We Examine Boeing CEO Dennis Muilenburg’s Strategy For Improving Profitability

Since Dennis A. Muilenburg was appointed Boeing’s CEO in July 2015, the firm’s shares have gained a staggering 210% and climbed from $140 to $440/share. The gain has taken place mainly over the course of the last 2.5 years and during that period, Boeing’s share value noted a 230% increase. Boeing’s current market capitalization is 243.9 Billion, before Muilenburg’s era, it was 90 Billion. In this article we will focus on how Muilenburg’s strategy of improving firm’s profitability by squeezing its suppliers has led Boeing to become America’s biggest exporter.

Dennis A. Muilenburh. Photo courtesy/Boeing

The Suppliers

As we all know, Boeing has a global map of suppliers. The production of aircraft components is outsourced in order to reduce costs, at the same time increasing firm’s dependence on the suppliers as well as increasing the difficulty of the logistics. Among major suppliers are, China’s Xian Aircraft Co. which produces some 737 vertical fins, and Japan’s Mitsubishi Heavy Industries provides the wing’s inboard flaps.

The extensive outsourcing has for example, led to delays in the production of the 787. On the other hand, it also allowed to reduce the product development costs, without which the 787 would have never been created in the first place. There were also a lot of problems with the 787 engines produced by General Electric, which has led to worldwide grounding of almost all Dreamliners. Mainly due to these two factors, Boeing has lost money on over 500+ of the first 787’s sold.

The suppliers are crucial for Boeings functionality, on the photo a final assembly line of the 737max is presented. Image courtesy/Boeing-Facebook

Interestingly, the suppliers are very often responsible not only for the production, but also for the design of the products. The firm works very closely with its suppliers, it has created a “Boeing Performance Excellence Award” and a “Supplier of the Year Award” in order to “recognize suppliers who achieve the high-performance standards necessary to meet customer expectations and remain competitive in the global economy”.

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In 2017 Boeing recognized 13 of its suppliers as outstanding, also spending almost $60 billion with nearly 13,000 suppliers from all 50 U.S. states and 57 countries. Supplier-provided components, services and engineering account for 65% of the production costs. Since Muilenburg was appointed as the firm’s new CEO, he has reportedly squeezed the suppliers, lowering the production costs by 10% and started to re-engineer its production process, setting up some production on its own. These changes were the main factors leading to an improvement of the firm’s profitability ratios, increasing the return on assets from 5.48 in 2015 to 8.91 in 2018. The net profit margin has also almost doubled, going from 5.38% in 2015 to 10.34% in 2018.

The demand for the 777X should add stability to Boeing’s future performance.
Photo courtesy – The Boeing Company/Facebook

What does the future hold?

The future for Boeing looks quite optimistic, current demand for flying outpaces market growth, and IATA expects 7.2 billion passengers to travel in 2035, nearly doubling the 3.8 billion air travellers in 2016. Alone in North America, 1.2 billion people are expected to fly in 2035. Boeing is set to remain world’s largest and most prominent aircraft manufacturer, as the 737max, 787-9/10 Dreamliners and the 777X create a solid foundation for Boeing’s global domination.

Right now, Boeing has 5,870 planes on order, a backlog of $490 billion. Another 20 000 of US-manufactured jets are expected be ordered by 2035, with a total listed value of $5,930 billion, which allows us to expect constant growth of the company. On the other hand, the awaited announcement of the 797 series could be a turning point in the firm’s financial performance. Currently, investor expectations are at its peak, thus a decrease in performance or simply a slightly lower than expected demand for the new series could see Boeing’s stock price decrease.

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