Aircraft manufacturer Boeing is said to be seeking to extend supplier payment terms from 30 days to upwards of 120 days as part of a continued effort to reduce cost, conserve cash and reduce inventory.
“To align with industry norms we are in the process of adjusting the payment terms of our large suppliers,” spokesperson Jessica Kowal said in a statement. “In most, if not all cases, our new payment terms are in line with their payment schedules to their own suppliers.”
The new terms were revealed in early July and will be rolled out next year. Boeing and its arch rival Airbus have both said recently that the flow of new airline orders is slowing. Boeing is also reported to have paid US$19bn to investors by buying back its own shares over the last three years.
Boeing told SCF Briefing that they have a supply chain finance programme in place but declined to provide details. “We share that information with our suppliers,” said Kowal via email.
Boeing aims to boost its operating profit margin from an average of 6.9% over the last decade to double digits by 2020. Reuters notes that Boeing’s margins are better than Airbus’s, which are running at 3.7%, but well below the 16% earned by United Technologies subsidiary UTC Aerospace Systems, one of the world’s largest aircraft parts suppliers.
Boeing launched a round of supplier renegotiations in 2012 under a programme called Partnering for Success, which resulted in suppliers’ prices being cut by 15%. Now, executives at some of Boeing’s suppliers say that CEO Dennis Muilenburg [right] is pushing a new round of cost cutting.
“Looking under every rock”
David Gitlin, president of United Technologies subsidiary UTC Aerospace Systems, told Reuters: “I was in a meeting with Dennis [Muilenburg] where he was quite specific about needing to get continued cost reduction from the suppliers.” But Gitlin said that United Technologies had not agreed to delayed payment terms because it was focused on its own cash flow.
As Boeing searches for savings, however, he said, “It’s accurate to say that everything is part of the discussion. I think they’re looking under every rock.”
Another major supplier, Mitsubishi Heavy Industries (MHI), said Boeing is seeking lower prices and changes in payment terms. “I cannot say the number, but I would like to satisfy as much as possible the required cost reduction level from Boeing,” said Shunichi Miyanaga, chief executive of MHI, in an interview with aviation publication Leeham News. On the question of whether MHI would agree to longer payment periods, he said, “We have not decided.”
Boeing’s hard line approach means that suppliers are constantly pushed for greater productivity. A supply chain review initiated in 2014 has already seen Boeing secure cost savings in excess of US$2bn over the last two years through re-engineering of components, a process known as ‘value engineering’.
Tom Gentile, chief executive of supplier Spirit AeroSystems Holdings, noted in an interview that price reductions were “very aggressive” but also added: “Boeing is as hard on themselves as they are on anyone else.” On a recent tour of Boeing’s factories in Washington state, Gentile noted that workers were under pressure to install new tools, reduce production time and reduce inventory.
He also suggested that the new payment terms could be part of an overall negotiation which would form part of a long term agreement: “There are a lot of levers to pull,” he said.
Cash flow impact on suppliers
But many suppliers are reported to have already agreed to the changes. One mid-sized machining shop in Washington state said that Boeing’s payment terms were changed in the spring. “We went a whole month with no receivables from Boeing,” said the owner, who spoke to Reuters but asked not to be named because of concern about damaging relations with its customer.
When payments resumed, about 10 percent of the company’s annual revenue remained unpaid, he said, adding that Boeing now pays in 60 days, not 30, and pays twice a month, not weekly.
“We’re having to change the way we manage our cash flow and change the way we pay our suppliers,” the owner said. “It is preventing us from buying equipment.”
Boeing spokesperson Kowal commented: “Boeing did not implement any policy change or action that would have delayed or missed a contractual payment to large or small suppliers in April.” Boeing added that small suppliers in the US will be exempt from the new payment terms.