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CHINOOKS February 10, 2017Boeing Business Case Competition
BOEING BUSINESS CASE COMPETITIONTEAM CHINOOKS
AIMEE XU | ANAV SHARMA | CHRISTOPHER SCHUMACHER | NICHOLAS PIETROW | SHARON WANG
CHINOOKS February 10, 2017Boeing Business Case Competition
Agenda
I. OverviewII. Demand PrioritizationIII.Expanded Production CapacityIV.Efficient Inventory ManagementV. Appendix
Overview
CHINOOKS February 10, 2017Boeing Business Case Competition
Overview of Issues
Demand Prioritization
Issues Solutions
New Contract
Current Backlog
Long Lead Times
High Delinquency Rate at 3% Per Month
Rigid Expectations of 20 Planes Per Year
Heavy Backlog of Approximately 800 Aircrafts
Growing Demand at 6% Per Year
12 to 15 Month Lead Times Varying
Supply Chain Limitations
Expanded Production Capacity
Efficient Inventory Management
CHINOOKS February 10, 2017Boeing Business Case Competition
Potential Approaches: Renegotiate or Prioritize
Demand prioritization overcomes the risks of renegotiating but retains core benefits.
• Potential damages to customer relations
• Delayed revenue realization• Risk customer says ‘no’• Does not address backlog• Unforeseeable outcomes with lack of
guarantee
Renegotiate Prioritize
Risk
sOp
portu
nitie
s
• Could lower delinquency rates• Less pressure on backlog• Common industry practice
• Could decrease backlog customer satisfaction
• Perverse incentive to increase delinquency rates for customers to receive priority
• Eliminates delinquency rates• Maintains customer relations• Control on outcomes
Short Term, Singular Benefit
Renegotiation of Current Contract
Long Term Precedent
Demand Prioritization of
Current Contract
Demand Prioritization
CHINOOKS February 10, 2017Boeing Business Case Competition
Demand Prioritization Rationale
The high delinquency rate of the new contract incentivize producing planes for this customer with priority.
Reasons Evidence
• Escalating delinquency fees necessitate prioritizing the new contract
• Failure to do so will result in the accumulation of nearly 80 billion dollars in penalty payments over 11 years
Unfavorable Delinquency Rate
• Terms of the contract do not align with industry standards
• A late fee of $4.8mm per plane per month is significantly above average
“Boeing 787 delivery penalties reach $5.1 billion” after 2.5 years of delay on 83 planes -- Aviation Daily
“Supplier agrees to pay $5,000 for each day of delay subject to a max of 25% of price” -- Skift News
High Delinquency Payments
CHINOOKS February 10, 2017Boeing Business Case Competition
Risks of Demand Prioritization
Through increased inventory management, Boeing can maintain and ensure positive customer relationships.
More Efficient Manufacturing
Risk 1: Increased Wait Times
Risk 2: Adverse Impact on Corporate Image
Mitigation:• Increase organization of
prioritization strategy to ensure that customer orders are filled in financially efficient order
• Improve efficiency through Just-In-Time inventory management
Mitigation:• Limit visibility into internal
operations• Seek opportunities to further
increase efficiency to limit late fulfillment
Potential Impact:Customer dissatisfaction due to increased wait times
• Risk of customers increasing delinquency rates to gain prioritization
• Damage to existing relationships• Possibility of further increased wait times
from supplier delays due to projected increase in production from Charleston factory
Potential Impact:Decrease in future customer contracts
• Frustration due to potential increase in wait times
• Questioning of prioritization of contracts with higher delinquency rates
Expanded Production Capacity
CHINOOKS February 10, 2017Boeing Business Case Competition
Examining Production Capacity Alternatives
A second shift in Charleston proved to be significantly more beneficial with positive financial impacts.
Third Shift in Seattle Second Shift in Charleston
Strategic Considerations:• Easier access to skilled workers• Existing significant manufacturing
presence in region• Physical capacity to increase
production if requiring additional space
Financial Considerations:• Higher labor costs due to higher
cost of living in Seattle• Diminishing marginal returns• Employee wages for more hours
than actual productivity given nature of third shift
Strategic Considerations:• Hiring challenges due to smaller
presence in Charleston• Smaller production facility• Potential difficulty in initiation of
production of 787
Financial Considerations:• Significantly lower labor costs• Financial efficiency in full
utilization of second shift
CHINOOKS February 10, 2017Boeing Business Case Competition
Expansion Through Charleston Factory
By leveraging talent at nearby technical institutes, Charleston can successfully expand its production capacity.
2015 2016 2017 2018
Action Items:Begin sourcing labor from technical institutes for additional shift
Train new employees in Boeing’s production methods
Commence use of 2nd shift in Charleston
Refine manufacturing processes continually
Timeline
Increased Supply Strategy
• Offer hiring incentives such as insurance benefits
• Advertise employees are paid during training
• Create channels for upward mobility
Hiring Strategy
• Leverage current relationships with suppliers for parts required for increased production
• Reduces risks of unreliability from seeking new suppliers
• Lower opportunity cost due to trust established within current supplier relationships
CHINOOKS February 10, 2017Boeing Business Case Competition
Output Timeline
By fulfilling the minimum yearly production requirement, Boeing can avoid delinquency payments.
