6 Question In Boeing Case – Supply Chain Management

  1. What should Jim McNerney do about the production of the 787 Dreamliner? Should he continue production not knowing what the problems with the battery are, or stop production until the problem has been resolved?
  2. How might this incident influence future public opinion and regulatory actions if another issue arises with the 787 Dreamliner?
  3. Regulatory Agencies like the FAA have the double purpose of both promoting and regulating the commercial aviation industry. Where should the FAA draw the line between a proven yet not fully tested technology and a possible hazard to human life?
  4. How should Boeing respond to growing pressure from airlines both in delivering new orders and finding a solution for the aircraft that have already been delivered to customers?
  5. How should Boeing respond to organizations that have been affected by the delays in the 787 Dreamliner, and how can they deal more effectively with any further issues arising from the aircraft in the future?
  6. What long-term implications might this incident have on Boeing’s reputation?

The Boeing Company: The Grounding of the 787 Dreamliner

Abstract

On January 16, 2013, Boeing had its newest and most advanced aircraft, the 787 Dreamliner, grounded worldwide due to fires that started in the airplane’s batteries. The Lithium-Ion technology used in the 787 aircraft was a new feature used in commercial aircraft as a solution to save weight. Several prior delays had already affected the introduction of the Dreamliner 787, one of the most revolutionary planes to date. Boeing is faced with high demand, costs, and pressure to respond quickly, while responding to both safety concerns and general industry concerns and loss of revenue.

Case

Though January, 2013 hadn’t even come to an end yet, Jim McNerney, CEO of The Boeing Company was having one hell of a year. Unfortunately, it was not in a good sense. For more than half the previous decade, Boeing had invested heavily in its new flagship airplane, the Boeing 787 Dreamliner. Problems with the production and assembly of the aircraft had delayed its initial delivery but its long expected arrival to the market had finally come by the end of 2011. Less than two years later, the 787 had once again become the source of McNerney’s headaches.

As McNerney prepared for the earnings conference call scheduled for January 30, he wondered how he would respond to the unavoidable questions that would come up regarding the 787 Dreamliner. The aircraft had become the center of attention after a series of incidents that culminated with the emergency landing of an All Nippon Airways 787 Dreamliners and the subsequent mandatory grounding of all 787 models in the US and other jurisdictions.

Investigating causes for the fires had become Boeing’s top priority. Neither the company nor regulators had made any headway identifying the exact reason for the problem, even if there were good reasons to implicate the Lithium-Ion batteries. The model’s safety was being questioned and the market had not responded kindly. He had to decide whether to continue producing a product that was likely to be faulty. He knew the impending conference call would be full of tough questions about the fires. He also knew that his response and decisions over current production would be critical in shaping the public’s response. It seemed that with every passing day, the Dreamliner was becoming more and more of a nightmare.

Sequence of Events

The bad news started on Jan. 7, followed by several other events.

Incidents:

· 1.January 7: Fire on a Japan Airlines Dreamliner in Boston. The incident occurred while the plane was grounded and no passengers were on board. The battery was found to be the source of the fire. It took firefighters 40 minutes to extinguish the flames.

· 2.January 9: All Nippon Airways (ANA) canceled a domestic flight to Tokyo after a computer wrongly indicated that there was a problem with 787’s brakes.

· 3.January 11: Separate inspection started on a Japan Airlines flight that leaked fuel in Tokyo’s Narita airport, after flying back from Boston, where it also leaked fuel.

· 4.January 11: A cracked windscreen on another 787 cockpit was also reported.

· 5.January 16: Smell of smoke on board an ANA flight from Ube to Tokyo. Fire started while the plane was taking off; the plane was rerouted to make an emergency landing in Takamatsu. All 137 passengers and crew were evacuated. One elderly passenger mildly injured his hip while descending through the emergency rafts on the side of the plane. No other passengers or crew were injured.

Groundings:

· 1.January 16: ANA and Japan Airlines voluntarily decide to ground all of their 17 and seven Dreamliners, respectively.

· 2.January 16: FAA decides to ground all 787 Dreamliners present in the US. Seeing as the fire had started in the battery section of the aircraft, the FAA specifically states that all 787 Dreamliners are grounded until the safety of the batteries is proven.

