February 9, 2012 in Business

Suppliers say they feel pressure from Boeing

Company’s contracts ‘were very stressful’
Dominic Gates Seattle Times
Associated Press photo

Boeing’s newest aircraft, the Boeing 787, sits on the tarmac at Huntsville International Airport on Jan. 27 in Huntsville, Ala. Some suppliers to Boeing are voicing concern about being pressured to lower prices while increasing production rates.
(Full-size photo)

Update on 787 problem

 Boeing Chairman and CEO Jim McNerney said the latest problem with its new 787 will not slow production.

 Boeing is fixing a problem with the way the skin on the 787 is attached to the tail section. Some spacers, called shims, were installed improperly. Boeing has said there’s no immediate safety issue. It is still inspecting 787s to see how many will need to be fixed.

 The 787 first entered service last year, and Boeing is speeding up production at the two plants where the planes are assembled, in Everett and North Charleston, S.C.

SEATTLE – As a Boeing Co. executive laid out the compelling growth prospects presented by the plane maker’s unprecedented production boom, managers of local aerospace suppliers listened intently.

But on the sidelines of the Lynnwood, Wash., conference where the suppliers gathered this week, some later voiced concern that Boeing is constantly pressuring them to lower prices even as they improve quality and increase production rates.

“We’ve given our pound of flesh,” said Peter Swift, an aviation executive and consultant working for German supplier ESW. “We can’t give any more.”

One sales vice president, who asked not to be identified and whose previous company sold avionics parts to Boeing, said price squeezing is common throughout the supply chain.

“Our contracts with Boeing were very stressful,” he said.

John Byrne, Boeing vice president for aircraft materials and structures, on Tuesday told the audience of suppliers at the annual conference of the Pacific Northwest Aerospace Alliance that the plan to increase 737 output in Renton, Wash., to 42 airplanes a month is “uncharted territory.”

He said local suppliers will need to steadily raise the quality of their manufacturing processes to meet Boeing’s targets and avoid the need for rework.

Analysts speaking at the conference were unanimous that the biggest challenge for Boeing’s ramp-up plan is whether suppliers can keep pace.

Boeing is checking whether subcontractors two or three steps down the supply chain can make the required parts at the required rates, demanding to see performance data and applying scrutiny “far surpassing anything we’ve done in the past,” Byrne said.

In an interview later, he added that in working with suppliers, “the key is collaboration.”

But as Byrne spoke with reporters, Swift joined the group and pointedly asked Byrne how he can expect suppliers to constantly reduce their prices.

For about a dozen years, spanning about five follow-on contracts, Swift’s company, ESW, has supplied the fitting through which airplane ramp mechanics connect to fill the potable water tanks on the 737.

Each time the contract was renegotiated, Swift said, Boeing has demanded higher quality, higher productivity and a 3 percent reduction in price.

When it comes to the price of small parts such as washers, he said, “We’re getting down to pennies here. You want to risk delivery to chase 10 cents?”

Swift said he fears the pricing squeeze will drive some smaller suppliers to sell out, destroying what was once a thriving local universe of small, innovative machine shops.

A manager with an engineering company, who also asked not to be identified, said firms supplying engineering services and technology to Boeing have a different experience from parts manufacturers.

He agreed that Boeing is demanding more from local parts suppliers, and paying them less, even as it hires away their best people.

“Boeing is just crushing them,” he said.

On the other hand, he added, Boeing is throwing money at companies that can provide technology or research and development that will increase productivity.

As Renton gears up to build the MAX and Charleston, S.C., ramps up 787 production, he said, Boeing’s investment will provide big opportunities for suppliers of automation equipment and engineering support.

The former avionics executive said Boeing’s squeeze on pricing, difficult as it may be, is now an inevitable part of the business and the flip side of the growth opportunity ahead.

“It’s the capitalist way. Business is tough. Boeing is doing what it needs to do.”

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