Raytheon Aircraft, Still Troubled,
Showing Signs of Turnaround

By By Anthony L. Velocci, Jr.
Aviation Wek & Space Technology

Raytheon Aircraft's operations probably will lose around $15 million this year. While such a prospect hardly inspires confidence, there's a growing body of evidence--still not widely known--that a turnaround is underway at the long-troubled business.

Productivity gains are helping Raytheon ramp up production of Premier I business jets, and by year-end the firm will be building the equivalent of 60 per year. For the first time in years, management is regaining control of Raytheon's manufacturing operations. There are meaningful, documented results in many areas, and positive momentum is building.

Assuming Raytheon can sustain the improvements and reinvigorate the company, it will mark a sharp departure from the business' agonizing decline from preeminence to disrepute.

In the five years leading up to mid-2001, Raytheon Aircraft was in an abysmal state--and getting worse. It limped along, hemorrhaging about $1 million a day. Quality and productivity worsened as the number of hours required to build all legacy aircraft rose steadily. Inventory control was in confusion. Trust between senior management and the workforce--critical in a troubled business--all but evaporated. The number of dissatisfied customers grew, as did the number of lost sales opportunities.

By all accounts, the company was as poorly run as a business could be and still remain a going concern. "We didn't just slip," said chairman and CEO James Schuster, who was brought in to pull the aircraft unit out of its downward spiral. "Functionally, we lost the recipe."

It was a recipe that had served the legacy company (Beech Aircraft) well for many years. Beech was accustomed to earning a profit before Raytheon entered the picture, although very little money was invested in new products. Market share wasn't what drove the enterprise. Rather, it was the company's well-established reputation for building high-quality turboprop aircraft, backed by customer service that set the industry standard.

All that began to change in the mid-1990s when Raytheon Aircraft made the mistake of taking on more than it could handle.

First was the purchase and integration of the Hawker business from the former British Aerospace in 1994. Then, in 1995, came the launch of the Premier I business jet, a clean-sheet design, followed in 1996 by the launch of the Horizon business jet. Both were complex undertakings because of their composite fuselages, which called for new technology and thus new production processes. Also in 1996, Raytheon began competing aggressively for the Joint Primary Aircraft Training System (JPATS), the Air Force's next-generation jet trainer. As if all this weren't enough, parent Raytheon in the late 1990s dropped the Beech Aircraft name to reinforce the parent corporation's identity, a move that took its own toll on employees' psyches.

Throughout this period, the Starship program's failure in the late 1980s was a drag on the company. Raytheon invested more than $700 million and sold just 53 of the aircraft.

As programs competed for resources and began to slip in the second half of the 1990s, the company experienced a cash flow crisis. Robert Horowitz, vp and COO, is quick to point out that it wasn't the employees on the shop floor who failed to rise to the challenge. "We have good people--they were just mismanaged," he said. Horowitz was one of the first of the senior people Schuster recruited when he assembled a new operations team. One of his first observations at Raytheon was how dirty the production areas were. Altogether, Schuster replaced 11 vice presidents in his first nine months.

Another addition to the team was David Shih, vp for manufacturing operations. When he arrived, the lack of inventory accuracy was one of the problems he most vividly recalls. It was wrong 32% of the time--"probably the worst I had ever seen anywhere," he said. With no system in place to accurately gauge what was in the stock bins at any given time, Raytheon was purchasing too much month after month and making parts that weren't needed to mask systemic shortages on the production lines.

"It was all very haphazard," Shih said.

There seems little doubt, however, that the operation has come a long way in the last 12 months, and positive momentum is building.

There are many examples of significant reductions in cycle time. For instance, in the last 18 months the lead time required to build the pedestal assembly for Beechcraft airplanes has declined from 112 days to 20. Another example is the time it takes to build the aft section of a King Air twin-engine turboprop, which has dropped from 2,400 to 2,500 hours a year ago to 800 to 1,000 hours.

In the assembly of the T-column for the Premier I's cockpit, adoption of lean manufacturing work cells using Six Sigma principles has resulted in an average lead time reduction of 83%, a 90% reduction in work-in-process and a 124% increase in value-added content. Before the changeover, a job in progress traveled 2,315 feet before it was finished, versus 60 feet now.

Significant progress has also been made in customer support. For instance, Raytheon's backlog of warranty claims has been reduced from approximately 10,000 in mid-2001 to about 1,600. Many of them resulted after aircraft owners were forced to wait long periods for replacement parts. The number of days required to settle claims has been reduced from 58 to 21, and it is continuing to fall, according to Horowitz.

"We had a lot of very unhappy customers," said Ed Dolanski, who was recruited from WalMart to head customer support. "We have focused a great deal of attention on warranties because 18% of our claims involve direct retail customers, and our ability to efficiently process claims will determine whether they represent repeat business."

Often, the wrong parts were shipped to customers, and those errors are down by 35%. In other cases, some customers received duplicates of the same part, and that kind of mistake has been reduced by 39%. Neither should be happening at all, Dolanski said. "Customer support steadily declined for seven years, so 12 months of improvement won't necessarily restore customer confidence. We have to sustain it."

Schuster has carte blanche to tap Raytheon's most skilled people in a wide range of disciplines, such as inventory accuracy, quality, strategic planning and process yields. For example, William Swanson, who recently was named president of the corporation, took up temporary residence in Wichita to help develop a strategy and determine where Raytheon-wide resources could be applied. Altogether, Raytheon Aircraft brought in more than 50 individuals from parent Raytheon. Schuster also invited every employee to communicate his ideas directly to him by e-mail, and assured them they would receive a personal response.

While Raytheon's new management team was developing a strategy that would foster systemic change throughout the company, they pursued a parallel set of tasks aimed at solving problems that would produce an immediate impact on the health of the business. One of the most pressing jobs was to speed up the shipment of new product to ease Raytheon's cash flow crisis.

Other sources of concern include being agile enough to take advantage of market opportunities, overcoming the competitive disadvantage caused by years of neglecting customer support, and having sufficient resources to continue to invest in new product development. Raytheon has new product designs on the drawing board and is funding their development. One of them is the Hawker 450, which was put on hold. A decision on its future will be made within the next 30 days. Existing airframes also offer possibilities.

Whatever the next new product introduction is, there's a good chance it won't come to market under the Raytheon banner. The corporation has decided that its core business is defense electronics. Period. Since 1999, Raytheon has sold 11 noncore businesses for about $3 billion to reduce the corporation's heavy debt load and to become a more focused enterprise.

That process almost certainly will continue, but Raytheon is unlikely to sell the aircraft unit until it returns to full health. In the current market environment for business jets, that's apt to occur later rather than sooner. The company tried to sell the business several years ago, but in its declining state, buyers weren't willing to pay the asking price, according to people outside the company who were close to the situation. It's also possible Raytheon could try to sell the business in pieces.

Whatever the end game, the method and timing of how Raytheon will divest Raytheon remains up in the air. In the meantime, the first priority is to complete Raytheon's turnaround, or as Schuster put it, "return Raytheon Aircraft to preeminence."

As much progress as Raytheon has made, that's still going to be a tall order, although the organization definitely is headed in the right direction. "We're still a deeply troubled enterprise," Schuster said. "Before we can be a great business, we first have to be a good one, which requires managing the fundamentals. We've got the people's attention, and we've got their support. None of us can afford to let up."