Boeing Supply Chain Squeeze Soldiers On

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Boeing’s contentious squeeze on suppliers is gaining traction despite complaints from below and still has a lot more to give, according to the manufacturer’s chairman and chief executive.

CEO Jim McNerney told financial analysts and reporters during the Chicago company’s first-quarter teleconference April 23 that Boeing is in “the early innings” of turning the Partnering for Success (PFS) supply chain policy into contracts, and that Wall Street will increasingly see the benefits over the coming decade.

“It’s already in the order of billions of dollars over a medium and long term, and there’s more where that came from,” he said. “We have already baked in substantial money into our [estimates at completion] based on agreements we reached so far.”

McNerney said 25-30% of Boeing’s supply chain has reached some kind of deal with Boeing, while another third are in “deep discussions” and are close to an agreement. He did not comment on the last third or so. Still, he asserted that while implementation is difficult, as Boeing demands profit margin sacrifices from providers, the deals are mutually beneficial in the end.

“These arrangements often do have price reduction associated with a significant price reduction associated with, but also have benefits to our partners,” McNerney said. “This is not just, ‘we want your margins and be nice to us from now on.’ This is a broader business arrangement that does reflect the more-for-less world that I see out in front of Boeing.”

Boeing providers reportedly beg to differ. “We were at the Pacific Northwest Aerospace Alliance conference and there isn’t one supplier we talked to who was happy with Boeing’s PFS program,” Leeham Co. analysts said in February. “To a supplier – none of whom would consent to be identified, for fear of offending the Big Momma – each complained that Boeing is being unreasonable in its asks: 15% to 25% cost reductions.”

Leeham and other analysts have warned that PFS could damage relations with suppliers to the degree that labor relations soured with the International Association of Machinists district 751. “We certainly understand Boeing’s desire to shave costs in its supply chain, just as we understood the desire to control pension fund and medical costs with IAM 751,” Leeham said. “However, the rosy picture painted by Boeing officials is very much at odds with those suppliers we’ve talked with.”

Nevertheless, the Boeing CEO insists PFS positions both providers and the manufacturer better and is necessary in light of global competition. “This isn’t pure gravy, McNerney said. “I mean the reason we are doing this is we have world out there putting pressure on us, that is putting cash pressure on us, and we are trying to respond to that. And so you see our margins sort of steadily improving,” he added. “That remains our objective.”

Wall Street is increasingly seeing the same thing, too. “We view Boeing’s Partnering for Success effort to cut its supplier costs as a driver of improving profitability,” said J.P. Morgan analysts.

“Under program accounting, Boeing pulls forward some benefits of the supplier cost breaks it negotiates, so the cost reductions management negotiates for future years support profitability now,” they told investor clients last week. “We view [Boeing Commercial Aircraft’s] core profitability as an important positive trend underway at Boeing and with management indicating there is considerable running room left on PFS, we could see estimates moving higher.”

Discuss this Blog Entry 3

David Hair (not verified)
on May 1, 2014

As seen by a former 35 year employee of Boeing suppliers, there is overlooked opportunity for cost reduction by using more focus on "design for cost". Boeing has excellent aerospace engineers and technology, it appears that more effort to design in lower costs, perhaps by using folks with a fresh perspective from outside the legacy or traditional aerospace viewpoint or paradigm might have substantial paybacks. Actively soliciting cost reduction design inputs from suppliers would be an investment with low out lays and high returns.

HB
on May 2, 2014

Boeing's PFS program is beginning to mirror the supply chain problems experienced with the 787 but on a different angle.
Boeing's number one commitment is to build the highest quality and most innovative commercial a/c if it is to remain dominant with Airbus in larger airframe a/c production.
Squeezing suppliers to accept marginal profitability while Boeing seems to seek maximum returns for itself and it's investors spells trouble in the future for Boeing as suppliers deliver less than optimal quality and/or innovative parts and subsystems for Boeing a/c which obviously affects the end product.
As an American citizen, I slightly lean toward Boeing but have immense respect for Airbus equipment as well and if Boeing continues with this PFS, Airbus will be the one to gain as Boeing will experience a near repeat of the 787 supplier fiasco but for another reason.

on May 7, 2014

Normally the OEM and the supplier engineers and staffs works together to find smart solutions. Just to demand the same bits cheaper is heading for troubles unless volumes makes a quantum leap. The best is to find parts that are not needed anymore. Scania trucks do this well and has always +10% profit margin.

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