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Boeing Research Paper

Provide a brief overview of the relevant issues and summarize your recommendations.

In early 2003, Boeing announced its plans to develop a new airplane (7E7 & 7E7 Stretch) in a market that was facing a tight squeeze on profits. The decline in the airline industry was attributed in large part to the war in Iraq, international terrorism, and fear of spreading SARS. The development of this new aircraft could possibly bring Boeing out of their innovation slump and potentially give them an advantage in the mid-sized aircraft market.

Since 1994, Boeing had not put a new airplane into production and had failed to follow through on two commercial aircraft programs. The company was in desperate need of an aircraft that would set them apart from Airbus, their main competitor and market leader. Boeing’s vision for the 7E7 was a cost efficient plane that used less fuel, had cheaper operating costs, and flexibility for short or long haul routes. The new plane would be made with cheaper composite parts which would reduce the production time from 20 days to 3 days.

The new project faced some concerns. The cost efficiency relied on the use of composite materials that had not gained regulators’ confidence. Also, Boeing would have to design completely new production methods for this new plane. Unfortunately, Boeing has a track record of problems with their production methods and delivering planes on time. The board of directors also expected development cost estimates to be substantially reduced prior to approving such a product. The demand in the market was for cheaper and more efficient planes, and that ideology needed to be part of Boeing’s development strategy.

Airbus, the market leader, produced planes to serve the short, medium and extended-range routes. Analysts believe that Airbus seemed to be more bullish on the future of the large aircraft market leaving Boeing an opportunity to gain back market share in the mid-size market, assuming that Airbus did not pursue the mid-range segment with a competing product. Boeing had a drop in commercial airplanes delivered from 527 in 2001 to 381 in 2002 and needed this project to keep them in the hunt with Airbus.

The board will also have to consider the decades it may take to recoup the costs of starting this project. Development costs in the airline industry are substantial leading to many years of negative cash flows. The introduction of a new plane is a make-or-break activity for the producers and requires huge financing capabilities. The development costs and per-copy costs were difficult to predict, and Boeing also faced engineering uncertainty with the project. The success of the project depends heavily on Boeing’s ability to keep the production costs low and actually deliver a more efficient aircraft than the competition.

A final consideration that needs to be evaluated is the set up of the Boeing business. It is set up as two separate businesses- the integrated defense systems business and the commercial business. The defense systems group experienced significant revenue growth due to the war and demand from fear of terrorism. As stated previously, the aircraft division is experiencing an uncertain market. Analysts believe that Boeing has significant technology advantages because of the transferability of R&D across the two divisions. One question to consider, should the required return be based on the two business portfolios or by individual division?

Recommendations summarized:

Ultimately Boeing needs to determine if the project will be profitable and if it will have positive cash flows in accordance with business requirements. Our analysis shows that the WACC, NPV and IRR are favorable (according to sensitivity analysis) and the project will likely be profitable. Boeing should keep this project as an individual project within the commercial business division. Defense projects and commercial projects both have unique factors that can be handled efficiently through separate divisions with the ability to share research and knowledge between the two divisions. Boeing should pursue the project with disciplined focus on maintaining cost efficiencies.

What is the project’s estimated WACC?

Cost of Debt

To calculate the average cost of debt, we took a weighted average of all interest rates on outstanding bonds of The Boeing Company as of June 2003. The weighted average bond YTM interest rate was 5.286% (see chart using Boeing case exhibit 11 data below). Next, we multiplied by (1-Tax Rate), which resulted in an after-tax cost of debt of 3.436%.

Cost of Equity

Since the case study does not mention preferred stock issues, we assumed that there were none.

To estimate the cost of common equity, we used the CAPM approach: rs = rRF + (RPM)bi:

RRF=4.56%(Treasury bond rate listed on page 7 of the case)

RPM=6.40%

bi = 1.05 (We used the Value Line beta listed on page 23 of the case since it consisted of the most data, 5 years, in comparison with the New York Stock Exchange Composite Index)

Using the CAPM approach, the cost of equity is 11.28%.

Capital Structure

The market value debt/equity ratio given in Exhibit 10 of the case is 0.525. We assumed that this ratio reflects Boeing’s capital structure target and that Boeing will finance the 7E7 commercial aircraft project equal to the firm’s capital structure (i.e. using only debt and equity). If so, then only slightly more than a third of the 7E7 project will be financed through debt, with the rest coming from equity as shown below:

D/E = 0.525

D+E = 1 пÑ" D = 1-E пÑ" (substituting back into first equation) пÑ" (1-E)/E = 0.525

пÑ" E = 1/1.525 = 0.6557 and therefore D = 1-0.6557 = 0.3443

Weighted Average Cost of Capital

WACC = wdrd(1-T) + wprp + wcrs

OR

WACC = (% of debt)(After-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity)(Cost of common equity)

WACC = .3443(3.436%) + .6557(11.28%)

...

