ (800) $ (800) $ (250) $ (200) $ (200) $ (200) $ (200) $ (200)
Additions To R&D $ (200) $ (200) $ (350.00)
Reconciled R&D $ (500) $ (1,000) $ (1,200) $ (1,200) $ (1,000) $ (1,850) $ (800) $ (800) $ (250) $ (200) $ (200) $ (200) $ (200) $ (200)
General & Admin8 $ (231.00) $ (385.01) $ (445.12) $ (439.12) $ (371.74) $ (324.68) $ (354.16) $ (372.58) $ (391.95) $ (412.33) $ (433.77) $ (456.33) $ (480.06) $ (505.02)
Additions to G&A $ (50) $ (50) $ (50) $ (60) $ (20) Reconciled G&A $ (231.00) $ (385.01) $ (495.12) $ (489.12) $ (421.74) $ (384.68) $ (374.16) $ (372.58) $ (391.95) $ (412.33) $ (433.77) $ (456.33) $ (480.06) $ (505.02)
Total Overhead $ (731) $ (1,385) $ (1,695) $ (1,689) $ (1,422) $ (2,235) $ (1,174) $ (1,173) $ (642) $ (612) $ (634) $ (656) $ (680) $ (705)
EBITDA $ (731) $ (1,385) $ (1,695) $ (1,689) $ (1,422) $ (2,235) $ (31) $ 1,144 $ 3,435 $ 4,453 $ 4,432 $ 4,409 $ 4,386 $ 4,361
Depreciation9 $ (13) $ (15) $ (15) $ (15) $ (14) $ (14) $ (33) $ (36) $ (36) $ (36) $ (34) $ (34) $ (34)
EBIT $ (731) $ (1,398) $ (1,710) $ (1,704) $ (1,437) $ (2,248) $ (45) $ 1,111 $ 3,400 $ 4,418 $ 4,396 $ 4,375 $ 4,351 $ 4,326
Tax/Tax Shelter $ 292 $ 559 $ 684 $ 682 $ 575 $ 899 $ 18 $ (444) $ (1,360) $ (1,767) $ (1,758) $ (1,750) $ (1,740) $ (1,730)
Net Income $ (439) $ (839) $ (1,026) $ (1,022) $ (862) $ (1,349) $ (27) $ 667 $ 2,040 $ 2,651 $ 2,638 $ 2,625 $ 2,611 $ 2,596
PPE (CapEx)10 $ - $ (250.00) $ (50.00) $ - $ - $ 25.00 $ - $ (387.50) $ (50.00) $ - $ - $ 25.00 $ - $ -
Free Cash Flows $ (439) $ (601) $ (991) $ (1,037) $ (877) $ (1,388) $ (41) $ 1,021 $ 2,054 $ 2,615 $ 2,602 $ 2,566 $ 2,576 $ 2,561
Discounted FCF's $ (439) $ (544) $ (813) $ (771) $ (590) $ (846) $ (23) $ 511 $ 931 $ 1,073 $ 967 $ 864 $ 786 $ 708
Net Present Value $ 3,036
72April 16, 2010
Addendum B: 787 Income Realistic AssumptionsAssumptions:
Delay Costs / Q1 $ 1.5
Plane Price2 $ 171.6
COGS3 82%
Future Growth4 5.20%Tax Rate 40%
Discount Rate5 10.4%
Notes:1 $1.5 million = 3* $0.5: given in case as monthly delay penalty plane month2 $171.6 million = .7* $164 + .3* $194 to represent weighted average costs of 787-8 & 787-9 (exclusion of 787-3 due to later arrival)3 See Cost of Goods Sold Assumptions4 Found in Case A: pg 75 Discount Rate from CAPM using rf: .16%, Market Return: 8%, Beta: 1.31: sources; yahoo finance, http://www.ustreas.gov/offices/domestic-finance/