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Sunday, August 4, 1991 - Page updated at 12:00 AM

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Flying Out Of Turmoil -- Mcdonnell Douglas Is Beginning To Recuperate From Dramatic Change, But Challenges Still Ahead

Orange County Register

LONG BEACH, Calif. - Inside the giant hangar, celluloid airplanes flickered on huge screens. Inspirational music swelled in the background.

Endless rows of metal chairs held 5,200 anxious executives waiting to hear a speech by their boss, John McDonnell, chief executive of McDonnell Douglas Corp.

This chilly Monday, Feb. 13, 1989, was to be a long-overdue day of reckoning for McDonnell's Douglas Aircraft Co. subsidiary. More than 20 years of dismal financial performance finally had exhausted the patience of the Long Beach aircraft maker's corporate parent.

John McDonnell wanted higher profits from Douglas Aircraft. To get them, he had decided on drastic action.

All 5,200 vice presidents, general managers and supervisors gathered in the hangar were told they had been stripped of their titles. Although assured of a place in the new organization, they would face months of uncertainty while the company sorted itself out.

Douglas would be restructured according to a new industrial philosophy, the Total Quality Management System (TQMS). Four layers of management would be erased. Centralized engineering, manufacturing and customer-relations departments would be broken up, their assets distributed to individual airplane programs.

The executives were stunned. No U.S. company had ever attempted anything so audacious.

Robert Hood, named president of Douglas Aircraft only one month earlier, sought to inspire his workers. Grasping a microphone, he plunged Donahue-like into the crowd, beseeching the shellshocked executives. Will you help me save Douglas, he implored them.

Twenty-eight months later, Hood's question still hangs in the air. There are clear signs of financial improvement at Douglas, yet only the outlines of TQMS remain. In a series of reorganizations, the company has put back together much of what was taken apart on Feb. 13, 1989. The new workplace environment, based on consensual decisions and labor-management partnership, also has faded.

In the past year, almost 9,000 workers have been let go in a sweeping cost-cutting. Douglas officials say the steep human toll was the unavoidable price of overhauling a company dangerously close to extinction.

The success or failure of TQMS is of more than academic concern. Douglas is entering a crucial period, during which its financial performance will determine the fate of the entire McDonnell Douglas Corp., the nation's No. 1 defense contractor. Locally, the stakes are equally high: the fate of 42,700 workers and the countless small businesses surrounding the Long Beach plant.

Douglas has all the business an aircraft maker could ask for. Its ledgers bulge with $36 billion in unfilled orders.

Yet the company is hamstrung in its efforts to transform those orders into profits by many of the outmoded production systems and flawed management approaches of the pre-TQMS years. After all of the turmoil, Douglas continues to struggle with the industrial choreography of airliner production.

By any measure, Douglas' financial performance has been abysmal. Until the first quarter of this year, the company had not made money on aircraft production since 1974. No aircraft model generated profits over its lifetime.

By the late '80s, the company was recording annual profits, usually thanks to sales of spare parts or bookkeeping gains. But its margin of about 2.5 percent was far below both industry and McDonnell's standards.

"There's no doubt, looking at our history, that we absolutely had to improve business performance. It's been bad for over 20 years," said David Swain, an executive vice president at Douglas.

St. Louis tolerated the subpar record when Douglas accounted for only one-quarter of total corporate revenue. But the peace dividend and the airline-industry boom of the late 1980s changed all that. By 1992, Douglas was expected to provide more than 50 percent of the corporation's total revenue. Its financial fumbling no longer could be waved off.

"For years at Douglas we tried Band-Aids as a way of patching outmoded systems and processes that were breaking down under the weight of rapid and sustained expansion," John McDonnell said in a September 1989 video message to employees. "This time, we're fixing the root causes of Douglas' problems."

In the first few weeks after McDonnell's Feb. 13, 1989, bombshell, Douglas was like a giant machine laboring with sand in its gears. The company was simultaneously creating a new structure while producing aircraft under the old one.

Production-level workers complained they didn't know who was in charge. Meanwhile, the company's wounded managers were preoccupied with personality tests and role-playing sessions that would determine their new position.

John McDonnell had handpicked nine new vice presidents to oversee implementation of TQMS. Dubbed the "Divine Nine," they directed the massive management-placement effort that consumed much of 1989. Most were outsiders at Douglas, unfamiliar with the proud alchemy that shapes metal into swift, gleaming passenger jets.

Today, four members of the Divine Nine are gone. One retired under pressure, two were victims of internal power struggles. One died of acquired immune deficiency syndrome.

In January 1990, Hood and his team brought good news with the first flight of the MD-11 trijet. Later in January, John Capellupo, president of the corporation's Missile Systems Co. in St. Louis, came to Long Beach to become Hood's deputy president.

Capellupo was struck immediately by what seemed to be a lax work ethic. The plant was littered with parts and scraps of material.