Dec. 2018 Jun. 2019
Dec. 2015 Mar. 2016 Dec.
2016Dec. 2017
Jun. 2018
Year 148 planes delivered
First parts for Charleston production are ordered
Year 348 planes deliveredCharleston production begins
20 planes delivered to prioritized customer every June forward
Year 248 planes delivered
55 additional planes delivered throughout each year moving forward to other customers
Second 20 planes deliveredto prioritized customer
Dec. 2020
55 additional planes are deliveredProduction cycle continues
Production Output Timeline
Current Seattle Output:48 planes/year
Charleston FirstShift Output:20 planes/year
Additional CharlestonSecond Shift Output:7 planes/year
CHINOOKS February 10, 2017Boeing Business Case Competition
Financial Implications
The second shift at Charleston will provide significant improvements to gross profit.
Without Additional Shift Additional Shift at Charleston Improvements
Curre
nt B
ackl
og
Completion inDecember 2029
Completion inNovember 2028
13 monthadvance completion of current backlog
Finan
cial A
naly
sis
NPV of 10 YearsOf Production$7.71bn
NPV of 10 YearsOf Production$8.28bn
Increase in NPV$570mm7.4% increase
Annual GrossProfit by 2018$1.44bn
Annual GrossProfit by 2018$1.59bn
Increase inAnnual Gross Profit$150mm10.4% increase
Efficient Inventory Management
CHINOOKS February 10, 2017Boeing Business Case Competition
Outsourcing Considerations
Outsourcing provides potential for some benefits, but would not be optimal for major aircraft sections.
Outsourcing Considerations for Major Aircraft Sections
Risks Benefits
• Vulnerability to supply disruptions
• Potential for decreased quality
• Subcontracting• Union strikes• IP concerns• Diminishing returns
• Potential for cost savings
• Reduced lead times
Current Boeing Outsourcing
Assembly Work
Outsourcing Insourcing
20Operations:• Current Lead Time: 15 mo.• 20% assembly work outsourced• 787 aircraft: 30% outsourced
LEAN and AGILE:• Strategic need for
optimization• Minimize excess
inventory but maintain flexibility of operations
CHINOOKS February 10, 2017Boeing Business Case Competition
Just-In-Time and Just-In-Case Inventory
A combination of Just-In-Time and Just-In-Case inventory management will bridge the LEAN and AGILE strategies.
• Order parts only as needed• Minimize carrying costs• Ship finalized products immediately• Requires active management of
supply procurement
Just-In-Time Inventory: LEAN Strategy
Just-In-Case Inventory: AGILE Strategy• Maintain excess inventory to ensure
flexibility• Increase in carrying costs• Mitigates risk of supply chain delays
Combined Strategy• Maintain minimum inventory of
parts for two planes to ensure some degree of flexibility
• Minimize excess inventory on hand
Summary
CHINOOKS February 10, 2017Boeing Business Case Competition
Summary of Recommendations
Through demand prioritization, expanded production capacity and efficient inventory management, Boeing can fulfill the new contract and address the current backlog as well as
growing demand.
Solutions Implications
Decreased Risk of Delinquency PaymentsDemand Prioritization of Contract
with Higher Delinquency Rate Ensuring Completion of New Contract
Increased Production to Address DemandExpanded Production Capacity
through Second Shift at Charleston Factory Expanding Presence around Charleston
Factory
Minimizes Carrying CostsEfficient Inventory Management through Just-In-Time and Just-In-Case
Strategies Ensures Part Availability for Production
Appendix
CHINOOKS February 10, 2017Boeing Business Case Competition
Appendix Table of Contents
I. Supply and Demand Forecast MethodologyII. Charleston Capacity Forecast MethodologyIII. Production Forecast: Without Second Charleston ShiftIV. Production Forecast: With Second Charleston ShiftV. Partial Pro Forma Income Statements
CHINOOKS February 10, 2017Boeing Business Case Competition
Supply and Demand Forecast Methodology
Projecting Cumulative Demand Projecting Cumulative Supply
Utilize the existing backlog of 640 as a base
Add 60 orders to demand for 2016
Compound prior year’s cumulative demand
6% annually
Project until 2040
Utilize the existing capacity of 48 planes per year as a base
