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May 2, 2023
Boeing’s 737 MAX 8 Disasters

John Sterman and James Quinn
On October 29, 2018, a nearly new Boeing 737 MAX 8 jet plunged into the Java Sea at 400 miles per
hour, killing all 189 people onboard. The sudden and rapid descent of Indonesia’s Lion Air Flight 610
commenced at 5,000 feet, just 11 minutes after taking off from Jakarta’s Soekarno-Hatta International
Airport. Captain Bhavye Suneja and First Officer Harvino, who went by a single name as was common
in Indonesia, contacted air traffic control requesting immediate return to Jakarta before losing control
of the aircraft. The plane crashed into the sea, “hitting the water with such force that some metal fixtures
on the aircraft disintegrated.”1
The accident initially seemed to be a senseless and anomalous tragedy. Air safety, enforced in large
part by the certification process of the Federal Aviation Administration (FAA), was enjoying an
exemplary record: Globally, the five-year worldwide average stood at one fatal airliner crash for every
2.5 million to 3 million flights. In the United States, airline safety had reached record levels, with only
one passenger fatality in more than 10 years.2
Boeing’s initial response to the crash focused on Lion Air’s airline maintenance procedures and
suggested the pilots were at fault.3 Nonetheless, about eight days later, on November 6, 2018, Boeing
issued a bulletin to all 737 MAX 8 and 737 MAX 9 operators indicating that “erroneous angle-of-attack
data” could result in “uncommanded nose-down movement of the aircraft and that this action can repeat
until the related system is deactivated.”4 The Boeing bulletin provided additional instructions to pilots
who might encounter such a dangerous situation. On November 7, 2018, the FAA followed by issuing
an Emergency Airworthiness Directive requiring Boeing to revise the operating procedures in its flight
manual for the 737 MAX aircraft. Of specific concern was the new Maneuvering Characteristics
Augmentation System (MCAS), software designed to prevent the aircraft from stalling by automatically
This case was prepared from public sources by James Quinn, Managing Director, CaseStudy Co., under the supervision of
Professor John Sterman.
Copyright © 2023 John Sterman. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative
Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a
letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California 94105, USA.
BOEING’S 737 MAX 8 DISASTERS
pushing the nose of the plane down when a high angle of attack (AOA), or nose-up condition, was
detected.
Officially, Boeing, including CEO Dennis Muilenburg, repeatedly declared “…the 737 MAX is safe.”5
But, as investigative reporter Peter Robison documented, “Behind the scenes, some of the largest and
most respected airlines in the world were screaming that Boeing had hidden the existence of potentially
deadly software inside their planes.”6 Internal communications that Boeing handed over to the U.S.
Department of Justice and Congressional investigators would later show that the company’s own
engineers and test pilots had known about the MCAS problem well before the crashes.
After the Lion Air crash, Boeing rushed to redesign MCAS. Boeing Vice President Mike Sinnett
initially promised it would take “not a year, but…maybe six weeks-ish” to “tame the system.”7 By
March 2019, the revisions were still not completed.
Then, on March 10, 2019, shortly after Ethiopian Airlines Flight 302 took off from Addis Ababa Bole
International Airport bound for Nairobi, Kenya, Captain Yared Getachew and First Officer Ahmed Nur
Mohammod Nur struggled to ascend at a stable speed.8 Getachew sent out a distress call, but contact
with air traffic control was lost six minutes into the flight. The same model Boeing MAX 8 that had
plummeted into the Java Sea crashed near Bishoftu, a town southeast of Addis Ababa. All 157 onboard,
hailing from 35 different countries, were killed.9
A maelstrom of questions immediately followed, from maintenance crews in Indonesia and Ethiopia,
airlines and pilots flying the MAX 8 around the world, Boeing leadership at its Chicago-based
headquarters, the FAA and U.S. Congress, and the families of the victims. High-stakes public disputes
arose over the root causes of the crashes. U.S. Congressman Sam Graves declared, “Pilots trained in
the United States would have been able to handle the emergencies on both jets.”10 Others, however,
blamed MCAS and a flawed design process at Boeing. Still others faulted the FAA. A subsequent report
by the U.S. Department of Transportation’s Inspector General, entitled “Weaknesses in FAA’s
Certification and Delegation Processes Hindered Its Oversight of the 737 MAX 8,” identified
“limitations in FAA’s guidance and processes that impacted certification….” These included
“communication gaps,” “management and oversight weaknesses,” and “process and structure [that] do
not ensure [FAA] personnel are adequately independent.”11
On March 13, 2019, under pressure from the Indonesian and Ethiopian governments, airlines, pilots,
the public, and the families of the 346 dead, the President of the United States Donald Trump ordered
the grounding of all 737 MAX aircraft. Several independent review boards were created to identify the
root causes of the two crashes and the changes regulators would require Boeing to implement before
the aircraft could return to service.
