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Complete a SWOT analysis on the case.




Complete a SWOT analysis on the case.;?Strengths?Weaknesses?Opportunities?Threats;?Personal Observations.;Each section is to be 190-200 words, with reference citations if it is possible.;Thank you;Attachment Preview;Boeing Commercial Aircraft.txt;Case 1;Boeing Commercial;Aircraft: Comeback?;This case was prepared by Charles W. L. Hill, the University of Washington.;I;I;t looked as if 2006 would be the year that Boeing;could boast of a comeback in its three-decadeslong;duel with Airbus Industries. Long the dominant;player in the commercial aerospace industry, Boeing;has been steadily losing market share to Airbus from;the mid-1990s onwards (represented in Exhibit 1).;In 1999, for the first time in its history, Airbus garnered;more orders for new commercial jet aircraft;than Boeing. The European upstart repeated this;achievement regularly between 2001 and 2005.;By mid-2006, however, the tide seemed to be;shifting in Boeing's favor. Underlying this were;strong sales of Boeing's newest jet, the super-efficient;wide-bodied 787, along with surging sales of its well-;established 737 and 777 jets. For the first six months;of 2006, Boeing took orders for 487 aircraft, Airbus;took just 117. While Boeing seemed to be leaving a;decade of production problems and ethics scandals;behind it, Airbus was mired in problems of its own.;Its largest jet to date, the A380 super jumbo, had;been delayed from entering service while the company;struggled with production problems. Orders;for the A380 had stalled at 159 for almost a year, and;analysts were beginning to question whether the aircraft;would be a commercial success. Moreover, Airbus's;contender to the Boeing 787, the A350, had to;be scrapped before it even left the drawing board;Copyright 2007 by Charles W. L. Hill. This case is intended to be;used as a basis for class discussion rather than as an illustration of either;effective or ineffective handling of the situation. Reprinted by;permission of Charles W. L. Hill. All rights reserved. For the most recent;financial results of the company discussed in this case, go to;, input the company's stock symbol, and;download the latest company report from its homepage.;due to negative customer feedback. The challenge;facing Boeing's management was to translate this revival;in fortunes for the company into a sustainable;competitive advantage. It was off to a good start, but;what else needed to be done?;The Competitive Environment;By the 2000s, the market for large commercial jet;aircraft was dominated by just two companies;Boeing and Airbus. A third player in the industry;McDonnell Douglas, had been significant historically;but had lost share during the 1980s and 1990s.;In 1997, Boeing acquired McDonnell Douglas, primarily;for its strong military business. Since the mid1990s;Airbus had been gaining orders at Boeing's;expense. By the mid-2000s, the two companies were;splitting the market.;Both Boeing and Airbus now have a full range of;aircraft. Boeing offers five aircraft "families" that;range in size from 100 to over 500 seats. They are the;narrow-bodied 737 and the wide-bodied 747, 767;777, and 787 families. Each family comes in various;forms. For example, there are currently four main;variants of the 737 aircraft. They vary in size from;110 to 215 seats and in range capability from 2,000;to over 5,000 miles. List prices vary from $47 million;for the smallest member of the 737 family, the 737600;to $282 million for the largest Boeing aircraft;the 747-8. The newest member of the Boeing family;the 787, lists for between $138 million and $188 million;depending on the model.1;Similarly, Airbus offers four families: the narrow-;bodied A320 family and the wide-bodied A300/310;C1;C2 PART 5 Cases in Strategic Management;A330/340, and A380 families. These aircraft vary in;size from 100 to 550 seats. The range of list prices is;similar to Boeing's. The A380 super jumbo lists for;between $282 million and $302 million, while the;smaller A320 lists for between $62 million and $66.5;million.2 Both companies also offer freighter versions;of their wide-bodied aircraft.;Airbus was a relatively recent entrant into the;market. Airbus began its life as a consortium between;a French and a Germany company in 1970.;Later a British and a Spanish company joined the;consortium. Initially, few people gave Airbus much;chance for success, but the consortium gained;ground by innovating. It was the first aircraft maker;to build planes that "flew by wire," made extensive;use of composites, flew with only two flight crew;members (most flew with