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.

How do you make Amtrak safer?

Tomorrow (actually, already today) marks the first class of this Spring semester BUS 351 at Emory Goizueta Business School. But before we take off for a new exciting semester, I would like to comment on some great work done by students in the last year’s cohort. The accolade goes to GBS students Gobie Kumarasmy, Jamie Landman, Shannon Lin, Jeff Meng, and Aaron Weiner for their project on the safety of Amtrak. Basically, they asked the question which is in the title – how would you make Amtrak safer?

Amtrak is the largest publicly funded US passenger rail operator, so the debate about spending there is rather intense. First, let us understand how many accidents happened with Amtrak trains over almost 40 years, from 1973 to 2012. Accidents can be of two types: those involving rail equipment (for example, locomotive breakdowns), and those involving crossings with highways (for example, car crashes into a train). Results are reproduced with the authors’ permission.

You can see that highway accidents are mainly confined to the coastal areas, as expected. Somewhat surprisingly, southwestern states have a lot of equipment accidents. So what drives the accident rate?

For the highway-rail accidents the key drivers are weather and the presence of lights at the crossing, whereas visibility and presence of the warning signs are not. We cannot do much about weather, but it seems that lighting more of rail-highway crossings can help.

The situation gets more interesting if you look at the rail accidents. First of all, one might think that the age of rolling stock is a significant predictor of the accidents. Somewhat surprisingly, it is not. Neither is the train speed. Extreme temperature, it turns out, is associated with a higher rate of rail accidents, but it is not the only one. Amtrak, it turns out, has a history of drug-related problems. Look at this data:

Accident rate seems to decrease when more drug testing is done, but what is really interesting that simply bringing attention to this problem (2012 inspector’s report) has roughly equivalent effect.

All this data gives food for thought about importance of work culture for successful operations. Sometimes one needs to look beyond obvious solutions (such as invest in new locomotives), to improve the situation. This can be cheaper and more effective.

How do you operate a popular restaurant in NY?

I must confess that I am a fan of Balthazar. For those who have not heard the name, it is a french brasserie in the SoHo neighborhood of New York. I think their onion soup is sublime, fries are delicious, and profitroles are absolutely the best. However, this is an operations blog, so, here fittingly comes an article from the NY Times magazine, nicely describing why Balthazar is so good.

For starters, I knew that the restaurant business is extremely competitive and labor intensive, but this article is eye-opening in a few aspects. First off, the restaurant is literally a 24 hours a day operation:

For now, everything is quiet at Balthazar. The last guests from the night before left just a few hours ago, and the nighttime porters are still finishing their thorough scrub of the restaurant. But the delivery trucks are starting to arrive all over again, idling on Crosby.

Second, the sheer volume of the food they serve is impressive:

By the end of the day, the rotating staff of six cooks behind the line will have produced 111 steak frites, 90 French onion soups, 88 Balthazar bar steaks, 69 burgers, 68 omelets, 62 goat-cheese tarts, 56 chicken paillards, 51 chicken clubs, 48 seared salmon fillets, 46 heirloom-tomato salads, 45 sides of fries, 44 chicken-liver-and-foie-gras mousses, 43 duck confits, 40 grilled dorades, 39 steaks au poivre, 39 eggs Norwegian, 38 steak tartare appetizers (plus 16 entrees), 32 escargot, 32 moules frites, 29 grilled trout — the list, pulled from the P.O.S. terminals, goes on and on and on.

 

The day referred to in the article is a relatively slow one with 1247 people eating there (normally it is 1500). Mind you that the restaurant has only 180 seats, so the table turnover is essentials. Accounting for less than 100% utilization, each table has to be turned about 10 times, multiplying that by 90 minutes average dining time means that all tables are completely busy for 15 hours a day!

Third the margins – here we can get only an estimate, but it is impressive:

During the busy season, Balthazar spends $90,000 a week on food to feed some 10,000 guests.

So the cost of food is $9 per customer. Average check I reckon, is no less than $50. That does amount to a quite a markup, that allows decent pay for waiters, food runners and bus boys.

The key to all of this – is, not surprisingly, a careful process design: