(Updates with closing share price in eighth paragraph.)
Feb. 8 (Bloomberg) -- Boeing Co. is scrutinizing its supply chain’s capacity and quality more closely than ever as the planemaker ratchets up commercial-jet output to record levels.
Chief Executive Officer Jim McNerney said today he has “pretty high” confidence that the new 787 Dreamliner can meet a planned production boost next quarter without halting parts deliveries so suppliers can catch up, as Boeing had to do several times recently.
A steady flow of jetliner components is pivotal for Boeing, which blamed part of the 787’s three-year delay on a shortage of fasteners and partners falling behind schedule. Airlines sign up for delivery slots when they place orders, and Chicago-based Boeing has to pay penalties for late planes.
“With the suppliers, it’s not what they’re doing today, it’s their capacity to do what you need them to do tomorrow, which we now have a far greater capacity to understand,” McNerney told analysts and investors in New York, a day after another executive said that vendors rushing to meet Boeing’s tempo were showing signs of strain.
John Byrne, who oversees purchasing for Boeing Commercial Airplanes, said Boeing began demanding more information last year from all suppliers and for the first time is drilling down into its biggest partners’ own vendors as well.
“We’re being more proactive,” Byrne said yesterday at a Pacific Northwest Aerospace Alliance conference near Seattle. “Some of this stuff we’ve never looked at before.”
On the 787, the world’s first jetliner made chiefly of composite plastics, suppliers are now meeting schedules, McNerney said at a Cowen & Co. investor conference in New York. The delamination on Dreamliner fuselages disclosed over the weekend will require only a “standard” fix and won’t affect 2012 deliveries, McNerney said.
Boeing rose 0.9 percent to $75.46 at the close in New York, the first gain after two straight declines.
Byrne said Boeing was seeing pressure across its supply chain. “Weaknesses are beginning to cause increased risk” as Boeing ratchets up production in a planned 60 percent boost over four years by 2014, he said. “The biggest threat we have is poor quality.”
Lead times between placing and receiving orders are starting to “creep out a little bit” for items that include treated metal parts, Byrne said. In some cases, suppliers can’t keep up, and the company has had to seek additional vendors, he said.
A one-week increase in the lead time is “a big thing for us,” Byrne said. “Lead times are the first indication when you get demand exceeding capacity.”
Boeing’s commercial-jet business makes $30 billion in purchases annually, buying parts from 5,400 factories around the world. Most assembly takes place at its Seattle-area manufacturing hub.
Some smaller suppliers say Boeing’s more-aggressive approach may backfire. Workers are swamped by new demands for extra paperwork, along with higher quality and production and lower prices, said Peter Swift, a consultant for a small German producer of fittings through which potable water can be pumped into the 737.
“Expectations for oversight for what you would otherwise consider a minor part of the supply chain have gone up markedly,” said Ken Herbert, a Wedbush Securities analyst in San Francisco. “Boeing senses the risk in the supply chain is significantly heightened.”
Boeing’s production plan calls for 10 separate “rate breaks,” which is when the assembly line for a certain model boosts output, from 2011’s first quarter through the third quarter of 2014, Byrne said. The planemaker plans to push 737 production to 42 a month in two years, from 35 now, and is studying what it would take to reach 60.
“We’re well set up for 38 a month, but when we get to 42 a month we’re really starting to head into some uncharted waters,” Byrne said.
In the late 1990s, Boeing had to halt work for a month when some suppliers couldn’t keep up with an attempt to more than double production in four years. Now, Airbus SAS is also asking suppliers for more, as the Toulouse, France-based planemaker works off a record order backlog, and competitors in China and Canada develop new models.
“The supply chain is not necessarily fragile but is certainly filled with risk,” said Bruce Burnett, the head of commercial procurement for the Americas for Airbus parent European Aeronautic, Defence & Space Co. The company spent $12 billion in the U.S. last year, Burnett said.
Byrne said he would give Boeing and its supply chain a low grade of C- or D because of the effort and cost needed to raise output while keep quality high. A “lot more work” is needed, he said.
“When you drain the lake, you find more rocks,” Byrne said. “Rate increases tend to drain the lake.”
--Editors: Ed Dufner, James Langford
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