May 2, 2023 2
Boeing’s best-selling plane remained grounded for 21 months, while customers continued to cancel
orders. Through the end of October 2020, Boeing removed 595 MAX orders from the backlog and
canceled a further 448, a total loss of 1,043 orders, leaving a backlog of 3,320. Boeing’s rival Airbus
had a backlog of 5,956 jets for its A320neo family, a direct competitor to the 737 MAX.12
On November 18, 2020, just over two years after the Lion Air crash, FAA Administrator Steve Dickson
signed an order permitting the 737 MAX to return to commercial service.13 At the time of Dickson’s
order, the COVID-19 pandemic had slashed global air travel. Airlines announced plans to return their
737 MAX aircraft to service slowly.
Yet major questions remained as passengers once again began flying on the MAX 8, which Boeing
rebranded the 737-8.14 What role, if any, did company engineers play in causing the two catastrophes?
What about their managers? Their test pilots? What role did Boeing’s CEO, board, and other senior
leaders play in shaping the processes, procedures, and corporate culture that may have set the stage for
the disasters? Why didn’t the FAA detect the flaws in the design before allowing the 737 MAX 8 to
enter service? How could future disasters be prevented?
Air Safety
Over many decades, commercial aviation had become much safer. Technical innovation in engines,
airframes, cockpit instrumentation, communications, software, and control systems—together with
better procedures and stronger regulations governing aircraft testing, certification, pilot training,
operations, and air traffic control—all contributed to improving safety.
Measured by accidents per passenger miles flown, the improvements were impressive. In 2018, the
National Safety Council (NSC) reported only 1 death per 100 million passenger miles on scheduled
airlines in the U.S. Exhibit 1 shows U.S. commercial aviation accidents, 1975–2018.
However, the number of flights, flight hours, and passenger miles traveled per year all exploded as
people around the world became more affluent and average fares fell. From 2010 to 2019 (the year
before COVID-19 drastically cut airline travel), passengers carried by scheduled commercial air traffic
grew from 2.7 billion to 4.5 billion worldwide, and total flight miles grew from less than 3.1 trillion to
nearly 5.4 trillion passenger miles.15 The industry formed a complex web with more than 1,400
scheduled airlines, 26,000 aircraft, 3,900 airports, 173 air navigation centers, 360,000 pilots, and 86,000
air traffic controllers.16
The growth in air travel meant that the accident rate did not fall as much as data on accident per flight
or per passenger mile suggested. Between 1959 and 2008, 33.8 commercial jet accidents per year
occurred worldwide, 35% of which involved fatalities. Between 2009 and 2018, 41.4 accidents per year
occurred, 13% of which were fatal.17
May 2, 2023 3
The root causes of accidents remained a hotly contested topic. Human error was often the go-to
explanation. In a 2006 study, the FAA noted, “Although percentages vary, most would agree that
somewhere between 60%–80% of aviation accidents are due, at least in part, to human error.”18
Safety experts, however, argued that most human errors were the result of poorly designed equipment
and systems.19 In addition to focusing on “personal safety”—roughly speaking, admonishing people to
be careful—designers focused on increasing “process safety”—designing an intrinsically safe system
that minimized opportunities for and consequences of human error. As safety expert and psychologist
James Reason noted, “Though we cannot change the human condition, we can change the conditions
under which humans work.”20
The Boeing Company

Incorporated in 1916 by timber baron William E. Boeing, the company’s first contracts were with the
U.S. Navy, for which Boeing produced seaplanes, patrol flying boats, and torpedo bombers. During
World War II, Boeing produced nearly 100,000 aircraft, including the famous B-17 Flying Fortress.