three), and used a common;cockpit layout across models. It also gained;sales by being the first company to offer a wide-;bodied twin engine jet, the A300, that was positioned;between smaller single-aisle planes like the 737 and;large aircraft such as the Boeing 747.;In 2001, Airbus became a fully integrated company.;The European Defense and Space Company;(EADS), formed by a merger between French, German;and Spanish interests, acquired 80% of the;shares in Airbus, and BAE Systems, a British company;took a 20% stake.;Development and Production;The economics of development and production in;the industry are characterized by a number of facts.;First, the R&D and tooling costs associated with developing;a new airliner are very high. Boeing spent;some $5 billion to develop the 777. Its latest aircraft;the 787, is expected to cost $8 billion to develop. Development;costs for Airbus's latest aircraft, the A380;super jumbo, could run as high as $15 billion.;Second, given the high upfront costs, to break;even a company has to capture a significant share of;projected world demand. The breakeven point for;the Airbus super jumbo, for example, is estimated to;be between 250 and 270 aircraft. Estimates of the total;potential market for this aircraft vary widely.;Boeing suggests that the total world market will be;no more than 320 aircraft over the next twenty years.;Airbus believes that demand for this size aircraft will;be more like 1,250 jets. In any event, it may take five;to ten years of production before Airbus breaks even;on the A380and that's on top of years of negative;cash flow during development.3;Third, there are significant learning effects in aircraft;production.4 On average, unit costs fall by;about 20% each time cumulative output of a specific;model is doubled. The phenomenon occurs because;managers and shop floor workers learn over time;how to assemble a particular model of plane more;efficiently, reducing assembly time, boosting productivity;and lowering the marginal costs of producing;subsequent aircraft.;Fourth, the assembly of aircraft is an enormously;complex process. Modern planes have over 1 million;component parts that have to be designed to fit with;each other, and then produced and brought together;at the right time to assemble the engine. At several;times in the history of the industry, problems with;the supply of critical components have held up production;schedules and resulted in losses. In 1997;Boeing took a charge of $1.6 billion against earnings;when it had to halt the production of its 737 and 747;models due to a lack of component parts.;Historically, airline manufacturers tried to manage;the supply process through vertical integration;making many of the component parts that went into;an aircraft (engines were long the exception to this).;Over the last two decades, however, there has been a;trend to contract out production of components and;even entire subassemblies to independent suppliers.;On the 777, for example, Boeing outsourced about;65 percent of the aircraft production, by value, excluding;the engines.5 While helping to reduce costs;contracting out has placed an enormous onus on;airline manufacturers to work closely with their suppliers;to coordinate the entire production process.;Finally, all new aircraft are now designed digitally;and assembled virtually before a single component is;produced. Boeing was the first to do this with its 777;in the early 1990s and its new version of the 737 in;the late 1990s.;Customers;Demand for commercial jet aircraft is very volatile;and tends to reflect the financial health of the commercial;airline industry, which is prone to boom and;bust cycles (see Exhibits 1 and 2). After a moderate;boom during the 1990s, the airline industry went;through a particularly nasty downturn during;2001-2005. The downturn started in early 2001 due;to a slowdown in business travel after the boom of;the 1990s. It was compounded by a dramatic slump;in airline travel after the terrorist attacks on the;United States on September 11, 2001. Between 2001;CASE 1 Boeing Commercial Aircraft: Comeback? C3;Exhibit 1;Commercial Aircraft Orders 1990-2005;1200;1000;10;I;O;1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 2000 '01 '02 '03 '04 '05;Boeing Airbus;Sources:, accessed September 2006, and, accessed;September 2006.;and 2005, the entire global airline industry lost some;$40 billion, more money than it had made since its;inception.6;For 2006, the industry was forecasted to lose $1.7;billion, which represents an incremental improvement;over the $3.2 billion lost in 2005. The industry;would have been profitable in both 2005 and 2006;Exhibit 2;World