chinooks boeing presentation

CHINOOKS February 10, 2017Boeing Business Case Competition

BOEING BUSINESS CASE COMPETITIONTEAM CHINOOKS

AIMEE XU | ANAV SHARMA | CHRISTOPHER SCHUMACHER | NICHOLAS PIETROW | SHARON WANG


Agenda

I. OverviewII. Demand PrioritizationIII.Expanded Production CapacityIV.Efficient Inventory ManagementV. Appendix

Overview


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


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

Risk

sOp

portu

nitie

s

• 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

Demand Prioritization


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


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

Expanded Production Capacity


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


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


Output Timeline

By fulfilling the minimum yearly production requirement, Boeing can avoid delinquency payments.

Dec. 2018 Jun. 2019

Dec. 2015 Mar. 2016 Dec.

2016Dec. 2017

Jun. 2018

Year 148 planes delivered

First parts for Charleston production are ordered

Year 348 planes deliveredCharleston production begins

20 planes delivered to prioritized customer every June forward

Year 248 planes delivered

55 additional planes delivered throughout each year moving forward to other customers

Second 20 planes deliveredto prioritized customer

Dec. 2020

55 additional planes are deliveredProduction cycle continues

Production Output Timeline

Current Seattle Output:48 planes/year

Charleston FirstShift Output:20 planes/year

Additional CharlestonSecond Shift Output:7 planes/year


Financial Implications

The second shift at Charleston will provide significant improvements to gross profit.

Without Additional Shift Additional Shift at Charleston Improvements

Curre

nt B

ackl

og

Completion inDecember 2029

Completion inNovember 2028

13 monthadvance completion of current backlog

Finan

cial A

naly

sis

NPV of 10 YearsOf Production$7.71bn

NPV of 10 YearsOf Production$8.28bn

Increase in NPV$570mm7.4% increase

Annual GrossProfit by 2018$1.44bn

Annual GrossProfit by 2018$1.59bn

Increase inAnnual Gross Profit$150mm10.4% increase

Efficient Inventory Management


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

20Operations:• 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


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

Summary


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 PaymentsDemand Prioritization of Contract

with Higher Delinquency Rate Ensuring Completion of New Contract

Increased Production to Address DemandExpanded Production Capacity

through Second Shift at Charleston Factory Expanding Presence around Charleston

Factory

Minimizes Carrying CostsEfficient Inventory Management through Just-In-Time and Just-In-Case

Strategies Ensures Part Availability for Production

Appendix


Appendix Table of Contents

I. Supply and Demand Forecast MethodologyII. Charleston Capacity Forecast MethodologyIII. Production Forecast: Without Second Charleston ShiftIV. Production Forecast: With Second Charleston ShiftV. Partial Pro Forma Income Statements


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 2040Return to Appendix Table of Contents


Charleston Capacity Forecast Methodology

Step Outcome

Find ratio of production workers in Seattle’s Second to First Shift 200

second shift600first shift

.33ratio

Multiply ratio by number of production workers in Charleston’s First Shift

.33ratio

375first shift

125second shift

Find ratio of aircrafts produced to total production workers in Seattle 48

planes800workers

.06ratio

Apply ratio to production workers in Charleston’s Second Shift .06

ratio125

second shift~7planes

Return to Appendix Table of Contents


Production Forecast: Without Second Charleston Shift

Year ContractOther

BacklogAdditional Demand

WA Supply SC Supply

Total Supply

Contract Supply

Other Supply

Cum. Backlog Supply

2015 160 640 48 0 48 0 48 482016 60 48 0 48 0 48 962017 64 48 0 48 0 48 1442018 67 48 20 68 20 48 1922019 71 48 20 68 20 48 2402020 76 48 20 68 20 48 2882021 80 48 20 68 20 48 3362022 85 48 20 68 20 48 3842023 90 48 20 68 20 48 4322024 96 48 20 68 20 48 4802025 101 48 20 68 20 48 5282026 107 48 20 68 0 68 5962027 107 48 20 68 0 68 6642028 107 48 20 68 0 68 7322029 107 48 20 68 0 68 8002030 107 48 20 68 0 68 8682031 107 48 20 68 0 68 9362032 107 48 20 68 0 68 10042033 107 48 20 68 0 68 10722034 107 48 20 68 0 68 11402035 107 48 20 68 0 68 12082036 107 48 20 68 0 68 12762037 107 48 20 68 0 68 13442038 107 48 20 68 0 68 14122039 107 48 20 68 0 68 14802040 107 48 20 68 0 68 1548

Backlog Completion by December 2029



Production Forecast: With Second Charleston Shift

Year ContractOther

Backlog

Additional

DemandWA

SupplySC

Supply

SC 2nd Shift

SupplyTotal

SupplyContract 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



Partial Pro Forma Income Statements

Production w/o Contract 48 48 48 48 48 48 48 48 48 48Production w/ Contract 48 48 48 68 68 68 68 68 68 68

Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Revenues $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 $9.36Gross 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 55Production w/ Contract 48 48 48 75 75 75 75 75 75 75

Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Revenues $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 $10.32Gross 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