· 3.January 17: European Aviation Safety Agency and Indian aviation authority order grounding of all 787s in their jurisdictions and four other agencies follow suit. Chilean LAN airlines voluntarily decides to do so as well. Only Poland’s national carrier LOT continues to fly one of their two 787s. The other is stranded in Chicago.

The History of Boeing

Boeing draws its history from 1910 when William Boeing bought a shipyard in Seattle. This would later become his first airplane factory. In 1916 Boeing became incorporated as a company. From the beginning, the company served both commercial and defense segments. Boeing grew throughout the years by serving both segments and after signing a contract with the U.S. Postal Service, it created its most popular commercial plane to date: the 737. In 1997, the Boeing Co. merged with McDonnell Douglas Corporation, making it the biggest aircraft manufacturer in the world. 1

Today, Boeing employs more than 170,000 people worldwide. It has produced roughly 75% of the world’s fleet of commercial jetliners, which amounts to nearly 12,000 aircraft. More than 80% of all Boeing jetliners have been ordered by non-US customers, making Boeing a truly global company. Additionally, their customers are divided between commercial at roughly 55.3% and defense at roughly 44.7% (2011 data). 4

The 787 Dreamliner

The Creation

During the late 1990s Boeing wanted to make a truly progressive change to the aircraft market and decided to make the fastest commercial aircraft ever. In 2001, Boeing began work on the Sonic Cruiser. After they began production, the September 11th terrorist attacks put a halt on manufacturing. Shortly thereafter, the airline industry plummeted as oil prices rose dramatically. Boeing realized that in this new market, costs were more important than speed and thus decided to put an end to its Sonic Cruiser project. Nevertheless, using the technology developed during this period of time, Boeing began production one month later on the Dreamliner 787 (then known as the 7E7), a real game changer.

The plane is known as “revolutionary” for many reasons. For one, the 787 aims at being the most fuel-efficient aircraft, for which reducing weight was extremely important. Some 50% of the airplane is made of carbon-fiber composites, a material stronger, 20-30% lighter than aluminum and less likely to corrode. Furthermore, it also reduced weight by using lighter weight lithium-ion batteries instead of the standard nickel cadmium ones. As if reducing weight and thus boosting fuel efficiency wasn’t enough, Boeing also reinvented the manufacturing process.

Contrary to how the aircraft manufacturing process usually works, 70% of the 787s component parts were outsourced to some 900 subcontractors all around the world. After production, the parts are shipped back to the United States where Boeing assembles the aircraft. This cuts assembly time by 75% to three days and many have compared the process to the innovations of Toyota with their lean operations model and Ford with its Model T assembly line. Though there are many benefits to this process, there were also downsides. For one, if at any point in time the company would run into problems in the manufacturing process, the source would prove harder to pinpoint. Secondly, the problem resolution procedure would likely take longer to fix and would fall outside of Boeing’s hands as changes would have to be made at the subcontractor level and within operations that weren’t under Boeing’s direct control.

Popularity and Delays

As word came out that Boeing planned to produce a lightweight, fuel-efficient carrier, orders began pouring in before a single 787 had ever been assembled. Unfortunately, Boeing had several issues along the manufacturing process that led to several and continuous delays. Although the model was scheduled to take its first flight by the end of August 2007, the company stated in December 2006 that the aircraft that had been built were overweight and had to delay the first flight.

Following the initial delay, the company faced significant problems due to its highly outsourced supply chain, an ongoing shortage of fasteners, lack of documentation from foreign suppliers and problems with the flight guidance software. In 2007 the Dreamliner’s program manager was replaced. A Boeing statement made in January 2011 quotes “We made too many changes at the same time – new technology, new design tools and a change in the supply chain – and thus outran our ability to manage it effectively for a period of time.” At a total of seven delays, the first flight was moved from August 2007 to December 2009 and Boeing delivered the first 787 in September 2011, more than three years behind schedule.

Yet none of the interruptions were due to malfunctions and this did not stop orders from continuing to pile up. Boeing received more than 600 before the first 787 was assembled in 2007 and more than 800 before the first took flight. Moreover, and despite all the delays, Boeing remained confident in its progress. In December 2012, Boeing CEO Jim McNerney stated, “We’re having what we would consider the normal number of squawks on a new airplane, consistent with other new airplanes we’ve introduced.” He continued comparing the number of problems with what the aircraft manufacturer faced in the 1990s after introducing the Boeing 777. 10

Since the first 787 was delivered in 2011, there had been no reported incidents onboard any of the aircraft. The model’s popularity was outstanding and by January of 2013, Boeing had 848 orders from airliners all around the world. The company had struggled at first but until the series of 2013 incidents, everything seemed to be going well.