Airline Industry Revenues;500;450;400;were it not for surging jet fuel prices after January;2004 (prices for jet fuel more than doubled between;2004 and 2006see Exhibit 3). The International Air;Travel Association estimates that the fuel bill for all;airlines in 2006 was around $115 billion. This would;represent over 25% of the industry's total operating;costs in 2006, compared to less than 10% in 2001.7;2000 2001 2002 2003 2004 2005 2006 2007;Source: IATA data (figures for 2006 and 2007 are forecasts); htm;accessed February 12,2007.;C4 PART 5 Cases in Strategic Management;Exhibit 3;Jet Fuel and Crude Oil Prices;120.0;100.0;Jan May Sep Jan May Sep Jan May Sep Jan May Sep;03 '03 '03 '04 '04 '04 '05 '05 '05 '06 '06 '06;Jet fuel Crude oil price (Brent);Source: IATA data, monitor/price;development.htm, accessed February 12, 2007.;Losses were particularly severe among the big six;airlines in the world's largest market, the United;States (American Airlines, United, Delta, Continental;US Airways, and Northwest). Three of these airlines;(United, Delta, and Northwest) were forced to;seek chapter 11 bankruptcy protections. Even;though demand and profits plummeted at the big six;airlines, some carriers continued to make profits;during 2001-2005, most notably the budget airline;Southwest. In addition, other newer budget airlines;including AirTran and Jet Blue (which was started in;2000), gained market share during this period. Indeed;between 2000 and 2003, the budget airlines in;the United States expanded capacity by 44%, even as;the majors slashed their carrying capacities and;parked unused planes in the desert. In 1998, the;budget airlines held a 16% share of the U.S. market;by mid-2004, their share had risen to 29%.8;The key to the success of the budget airlines is a;strategy that gives them a 30 to 50% cost advantage;over traditional airlines. The budget airlines all follow;the same basic script: They purchase just one;type of aircraft (some standardize on Boeing 737s;others on Airbus 320s). They hire nonunion labor;and cross-train employees to perform multiple jobs;(to help meet turnaround times, for example, pilots;might help check tickets at the gate). As a result of;flexible work rules, Southwest needs only 80 employ;ees to support and fly an aircraft, compared to 115 at;the big six airlines. The budget airlines also favor flying;point to point" rather than through hubs, and;often use less costly secondary airports rather than;major ones. They focus on large markets with lots of;traffic (up and down the East Coast, for example).;There are no frills on the flights (passengers receive;no in-flight food or complementary drinks, for example).;And prices are set low to fill the seats.;In contrast, major airlines base their operations;on the network, or "hub and spoke," system. Network;airlines route their flights through major hubs;one airline often dominates a single hub (United;dominates Chicago's O'Hare airport, for example).;This system was developed for good reason: It efficiently;uses airline capacity when there isn't enough;demand to fill a plane flying point to point. By using;a hub and spoke system, major network airlines are;able to serve some 38,000 city pairs, some of which;generate fewer than fifty passengers per day. By focusing;on a few hundred city pairs, where there is;sufficient demand to fill their planes, and flying directly;between them (point to point), the budget airlines;seem to have found a way around this constraint.;The network carriers also suffer from a;higher cost structure due to their legacy of a unionized;workforce. In addition, their costs are pushed;higher by their superior in-flight service. In good;times, the network carriers can recoup their costs by;charging higher prices than the discount airlines;particularly for business travelers, who pay more to;book late and to fly business or first class. In the;competitive environment of the early 2000s, however;this was no longer the case.;Due to the effect of increased competition, the;real yield that U.S. airlines get from passengers has;fallen from 8.70 cents per mile in 1980 to 6.37 cents;per mile in 1990, 5.12 cents per mile in 2000, and;4.00 cents per mile in 2005 (these figures are expressed;in constant 1978 cents).9 Real yields are also;declining elsewhere. With real yields declining, the;only way that airlines can become profitable is to reduce;their operating costs.;Outside of the United States, competition has intensified;as deregulation has allowed low-cost airlines;to enter local markets and capture share from;long-established national airlines that have used the;hub and spoke model. In Europe, for