Between 1942 and 1944, the company ramped up production from 60 to 362 B-17s per month. After
the war, Boeing went on to develop the B-52 Stratofortress strategic bomber and other critical military
aircraft. Boeing also developed the nation’s first commercial jet airliner, the Boeing 707, delivering the
first one to Pan Am to serve a transatlantic route.
Boeing became the preeminent player in the commercial airline industry. Author John Newhouse wrote:
Back in the 1970s and early 1980s, four companies divided the turbulent business of making and
selling passenger airplanes. One of them, the Boeing Company, was dominant. The other two big
American players—the Lockheed Aircraft Corporation and the McDonnell Douglas Corporation—
labored in the wake of their own mistakes. Lockheed’s were terminal, and McDonnell Douglas,
known in the trade as McDac, hadn’t come to terms with reality. The reality was that a small
European company called Airbus Industrie, generally known only as Airbus, had abruptly become
not just a player but a mortal threat. Simply put, Airbus was eating McDac’s lunch.
In the 1980s, …Boeing was universally judged one of America’s best and most admired companies,
partly because its sales abroad of large commercial airplanes were the country’s biggest export, and
partly because it had learned to build these airplanes better, faster, and cheaper than anyone else
had done. ‘World-class’ was Boeing’s lofty but accurate characterization of itself.21
By the end of 1990, Boeing held 62% of the commerical airline market, with sales of $20.3 billion and
earnings of $973 million.22 McDonnell Douglas (23%) and Airbus (15%) trailed far behind.23
May 2, 2023 4
Thornton “T” Wilson

One of Boeing’s legendary leaders, Thornton “T” Wilson, was credited with shaping much of the
company’s success. With a bachelor of science degree in aeronautical engineering from Iowa State
University and a master of science degree from California Institute of Technology, Wilson joined the
company in 1943 to work on its bomber programs. He became president of Boeing in 1968, CEO in
1969, and chairman in 1972. A hands-on manager who had worked on the factory floor, Wilson
understood every blue-collar job involved in the production process, and engaged closely with
employees at all levels. Newhouse commented: “Wilson would sit down with factory workers at lunch
in the cafeteria and find out what was going on in their various operations; and then if it was advisable,
he would take up what he’d learned with the relevant managers.” As one former executived noted, “He
ran the company. It did not run him.”24
During Wilson’s leadership and soon after his retirement in 1986, Boeing became the market leader in
commercial aircraft, defense, space, and security systems. Company engineers took on some of the
most challenging work in the industry, including high-visibility U.S. government contracts. In 1980,
Boeing initiated a study of the space station concept with NASA. In 1982, Boeing engineers designed
a solar power satellite system capable of providing power to millions of homes.25 In 1988, the company
delivered to the U.S. Army the first Avenger “air defense system,” one of several Cold War innovations.
And, in 1994, Boeing Computer Services won the contract to design software for the Space Shuttle
Program. Meanwhile, four years earlier, the Boeing 737 became the best-selling jetliner in the world.
During Wilson’s tenure, it was common for employees to spend their entire career at Boeing, as was
the case with Wilson himself, forging a “social contract” between workers and the company. Boeing
researchers Leon Grunberg and Sarah Moore summarized the company ethos:
Management of the company was anchored in loyalty and promoting through the ranks. Indeed, so-
called Heritage Boeing employees were extremely proud of building innovative, safe, quality
products, such as the 707 and 747, airplanes that set the global standard in commercial aviation
when launched. Executives told their employees—and the employees believed—that they were
number one in the world, as indeed they were until Airbus gradually ate into Boeing’s market share
and achieved parity in deliveries in the early 2000s.26
Years after retiring from Boeing, many employees reflected nostalgically on the Boeing family
atmosphere, where a deep commitment to quality engineering and pride in the work carried the day.
