The Remaking of Douglas by McDonnell : Aerospace: Following a massive restructuring of the Southern California aircraft firm by its St. Louis parent, morale is low at Douglas and there is a sea of red ink.
A cabal of McDonnell Douglas executives plotted a cultural upheaval at their Douglas Aircraft subsidiary in Long Beach early this year, undertaking revolutionary changes in what they had come to view as an antiquated and poorly run aerospace firm.
Meeting in the basement of the St. Louis home of Robert H. Hood Jr., who would later take over as president of Douglas, the executives had a mandate from the corporation’s new chief, John F. McDonnell, to recast the autonomous and independent-minded Douglas after 22 years under McDonnell ownership.
Later, other executives were brought into the planning sessions, picked up by chauffeurs and not told where they were being taken. Stunned, they were led down the stairs to Hood’s basement, where the walls had been plastered over with organization charts, to spend 12-hour days and “ponder the imponderables,” as one participant recalled.
The basement sessions were so secret that none of Douglas’s senior managers was brought into the discussions or even made aware of them. Rather, the chief architects of the new Douglas management system were mostly people who had never built airplanes. They included a veteran of the missile business, a personnel executive and a former United Auto Workers official who had recently joined McDonnell Douglas.
Then, on a cold day in February, Hood dropped the bombshell. In Long Beach, he called every one of Douglas’s 5,200 managers, supervisors and executives into a large paint hangar and announced that they had all lost their jobs. The long-troubled aircraft company, which has lost a quarter of a billion dollars so far this year, suddenly had an awesome new challenge ahead of it.
If they wanted to remain with Douglas, the managers could reapply for about 1,000 fewer positions. All but a few did so. To qualify for the new organization, they had to pass personality tests designed to measure leadership aptitude and whether they were team players. The leftovers were offered non-management jobs. It was a lengthy and tortuous process that has seriously wounded morale at the proud aircraft firm.
The turmoil and scramble for jobs turned hundreds of career employees at Douglas into walking wounded. Although there was widespread agreement that major changes were needed, some executives assert that the reorganization was so traumatic and poorly executed that much of the work force has lost faith and trust.
“Douglas needed some medicine, but the treatment has been too strong,” said Richard Randall, who made it to the top of Hood’s new organization as a vice president but became disenchanted and left in May. “The changes were more traumatic and dramatic than they had to be.
“A lot of people were hurt. You have to ask, did the philosophy and process require that?” he added. “Rather than bad-mouth the changes, I have to personalize it and say the approach taken and the process used wasn’t right for me.”
Douglas officials do not dispute that morale has been hurt. Joel Smith, a vice president for quality and one of the most influential of the new executives, said: “Sure, it is a big problem. It is like an Army without any morale, but I don’t doubt that the culture and morale will be supportive (of the reorganization). Right now, we are a little disconnected.”
The new system needs to work--and quickly--because Douglas is hemorrhaging. It lost $224 million in the first half of 1989 and disclosed that every one of its aircraft programs was behind schedule and losing money. Analysts forecast continued losses through 1990.
Most seriously, the Air Force C-17 cargo jet program is more than $400 million over its $4.2-billion contract for development and very close to a so-called contract ceiling beyond which Douglas must pay for all future cost overruns. Spending 10% over the ceiling would saddle the corporation with more than $400 million in charges against profits.
The T-45 Navy jet trainer development is already over its ceiling cost and overruns are being borne entirely by Douglas. The MD-11 wide-body jet program is four months behind its development schedule. Even the firm’s venerable MD-80 commercial jetliner program lost $34 million in the second quarter.
Many insiders blame the reorganization for the $224 million loss, but Douglas officials dismiss that out of hand and say the losses were inevitable.
“The programs are in bad shape because they have not been attended to all this year,” said one former executive, speaking not for attribution. “The people they brought in are good people, but they are new to the commercial aircraft business and new to the military aircraft business and new to each other.
“Douglas is a place where you constantly have to keep things on track because they will get off track in a minute or two,” the former executive added. “We were programmed to have made a good profit this year.”
Randall confirmed that assessment, saying: “I was the chief financial officer at Douglas, and this year would have been as good as last year. (Douglas earned $127 million in 1988 on sales of $4.9 billion.) There was bound to be a cost of this reorganization. Many of us said it would be as severe as it has been.”
But Smith, the vice president for quality, disputed the idea that Douglas could have earned a profit this year. “I am sure the losses were amplified by the reorganization, but the basic losses had to do with a whole lot of history.”