example, Ryan;Air and Easy Jet have adopted the business model of;Southwest and used it to grow aggressively.;By the mid-2000s, large airlines in the United;States were starting to improve their operating efficiency;helped by growing traffic volumes, higher;load factors, and reductions in operating costs, particularly;labor costs. Load factor refers to the percentage;of a plane that is full on average, which hit a;record 86% in 2006 in the United States and 81% in;international markets. Total losses for the U.S. industry;were projected to be $4.5 billion in 2006, primarily;due to one-time accounting charges. European;airlines were projected to make profits of $1.8 billion;in 2006, and Asian airlines profits of $1.7 billion. For;2007, the U.S. airlines were projected to break even;and the global industry was projected to earn;around $2 billion.10;Demand Projections;Both Boeing and Airbus issue annual projections of;likely future demand for commercial jet aircraft.;These projections are based on assumptions about;future global economic growth, the resulting growth;in demand for air travel, and the financial health of;the world's airlines.;In its 2006 report, Boeing assumed that the world;economy would grow by 3.1% per annum over the;next twenty years, which should generate growth in;passenger traffic of 4.8% per annum and growth in;cargo traffic of 6.1% per year. On this basis, Boeing;CASE 1 Boeing Commercial Aircraft: Comeback? C5;-,*..-;forecast demand for some 27,210 new aircraft valued;at $2.6 trillion over the next twenty years (1,360 de;liveries per year). Of this, some 9,580 aircraft will be;replacements for aircraft retired from service, with;the balance being aircraft to satisfy an expanded;market. In 2025, Boeing estimates that the total;global fleet of aircraft will be 35,970, up from 17,330;in 2005. Boeing believes that North America will ac;count for 28% of all new orders, Asia Pacific for;36%, and Europe for 24%. Passenger traffic is pro;jected to grow at 6.4% per annum in Asia versus;3.6% in North America and 3.4% in Europe.11;Regarding the mix of orders, Boeing believes that;the majority will be for aircraft between regional jets;(which have fewer than 100 seats) and the Boeing;747 (see Exhibit 4). Aircraft in the 747 range (in;cluding the Airbus A380) will account for some 3%;of deliveries and 10% of value between 2006 and;2025, according to Boeing.;The latest Airbus forecast covers 2004-2023. Over;that period, Airbus forecasts world passenger traffic;to grow by 5.3% per annum and predicts demand;for 17,328 new aircraft worth $1.9 trillion. (Note;that Airbus excludes regional jets from its forecasts;Boeing's forecasts include some 3,450 regional jet;deliveries.) Airbus believes that demand for very;large aircraft will be robust, amounting to 1,648;large passenger aircraft and freighters in the 747;range and above, or 22% of the total value of aircraft;delivered.12;The differences in the mix of orders projected by;Boeing and Airbus reflect different views of how fu;ture demand will evolve. Airbus believes that hubs;will continue to play an important role in airline;travel, particularly international travel, and that very;large jets will be required to transport people be;tween hubs. Airbus bases this assumption partly on;an analysis of data over the last twenty years, which;shows that traffic between major airline hubs has;grown faster than traffic between other city pairs.;Airbus also assumes that urban concentrations will;continue to grow, with fifteen cities having popula;tions of more than 20 million by 2023, up from five;in 2004. Airbus states that demand is simply a func;tion of where people want to go, and most people;want to travel between major urban centers. The;company notes, for example, that 90% of travelers;going from the United States to China travel to three;major cities. Fifty other cities make up the remaining;10%, and Airbus believes that very few of these cities;C6 PART 5 Cases in Strategic Management;Exhibit 4;Projected New Airplane Deliveries, 2006-2025;New Airplane Deliveries New Airplane Market Value;2006 to 2025 2006 to 2025;(in year 2005 dollars);4%;10%;41%;61%;27,210 new airplanes $2.6 trillion;Regional jets Single-aisle Twin-aisle 747 and larger;Source: Boeing,, accessed 2007.;will have demand large enough to justify a nonstop;service from North America or Europe. Based on;this assumption, Airbus sees robust demand for very;large aircraft, particularly its A380 offering.;Boeing has a different view of the future. The;company theorizes that hubs will become increasingly;congested and that many travelers will seek to;avoid them. Boeing thinks