Thursday, May 1, 2014

Best way Boeing can save a $100 million a year? Fire the entire top executive tier

In 2013, Boeing reported record earnings, record profits per share and $441 billion worth of in backlog orders (in part from production delays). So it is good times at Boeing? Hardly. It has been reported that Boeing’s recent announcement that it is moving more engineering jobs out of the state of Washington was purely a financial maneuver. Internal documents showed that Boeing hoped to save $100 million by shaving off $60,000 a year per employee in pay and benefits—the equivalent of 450 employees divided by Boeing CEO James McNerney’s 2012 pay and benefits. Analysts suggest that this strategy might not be as cost effective as Boeing envisions, as it will certainly lose even more experienced and skilled employees than it already has. 

Not that Boeing’s top management has a habit of learning from its mistakes. The Harvard Business Review noted that Boeing made a huge mistake in deciding to build an entirely new airplane in modular fashion right from the jump, with large sections manufactured all over the world, rather than build it in an integrated environment to make it easier and more cost-effective to work out all the kinks. It seems clear that Boeing went ahead with the 787 Dreamliner as it did in order to avoid any long-term commitment to build the plane in Washington. Not only that, but instead of designing the plane in-house by its own engineers, Boeing allowed disparate subcontractors to “design” parts of the plane without any real idea of what the other was doing. This meant that in the beginning, many parts of plane simply didn’t fit together. Boeing ended-up spending millions—maybe billions—of dollars in trying to “recover” from its mistake, and blackmailing domestic labor to pay the price for it.

Last year the usually reliably pro-corporate Forbes noted that Boeing made a major mistake off-shoring jobs in building the Dreamliner, apparently doing so in part not just to eliminate jobs in the United States, but to cut sweet deals with customer countries’ own economic requirements. It all sounded good on paper, except that 60 percent of offshore decisions were based on “miscalculations,” while “devastating whole US industries, stunting innovation, and crippling capacity to compete long-term.” 

Quoting Gary Pisano and Willy Shih, outsourcing manufacturing jobs “sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

Boeing in its outsourcing zeal refused to allow its experienced in-house engineers to create a detailed plan of the Dreamliner, relying on multiple outside sources (many in different languages) to “engineer” the parts they were supposed to manufacture. This naturally led to widespread design incompatibilities that has cost the company much more than it is allegedly “saving” from cutting labor costs. This led Forbe’s Steve Denning to ask “While several decades of outsourcing were under way, why didn’t these smart managers think about the importance of innovating and protecting intellectual property? Why didn’t these well-educated managers realize that it was important to have designers, engineers, and assembly-line workers talk to each other? Why didn’t these MBA graduates realize that outsourcing might be mortgaging the future of their firms?” Boeing also missed the boat by misjudging the added cost of an “international supply chain,” rather than a domestic one.

Denning also pointed out that the foolhardiness of Boeing’s management was due to one overriding factor, for which the continuing attempts to make labor pay for the mistakes of its million dollar executives is meant to address: “The root cause of these errors is a focus on the dumbest idea in the world: maximizing shareholder value.” What has it wrought in reality? “Focusing on short-term shareholder value ended up destroying vast quantities of long-term shareholder value.”

Mismanagement has certainly cost Boeing much less than it deserves. It still receives billions in tax breaks from the state of Washington, while continuing to break its “assurances” by cutting jobs in the state, and blackmailing remaining labor unions. Boeing also seems to be immune from paying federal taxes (like all-time profit maker Exxon). This is explained by a Boeing spokesperson because of “the very large investment we have made in American jobs, production facilities and research and development for our new airplanes.” Boeing’s cynical engagement in deception and outright lies is rather remarkable. It can’t even be truthful to itself. The company in reality has been benefiting from incomprehensible tax loopholes that costs the federal government tens of billions in revenue every year.

This massive display of incompetence has not gone “unrewarded.” The board that “determines” the pay scale of Boeing’s executives apparently looks at only two things: Cost cutting and share returns. It doesn’t care how it got there. Overlooked is the gross mismanagement. It’s top five executives—McNerney, Shephard Hill, John Tracy, Dennis Muilenburg and Gregory Smith—combined “earned” nearly $50 million in 2013, and that despite a “pay cut” for McNerney, who “earned” only $23+ million. No doubt the entire top tier of Boeing cost the company at least $100 million last year—and that isn’t counting their lofty severance and pension packages when they eventually move on. 

The engineers and machinists who actually build the planes, of course, make considerably less. Considering all the miscues, mistakes and miscalculations that McNerney and company have made that have hurt both short-term production and long-term prospects, the best way Boeing can save money is not by undermining and ridding itself of its best employees, but by “laying off” McNerney and his sorry posse.

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