Boeing's Big Problem It's a great time to be an airplane builder. If Boeing could learn to make aircraft efficiently, it could be a truly great company.
By Ronald Henkoff Reporter Associate Maura Griffin Solovar

(FORTUNE Magazine) – Boeing's cavernous Boeing 747-400 plant in Everett, Wash., turns out four massive jets per month, and every one is unique--a 200-ton snowflake, a $170 million bespoke suit. What the customer wants, the customer gets, with no seeming end to the possible permutations: Boeing offers 747 buyers as many choices of paint colors as Elton John has outfits, including no fewer than 109 shades of white. The factory is surprisingly quiet and low tech. There are no flashing lasers or whizzing robots. Just small teams of workers, many wielding nothing more sophisticated than hand tools. It looks, in fact, like a giant version of the repair bay in your neighborhood service station.

Boeing's problem--and it's a big one--is that your humble service station probably operates more efficiently than the largest aerospace company on the planet. Boeing's fusty production techniques carry an enormous price tag. Every alteration, even a seemingly minor one like moving the location of an emergency flashlight holder, consumes thousands of hours of engineering time, requires hundreds of pages of detailed drawings, and costs hundreds of thousands, if not millions, of dollars to execute. It's bizarre enough that any company still muddles along this way in the late 1990s. But what's truly extraordinary is that Boeing, widely admired as a titan of American industry, a major exporter, and the leading company in its field, has actually managed to prosper with such archaic methods. The reasons are clear enough. Its major customers--airlines protected by regulation and a free-spending Department of Defense--cared little about price. Then too, Boeing has had no hyperefficient competitor from Japan (or anyplace else) breathing down its neck.

But how the times have changed. Airline deregulation is spreading around the globe, the post-Cold War Pentagon has gone on a diet, and Boeing's only remaining competitor in passenger jets, Airbus Industrie, a government-subsidized European consortium, is chipping away at Boeing's lead in the marketplace. So now, just when Boeing should be celebrating a strong surge in the demand for its jets, it has instead been forced to take a series of expensive and embarrassing steps to keep its overtaxed factories operating.

Last fall things got so bad that Boeing had to halt production on two major assembly lines for a full month, take a $1.6 billion charge against third-quarter earnings, and then warn a stunned Wall Street that manufacturing woes would knock another $1 billion off its anticipated profits in 1998.

Boeing's stock price fell 20% over several days last October on news of the production problems and write-offs. The shares have recovered somewhat since then, but they were still trading around $50 in late December, well below the 12-month high of $60.50 reached last July. Analysts expect Boeing to eke out a profit of merely 67 cents per share for 1997, down sharply from 1996's pro forma figure (adjusted for mergers) of $1.88 per share.

Boeing's pain in the midst of plentiful demand has top officials pressing ahead with a sweeping plan to overhaul the way the company designs and produces airplanes. But this multiyear, billion-dollar manufacturing makeover is significantly behind schedule and dauntingly ambitious in scope. The core question about the Seattle-based planemaker is whether it can recover from the trauma of its recent production snafus and complete the factory-floor restructuring it so obviously needs.

For the moment, most of the Wall Street wizards who follow Boeing are still optimistic. Convinced that management has at last gotten a fix on its production woes, most analysts rate the stock a buy or a hold. None rate it a sell. The consensus forecast calls for a recovery to $2.49 per share by 1998, and some analysts have big hopes for the future. Pierre Chao of Morgan Stanley Dean Witter, probably the biggest bull of all, says, "This is shaping up as one of the great transformation stories in corporate America."

Boeing, of course, is changing much more than the complexion of its factories. It has also radically altered the size and shape of the company. In August it completed a $16.3 billion merger with McDonnell Douglas, a move that eliminated the only other American contender in the commercial aircraft business. That combination came right on the heels of Boeing's $3.1 billion acquisition of the defense and space operations of Rockwell International. Boeing, long an also-ran in defense, is now the largest builder of military aircraft in the world, as well as the No. 1 supplier of goods and services to both the Pentagon and NASA.