that passengers prefer frequent;nonstop service between the cities they wish;to visit. It also sees growth in travel between city;pairs as being large enough to support an increasing;number of direct long-haul flights. The company;notes that continued liberalization of regulations;governing airline routes around the world will allow;for the establishment of more direct flights between;city pairs. As in the United States, the company believes;that long-haul, low-cost airlines will emerge;that serve city pairs worldwide and avoid hubs.;In sum, Boeing believes that airline travelers will;demand more frequent nonstop flights, not larger;aircraft.13 To support this, the company has data;showing that all of the growth in airline travel since;1995 has been met by the introduction of new nonstop;nights between city pairs and by an increased;frequency of flights between city pairs, not by an increase;in airplane size. For example, Boeing notes;that following the introduction of the 767, airlines;introduced more flights between city pairs in North;America and Europe and more frequent departures.;In 1984, 63% of all flights across the North Atlantic;were in the 747. By 2004, the figure had declined to;13%, with smaller wide-bodied aircraft such as the;767 and 777 dominating traffic. Following the introduction;of the 777, which can fly nonstop across the;Pacific and is smaller than the 747, the same process;occurred in the North Pacific. In 2006, there were;seventy-two daily flights serving twenty-six city pairs;in North America and Asia.;Boeing's History14;William Boeing established the Boeing Company in;1916 in Seattle. In the early 1950s, Boeing took an;enormous gamble when it decided to build a large;jet aircraft that could be sold both to the military as;a tanker and to commercial airlines as a passenger;plane. Known as the Dash 80, the plane had swept-;back wings and four jet engines. Boeing invested $16;million to develop the Dash 80, two-thirds of the;company's entire profits during the postwar years.;The Dash 80 was the basis for two aircraft, the KC135;Air Force tanker and the Boeing 707. Introduced;into service in 1957, the 707 was the world's first;commercially successful passenger jet aircraft. Boeing;went on to sell some 856 Boeing 707s, along with;820 KC-135s. The final 707, a freighter, rolled off the;production line in 1994 (production of passenger;planes ended in 1978). The closest rival to the 707;was the Douglas DC 8, of which some 556 were ultimately;sold.;The 707 was followed by a number of other successful;jet liners, including the 727, which entered;service in 1962, the 737, which entered service in;1967, and the 747, which entered service in 1970.;The single-aisle 737 went on to become the workhorse;of many airlines. In the 2000s, a completely redesigned;version of the 737 that could seat between;110 and 180 passengers was still selling strong. Cumulative;sales of the 737 totaled 6,500 by mid-2006;making it by far the most popular commercial jet;aircraft ever sold.;It was the 747 "jumbo jet," however, that probably;best denned Boeing. In 1966, when Boeing's;board decided to develop the 747, they were widely;viewed as betting the company on the jet. The 747;was born out of the desire of Pan Am, then America's;largest airline, for a 400-seat passenger aircraft;that could fly 5,000 miles. Pan Am believed that the;aircraft would be ideal for the growing volume of;transcontinental traffic. However, beyond Pan Am;which committed to purchasing 25 aircraft, demand;was very uncertain. Moreover, the estimated $400;million in development and tooling costs placed a;heavy burden on Boeing's financial resources. To;make a return on its investment, the company estimated;it would have to sell close to 400 aircraft. To;complicate matters further, Boeing's principal competitors;Lockheed and McDonnell Douglas, were;each developing 250-seat jumbo jets.;Boeing's big bet turned out to be auspicious. Pan;Am's competitors feared being left behind, and by;the end of 1970, almost 200 orders for the aircraft;had been placed. Successive models of the 747 extended;the range of the aircraft. The 747-400, introduced;in 1989, had a range of 8,000 miles and a;maximum seating capacity of 550 (although most;configurations seated around 400 passengers). By;this time, both Douglas and Lockheed had exited the;market, giving Boeing a lucrative monopoly in the;very large commercial jet category. By 2005, the;company had sold some 1,430 747s and was actively;selling its latest version of the 747 family, the 747-8;which was scheduled to enter service in 2008.;By the mid-1970s, Boeing was past the breakeven;point