Boeing Integrated Defense Systems
"Transformation for Future Market Growth"
Boeing Global Supplier Conference
September 16, 2004
I have a great job. I have an opportunity to visit with great customers and great employees, and, on occasion, they let me fly in the products that we build. It reminds me of a story about the early days of World War II. The parachutes that were being packed would only open about 19 of every 20 times. Somebody had the bright idea that the person who packed the chutes should get the opportunity to choose one of the parachutes that they had packed and jump out of an airplane. It's amazing what happened. The quality went from 19 out of 20 to 100 percent quality. It's amazing how you can get people's attention.
Back in July I was invited to fly in an F-18. I had a lot of worries about that. The picture I had was that I was going to get sick in the cockpit and embarrass John Lockard and his team. I was also a little concerned that I might accidentally pull the ejection cord. I can tell you that neither of those things happened.
But one fear I didn't have was of that F-18 not getting off the ground or not getting me back safely. I had a lot of confidence in the hundreds of suppliers that are here today that support that program and in the great quality products that they build.
I think that all of our customers feel the same way about the products that Boeing builds. The soldiers, the marines, the airmen, the sailors all rely every day on the products that we provide for them. When astronauts go into space, they are counting on us to bring them back safely. And when families fly on a Boeing airplane they know they are going to safely get to their destination. In fact, even when you turn on your DirectTV you expect to get a signal each and every day without fail.
As I talk to more customers around the world, that's the way they feel about The Boeing Company. They feel that we do provide them with the kind of reliable product that they need. So I would like to extend my appreciation on behalf of The Boeing Company and all of the customers we have around the world for the great job that you do. My thanks go out to the thousands of partners that we have, the supplier management organization, the process councils, and certainly the customer representatives that work with us every day to make sure we provide them with what they want.
At Integrated Defense Systems we'll bring in about $30 billion in revenue this year. We have some 80,000 employees and we have 40 sites around the country that have more than 200 employees. It's difficult for me to visit all of those sites. It's even tougher for me to get around and talk to all of the fine partners that we have. So it's great that we're all here in one room today and I'd like to spend the majority of the time taking your questions.
The theme of this conference, "one team with one future" is so true. We are only as good as the partners we have and I hope you feel the same way about us. Let me talk to you for a minute about The Boeing Company.
Boeing's Historic Role and the Supplier Contribution
I feel very privileged to work for Boeing. I can't think of any company that did as much in the 20 th Century to change the world as Boeing did. We helped during wars; we put people on the Moon; we changed the way that people travel; we brought people together with the advent of the jet age; and we changed the way that communication was done with the satellites that we built. It's a great legacy!
As we look to the 21 st Century I am convinced that we are going to have the same kind of influence on the 21 st Century that we had on the 20 th Century. The 7E7 is a transformational airplane and it's the biggest advancement in air travel since the 707. Programs like Future Combat Systems will transform the warfighter and how they do their job.
A lot of people thought that Joint Strike Fighter was a defining program of the 20 th Century; in my mind it was just the last platform program of the 20 th Century. Future Combat Systems is the program that will redefine how our customer does their job and we want to continue to be innovative. We want to help our customers move forward just as we continue to have a major influence on the world.
2003/2004: The Year in Review
Let's talk about 2003 and 2004; maybe more correctly about the last fifteen or sixteen months. If we were a Broadway show or a movie you'd probably say we received mixed reviews.
Go back to February 1, 2003 and the loss of Columbia . That probably affected me the most in a personal way. We lost friends, we let people down. I imagine all of you feel the same way I do about the Columbia tragedy in that you ask "what could I have done to help bring those astronauts back safely?"
We had issues associated with the Evolved Expendable Launch Vehicle and the Air Force suspension of our launch business. It's a suspension that we are still under.
We had a significant write-down in the satellite and launch business as a result of the commercial space business not living up to the expectations that we had in the late 1990s.
We had continual issues associated with the tanker deal. We had the dismissal of a couple of executives and the resignation of our chief executive officer.
