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Boeing 737 Manufacturing Footprint: The Wichita Decision Case Solution

Solution Id Length Case Author Case Publisher
559 1120 Words (3 Pages) Willy Shih, Margaret Pierson Harvard Business School : 612036
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With the merger of McDonnell-Douglas and Boeing, Boeing became the largest aircraft manufacturer, and its market share increased considerably. After the merger in 1997, in the following year, the company forecasted that it would not be able to make money for its 550 commercial aircraft and Airbus started to take the lead in market share.

Horizontal Industry structure certainly improves the market share, decreases the operating costs and brings the economies of scale. But in this case, as the company was struggling with its production methods, this merger and horizontal strategy did not benefit the company. Boeing needed to improve its production techniques and designs, with fewer staffers and needed a design similar to modular design of Airbus, in which suppliers prepared modular components in their factories and flew them to Airbus’s final assembly lines.  

Boeing’s cost to manufacture a plane was higher than 10% to 20% to that of Airbus. Merger could have helped to decrease some of these costs, but it has been reported that the merger was not handled well. Company needed some strategic moves related to changing the production methods and techniques, but it went for the horizontal strategy which did not turn out successful; hence, it can be considered as a liability for a company like Boeing.

Following questions are answered in this case study solution:

  1. Is a horizontal industry structure a benefit or a liability for a company like Boeing? For a company like Airbus? For Commercial Aircraft Corporation of China (COMAC)?

  2. Do you agree or disagree with the Stonecipher's strategy of only doing design and final assembly of commercial airplanes? What does theory suggest? Is there a performance-defining subsystem?

  3. Why are things like NPV, EVA, RONNA, and other financial measures taught separately in finance classes?

Boeing 737 Manufacturing Footprint The Wichita Decision Case Analysis

2. Do you agree or disagree with the Stonecipher’s strategy of only doing design and final assembly of commercial airplanes? What does theory suggest? Is there a performance-defining subsystem?

Boeing currently is lagging behind Airbus which is continually advancing in the industry. Its costs have increased along with backlogs and unfinished aircrafts in its factories. Company is assembling huge volumes of parts from a large number of suppliers which is increasing the costs. Strategy of only working on design and final assembly certainly can work in this case if Boeing works with its suppliers and partners to improve the process and reduce its plant proliferation. Similar to the model of Airbus, suppliers would be delivering modular aircraft components to Boeing who would assemble those components using automated machines. This would also reduce the labor costs at the plant.

However, outsourcing can lead to problems which have been identified by John Hart-Smith who points out those extra costs from managing suppliers are accounted as overheads to in-house activities instead of its allocation to outsourced activities. Outsourcing can be less cost effective under these conditions.

Keeping in view the current performance of Boeing, the outsourcing using modular design stills shows a promising look as it will let Boeing to focus more on the design and technology part while suppliers would be using their expertise to develop the required component. It would be easier for them to decrease the costs on those aircraft components while working with Boeing. Boeing can turn Wichita into a partner after selling this division and certainly it can help Boeing to recover from the increasing costs pressure. Boeing would be able to focus more on the design and assembly part with a lean production process.

According to a theoretical perspective, strategy of only working on design and final assembly along with improving the network with suppliers, converts an organization into a lean enterprise which creates value quite effectively and efficiently. Lean organization using the partners who develop the important subsystems of the aircraft decreases its costs and reduces the lead times. Designing the production systems similar to Toyota Production Systems certainly would create a lean system for Boeing and with its system integration approach it can reduce its costs and production time. Performance-defining subsystems take into account how much these key partners have invested in research and development and how much it has expanded horizontally to achieve economies of scale.

3. Why are things like NPV, EVA, RONA, and other financial measures taught separately in finance classes?

These metrics are used for evaluating the performance based on a different set of criteria. EVA is an economic measure which is cash based measure. EVA evaluates a project or a division based on the economic value created based on real cash basis instead of accounting policies. It is value of economic profit after subtracting the cost of capital from Net Operating Profit after Taxes (NOPAT).

RONA is actually efficiency based measure. RONA measures how well a project would be using its assets to generate returns. Growth oriented sectors would use EVA or other measures instead of RONA. RONA increases when companies outsource to get the capital off its books. RONA and other efficiency ratios are used for performance comparisons and investments rankings irrespective of their size.

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