on all of its models (707, 727, 737, and 747).;The positive cash flow helped to fund investment in;two new aircraft, the narrow-bodied 757 and the;wide-bodied 767. The 757 was designed as a replacement;to the aging 727, while the 767 was a response;to a similar aircraft from Airbus. These were the first;Boeing aircraft to be designed with two-person;cockpits, rather than three. Indeed, the cockpit lay-;CASE 1 Boeing Commercial Aircraft: Comeback?;out was identical, allowing the crew to shift from one;aircraft to the other. The 767 was also the first air;craft for which Boeing subcontracted a significant;amount of work to a trio of Japanese manufactur;ersMitsubishi, Kawasaki, and Fujiwhich sup;plied about 15% of the airframe. Introduced in 1981;both aircraft were successful. Some 1,049 757s were;sold during the life of the program, which ended in;2003. Over 950 767s had been sold by 2006, and the;program is still going.;The next Boeing plane was the 777. A two-;engine, wide-bodied aircraft with seating capacity;of up to 400 and a range of almost 8,000 miles, the;777 program was initiated in 1990. The 777 was seen;as a response to Airbus's successful A330 and A340;wide-bodied aircraft. Development costs were esti;mated at some $5 billion. The 777 was the first wide-;bodied, long-haul jet to have only two engines. It;was also the first to be designed entirely on com;puter. To develop the 777, for the first time Boeing;used cross-functional teams composed of engineer;ing and production employees. It also brought major;suppliers and customers into the development;process. As with the 767, a significant amount of;work was outsourced to foreign manufacturers, in;cluding the Japanese trio of Mitsubishi, Kawasaki;and Fuji, which supplied 20% of the 777 airframe. In;total, some 60% of parts for the 777 were out;sourced. The 777 proved to be another successful;venture. By mid-2006, 850 777s had been ordered;far more than the 200 or so required to break even.;In December 1996, Boeing stunned the aerospace;industry by announcing it would merge with long;time rival McDonnell Douglas in a deal estimated to;be worth $13.3 billion. The merger was driven by;Boeing's desire to strengthen its presence in the de;fense and space side of the aerospace business, where;McDonnell Douglas was traditionally strong. On the;commercial side of the aerospace business, Douglas;had been losing market share since the 1970s. By;1996, Douglas accounted for less than 10% of pro;duction in the large commercial jet aircraft market;and only 3% of new orders placed that year. The;dearth of new orders meant the long-term outlook;for Douglas's commercial business was increasingly;murky. With or without the merger, many analysts;felt that it was only a matter of time before McDon;nell Douglas would be forced to exit from the com;mercial jet aircraft business. In their view, the merger;with Boeing merely accelerated that process.;C8 PART 5 Cases in Strategic Management;The merger transformed Boeing into a broad-;based aerospace business within which commercial;aerospace accounted for 40 to 60% of total revenue;depending on the stage of the commercial production;cycle. In 2001, for example, the commercial aircraft;group accounted for $35 billion in revenues out;of a corporate total of $58 billion, or 60%. In 2005;with the delivery cycle at a low point (but the order;cycle rebounding), the commercial airplane group;accounted for $22.7 billion out of a total of $54.8;billion, or 41%. The balance of revenue was made up;by a wide range of military aircraft, weapons and defense;systems, and space systems.;In the early 2000s, in a highly symbolic act;Boeing moved its corporate headquarters from;Seattle to Chicago. The move was an attempt to put;some distance between top corporate officers and;the commercial aerospace business, the headquarters;of which remained in Seattle. The move was;also intended to signal to the investment community;that Boeing was far more than its commercial;businesses.;To some extent, the move to Chicago may have;been driven by a number of production missteps in;the late 1990s that hit the company at a time when it;should have been enjoying financial success. During;the mid-1990s, orders boomed as Boeing cut prices;in an aggressive move to gain share from Airbus.;However, delivering these aircraft meant that Boeing;had to more than double its production schedule between;1996 and 1997. As it attempted to do this, the;company ran into some severe production bottlenecks.;15 The company scrambled to hire and train;some 41,000 workers, recruiting many from suppliers;a move it came to regret when many of the suppliers;could