Grunberg and Moore explained:
Boeing offered lifelong employment and the promise of a meaningful career. Opportunities for
growth and promotion were endless, and despite the cyclical nature of the industry and the
accompanying layoffs, one could work at Boeing for life, as could members of one’s family. It was
May 2, 2023 5
commonplace for one’s parents, grandparents, children, siblings, aunts, and uncles to work for the
company.27
While the company employed thousands of people in the state of Washington’s Puget Sound region,
many recalled feeling like they were members of a “Boeing family.” As one longtime engineer said,
“I’ve been to weddings. I’ve been to funerals and Christmas parties. I’ve got friends I’ve done dog
sitting for. Our families still get together.” The emotional ties employees had with Boeing went beyond
coworkers and supervisors and included the airplanes they built and the buildings in which they
worked.28
Acquiring McDonnell Douglas

When I say I changed the culture of Boeing, that was the intent, so it’s run like a business rather
than a great engineering firm. It is a great engineering firm, but people invest in a company
because they want to make money.
– Harry Stonecipher, 2004, former president and CEO of
McDonnell Douglas and then Boeing29
In December 1996, Boeing announced its intention to purchase long-time rival McDonnell Douglas in
a stock swap valued at $13.3 billion. It was the 10th-largest U.S. merger at that time and the largest in
the aerospace industry. Under the terms of the agreement, 0.65 Boeing shares were exchanged for each
McDonnell Douglas share. The implied value of $62.89 per share represented a 21% premium on
McDonell’s closing price of $52 when the deal closed on July 31, 1997.
On its face, joining the two companies, which analysts estimated would yield in excess of $48 billion
in 1997 revenue—$28 billion from Boeing and $20 billion from McDonnell Douglas—would bring
together complementary product lines and internal capabilities, while helping to mitigate market risk
for each. “We’ve looked very carefully at all of our programs,” said Philip Condit, then Boeing’s
president and CEO. “We believe that dramatically they are complementary. There are some overlaps,
but they’re very, very minor.”30
Whereas Wilson knew many frontline employees by name and often met with them, Boeing’s
headquarters and senior management were moved to Chicago, about 2,000 miles from the commercial
aircraft division. The reporting structure changed so that top engineers reported first to business leaders
in each division and second to the chief engineer. In the years following the merger, many longtime
Boeing employees lamented what they perceived as a fundamental change from “an engineering and
‘family’ culture to a ‘team’ and shareholder value culture.”31
Other changes included the computerization of parts ordering, a shift to lean manufacturing to reduce
cycle times, increased use of outsourcing and global partnering—and approximately 50,000 layoffs
between 1999 and 2003.32
May 2, 2023 6
Some observers noted growing conflict between the engineering culture that Wilson had built with a
“bean counter” approach that emerged among many of his successors, particularly after the merger.
“Boeing’s critics, in-house as well as external, complain about a heavy presence of inexperienced
business-school types and too little listening to the airline market,” said author John Newhouse.33
Kyle Smith, a business operations and corporate consultant with 30 years of experience at Boeing,
commented on the labor-management dynamic following the merger:
So you have a workforce that is highly disillusioned, that feels that leadership is out of touch.
Management deals with that by hiding and by being increasingly authoritarian. A culture of fear is
the only way they have of maintaining control. And it’s all done in an environment of encouraging
people to tell management what they think, which is absolutely the opposite of what management
actually wants them to do. So you get all of these double messages and double binds that you’re
putting the workforce in, of saying we want your input but when we get it you’re punished or held
back because of it. We want your input, but when you give it, you’re not a team player, because
team players only give us things that make us feel better.34
In the past, Boeing engineers with safety concerns could and would raise them even if doing so held up
progress until the issue was resolved.35 Carrie Conway was a 62-year-old hourly worker in 2012 with
26 years of experience with Boeing when she noted the difficulty she faced in presenting quality issues
to her boss while working on the 787 family of aircraft:
One day I’m working, and my lead brought all the parts out of storage. They were all wrapped up
in a paper, brown bag. This was a Monday morning, so all the tables were stacked with the
necessary parts to do whatever we were working on. So I started unwrapping mine, and you could
see chips in it, little tiny holes. And there were areas where you could see corrosion—corrosion has
a different look to it. So the first part I took to my lead, and I said, ‘Look at this.’ He said, ‘Oh,
can’t use that.’ Well, it took four parts to get one that I could use. When the inspector came in, I
called him over—I’d saved one of them. I said, ‘I want you to look at this part,’ and he goes, ‘Well,
that’s not acceptable,’ and I said, ‘Well, we got a whole warehouse full of them, you know. I had
to get to the fourth part to find an acceptable one.’