On the plus side, the business of making commercial airplanes is booming, and Boeing commands an amazing two-thirds share of the $65 billion global market for planes with 100 or more seats. (For a look at its sole remaining competitor, Europe's Airbus Industrie, see the box later in this story.) The world's airlines have finally recovered from the slump that nearly grounded them in the early 1990s. They have gone on a mighty shopping spree, and Seattle is their main destination. Last October, for example, China signed a $3 billion deal to buy 50 jets for its state-owned carriers--just one of the latest in a string of megaorders that Boeing has won from airlines in Asia, Europe, and North America over the past year. Passenger-jet sales should account for about 60% of the company's anticipated 1997 revenues of $46.5 billion.

To meet all these new commitments to customers, Boeing executives have had to increase production at an unprecedented pace. The company plans to more than double its 1996 output of 18.5 planes per month to a record 43 planes per month by April 1998. To fuel the production buildup, Boeing has hired and trained 38,000 workers in the past 20 months. The company now says it will reduce that swollen work force by 12,000 in the second half of 1998, after it gets its snarled assembly lines running more smoothly.

Yet that may be wishful thinking. Boeing's suppliers, many still hurting from the last downturn, are straining to meet the airplane maker's stepped-up demand for parts. John Gazecki, chairman and chief executive of Precision Machine Works, a Tacoma, Wash., company that has provisioned Boeing for 73 years, complains that he's been left in the lurch by his own subcontractors: "We have $25,000 engine mounts that can't be finished because we're waiting for $40 nuts and bolts."

Boeing's production problems reached a crescendo in October. Late shipments of parts meant workers couldn't do their jobs in the right order--a serious concern on a product with as many as six million components. Overtime exploded, accounting for as much as 30% of total labor costs, and Boeing managers finally called a time-out. They stopped the lines at the 747 plant in Everett and at the factory that produces the popular 737 family of twin-engined jets in nearby Renton.

Boeing executives have known for years--for decades even--that their factories were inefficient, their supply chains tangled, their computer systems outmoded. Ever since the late 1970s they have tried, in a piecemeal fashion, to fix these problems. But they never took the issues seriously.

The environment in which Boeing does business has undergone such epochal change that now the company is being forced to become more efficient. As the lead player in a global duopoly, you'd expect Boeing to have some pricing power. But it's actually the airlines that hold the chips. They've learned to extract huge discounts from aircraft manufacturers by offering long-term deals and then bargaining hard on price. American, Delta, and Continental have each recently signed agreements that could have them purchasing planes from Boeing for the next 20 years if they exercise all the options written into their contracts. With orders that large at stake, the competition between Boeing and Airbus has become savage, and the two now flog their jets the way department stores hawk sweaters at an after-Christmas sale, often marking down their jets by 20% or more.

Boeing executives complain regularly--and venomously--about having to compete on a tilted playing field. As they see it, the governments that back Airbus, a consortium of state-run European aerospace companies, care more about jobs and prestige than profits. In 1994, Airbus for the first time claimed to have booked slightly more orders than Boeing did--a wake-up call that reverberated loudly across Washington State. Recalls Bruce Dennis, vice president of marketing for the commercial aircraft group: "It was like getting hit over the head with a two-by-four."

Then too, although Boeing is loath to admit it, its airplanes are becoming more and more like commodities. Says Ron Woodard, president of the commercial aircraft group: "We've pretty much run out of technological evolutions on our products. That's a tough thing to deal with for people whose lives have been focused on how to make airplanes better." For the first time since the dawn of the Jet Age, Boeing has no plans to develop a totally new aircraft. It last launched a new plane in 1995 when it introduced the 777, a wide-bodied twinjet that has become popular on North Atlantic routes.

With no new airplanes on its drawing boards, Boeing has only one place left to look for competitive advantage--the factory floor. Leading the makeover is Philip Condit, 56, the affable engineer who became chief executive in 1996 and chairman the following year. Before he became president in 1992, Condit headed up the successful development of the 777, the first jet at Boeing designed from start to finish using computers. With that background, Condit is well-suited to help Boeing fix its production problems.