But, despite the fact that we had those issues, I am so proud of the job done by our employees and by our partners. I am proud of the way they focused on keeping the promises that we've made to our customers, on mission success, and on execution of our programs. We supported the warfighter in Iraq and Afghanistan ; we've made significant contributions to Homeland Security; we won the Future Combat Systems program; and we delivered virtually all of our products on time and on schedule. At the same time, we've taken some significant steps in improving what I view as an already sound ethics program.
As I keep telling our employees time and time again: nothing has happened in the last eighteen months that impacts our capabilities or our ability to satisfy our customer. The $51 billion in orders in 2003 is unprecedented at Boeing. In fact, I'm not sure that any other defense company has ever had a year like we did in 2003.
As we moved into 2004, we've continued with great success. If there's one success that stands out it is John Lockard's team capturing the Multi-Mission Maritime Aircraft (MMA) program. It's a program that another company had held for over forty years.
Finally, looking at our performance, we're making near double digit margins.
IDS: Right Strategy, Right Structure, Right Leadership
So, then the question is: "Why we have been able to achieve what we have been able to do together?" It's because we have great ideas. It's because we have great processes. And it's because we have great partners with a shared destiny. Put another way: we have the right strategy in place, we have the right structure, and we have the right leadership team.
Back before we created Integrated Defense Systems we had a Space and Communications organization focused on networks and we had a Missiles and Aircraft organization focused on platforms. We saw that our customer was looking for end-to-end solutions. That's why we put this organization together. It's not just about platforms; it's not just about networks. It's about how networks can add value to the platforms that we produce. It's about how the networks can make the systems more operational and more capable.
At IDS we spent a lot of time in the beginning trying to identify the enduring needs of our customers. We identified four capability requirements that were most significant: mobility; precision engagement; integrated command and control; and situational awareness. We worked very hard to fully understand these customer needs and to identify the capabilities required to meet those needs. The result was Boeing integrating those four capabilities into programs. I think Future Combat Systems is an outstanding example of where we were able to do that.
A second key part of our strategy is to be the best horizontally-integrated business in the world, as opposed to vertical integration. When I talk about horizontal integration I'm talking about having the ability to bring to bear all of the capabilities we have across all of our locations. We want to call upon the warfighter capabilities that we have in St. Louis , the rotorcraft knowledge that we have in Philadelphia and Mesa , the communications capabilities in Anaheim and the knowledge management capabilities that we have in Seattle .
Horizontal integration allows us to come up with great ideas that can win programs like the Future Combat Systems. We are not vertically integrated. My view is that if you are a virtually integrated company, by definition you will offer suboptimal solutions; no company can be the best in everything that they do.
We want to bring the best of Boeing together with the best of industry. We know that by working with the best of industry we can optimize the solutions that we provide to our customers.
I would add that by not vertically integrating we are not competing with you; we are not using you as stalking horses for internal businesses that we run. We do not want to compete with you. We want to bring you into a program.
Network-Centric Operations and Lead Systems Integration
We are focused heavily on network-centric operations and lead systems integration. In the past it was all about who has the most planes, ships and tanks. In the future it will be all about who has the best information. Who can see first, who can understand first and who can act first? Our view again is that by network-enabling all of the platforms we can provide greater value to them. The concept of network-centric operations is working and working very well.
I believe the first real program to use a network-centric approach is the Ground-Based Midcourse Missile Defense program. We were charged by our customer to come up with a way to discriminate and intercept a reentry vehicle that would be approaching very fast. To do that, we could have started with a blank sheet of paper and built a program from the bottom up. But we didn't.
Because an Early Warning Satellite System already existed, we took existing ground-based radars and the established communications system and fused these together. We used a booster that already existed. We only needed to build one piece of hardware: a kill vehicle. We integrated all of those elements together so they could share information and share capabilities. By doing so we were able to create a system that none of us had ever designed or addressed and that showed us the power of network-centric operations.
And it's an approach we'll continue to bring to Future Combat Systems. You probably saw that the Army changed the Program two months ago in order to bring the network on sooner so that it could interface with the current forces. The Army wants the current forces to be more capable and they want them to be network-enabled.
