todd penke, juan pablo saldarriaga, katlin smith & jon so vision 2025: the premier global supply...

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

http://seattletimes.nwsource.com/html/boeingaerospace/2010509566_787timeline15.html

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


Boeing 2025

Precision and SMART will enable Boeing to become the premier global supply chain leader

Boeing SMaRtBoeing SMaRt

General Design Work Final Assembly


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






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



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


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, 2, and 3: Place Boeing employees in house

Poss

ible

ext

ent o

f com

poun

d de

lays



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


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


14April 16, 2010

Even suppliers not at risk of delay should be incentivized to perform

Hig

h

12

Lo w

34


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



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


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


17April 16, 2010

Boeing PrecisionBoeing

Precision



Large Component

Manufacturing


Large Component

Manufacturing

BOEING SMaRtLong-Term Strategy


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


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


20April 16, 2010

SMaRt determines production roles of first-tier suppliers based on procurement capability and ability to design large componentsX


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’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


Plane Design

Part Engineering

Supplier

Manufacturing

Final Assembly

Delivery



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


Plane Design

Part Engineering

Supplier

Manufacturing

Final Assembly

Delivery



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


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


27April 16, 2010

Inexperienced global partners cannot handle detailed design

work

Insufficient oversight of

manufacturing


Boeing 2025

Precision and SMART will enable Boeing to become the premier global supply chain leader

Boeing SMaRt



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.


[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.




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.




33April 16, 2010

Appendix D: Outsourcing the manufacturing of the Dreamliner

Source: http://www.seattlepi.com/boeing/787/787primer.asp


http://www.seattlepi.com/boeing/787/787primer.asp

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


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


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


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


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.


http://www.bmpcoe.org/bestpractices/internal/mdasl/grf_mdasl_39.html

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


Xxxxxxxxxxxxxxxxxxxxx


x



TOTALxxxxxxxxxxxxxxxxxxxx


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


•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


•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


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/

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