Customer Responses to the Grounding Order

At the time of the grounding, eight airlines counted 787 Dreamliners among their fleets. ANA and Japan Airlines owned 24 of the 49 delivered so far. The other operators are Air India, Ethiopian Airlines, Chile’s LAN Airlines, Poland’s LOT, Qatar Airways and United Airlines.

Ten days after the initial grounding, more than 1,000 flights worldwide had been cancelled due to the incident. ANA itself had cancelled 459 flights since January 16, affecting more than 58,000 passengers. The airline either used substitute planes or rebooked passengers, incurring heavy logistical and financial costs. 11 The airline estimated that the 787 grounding would reduce its revenue for January by $15.4 million. 12

To Boeing’s good fortune, most of the company’s customers had so far decided to back the company and had publicly expressed their support.

After a meeting with the Japanese transport minister, ANA Chief Executive Shinichiro Ito, told reporters “we are not in a situation where we should change the strategy we have been pursuing.” United’s chairman, Jeffery A. Smisek, showed his support by saying that he considered the fuel efficient 787 “terrific” and added that he believed Boeing would come up with a solution soon. The spokesperson for Qantas Airways Ltd. said the company was “confident” the problems would be resolved before it took its first deliveries in the second half of 2013, while state-run Air India said its six Dreamliners were operating normally. Only Polish airline LOT was not so supportive as its officials said they would seek compensation from Boeing. 13

Despite customers’ overall announcements of support but with the exact cause for the problems not yet determined, many believed that in private airline executives were becoming increasingly nervous. Polish LOT had already threatened with suing Boeing and McNerney feared that other airliners would follow in their step.

Market Responses

The market had mixed feelings concerning the 787’s grounding. On one hand, Boeing’s stock had been punished by the stock market, seeing a 2.5% decrease only five days after the initial grounding order and shedding a total $1.5 billion in market cap. On the other hand, there had been no changes in flight reservations in Japan or anywhere else. To Boeing’s fortune, it seemed that passenger bookings hadn’t changed much as few passengers chose their flights based on the type of aircraft used and instead selected by airline.

For the moment, it seemed like some of the market shock had been insulated by the fact that Boeing didn’t deal directly with end consumers. Nevertheless, the risk of a brand boycott due to safety concerns was not impossible. A frequent flyer was quoted saying: “If I was going to fly on a Dreamliner for this trip, I would cancel it and re-book on another flight using ‘proven winner’ airplanes that have a good safety record.” 14 If this trend were allowed to pick up, Boeing would begin facing very serious issues.

Possible Causes

Although investigators weren’t sure as to the exact cause of the fires, both the Japan Airlines and ANA fires had started in the battery section of the 787s. Furthermore, Lithium-Ion batteries, the batteries employed in all 787 models had a reputation for being prone to overheating and as a consequence, causing fires. Thus, although the exact causes remained a mystery, the batteries were targeted as the likely culprits as shown by the FAA’s initial grounding order.

Batteries: A Brief History

A battery can be defined as a source of electrical energy through the electrochemical reaction of its components (See Exhibit A). Batteries have been around for a very long time. Some speculate the existence of batteries dating back to 200 B.C., as has been evidenced in archaeological findings in Khujut Rabu, near modern day Baghdad. 15 The first modern battery however, was created by Italian physicist Alessandro Volta in 1799 by stacking alternating layers of zinc, brine soaked cloth and silver, creating a highly effective yet impractical source of power. More modern and more reliable versions of the battery include; Zinc-Carbon, Alkaline, Lead-Acid, Nickel-Cadmium and more recently Lithium-Ion. (Exhibit B)

Deeper into Lithium-Ion

The Lithium-Ion (Li-ion) battery provides several advantages compared with other types of cells. Li-ion’s most prominent advantage is given by its high energy density, which is typically twice that of comparable nickel cadmium units. In addition, the higher cell voltage (3.6V as opposed to Ni-Cd voltage of 1.2V) allows battery packs to be designed with significantly fewer cells connected in series. All in all, they make for lighter batteries. (Exhibit C) Li-Ion batteries also require low maintenance; they have no memory effect (an effect by which batteries take less and less charge with every recharge) and have very low self-discharge rates.