So in my view, we bring together the best of Boeing with the right partners. We have successful programs like Future Imagery Architecture, Missile Defense, FCS and MMA. And the order book that we have in backlog is looking very good for the future.
We have put together a customer-facing organization. We have a business unit for intelligence, one for the Navy, one for the Army, one for the Air Force, one for NASA. We want to provide one-stop shopping for our customers. We will continue to focus on and meet the enduring needs of our customers.
As we address our leadership strategy for the future, we are focused on three things: leadership, execution and profitable growth. When we say leadership we're not just talking about the people who sit in the corner offices. We're talking about all of our people and all of our partners. We're asking the fundamental questions: What are we doing to better understand our customer requirements? What are we doing to improve our processes? What are we doing to improve ourselves? That's the way that we define leadership.
On execution, we've got to follow through on the commitments that we've made. We've won a lot of programs, but we'll keep those programs only if we can meet the milestones and the commitments we've made to our customer. Our success for Boeing will translate to success for our partners as well.
Let me talk a little about the defense budget. In my view, the days of significant increase in procurement spending are probably behind us. The 2005 budget got tougher and I think the 2006 and 2007 budgets will be tougher still. There are several factors involved: who gets elected President this fall, the war, the need for a balanced budget, the competition for resources between national security needs and domestic and social programs. The days of the seven percent increase in the defense budget are probably behind us.
There are four kinds of defense programs that will get a lot of scrutiny by the Secretary of Defense and Congress. All large programs will be looked at. All programs that are viewed as transformational will be examined closely. All programs that aren't performing well will be looked at. Finally, all of those programs that are new starts are likely at risk of sliding to the right; we've recently seen that on programs like Space-Based Radar and KBI.
What Keeps Me Up Nights?
Everybody has been asking what keeps me up at night. I'm fortunate that I'm a very sound sleeper. There are probably a few things that could keep me up but I do get my rest. I do worry about the supply chain. Let me make a few points about that.
First of all, we turn to our suppliers you because we think you are better at what you do than we are. Clear and simple, you're the expert and we're not. Our future is very dependent on you and your performance and I think our success is interdependent.
I worry about the industrial base, especially the third and fourth tier suppliers. An example of that would be lasers. There are not many people anymore that make the mirrors they need; there are not many people to polish them; there are not many people that can provide the coatings that are needed.
I also have concerns about process and baseline management. There is not a program that we have where we don't get a surprise every year or two because we've lost the formula, we've changed the process or lost the baseline. I will admit that we have problems within Boeing about process and baseline management and people not finding issues as thoroughly as they should. We need to work together as a team.
"One Team - With One Future"
You know what my goal is in working with our partners? It is to make Boeing a company that you like to do business with more than anybody else. We want to be the company that you assign your best people to. We want to be the company that you share your best ideas with. We want to be the company where you can look at us and see that we have a shared vision and a shared opportunity to be successful going forward.
But we also want to be thought of as the company where you can make the best margins. We structured ourselves so that you don't have to worry about competing with us. We're not vertically integrated and we don't have any intention of doing that.
I need all of you to commit to working for the things that Boeing is working on internally: quality, reliability, safety, diversity and cost. These are the things that are the real foundation of our company and if we all work on them we can be very successful. We also need you to operate to the highest ethical standards. Boeing certainly understands the implications of ethical lapses by a handful and it can be very damaging to a company.
I ask you all to be vigilant with your second and third tier suppliers. We need to treat them like customers; we need to make sure that they have the baseline issues under control; that they don't have processes changes that could impact us. I need all of you to strive for continuous improvement.
Boeing is truly committed to your success. You've heard our supplier management and procurement team talk about how they want to work with you in the future. We'll be involved with you earlier. We'll talk to you earlier to include you in our proposals. We want you to be profitable because we want you to invest in processes and technology. You can only do that if you are making a good return.
You know, our future will continue to be linked to yours as we call on you to bring the best of industry to everything we do. Together we can satisfy our customers and make a difference in the world.
And I am sure that in the future as I go out and test-fly some of the great products that we build together I won't have to worry about the "chutes not opening."
Thank you very much.