Keeping Boeing Flying Higher and Higher

Case Study

Introduction

Boeing has been building commercial airliners since 1927 with the first Boeing commercial jet airliner, the 7O7, introduced in l955. As discussed in the article on page 172 of the text. This success is even more remarkable when one realizes that the Boeing "Design/ Build" process had not changed very much during the past three decades. The system was antiquated, cumbersome, and inefficient creating production delays, increased costs, and spawning a huge bureaucracy simply to handle the paperwork. Boeing must clearly be motivated to bring this World War II era process into the 21st Century.

Airbus Industries' increasingly larger share of the commercial airliner market was a major force instigating these changes. Airbus had the advantages of government subsidies to help defray the costs of implementing best design practices, as well as latecomer advantages. It learned from Boeing's, as well as Lockheed's and McDonnell Douglas', mistakes and it did not have 40 years of bureaucratic momentum to overcome. Other motivating factors include the need for Boeing to increase the income from the commercial aircraft division to offset the loss of revenue due to cutbacks in government defense and aerospace contracts.

In this paper I will attempt to highlight those topics I think should be covered, suggestions, and background for those reasons. In this I will hope to show why the Boeing Company was in need of the much-needed overhaul of the design/build process at Boeing, the changes themselves as well as the methodology used in accomplishing those changes.

The Commercial Aircraft Industry

The last decade has seen the commercial aircraft industry dominated by two manufacturers: the Boeing Commercial Aircraft Company and Airbus Industries, with McDonnell Douglas, a distant third. Airbus Industries is a relative newcomer, but it has very quickly provided much competition to Boeing, surpassing McDonnell Douglas and Lockheed. Airbus Industries is a consortium backed by the British, French, German and Spanish governments. The great, and many say unfair, advantage that Airbus has over the competition is government subsidies allowing Airbus to operate in the red. Thus, Airbus can afford to develop new technologies without having to worry about passing on the costs to the customers and can price their aircraft very competitively to lure away airlines from Boeing.

Cost cutting

The effects of the changing airline industry resulting from deregulation in 1978 are still being felt in the commercial aircraft industry. The competition among airlines for passengers has resulted in a greater emphasis on cost cutting leading to mergers and bankruptcies. In addition, airlines modified their routing systems since they were not limited to certain routes, as was the case before deregulation, changing their buying patterns for aircraft accordingly. Airlines were now less concerned with having a technologically superior airplane and more concerned about the cost and efficiency of that airplane.

Why Change.?

The first question that comes to mind is "why would the undisputed leader in the commercial airliner industry make such a risky, change?". In other words, doesn't the old motto "If it ain't broke, Don't fix it" apply in this case? Well according to many observers both inside and outside of Boeing, the system was 'broke'. To give an example of the inefficiency of the process that coordinates engineering and manufacturing, it used to take 800 different computer systems to manage it. This process has been around since Boeing was building the B-17 Bomber in World War II. The process of tracking parts in an airplane was called "effectinitly" and was done manually! A drafter required two years of training to fully understand the system, and still one-third of the paper work contained errors. This "effectivity" just doesn't make sense, and this process adds absolutely no value to their product and results in tremendous costs.

Regardless of all the evidence pointing to flaws in the system, changing a successful company is not easy, especially if we consider the cost and the additional time involved. For the 777, the additional time is estimated to be six months over the normal 48 months to develop a new airplane. Getting a tremendously large bureaucratic system to move forward is a daunting task, especially while continuing to produce airplanes.

The Changes;

The changes to the Boeing Commercial Aircraft Company must encompass all fields. From the philosophy of the company to the technical details, every aspect of the design/build process will need to be modified.

Measurement Tools and Practices

Need:

All content is integrated and organized to fit each user's needs and delivery preferences.

Barriers:

 Lack of collection point for distributed server statistics

 Split between internal metrics and vendor hosted metrics

 Lack of direct user identification

 Difficulty of collecting true costs and true benefits

 Lack of accounting tools to measure intangibles

What Boeing is doing:

 Collecting metrics from high volume servers as indicators of growth

 Using local server statistics to monitor content usage

 Using traditional survey methods to answer questions about usefulness, abuse, and value

 Collecting data on increased revenue, decreased costs, and better use of information for specific sites

 Participating in bench marking surveys with peer institutions

Delivery Tools and Practices

Need:

All content being able to be integrated and organized to fit each user's needs and delivery preferences.

Barriers:

 Rapid proliferation of tools for content delivery

 Media hype based on marketing claims

 Lack of software compatibility

 Instability of tools developed on fast schedules

 Lack of common standards for content description

 Poor content maintenance

 Poor integration of delivery tools and content

What Boeing is doing:

 Providing enterprise-wide delivery systems for search and filtering

 Site licensing search products for local server use

 Providing product support for licensed products

 Encouraging internal information owners to develop processes to manage their information, and making visible those sites that succeed

 Encouraging vendors to separate content from delivery tools, and to work towards common content formats

Platforms

Need:

Ensure all content is integrated and organized to fit each user's needs and delivery preferences.

