It has been three weeks since Boeing announced the replacement of the company’s CEO and more information as well as implications have come forward. In this Supply Chain Matters continuing update blog, we will focus on engineering and product management as well as supply network implications of such developments.

 

Added Perspectives Regarding CEO Leadership Change Boeing 737 MAX 8

In-depth reporting by the New York Times, Seattle Times and The Wall Street Journal have provided more backdrop to the CEO ousting. The general consensus reported is that Boeing’s Board members had finally come to the conclusion that the company’s relationships with U.S. and international safety regulators, global based airline customers, suppliers and investors were tarnished beyond repair and a leadership change needed to occur.

Both the Seattle Times and WSJ indicated that Boeing’s Board made the decision to temporarily suspend 737 monthly production in mid-December. Then CEO Dennis Muilenburg had continued to provide assurances that the global return to service of the 737 MAX would occur before the end of 2019, but it was increasingly clear that the milestone would not occur, hence the management change decision.

It was but a week later that the Board decided that a senior leadership change had to occur. According to these reports, the final catalyst turned out to be the immediate blowback from airline customers and suppliers when they were informed of the production suspension decision. The Seattle Times report cited an internal source as indicating that relationships had reach a point that was difficult to repair.

In a Supply Chain Matters commentary focused on the company’s Q2-2019 financial performance, we had referenced the production suspension decision as a means to pressure the FAA to accelerate the aircraft’s recertification. It turned out that in some respects the implications of that very decision, coupled with the building frustrations of many key stakeholders, were presumedly one of the catalysts for the change in senior leadership. The bad news was delivered, and the CEO took the bullet.

 

Ongoing Challenges

Since the decision for the temporary 737 production halt this month, one of Boeing’s largest suppliers, Spirit AeroSystems has already announced plans for voluntary layoffs. Reports indicate that Boeing  is further in the process of meeting with various suppliers to determine impacts and means toward minimizing headcount reductions.

A further theme being expressed in media and industry reporting is the acute need for the company to restore its engineering-driven excellence culture in product design and aircraft safety.  While Mr. Muilenburg’s background was one of engineering, the company had reportedly strayed into too many compromises related to time-to-market, cost-saving and shorter-term investor returns.

The appointment of David Calhoun as the company’s new CEO effective this week has apparently brought mixed reactions.

The three cited media reports indicate that the Board favored the decision because of Calhoun’s intimate knowledge of Boeing’s goals and strategies, his background and reputation in understanding manufacturing operations and customer needs within aviation circles. Some equity analyst views were reported as mixed on the decision, some reflecting whether bringing in an outsider would be more appropriate given the wide scope of internal challenges. Mr. Calhoun’s private equity background is also a concern among  stakeholders. The Seattle Times cited a further internal source, seeking anonymity to speak freely, as indicating doubts as to whether such a background can: “revive the company’s historic culture of engineering prowess that’s been eclipsed for years by the forces of financial performance.

 

Developments Are Ongoing

Mr. Calhoun has wasted little time in reaching out to key stakeholders.

He has spoken directly to the head of the Federal Aviation Administration (FAA), reportedly without the assistance or voices of handlers, and committed to the agency that the company will strive to be more open and less confrontational.

Further evidence of more openness arrived this week as the  company announced that it will recommend supplemental flight-simulator training for 737 MAX pilots, a complete reversal of a former stance. Recall that Boeing positioned the MAX as an aircraft that could be easily transitioned into the existing 737 operating fleet, and that personal computer and laptop training was sufficient. That was before the revelation of the design flaws and pilot operating assumptions related to the aircraft’s MCAS flight control system.

The former view was an ongoing burr on the part of international air safety regulators, while the latter and now agreed to view upsets key airline customers because of the added time required to train and certify existing 737 pilots.  According to the report by the WSJ, launch customer Southwest Airlines had a contract stipulation that called for refunding $1 million for each MAX purchased if the aircraft required extra simulator training. That’s the example of the sensitivity to the aircraft’s original design parameters, that existing 737 pilots could easily transition to piloting the MAX.

Seattle Times aviation industry correspondent Domenic Gates reported this week that in this new spirit of openness, Boeing engineers have discovered a potential new wiring-design problem involving the MAX’s operation of the horizontal stabilizer. A separate manufacturing issue related to aircraft produced over the past year involves proper installation of lighting protection surrounding the aircraft’s engines, which will require added inspection and repair. The wiring harness issue is unrelated to the MCAS flight control issues, in that involves wiring hardware design, and according to the report, engineers are still evaluating whether the issue is significant for added attention. Both of these added issues could reportedly add to the delay of returning the aircraft to operational service by March.

 

Raising Additional Debt

Also reported this week is that the company is expanding plans to raise additional debt to bolster overall finances related to the ongoing grounding crisis. The WSJ reported that while the company is not at risk for running out of cash, the costs related to the grounding thus far, lead to the prospect for having to eventually raise more money.  Recall that in our prior update, we, along with others, questioned the financial justification for having to suspend monthly production, while on the same day, announcing continued payment of the company’s lucrative stock dividend.

What caught our eye was the report’s indication that while raising more debt, the company is further: …also thinking of deferring some capital expenditures, freezing acquisitions and cutting spending on research and development to preserve cash, people familiar with those possibilities said.

By our lens, such a statement smacks of  the presence on the former corporate culture which led up to the ongoing MAX crisis. Deferring needed capital and cutting R&D does not reinforce an engineering-driven company, especially one faced with difficult strategic decisions for future aircraft development needs.  They are further indications of the ongoing challenge for new leadership.

 

A New Further Unknown

These last two days have provided news of the tragic crash of a Ukraine International Airlines 737-800 jetliner shortly after takeoff from Tehran’s International Airport, resulting in the death of all 176 passengers and crew. The aircraft was reported as being three years in operation and having undergone all prescribed maintenance checks. The 737-800 series is the forerunner to the development of the 737 MAX and the pilots of this aircraft were described as highly experienced by the airline.

At this point is very unclear as to the potential cause of this accident other than observations that the aircraft suddenly dropped from the skies.

During the same time of the accident, ballistic missiles were reigning in on U.S. military targets in Iraq, with both countries on high military alert. Initial indications are that Iranian air safety regulators have recovered the aircraft’s black boxes and are insistent on in-country analysis, denying access to both the FAA, Boeing and engine manufacturer CFM International.

There is further speculation as to whether a hostile act might have led to the accident. As we pen this blog, today’s news headlines point to spy satellite data indicating that the aircraft may have been subject to a missile attack.

In either case, prospects for more definite information look likely to take a lot of additional time, which obviously adds to the challenge for restoring the safety reputation of Boeing among the global flying community.

 

Reader Takeaway

While the decision to replace the company’s, CEO was inevitable and likely overdue, the challenges remain, and they are not getting easier.

What we found to be encouraging in the ongoing developments is the now evident correlation of how bold leadership, clearer and open communication and the critical understanding of how product design, manufacturing and supply network decisions impact business outcomes. In the case of Boeing, not in positive ways.

We often flag readers to visible business case studies, and the Boeing 737 MAX, coupled with previous and ongoing program setbacks remain as real-time chapters for this specific management case study. The obvious differences from others is the huge scope and far-reaching financial and industry dimensions. That includes the manufacturer’s entire supplier network and ecosystem.

Even arch competitor Airbus has a desire that Boeing recovers from this crisis, since fulfilling existing ten-year backlogs for new aircraft cannot be successfully completed in a timely fashion by one manufacturer.

Stay tuned for added chapters.

 

Bob Ferrari

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