The C-17 program for some time has been having problems with excess weight on the aircraft. Likewise, the MD-80 program has suffered from delays for more than a year. Security analysts said that Douglas’s new management could be trying to get all the bad news out of the way as quickly as possible by taking write-offs sooner, rather than later.
Shortly after Hood assumed control of Douglas, he began making extraordinarily critical statements about the condition of the company. In March, he told reporters that Douglas’s management systems were “antiquated,” its procedures “disorderly,” the plant “dirty” and that the quality of the aircraft it was building was not up to his personal standards.
It all hinted of an attack on James E. Worsham, the previous president long credited with saving Douglas from bankruptcy when he took over in 1982. Worsham, who retired from Douglas in January at age 65, is still popular at the firm and many there give him credit for a record $16-billion backlog of new work.
“I sincerely hope and trust that the new organization at Douglas is tremendously successful,” Worsham, now chairman of GPA Asia Pacific, a unit of the Irish aircraft leasing firm, said in a telephone interview last week. “I would not have gone about the changes exactly the same way. I would have gone about it in a more evolutionary and less revolutionary way, but I hope it works. The world needs Douglas products. There is a lot of tradition and strength there.”
Just how strong those traditions are is difficult for outsiders to imagine. When McDonnell acquired Douglas in 1967, there was sometimes-open antagonism between the two operations.
The differences were as basic as the way two pieces of aluminum are joined on an airplane skin and to the way blueprints are drawn. It involved old alliances with engine companies and other manufacturers. But Douglas’s rivalry with McDonnell’s headquarters in St. Louis also manifested itself in strange ways.
After the merger, the two organizations ordered new pencils for their engineers. In Long Beach, the pencils read McDonnell Douglas, but with the name starting at the blunt end of the pencil. That way, the engineers could sharpen them and eliminate “McDonnell” and the pencil would simply read “Douglas.”
Meanwhile in St. Louis, the McDonnell Douglas name started at the eraser end of the pencil and the engineers there sharpened off the “Douglas” name first, leaving only “McDonnell.”
“If you sent a guy from St. Louis in here for a year, he couldn’t do anything, because he would be swallowed up by the organization or the system,” Smith said. “In the relationship between St. Louis and Douglas, we now have a lot more things going together than we had before.”
Douglas almost continuously lost money after McDonnell acquired it in 1967, and McDonnell came close to shutting down the operation in the early 1980s. Douglas finally earned a profit in the second quarter of 1984, ending an extraordinary 10 years of annual losses.
Not surprisingly, this year’s reorganization was aimed, in part, at ending the autonomy and independence from St. Louis that Douglas has long cherished. That was a key reason that no senior Douglas managers participated in its planning, many insiders say.
The revolution at Douglas involved two separate sets of changes. First, the corporate organization was turned upside down. The old matrix management system, in which various departments such as engineering and production worked for different aircraft programs, was thrown out. The line system that replaced it has separate organizations for each program--each with its own engineering and production department.
The change whittled the layers of management down from eight to five, Hood said last March. The number of management jobs was severely cut. For example, the ranks of directors--executives who report directly to vice presidents--were thinned from 275 to 75.
The second part of the overhaul involved what is called the Total Quality Management System, a plan that closely parallels one used by the General Motors and Toyota joint venture in Fremont, Calif., known as the New United Motors Manufacturing Inc. or NUMMI. It has been essentially a training ground for GM in Japanese management systems.
Smith, the vice president for quality, was a former UAW official involved in the NUMMI project and was hired only last year by John McDonnell after McDonnell became a disciple of the NUMMI system.
It was Smith, along with Hood and McDonnell Douglas Senior Vice President James Henry MacDonald, who drew up the new management organization in Hood’s basement. Later, all nine of the executives who were to become Douglas general managers--four of whom had no experience at Douglas--were invited into the basement.
The premise of TQMS is that through teamwork and less direct supervision, quality will improve, deficiencies will not have to be repaired at a later stage of production, waste will decline and productivity will increase.
Under the old system, first-level factory supervisors at Douglas typically had 25 workers under them; now 40 would be typical, Smith said. The workers are subdivided into teams of five to 15 and a non-management team leader is selected.
The emphasis in the new system, Smith said, was to find the right managers. The search included personality tests and other psychological evaluations.