Barriers:

 Wide accessibility brings enterprise-wide deficiencies into visibility

 Platform incompatibilities are escalating, driving importance of common standards

 Those standards are still in evolution, and often pushed for competitive advantage

 Problems of scale become major roadblocks for needed infrastructure services (directory, authentication)

 Pull between distributed and centralized services is a constant struggle

Publishing Tools/Content Management

Need:

All content is integrated and organized to accommodate each user's needs and delivery preferences.

Barriers:

 Most difficult piece of the puzzle to solve, and least interesting to technologists

 Rich content is essential for better management

 Agreement on how to enrich that content is not easy

 Very few standards for content description are available or stable

 Commercial tools do not lend themselves to software- independent content description

 90% of the battle is education

What Boeing is doing:

 Starting small

 Adopting a subset of Dublin Core meta-data as the company-wide tagging standard

 Initiating groups to examine impact of XML and RDF on Boeing's existing and planned content sets

 Promoting and presenting pilot projects using rich content through cross-company forums

 Influencing internal standards boards to address issues of content management vs. infrastructure management

 Participating in research studies and other activities related to knowledge management

Understanding User's Needs

Vision:

All content is integrated and organized to fit each user's needs and delivery preferences.

Barriers:

 Users all have different needs

 Identifying those needs is difficult

 Meeting those needs is harder still

 User expectations are often unrealistic

 Content is often tied to delivery systems

 Content is protected by passwords

 Content sets often overlap

What Boeing is doing:

 Tracking usage statistics to find high impact pages

 Using surveys to collect feedback

 Performing usability studies on high profile web sites

 Studying specific user groups' information seeking behavior

 Looking at cultural barriers to effective use of information

 Lobbying vendors to adopt common content and retrieval standards

 Purchasing content separately from delivery systems wherever possible

New Philosophy Needed

Vision:

All employees must be part of a team and have the pride that accompanies it.

Barriers:

 Working as teams can at times be extremely difficult

 Knowing your employees and your supervisors can cause animosity among sections

 Trust with in the company must be earned

What Boeing is doing:

 Boeing is touting the 777 as a new processes not just a new product, a philosophy that is espoused by everyone from the top down.

 Cards worn on name tags were printed listing the mission, goals, objectives

 The Boeing company mission statement is: "To be the number one aerospace company in the world and among the premier industrial concerns in terms of quality, profitability and growth." On the backside of the 777 division cards was this mission statement: "Working together to produce the preferred new airplane family."

Mind Change:

Vision:

Change need to not only tangible but in the mind of every worker.

Barriers:

 Working together solving problems

 Realizing the benefits of having every one involved

What Boeing is doing:

 The "I can do it alone " was changed to "We can do it together "

Computer Aided Drafting (CAD) Simulation and Integration:

Vision:

Computer Aided Drafting should be used and linked to every Engineer so as to promote ideas and decrease production time.

Barriers:

 Linking this type and style of software can be expensive

What Boeing is doing:

 The development of the 777 was the single largest trial of CAD and the initial production time results were impressive. The port wing tip of the first 777 was out of position by 1/1,000 of an inch when attached to the fuselage and the starboard wing was exactly located to within the accuracy of the measuring gauges where by saving countless man-hours and money.

Design/Build Teams Goals:

Vision:

Institute teams and publish goals that are obtainable and common sense.

Barriers:

 Established Companies are reluctant to change their ways

What Boeing is doing:

 Boeing management was a hand written list of goals including statements such as:

a) Everything works, b) No surprises, and c) Working together.

 This led directly to the concept of design/build teams, which were involved, on every aspect of the design effort. At one point there were 238 such teams.

Business/Marketing:

Vision:

Changes in business and marketing practices are necessary

Boeing will need to be more responsive to the customer.

Barriers:

 This can be a large hurdle to cross, as the Leader in the aircraft industry is some times difficult to change when you are the leader of the pack.

What Boeing is doing:

 One of Boeing's stated goals and marketing strategy cornerstones is the idea of service readiness from day one.

 Perhaps the strongest selling point of Boeing's marketing strategy is the idea of customer involvement and giving the customer configuration flexibility. Teams from four customers, United Airlines, British Airways, All Nippon and Japan Airlines, were heavily involved from the beginning of the 777 program. Boeing gives airlines great flexibility in configuring the cabin by making the galleys and lavatories completely modular.

Cost Cutting:

Vision:

In today's economy they must be and remain competitive they must reduce costs.

Barriers:

 This may and some times causes layoffs for several employees

 It is unpopular to take the needed steps to remain competitive in a world economy

What Boeing is doing:

 Boeing has set targets for reducing costs by 25%, defects by 50%

 Cut order-to-delivery time by half to six months.

 A large step toward achieving the cost reduction goal is going to just-in-time management of the nearly $8 billion inventory Boeing keeps on hand just in-case.

Will it Work?

Did all these changes substantially change the design/build process for commercial jet aircraft at Boeing? Yes! Was it a change for the better? Yes! Were the changes enough to maintain the market share that Boeing currently enjoys? The answer to the last question is difficult to answer now since the changes are not complete and their effects will not be known until well into the 21 st century.

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