"People did not appear busy. . . . Things just didn't seem to be going well," he said in a company newsletter.

Capellupo moved quickly. The company store and credit union were moved out of the plant to make it harder for workers to visit while on the clock. Popular "roach coach" lunch trucks were banned from company property.

The new No. 2 man also sought to open lines of communication from the executive suite to the factory floor. Capellupo held round-table discussions with Douglas managers and assembly-line workers. Periodically, he strolled the plant, buttonholing workers to find out how aircraft were progressing. Met with a complaint, he would return to his office and fire off a memo demanding to know how and when the problem would be fixed.

It was easy to criticize Douglas for worshiping at the altar of delivery schedules. But in truth, the company today faces a tough choice when problems occur on its assembly lines.

For example, if a part isn't ready when needed, the plane can move along the line without it. But then, it must be installed later, out of position. That's less efficient and often more costly, since out-of-position work can damage other components, which might require removal before the tardy part can be attached.

"There is no greater impact in my mind on cost than first-time quality, because the minute you've got to rework it, it costs extra and it's endless numbers of dollars," Hood said.

But if the plane sits and waits for the needed part, Douglas could miss a delivery date. That's no minor issue for the company's airline customers, who sell seats on planes months before taking delivery. If the plane isn't ready when promised, the airline has to scramble for a replacement or juggle its flight schedules.

In July 1990, after only 17 months under TQMS, John McDonnell signaled that the new system wasn't sufficient to restore profitability and announced massive layoffs. Over the next year, almost 9,000 workers would drop off the Douglas payroll, part of 14,000 to 17,000 let go throughout McDonnell Douglas.

"It is clear we made some mistakes in the course of our reorganizations. We did not do enough to establish the boundaries that would prevent excessive duplication of functions and services, and we did not exercise sufficient control over costs and staffing," the chief executive said.

At Douglas, the backpedaling from TQMS began to accelerate. In October 1990, customer support was recentralized. Airlines had complained they had to talk with a different Douglas executive for each type of Douglas plane they owned.

Key aspects of the TQMS workplace environment have not survived. The promised union-company partnership was stillborn. Consensual decision-making fell victim to the inexperience of the work force.

"We went a little bit overboard in decentralizing the whole thing and now we're coming back and recentralizing pieces of that," Hood said.

Today, experience is back in vogue. Technical skills are once again a key factor in filling openings.

Despite the recent changes, Hood insists the company is not abandoning TQMS. Indeed, Douglas officials credit the system for signs of progress on the bottom line and on the plant floor. First-quarter 1991 earnings were $11 million, compared with the $84 million bloodletting one year earlier. Man-hours to assemble the MD-80 are down 38 percent.

But the one person who counts hasn't changed his opinion.

In a video mailed to employees in March, John McDonnell said: "I will not let TQMS collapse at McDonnell Douglas." ................................................................

Douglas Aircraft's commercial lines ------------------------------------ Douglas Aircraft Co. makes two lines of commercial aircraft. Here are details of both:

The MD-80

The plane: Douglas offers a variety of MD-80 configurations with differing range, seating 150 to 170 passengers. The aircraft, which can fly routes up to 3,000 miles, competes with the Boeing 737 series and the Airbus A320 and A321, as will the MD-90. The first MD-90 model, the MD-90-30, will be slightly longer than the MD-80 and carry 158 passengers in its standard configuration. The MD-90, with a range of 2,750 miles, will carry as many passengers as an Airbus A320, but fewer than the Boeing 757.

History: The MD-80 is the successor to the DC-9 series, which delivered 976 aircraft between 1965 and 1982. The plane was certified by the FAA in August 1980 and flew in passenger service for the first time the following October. The company delivered a record 139 MD-80s in 1990. The MD-90 is being developed as a more fuel-efficient, quieter follow-up and is scheduled to make its first flight in 1993 with first deliveries the next year.

Price: $28 million for MD-80; $33 million for MD-90.

Orders: Douglas reports firm orders of 325 for the twinjet series and 419 "other" commitments.

Notes: More than 50 airlines fly the MD-80. ................................................................ The MD-11

The plane: The three-engine plane carries 250 passengers and can travel 7,980 miles. It competes head-to-head with the Airbus A340 as well as with variants of Boeing's 747 and 767 and the Airbus A330.

History: Assembly began March 9, 1988. First flight was Jan. 10, 1990. Douglas delivered four in May, bringing the program total to 16. Douglas spent an estimated $3 billion to develop the three-engine jet.

Price: $100 million (estimate)

Orders: An additional 158 firm orders have been booked, with 201 options.

Notes: Douglas boasts that "a passenger-carrying MD-11 is able to carry more revenue cargo below deck than any other commercial aircraft."

SOURCE: Douglas Aircraft Co. --------------------------------------------------------------- Seattle Times, Knight-Ridder Newspapers

Copyright (c) 1991 Seattle Times Company, All Rights Reserved.

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