Tag: Boeing 777

OM in the News: Incentives Drive Boeing Back to Washington State for the 777X

777XAfter much wrangling and predictions that Boeing would locate its new 777X plant in nonunion South Carolina, the firm may have reached deals with state and IAM union officials to win the aerospace giant new tax breaks and 8 more years of labor peace in exchange for building its planned jetliner in Washington. The Wall Street Journal (Nov.6, 2013) reports that Gov. Jay Inslee called for a special session of the state legislature to approve a package of tax and policy incentives valued at $18.7 billion. Inslee said approval of that package and of the labor agreement are necessary for Boeing to make the 777X in its longtime Puget Sound base. “Inaction will cost the state of Washington,” said Inslee.

The moves capped an intense period of maneuvering over the plans for the 777X, a long-range jetliner considered pivotal to Boeing’s future. The 777X, scheduled for its 1st delivery by 2020, is likely to be the last major new jet from Boeing for many years, and there has been intense speculation over where the plane and its huge carbon-fiber composite wings would be built. The Wall Street Journal reported just last week that Boeing was leaning towards a nonunion plant in South Carolina. Boeing also announced it would give “much” of the engineering work on the 777X to engineers in 5 U.S. states and Russia, with no mention of plans to use engineers in Washington.

The South Carolina facility, Boeing’s first aircraft assembly plant manned by a nonunion workforce, has been a source of tension with the IAM. Boeing selected it in 2009 as the site of its second 787 Dreamliner assembly line, prompting a complaint from the National Labor Relations Board that the move was retaliation for a 2008 strike by the IAM that halted Boeing’s assembly lines for 58 days. The potential new agreement with IAM leaders conveys to 2024 and includes a $10,000 signing bonus for workers. The union said the deal would provide an “unprecedented degree of labor stability in the volatile and competitive industry.” “It’s a tough one, if you call their bluff and you’re wrong, then you’re just kicking yourself,” adds a machinist.

Classroom discussion questions:

1. Why is this such a critical OM decision for Boeing?

2. What factors discussed in Chapter 8 did the company consider in selecting Washington over S. Carolina?

Teaching Tip: Learning Curves and the Boeing 787

I first heard of the importance of learning curves when working at McDonnell Douglas right out of college during the peak of the Viet Nam War. While I toiled designing the wing of the DC-10 jumbo jet in the basement of the St. Louis plant, over 30 F-4 Phantom jets were rolling off the assembly line on the ground floor per month. Each one took less time than the one before it–and we could compute to the hour how long completion would take, as the learning curve effect is well-known in the airplane industry (see Table E.1 in Module E of OM, 10th ed.).

But the F-4 is old news and we want to provide you with a more current example. Businessweek (Aug.23-30, 2011) tells the story of Boeing’s Dreamliner 787, the world’s fastest selling jet, racking up more than 800 orders before  it even flew. The planes have an average “catalog price” of $202 million, and Boeing plans to assemble 10 a month by 2013– a record for wide-body jets.

But here comes the bad news. As you know, Boeing is running 3 years behind schedule because of supply chain problems (that we have blogged about several times). The company has amassed $16.2 billion worth of inventory in the form of 35 almost-finished  jets  scattered at parking spaces from Washington to Texas. Some are waiting for seats, some lavatories, and others engines. Boeing has spent an average of over $250 million to build each of the 44 planes it has “completed” so far.  The 45th plane will cost $184 million. To reach a break-even point at 1,000 planes, the unit cost must drop to $113 million. And this can only be accomplished with a very aggressive learning curve of 76%.

Based on the plane (no.45) currently being completed, the rate sits at 82.5%, not far from the 84% learning curve the Boeing 777  jumbo jet  has followed. At this rate, the loss will be $4 billion per year through 2015. Is the learning curve critical to Boeing? Absolutely!