Despite the overall advantages of Li-Ion batteries, some of its greatest drawbacks come from the unstable nature of Lithium. This translates into a tendency for Li-Ion batteries to overheat. To aggravate this, if Li-Ion cells are overcharged, physically damaged or allowed to get too hot, they may experience thermal runaway (Exhibit D), a phenomenon by which a positive feedback loop leads to the creation of heat within the cell at a faster rate than can be dissipated, often with catastrophic results. 16

Li-Ion batteries and the 787 Dreamliner

Boeing has gone through great lengths to make the Dreamliner lighter, more efficient and easier to build. One such innovation comes from the complete redesign of aircraft systems. The Dreamliner is the first aircraft to completely remodel its hydraulic and electric configurations, as well as most other in-flight systems. 17 Heavily dependent on electrical power and more so than any other commercial jet, the 787 boasts two 32 Volt battery packs, consisting of eight Li-Ion cells each. However, due to the instability often associated with this type of high-power battery, the FAA required Boeing to install four separate layers of protection in the 787 to prevent short-circuits in any of the individual cells, as well as guarding them from heat generated in contiguous cells. (Exhibit E)

Compared to a more traditional Nickel Cadmium power source, Li-ion provided a weight advantage for the 787 Dreamliner of about 40 lb., or about the same as a single piece of luggage. However, redesigning the existing battery system to incorporate a different type of battery would ground the existing 787 fleet for as long as a year, pending FAA approval. 18

Boeing, the FAA and the NTSB

The Federal Aviation Administration or FAA is the agency authorized to regulate and oversee all aspects of civil aviation in the United States. A branch of the United States Department of Transportation, the FAA is in charge of regulating and creating all pertinent standards for the U.S. airspace, while encouraging and developing civil aeronautics and new aviation technology. The investigation of transportation accidents however, fall to a separate and independent agency called the National Transportation Safety Board, (NTSB).

As the largest aircraft producer in the U.S., Boeing’s relations with both the FAA and the NTSB are constant and tumultuous at times. In the case of the 787 Dreamliner, several of the delays in the design and early production phases were caused by compliance issues with FAA standards and regulations. On the other hand, however, with Boeing being the main aircraft producer in the U.S., the FAA has also been accused of playing favorites with them. According to Reuters, the FAA granted the 787 special conditions, knowing that the batteries could cause problems and saying that existing contain and vent systems would be enough to control the buildup of explosive or toxic gases created in the event of a battery bursting into fire. 19 Other instances in which the FAA might have sidestepped processes to Boeing’s advantage have been mentioned but none have been properly documented.

The Earnings Call

Jim McNerney had successfully appeased previous market concerns regarding the 787. But this time, he was worried that things could get out of hand. He had been comfortable thus far comparing the 787 to other aircraft models, ensuring the public that the delays and issues were nothing more than teething problems. On the inside however, he wasn’t sure whether this was the case anymore. Unfortunately, there would be no way for him to know until the NTSB figured out what the real problems were. He felt as if he were swimming in an ocean of uncertainty and his hands had been tied behind his back. He had to make big decisions regarding whether he would go ahead with the production increase of five-to-ten airplanes per month or whether he would halt production altogether. Furthermore, he would have to deal with the earnings call knowing little more than anyone else. The earnings call, he knew, would be crucial for Boeing’s reputation and he needed to address it smartly.

Discussion Questions

1. What should Jim McNerney do about the production of the 787 Dreamliner? Should he continue production not knowing what the problems with the battery are, or stop production until the problem has been resolved?

2. How might this incident influence future public opinion and regulatory actions if another issue arises with the 787 Dreamliner?

3. Regulatory Agencies like the FAA have the double purpose of both promoting and regulating the commercial aviation industry. Where should the FAA draw the line between a proven yet not fully tested technology and a possible hazard to human life?

4. How should Boeing respond to growing pressure from airlines both in delivering new orders and finding a solution for the aircraft that have already been delivered to customers?

5. How should Boeing respond to organizations that have been affected by the delays in the 787 Dreamliner, and how can they deal more effectively with any further issues arising from the aircraft in the future?

6. What long-term implications might this incident have on Boeing’s reputation?