Add 20 more planes to supply in 2018 to account for Charleston plant
opening
Include impact of new shift through expanding supply by 7 planes per year
Project until 2040Return to Appendix Table of Contents
CHINOOKS February 10, 2017Boeing Business Case Competition
Charleston Capacity Forecast Methodology
Step Outcome
Find ratio of production workers in Seattle’s Second to First Shift 200
second shift600first shift
.33ratio
Multiply ratio by number of production workers in Charleston’s First Shift
.33ratio
375first shift
125second shift
Find ratio of aircrafts produced to total production workers in Seattle 48
planes800workers
.06ratio
Apply ratio to production workers in Charleston’s Second Shift .06
ratio125
second shift~7planes
Return to Appendix Table of Contents
CHINOOKS February 10, 2017Boeing Business Case Competition
Production Forecast: Without Second Charleston Shift
Year ContractOther
BacklogAdditional Demand
WA Supply SC Supply
Total Supply
Contract Supply
Other Supply
Cum. Backlog Supply
2015 160 640 48 0 48 0 48 482016 60 48 0 48 0 48 962017 64 48 0 48 0 48 1442018 67 48 20 68 20 48 1922019 71 48 20 68 20 48 2402020 76 48 20 68 20 48 2882021 80 48 20 68 20 48 3362022 85 48 20 68 20 48 3842023 90 48 20 68 20 48 4322024 96 48 20 68 20 48 4802025 101 48 20 68 20 48 5282026 107 48 20 68 0 68 5962027 107 48 20 68 0 68 6642028 107 48 20 68 0 68 7322029 107 48 20 68 0 68 8002030 107 48 20 68 0 68 8682031 107 48 20 68 0 68 9362032 107 48 20 68 0 68 10042033 107 48 20 68 0 68 10722034 107 48 20 68 0 68 11402035 107 48 20 68 0 68 12082036 107 48 20 68 0 68 12762037 107 48 20 68 0 68 13442038 107 48 20 68 0 68 14122039 107 48 20 68 0 68 14802040 107 48 20 68 0 68 1548
Backlog Completion by December 2029
Return to Appendix Table of Contents
CHINOOKS February 10, 2017Boeing Business Case Competition
Production Forecast: With Second Charleston Shift
Year ContractOther
Backlog
Additional
DemandWA
SupplySC
Supply
SC 2nd Shift
SupplyTotal
SupplyContract Supply
Other Supply
Cum. Backlog Supply
2015 160 640 48 0 0 48 0 48 48
2016 60 48 0 0 48 0 48 96
2017 64 48 0 0 48 0 48 144
2018 67 48 20 7 75 20 55 199
2019 71 48 20 7 75 20 55 254
2020 76 48 20 7 75 20 55 309
2021 80 48 20 7 75 20 55 364
2022 85 48 20 7 75 20 55 419
2023 90 48 20 7 75 20 55 474
2024 96 48 20 7 75 20 55 529
2025 101 48 20 7 75 20 55 584
2026 107 48 20 7 75 0 75 659
2027 107 48 20 7 75 0 75 734
2028 107 48 20 7 75 0 75 809
2029 107 48 20 7 75 0 75 884
2030 107 48 20 7 75 0 75 959
2031 107 48 20 7 75 0 75 1034
2032 107 48 20 7 75 0 75 1109
2033 107 48 20 7 75 0 75 1184
2034 107 48 20 7 75 0 75 1259
2035 107 48 20 7 75 0 75 1334
2036 107 48 20 7 75 0 75 1409
2037 107 48 20 7 75 0 75 1484
2038 107 48 20 7 75 0 75 1559
2039 107 48 20 7 75 0 75 1634
2040 107 48 20 7 75 0 75 1709
Backlog Completion by November 2028
Return to Appendix Table of Contents
CHINOOKS February 10, 2017Boeing Business Case Competition
Partial Pro Forma Income Statements
Production w/o Contract 48 48 48 48 48 48 48 48 48 48Production w/ Contract 48 48 48 68 68 68 68 68 68 68
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Revenues $7.68 $7.68 $7.68 $10.88 $10.88 $10.88 $10.88 $10.88 $10.88 $10.88 Delinquency Deduction $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09)Total Revenues $7.59 $7.59 $7.59 $10.79 $10.79 $10.79 $10.79 $10.79 $10.79 $10.79 COGS $6.60 $6.60 $6.60 $9.36 $9.36 $9.36 $9.36 $9.36 $9.36 $9.36Gross Profit $0.99 $0.99 $0.99 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44
(In billions)
Without Charleston Second Shift: $7.71bn NPV
Production w/o Contract 48 48 48 55 55 55 55 55 55 55Production w/ Contract 48 48 48 75 75 75 75 75 75 75
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Revenues $7.68 $7.68 $7.68 $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 Delinquency Deduction $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09) $(0.09)Total Revenues $7.59 $7.59 $7.59 $11.91 $11.91 $11.91 $11.91 $11.91 $11.91 $11.91 COGS $6.60 $6.60 $6.60 $10.32 $10.32 $10.32 $10.32 $10.32 $10.32 $10.32Gross Profit $0.99 $0.99 $0.99 $1.59 $1.59 $1.59 $1.59 $1.59 $1.59 $1.59
With Charleston Second Shift: $8.28bn NPV
Return to Appendix Table of Contents