Condit's predecessor, Frank Shrontz, launched the first stages of Boeing's nose-cone-to-tail-fin manufacturing overhaul in 1994. Under the most optimistic scenario, the company won't have all its planned reforms in place until at least 2001. The program is ambitious, the potential savings are enormous--but the timing is terrible.

Condit and his team are trying to implement and perfect an entirely new way of building airplanes just as they're trying to boost production to unprecedented levels. At the same time, Boeing is attempting to integrate the back-to-back Rockwell and McDonnell Douglas acquisitions. (Among the issues still being worked out: who should report to whom, which product lines should be discontinued, and which factories should be closed.) Says Gordon Bethune, chairman and CEO of Continental Airlines, a former Boeing executive, and a fan of Condit's: "This company is trying to do so much at the same time--increase production, make its manufacturing lean, and deal with mergers. It's like a guy who's juggling eggs, and then somebody tosses him an orange. It's easy to drop something."

At the core of Boeing's plans to streamline its production processes is a program known as DCAC/MRM. Pronounced "DEE-kak M-R-M," this moniker is so awkward and infelicitous that even the executive in charge of the effort refers to it as the "acronym from hell." The program is so sweeping and so complicated that it has already taken managers two years longer to put it into place than originally anticipated.

When Boeing does finally get its production process reform fully rolled out by the end of 1999, the new scheme will supplant a system of engineering, manufacturing, and parts procurement that dates back to the production of B-17 and B-29 bombers in the 1940s. As the years have gone by, the old system, known as "effectivity" (don't ask why), has grown more byzantine in its complexity. The most important thing to understand about effectivity is that it does not produce airplanes. It produces paperwork.

The problems with the old production system begin with the extraordinary amount of choice Boeing has offered its customers--ranging from mission-critical (like what kind of engine goes on the plane) to mission-meaningless (like whether the clipboard in the cockpit has a spring on the top or on the side). The company then compounds its problems by manually--yes, manually--tracking every part that goes into every plane.

To get an idea of just how absurdly cumbersome this process can become, consider this: When an airline orders a 747, it can pick one of four configurations for the wall at the front end of the rear cargo compartment. It can select a hole on the left, a hole on the right, two holes, or no holes. The holes are for ducts, and the ducts are for heating or air conditioning.

Every time a customer makes a choice on the bulkhead configuration, that decision affects the placement of 2,550 parts. It also means that the engineering department must "tab" the 990 pages of drawings that record every bulkhead configuration on every 747 ever built--using an alphanumeric code so arcane that it takes an employee two years to understand how it works. The procurement department relies on those drawings to know which parts to order, and the manufacturing department depends on the sketches to figure out how to assemble those parts. But 30% of the drawings that engineering produces have to be redone because somebody miscoded them the first time.

Computers might help, but guess what? Nearly every department at every factory has its own computer system, and most of them can't even communicate with one another. Boeing maintains parts lists and sketches on 400 different databases. Concedes Robert Hammer, the vice president in charge of the production process reform: "You know the Baldrige prize for the best manufacturing processes? Well, if there was a prize for the opposite, this system would win it hands down." So, can the system be fixed? No way, says Hammer: "We're going to kill it."

Hammer and a handful of other executives hatched the murder plot four years ago, when they began meeting off-site in a former dentist's office not far from the Renton headquarters of the commercial aircraft business. The production reform team, which now involves some 2,000 people, has devised a plan that revolves around the simple notion that airlines should order airplanes the way consumers order automobiles. No longer will carriers have unlimited choice. They'll be able to pick from a finite number of options packages, all clearly displayed on every Boeing salesperson's laptop computer. The company will still handle special requests, but at a price. Says Hammer: "If you want us to move the pilot's clipboard to the other side of the cockpit we will, but you'll have to pay for it."

The team will junk those 400 computer programs and replace them with just four interconnected, off-the-shelf software packages--one each to manage configuration, manufacturing, purchasing, and inventory control. There will be one, and only one, list of parts for each airplane, updated electronically throughout the production cycle. Hammer predicts that the $1 billion program will completely pay for itself by 2000, its first full year of operation. Getting there, however, will be very painful. Admits Hammer: "Right now, part of the company is in the new system, and part is in the old. So we constantly have to translate data from one to the other. We're in the worst of all worlds."