not meet Boeing's demands and shipments;of parts were delayed. In the fall of 1997;things got so bad that Boeing shut down its 747 and;737 production lines so that workers could catch up;with out-of-sequence work and wait for back-;ordered parts to arrive. Ultimately, the company had;to take a $1.6 billion charge against earnings to account;for higher costs and penalties paid to airlines;for the late delivery of jets. As a result, Boeing made;very little money out of its mid-1990s' order boom.;The head of Boeing's commercial aerospace business;was fired, and the company committed itself to a;major acceleration of its attempt to overhaul its production;system, elements of which dated back half;a century.;Boeing in the 2000s;In the 2000s, three things dominated the development;of Boeing Commercial Aerospace. First, the;company accelerated a decade-long project aimed at;improving the company's production methods by;adopting the lean production systems initially developed;by Toyota and applying them to the manufacture;of large jet aircraft. Second, the company considered;and then rejected the idea of building a;successor to the 747. Third, Boeing decided to develop;a new wide-bodied, long-haul jetliner, the 787.;Lean Production at Boeing;Boeing's attempt to revolutionize the way planes are;built dates back to the early 1990s. Beginning in;1990, the company started to send teams of executives;to Japan to study the production systems of;Japan's leading manufacturers, particularly Toyota.;Toyota had pioneered a new way of assembling automobiles;known as lean production (in contrast to;conventional mass production).;Toyota's lean production system was developed;by one of the company's engineers, Ohno Taiichi.16;After working at Toyota for five years and visiting;Ford's U.S. plants, Ohno became convinced that the;mass-production philosophy for making cars was;flawed. He saw numerous problems, including three;major drawbacks. First, long production runs created;massive inventories, which had to be stored in;large warehouses. This was expensive because of the;cost of warehousing and because inventories tied up;capital in unproductive uses. Second, if the initial;machine settings were wrong, long production runs;resulted in the production of a large number of defects;(that is, waste). And third, the mass-production;system was unable to accommodate consumer preferences;for product diversity.;In looking for ways to make shorter production;runs economical, Ohno developed a number of techniques;designed to reduce setup times for production;equipment, a major source of fixed costs. By using;a system of levers and pulleys, he was able to;reduce the time required to change dies on stamping;equipment from a full day in 1950 to three minutes;by 1971. This advance made small production runs;economical, which allowed Toyota to respond more;efficiently to consumer demands for product diversity.;Small production runs also eliminated the need;to hold large inventories, thereby reducing ware;-;Ei.;housing costs. Furthermore, small product runs and;the lack of inventory meant that defective parts were;produced only in small numbers and entered the assembly;process immediately. This reduced waste;made it easier to trace defects to their source and fix;the problem. In sum, Ohno's innovations enabled;Toyota to produce a more diverse range of products;at a lower unit cost than was possible with conventional;mass production.;Impressed with what Toyota had done, in the;mid-1990s Boeing started to experiment with applying;Toyota-like lean production methods to the production;of aircraft. Production at Boeing used to be;all about producing parts in high volumes and then;storing them in warehouses until they were ready to;be used in the assembly process. After visiting Toyota;engineers realized that Boeing was drowning in inventory.;A huge amount of space and capital was tied;up in things that didn't add value. Moreover, expensive;specialized machines often took up a lot of space;and were frequently idle for long stretches of time.;Like Ohno at Toyota, company engineers started;to think about how they could modify equipment;and processes at Boeing to reduce waste. Boeing set;aside space and time for teams of creative plant;employeesdesign engineers, maintenance technicians;electricians, machinists, and operatorsto start;experimenting with machinery. They called these;teams moonshiners. The term moonshine was coined;by Japanese executives who visited the United States;after World War II. They were impressed by two;things in the United Statessupermarkets and the


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