“All the folks applying for the management positions went through an assessment program that was aimed at looking at their team leadership aptitude, rather than looking at technical qualifications--does he know how to build airplanes?--" Smith said. “The thrust was on leadership and team-playing.”
Outside consultants were brought in, and managers were required to go through a day or two of “team exercises.”
“In our view, the future is going to be wrapped around people’s team leadership, rather than technical, capabilities,” Smith said. “They are going to have to delegate the technical work to others.”
And that is as fundamental a change as possible in the aerospace industry’s world, where for decades the best engineers and scientists became the bosses. In Smith’s view, the best engineers might remain engineers and be rewarded in the same way as managers.
A critical part of the new teamwork approach is a partnership with the Douglas unions, but that has been a rocky relationship. The president of the UAW local representing Douglas workers recently wrote a letter to Douglas management threatening to dissolve the partnership. A second letter retracted the threat.
The dispute centered on exactly who had responsibility for making specific decisions, one area that was not well defined in the TQMS system.
“My management is telling me I am supposed to listen to my employees, but my employees don’t want to take responsibility for anything,” one tooling manager complained recently. “They say I wear the necktie.”
Bruce Lee, regional director for the UAW, added, “It is hard to get people adjusted to sharing power and accepting responsibility for making decisions. That’s true on both sides. It makes the job pretty tough when you have a plant that size and totally change the face of it.”
Lee agrees that the hard feelings created by the management reorganization are “the single most important element of what is causing difficulties over there.”
“It is devastating,” he said.
But John D. Wolf, a Douglas vice president and general manager of the MD-80 program, said last week that the new system has already had a beneficial effect on his program.
MD-80 deliveries to airlines have long been behind schedule, even after several agreements to reset the schedule and more than a decade of experience in building the plane at Douglas.
Wolf said that production of the MD-80 is paced by the output of nose sections. Since TQMS went into effect, the production time of those sections has dropped from 160 days to 130 days. Meanwhile, output has risen from an average of one or two noses a week to three a week.
Douglas is aiming to increase its MD-80 production rate by 33% by 1991 without any increase in the 17,600-member work force on that program. The rate will jump from the current 2.5 aircraft a week to 3.3 a week.
Some improvement will undoubtedly result just from the young work force gaining experience. Douglas has a still-growing force of about 40,000 employees, up from about 12,000 in 1982.
On July 19, Hood told Douglas employees that it would be critical for the company to deliver 123 of the twin-jet MD-80s this year. That goal has since been reduced to 119 and personnel on the flight ramp where the aircraft are delivered have been told that they will be working maximum overtime through the Christmas holidays.
If the new total quality system is working, Wall Street has yet to be convinced of it. Judging by the price of McDonnell Douglas shares, investors are deeply skeptical.
At the current price of about $71 a share, the stock is selling at only 85% of its book value and has dropped more than 20% since the first-quarter loss was announced, according to securities analyst Jack Modzelewski of the New York-based investment firm of Paine Webber.
“If this was a patient in the hospital, you would say he has yet to respond to the treatment,” Modzelewski said. “At the present time, there is no evidence that the medicine is working.”
The losses led Moody’s Investors Service Inc. to downgrade its rating of the firm’s long-term debt and commercial paper in July, affecting $2.6 billion of McDonnell’s debt. “Production inefficiencies in McDonnell Douglas’s transport aircraft business and a reduction in defense spending will continue to impair the company’s overall (profit) margins,” Moody’s said.
Lawrence Harris, aerospace analyst at the Los Angeles financial firm Bateman Eichler, Hill Richards, predicts that Douglas will lose $300 million this year, meaning $76 million in losses on top of the $224 million racked up so far. He also believes the firm will lose $125 million in 1990 and then show profits in 1991.
In addition to concerns about losses on the T-45 and C-17 contracts, Harris said the company has been overly optimistic in projecting that it will have the first three MD-11 jetliners flying by the end of this year and 10 to 15 of them delivered to customers in 1990.
William Gross, the former No. 2 executive at Douglas who retired this month after 37 years there, said it is unclear to him just when the benefits of the reorganization will begin to offset its costs.
“You won’t find many people who say this isn’t the right thing for our company to do,” Gross said. “The profitability had always been poor since the jet era, since the early 1950s. All you have to do is look at the financial record.”
But he added: “You don’t take (thousands of) managers and supervisors and tell them on Monday morning that they don’t have a job and then create a procedure where the jobs aren’t filled for months and months. That was the criticism.”