Bottlenecks at Boeing. Operations Clash with Finance?

Photo: REUTERS/Jason Reed

Reuters is bringing an interesting article (h/t Cameron Zuroff) about operational issues and financial pressures at Boeing (NYSE:BA).

Boeing is struggling to cope with the 787 production schedule, after the production ramp up to 10 planes per month late last year. The bottleneck seems to be fuselage complex wiring done in their South Carolina plant. But the bigger picture is that Boeing has committed to deliver 10 planes per month and missing the schedule would involve steep penalties. What does Boeing do? They send half ready components to the factory at Everett for rework and final assembly.

To me this is an example of clash between operations and financial goals:

Boeing’s ability to churn out the Dreamliner is crucial to its financial performance this year as the company is relying on commercial jetliners to offset a weak defense business. While Boeing still loses money on each 787 that it builds, it gets closer to breaking even as production increases.

Cash flow from the 787 is expected to improve next year, provided the factories stay on pace, Boeing said. The cash is needed to fund new plane development, as well as fulfill investors’ desire for share buybacks and dividends.

Clearly, Boeing is between a rock and a hard place. They try to ramp up capacity in South Carolina, hire temporary workers, but that leads to higher cost, further delaying the break even point. Sending “pre-routed” components to Everett, is also a questionable move. From the classical quality management standpoint, defects should be fixed immediately after they are detected. Unless there is an excess capacity at Everett that would allow to finish work quicker than it would have been done in South Carolina, sending half ready components would only delay the production.

One thing is evident. Learning curve for the new 787 production turned out to be steeper than originally thought. All the pressure is now on Boeing to catch up with it.

Has Wall Street overreacted to LULU quality issues?

Last couple of weeks have been eventful for CEOs, COOs, and quality managers. Boeing is trying to fix faulty batteries in their 787, Fisker Automotive is in dire straits and expected to file bankruptcy after quality issues with their car batteries. And another company is about to face harsh consequences of quality mismanagement — a yoga-oriented retailer Lululemon Athletica.

Ten days ago Lululemon (LULU) made an announcement of the quality issues with their yoga pants, and lost $600M or 7% of their $9B market capitalization. Ouch. More details and numbers in this video.

What fascinates me in this situation is how the stock market reacts to these kind of events. During the earnings call LULU has reported that the pants issue is going to cost them ~$15M in revenue, which seems not too big of a deal given that their latest quarter revenue was $485M. Later on they made an amendment saying that more pants currently in production and sea-shipments are affected, so that greater revenue losses are expected, but they still should be confined to the 2nd quarter. Still, they are not going to lose all Q2 revenue – so are the markets overreacting in slashing $600M from LULU’s value? Let us try a quick calculation.