Bottlenecks at Boeing. Operations Clash with Finance?

Photo: REUTERS/Jason Reed

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.

Advertisements

The new world approach to orange juice

The world of winemaking has two big philosophies: the old world wine (usually French), and the new world wine (California, South America, Australia, etc.). The former emphasizes the region of wine, while the latter highlights the grape variety. Aiming to achieve the consistent taste year after year, grapes of the new world wines are often sourced from different regions and blended appropriately. Basically, the same approach, but elevated to the next level, goes into production of orange juice by Coca Cola, as the recent Bloomberg Business Week article describes (hat tip to Jonathan Baird for sharing the link). The picture below pretty much explains it all.

comp_coke06__01__950popup

There are some interesting aspects of the OJ production process that I think Coca Cola has borrowed from the Toyota production system. First, they emphasize working together with growers, so that oranges are grown to the exact specifications. Coke even instructs farmers when to pick oranges. And after that, juice from different batches is blended to achieve the right level of sweetness and acidity. All of that is done so that the taste of the juice is as consistent as possible.

Interestingly, while the approach works for a large bottler, like Coca Cola, it might also present an opportunity for smaller Old World style juice producers. Think Chateau de Miami OJ style. Maybe we’ll even see Coca Cola and the likes adopt regional juice varieties in the future.

Supply chain realities

Think the days of the Bullwhip effect are over? Not at all. Here is a telling example from Russian aircraft manufacturing. As UAC tries to ramp up production of the SSJ 100 passenger jet, its engine supplier is struggling:

“We are facing difficulties with the supply chain. We need to fight every day [against Airbus and Boeing] to get priority,” PowerJet CEO Jacques Desclaux said, speaking at the ERA General Assembly in Dublin.

Desclaux explains that when Airbus and Boeing order 500-1,000 components, PowerJet struggles to secure slots for 100-500 parts. “It really is a challenge. There are not a lot of certified suppliers, so the choice is quite limited. The only thing we can do is to anticipate and place orders which are larger than we need,” he said.

There are two aspects to this situation.  Continue reading

How to counter demand variability?

Very timely comes this article about the Beer game and our favorite trillion-dollar-company-to-be Apple. The Beer game is a board game where the idea is to simulate a (beer) supply chain. It seems pretty simple – in order to fulfill the end demand retailers have to order inventory from wholesalers, wholesalers – from distributors, and distributors from factory, that produces beer. Each level has to decide how much to order or produce based on their demand. Things can get out of whack pretty quickly – a small increase in end consumer demand usually leads to inventory shortage at the retail level and that drives up the ordering quantity. Wholesalers facing increased demand, also start having backlog and increase order sizes even more. When the demand hits the factory, it has to produce crazy amounts to satisfy it…

All of this is the classical Bullwhip effect… One of the reason for it is the delay between the moment when the order is placed and when it is delivered. If the delay is shorter, supply will be matched with demand quicker and inventories will be reduced. How is this all related to Apple? Continue reading

The weakest link in the Karma battery

This is just too relevant for quality management to pass by. Plus it is about a nice car, which makes it even more difficult to ignore. The car is Fisker Karma, the plug-in hybrid with a massive battery pack. The issue is with the battery pack, supplied by A123 company. This piece from Bloomberg provides a fairly comprehensive overview of the case, but here are couple of excerpts that are particularly interesting:

Five customers are potentially affected by the defects, David Vieau, the company’s chief executive officer, told reporters today in a conference call. The root cause of a $107,000 Fisker Karma model shutting down in tests this month by Consumer Reports is associated with A123’s defective batteries, Vieau said, without naming other customers.

 

The cause of the defects described today was faulty calibration of one of four welding machines in the Michigan plant that caused misalignment of a component in some cells, Vieau said today. The flaw could cause an electrical short, which could result in premature failure of the battery or decrease performance and reduce battery life, he said.

 

While the rate of total cells welded by the faulty machine is “a fraction” of the product A123 made in the Michigan plant, the probability is “very high” that a module or pack contains a defect because of the number of cells that go into them, Vieau said. “We feel that virtually all the product that we produce in this facility has been effectively contaminated by this particular defect,” he said.

First, it is commendable that A123 has identified the root cause and were able to nail it down to a particular production step, and they’ve done so pretty quickly. Second, the case underscores the importance of quality management when there is a massive interaction between components in a product. One faulty part out of a thousand can trigger a chain reaction, thus leading to the failure of the entire product. In this case, it is surprising that such possibility was not prevented by the design of the battery.

A123 seems to be doing well in terms of damage control though. For one thing they are undertaking the replacement of $55M worth of batteries made at the Michigan plant. Also they are upping warranty terms on Karma’s batteries, clearly betting on the future demand. Such level of interaction between the companies is remarkable. Probably it has to do with the fact that A123 holds a stake in Fisker who is its major customer.

 

Shipping Apples around the globe!

Today is a big day for Apple, with a launch of the new iPad and possibly Apple TV. It is also a bonanza day for shippers. In anticipation of the launch Apple booked a large chunk of air cargo capacity to bring boxes from China into the States. According to this article the shipping rates over the last week went up by as much as 20% (hat tip to Zach Chahalis for the link).

Apple is certainly enjoying its status of a big boy in a sandbox here. For smaller companies though it means a struggle to get the goods from China. But there is also an opportunity. Since the cargo is flowing mostly into the States (and probably Europe as well), there must be excess capacity for shipping goods in the opposite direction. I wonder if anybody has decided to capitalize on this.

Managing this flow imbalance also presents a challenge for shippers. Of course with $100B in cash Apple probably paid them the return-ticket fare, but still looks like some money could be left on the table if they fly back completely empty.