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Stanley-deal-boeing-at-dubai-airshow.jpg Karim Sahib/AFP via Getty Images

More Boeing Hypocrisy—and Suppliers Will Feel the Fallout

The new vice president of Boeing’s commercial airline, Stanley Deal, who built his reputation on—among other things—squeezing supplier margins.

I can’t help myself but to comment on the November 15 articles Boeing Chairman Says CEO to Forgo Bonus as 73 Max Fallout Grows and For Boeing’s New Jetliner Boss, Job 1 is Making Amends for Max. Boeing CEO Dennis Muilenburg’s forgoing that bonus is, of course, in response to Boeing’s 737 Max design errors that have caused all sorts of financial problems not only for Boeing, but their suppliers and airline customers as well. 

For instance, the company has already incurred $9 billion in cost due to the 737 Max’s grounding.  Realize, this is before addressing the wrongful death claims of the relatives of the 346 people who died in 737 Max crashes and coming to a reimbursement agreement for the losses its airline customers have incurred. In other words, the financial impact due to the 737 Max snafu will likely be “the gift that keeps on giving.”

But back to Muilenburg’s offer to forego his 2019 bonus. For reference sake, let’s look at his 2018 compensation.

$23,392,187 in total compensation made up of:

  • $1,700,000 in salary.
  • $13,076,350 in bonus.
  • $7,330,916 in stock.
  • $1,284,921 in “other types of compensation.”

Assuming that 2019 compensation would be similar to that of 2018, Muilenburg will be giving up 50% to 60% of his pay for this year. At first this may seem to be an impressive sacrifice, but I suspect he’ll be able to scrimp by on the remaining $10 million or so he will still get. And, as cited above, this amounts to no more than “chump change” relative to current and future loses.

Personally, I see this as a token gesture and a bit hypocritical. I guess it’s not a surprise when industry executives have performance bonuses based on company financial results that they might be willing to accept risk on questionable cost-reduction schemes.  There are plenty examples of this to cite relative to Boeing, but the one that tends to illustrate the potential negative results better than most is their using $9 Indian programmers who, while they are capable of programming to spec, have no experience in airplane instrumentation.  As we all know, specs can’t be written to anticipate all potential problems and those programmers without aircraft industry experience aren’t likely to give feedback on needed spec adjustments.

I have previously been in contact with the president of a company that was built on the need to rework code created by Indian programmers. She said that those programmers, “have no idea how manufacturing works!!! Plus, academics mean nothing if you can’t apply it in the real world.”

Of course, the former VP of Boeing’s commercial airline division has been let go. He has been replaced by Stanley Deal who built his reputation on—among other things—squeezing supplier margins. Based on this, who is to doubt that under him, Boeing’s purchasing agents will be going out to 737 Max suppliers to ask/demand they share-the-pain by granting significant price reductions. This, in spite of suppliers having had nothing to do with the current 737 Max problems—unless  of course, you’re talking about those $9-an-hour Indian programmers. I’ve already heard from a couple of Boeing suppliers who have already been approached by Boeing on this.

There ought to be a law.

C02 Demand Fizzes Up, and Giving Suppliers the Advantage

In October, I had the opportunity to attend the annual North American Carbon Dioxide (CO2) Conference in Indianapolis. If you are like me, you probably have never thought much about this industry. In fact, though, CO2 touches a lot of things in life that you may take for granted. For instance, it is used in refrigeration and cooling, welding, water treatment, the production of carbonated beverages, etc. 

I attended the conference because its focus was on supply-chain issues. In fact, it portrayed a rather interesting supplier-customer relationship; i.e. in this case, CO2 producer/suppliers have all of the leverage over their distributor customers. Why? Because the production capacity of CO2 producers/suppliers is about 20% below demand. 

In my experience, customers who have the bulk of the leverage in a supplier relationship often set a paradigm “win-lose” negotiation. Customers that operate in this manner will likely someday be forced to pay the piper. This is because leverage can go both ways, and there will likely be a point in the future when it can be used to the benefit of the supplier. The reversal of the typical supplier-customer dynamics within the CO2 industry makes it a very interesting procurement case study.

In my discussions at the conference with CO2 distributors—the industry’s customers—it became apparent they felt C02 producers/suppliers took advantage of the existing leverage disparity “to the nth degree.”

Among the many interesting exhibits, I saw two that stood out. The first involved gas wastage. CO2 distributors typically supply their customers with a variety of other gases, such as argon. For the sake of storage efficiency, these gases are stored in liquid form at very low temperatures; i.e., sometimes hundreds of degrees below zero. These temperatures need to be maintained during distribution or—as the liquid warms up and transitions to gas—excessive material handling wastage will result, along the lines of 20 to 40%.

One of the marketing fliers at the Weldcoa (Aurora, Illinois) booth announced a new product to maintain the necessary storage and distributing temperatures for argon in a rather ingenious way. Ralph Johanson (Industrial System Engineering, LLC out of Davenport, Iowa)—inventor of the product he calls the HERO (Heat Exchange Rate Optimizer)—explained the theory and dynamics of the product to me, which I won’t get into here.

Use of Hero in distribution sets out to accomplish three major things. First, to reduce distributor reliance on producers/suppliers by lowering demand for the gas. In fact, once the technology is applied to CO2 distribution, it could eliminate the 20% under capacity issue. That, by the way, could dramatically influence leverage in the supplier-customer relationship in this industry, as cited above. Second, it lowers the “total cost” of a gallon of argon for the distributor. Why? Because prior to this product the distributor would have to buy about 20% more of the Argon gas needed to satisfy customer demand due to wastage.  Reducing that wastage results in a 25% reduction in cost-of-goods-sold for distributors.  This would have another impact on the supplier-customer leverage equation.

Johanson estimates the payback to a distributor using this new product at under one year. Although the Hero does not currently address CO2 wastage, Johanson says that this application is being worked on and will be available in the not-too-distant future.

This product reminds me a bit about what started happening 20 to 25 years ago in manufacturing.  If you remember, at the time there was a movement for companies to become more energy-efficient, through better insulation and adoption of more energy efficient processing.  And the savings was substantial.  It’s nice to see this also happening in the CO2 industry.

Finally, believe it or not, I was impressed with the role of decals in the industry, as described to me by the Rob Freeman at the Label Solutions, Inc. (Marshfield, Missouri).  You may be familiar with labels and bar coding as used in factories and everyday commerce. In the CO2 industry, however, product and process identification take on a significantly higher role.  Why?  The extremely low storage temperatures involved make this a dangerous industry for anyone involved in distribution. In fact, there are extreme standards and regulations relative to CO2 distribution overseen by OSHA and the Department of Transportation (DOT).

Additionally, there is an importance difference between CO2 labeling and labels used in everyday commerce. Specifically, equipment used in product CO2 storage and distribution have long lives.  As a result of this—as opposed to labels as they are typically used in factories—decals in distribution are subjected to significant, almost unending, material handling, throughout the supply chain; i.e. they are used as a form of “returnable container.”  For this reason, the decals applied to these products must be robust.  This implies being resistant to extreme fluctuations in temperature, being waterproof, having the ability to avoid condensation flux, fading and/or the loss of adhesion.

Why?  In addition to safety and identification issues, the gas industry is highly regulated, meaning that should OSHA or DOT find a lack of—or damaged—decal, there can be significant fines. Because of this, it makes a lot of sense for a distributor of CO2 (or other gas) to put a high emphasis on the decals they use. In other words, price should not be the primary consideration when distributors source their decals.

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