Boeing Co (BA.N) is stepping up efforts to conserve cash, cut costs in its supply chain and trim inventory of parts in its factories, telling vendors it will take longer to pay bills, Boeing and aerospace industry executives said.
Under the new terms, Boeing is taking up to 120 days to pay, rather than 30 days as in the past, these people said. The new payment schedules are being rolled out this year.
Boeing also is reducing its factory inventory and relying on suppliers to hold parts instead, these people said. The moves come at a time when investors are closely watching Boeing's cash flow.
In a statement to Reuters, Boeing confirmed the changes in payment and inventory terms, saying they were necessary to compete when airlines want more capable planes at lower prices.
"To align with industry norms" and remain competitive, "we are in the process of adjusting the payment terms of our large suppliers," spokeswoman Jessica Kowal said in the statement. "In most, if not all cases, our new payment terms are in line with their payment schedules to their own suppliers."
Boeing, which is marking 100 years in business this summer, and its European rival Airbus earn lower average profit margins on the airliners they engineer and sell than many of the companies that supply components for the planes.
The company's operating profit margin averaged 6.9 per cent over the last decade. Airbus's figure was 3.7 per cent. United Technologies Aerospace Systems' comparable margin was about 16 per cent, according to Thomson Reuters data.
"It's in Boeing's DNA to build the best airplanes," Kent Fisher, vice president of supplier management, said in an interview. "But what we and suppliers have to recognize is that we have to shift that dynamic and focus on reducing the cost to build the airplanes."
Boeing Chief Executive Dennis Muilenburg has told investors he wants to lift Boeing's profit margin to the mid-teens by 2020.
Under a program called Partnering for Success, launched in 2012, Boeing suppliers cut prices 15 per cent. Now, executives at Boeing suppliers say Muilenburg is pushing a renewed round of cost cutting.
"I was in a meeting with Dennis where he was quite specific about needing to get continued cost reduction from the suppliers," said Dave Gitlin, president of United Technologies Aerospace Systems, one of the world's largest aircraft parts makers.
Gitlin said UTC did not agree to delayed payment terms because it was focused on its own cash flow.
But as Boeing searches for savings, he said, "it's accurate to say that everything is part of the discussion. I think they're looking under every rock."
Major Boeing supplier Mitsubishi Heavy Industries said Boeing is seeking a new round of 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," Shunichi Miyanaga, chief executive of MHI, said in an interview.
On the question of longer payment, he added, "we have not decided."
Not all of Boeing's efforts require price reductions. Some suppliers find cost savings by re-engineering components, a process Boeing calls "value engineering." Boeing saved $1 billion a year in 2014 and 2015 through these efforts, up from $60 million in 2012, Kowal said.
"They're very aggressive," Tom Gentile, chief executive of Spirit AeroSystems Holdings, said in an interview about price reductions.
"But Boeing is as hard on themselves as they are on anyone else," he added. On a recent tour of Boeing's factories in Washington state, he said, workers were under pressure to install new tools, reduce production time and reduce inventory.
Payment terms could be included in a long-term agreement Spirit is negotiating with Boeing, Gentile said. "There are a lot of levers to pull," he said.