Important and costly as production reform is, the program barely begins to address the way workers actually do their jobs on the assembly line. To tackle that challenge Boeing has come up with another set of initiatives, loosely grouped under the rubric of "lean manufacturing." While process reform is a top-down, command-and-control affair, lean manufacturing is more like guerrilla warfare. Guided by consultants, employees huddle in five-day "accelerated improvement workshops," where they brainstorm on how to do their jobs more efficiently.

Employees at the factory that builds wings for the 737s and 747s, for example, have been able to trim production time for some functions from 56 to 28 days--by moving machines, designing new tools, and cutting out unnecessary inventory. Says Robert Dryden, executive vice president for airplane production: "The results are really kind of astounding."

Yes, they are--as far as they go. But at this stage, Boeing still has what Merrill Lynch analyst Byron Callan refers to as "islands of lean manufacturing in a sea of areas that aren't lean." Inventory management is one trouble area, for example. Boeing's factories now turn their stocks on average only two to three times per year, while an efficient manufacturing operation might turn stock 12 times a year. Says Dryden: "We'd like to get to the point where parts are delivered in the morning and put into the airplane by the end of the day." Toward that end, Boeing has retained the consulting firm Shingijutsu (the name means "new technologies"), run by Yoshiki Iwata, a former Toyota engineer best known in the West for helping get Germany's Porsche back on track. In an ironic twist, Dryden landed Iwata's services just as he was preparing to sign a consulting deal with Airbus.

Iwata, a gruff, emphatic man who speaks no English, vividly recalls his first visit to Boeing's Everett factory in 1996: "When I walked around I saw piles of inventory everywhere, some that had been sitting there for many years," he says, speaking via an interpreter. "I said to Mr. Dryden, 'This looks more like a moving warehouse than a factory.'" Iwata has helped Boeing improve productivity with some elegantly simple innovations. For instance: The fuselage on an airplane is curved, but to gain access to it on the factory floor a worker used to have to climb up a straight ladder. It doesn't take a degree in geometry to figure out that the closer he got to the top of the ladder the more he had to stretch to reach the fuselage. Iwata's recommendation: Use a ladder that's shaped like an upside-down J.

So Boeing, to put it gently, lags behind much of American industry on the efficiency front. But the flip side of that problem is that the company has so many opportunities--small and large--to improve productivity. "What Boeing is trying to do is what the auto industry was forced to do ten years ago because of competition from Japan," says Pierre Chao of Morgan Stanley Dean Witter. He calculates that Boeing holds about $18 billion in gross inventories, equivalent to about 35% of total revenues. If it can trim that figure to 25%, the average for American industry, the company would increase its free cash flow by $6 billion annually.

Boeing is unlikely to hit that target, or even get close to it, anytime soon--yet it still has some undeniable strengths. Even after it absorbs all the huge and embarrassing charges stemming from its production problems, Boeing will still have ample reserves of cash. Its newly augmented space and defense businesses are fundamentally healthy.

The biggest uncertainty Boeing faces in the next year or so is whether the economic problems of Asia, which accounts for 30% of the backlog of orders for Boeing's commercial jets, will hurt governments there so much that they stop buying airplanes. But even if some Asian airlines renege on their planned purchases--and none has so far--it's possible to see a brighter side: Those cancellations might actually give Boeing's overstretched factories some breathing room.

The long-term challenge for Boeing is one that, ironically, its own corporate traditions should have prepared it for. For decades Boeing has managed to succeed at the daunting business of designing, building, marketing, and servicing very big and very complex machines on a global scale. Says Condit: "Large-scale systems integration is what we do. Airplanes, space stations, launch vehicles. Things with lots of parts." What could be a better test of Boeing's capabilities than the integration of that largest-scale and multiparted system of all, Boeing itself? If Condit and his team succeed, Boeing, universally hailed as a maker of world-class airplanes, will also earn the right to be called a truly world-class company.

REPORTER ASSOCIATE Maura Griffin Solovar