He went into the warehouse, started checking all these parts, and he came back and stopped
production. He figured about two-thirds of this order was pitted and corroded. Before the day was
over, his boss and my boss were standing on one side of the table. My inspector and I were standing
on the other side of the table. My boss was telling me I have to use these parts, and both of us said,
‘No, we’re not doing that.’ It took months. I’m not sure even when, because I ended up getting
transferred out of the building over it.36
May 2, 2023 7
Enter Airbus
In the 1960s, European nations and aircraft companies felt the need to respond to U.S. industry
dominance in commerical aviation. Under Anglo-French-German leadership, many smaller European
aircraft makers were consolidated, and a new player entered the market: Airbus Industrie. Other
European nations joined in, with design and assembly spread across the Continent. The first Airbus,
the A300, was designed to be more efficient and less expensive than similar medium-sized American
jets, including Boeing’s. Yet Airbus had a rocky start. The first A300 flew in 1972, but by 1979 Airbus
had only delivered 26 aircraft, less than a tenth of Boeing’s 286 deliveries.
Nevertheless, Airbus steadily grew, expanding its product line and sales. Soon Boeing and Airbus
dominated the industry in a global duopoly, with smaller niche players such as Bombardier and Embraer
trailing behind.
In 1999, Boeing still supplied the majority of the market, delivering 573 new jets, compared to Airbus’s
294. But Airbus continued to build its product line and organizational, engineering, operational, and
marketing capabilities, successfully acquiring new customers. Airbus continued to cut into Boeing’s
market share and in 2003 delivered 305 new jets, outpacing Boeing’s deliveries for the first time.
Exhibit 2 shows aircraft deliveries and orders for Boeing and Airbus through 2019.
The 737 vs. the A320

Boeing and Airbus competed for the same customers and the same routes in every region of the world.
Each offered a family of aircraft spanning the entire market. Competition was intense. A major battle
involved Boeing’s 737 and Airbus’s A320 models. Author of Boeing versus Airbus John Newhouse
explained:
The low end of the market is covered by two single-aisle airplanes, Boeing’s 737 and Airbus’s
A320. They are roughly the same size, seating up to 190 people. Both are exceptionally successful,
having exceeded the most optimistic forecasts of their respective companies. The 737 is older and
has been steadily improved over the years. But the A320, a newer, slightly larger, and more
comfortable aircraft, is outselling the 737, not least in the low-cost market Boeing had
monopolized. 37
In December 2004, with orders surging for Airbus’s A320s, Boeing shook up its sales force, replacing
its head of sales.38
The success of the A320 raised the stakes in Boeing’s battle with Airbus, including the decision on
whether to develop and build a new aircraft. Newhouse wrote:
The decision to build a new LCA (Large Commercial Aircraft) alerts boards of directors and
shareholders to impending deficits, big ones. Indeed, the costs of any such venture can amount to
May 2, 2023 8
betting the company, literally. A single deal with one airline can determine the fate of an airplane
on which billions of dollars have been invested. And the returns, if any, lie far ahead.39
The 737 MAX Program

Boeing’s products cover the entire commercial market. The 737 family had an average range of 4,000
miles and seating capacity of approximately 130 to 220 passengers. Exhibit 3 shows the Boeing 737
aircraft family from 1967 to 2017. Other families consisted of larger planes with longer ranges. Prices
varied from $89 million for the 737-700 to $442 million for the 777-9 (Exhibit 4). The average price
of the 737 MAX 8 was $122 million.40
The Boeing Commercial Airplanes (BCA) division launched the 737 MAX project in August 2011.
Within the 737 MAX family, the MAX 8 was the first to market, with the first delivery in May 2017.
The schedule was compressed compared to other development projects. Exhibit 5 shows select Boeing
Commercial Airplanes “Go Ahead” and “Initial Delivery” schedules for several aircraft development
projects. Exhibit 6 shows a timeline for the MAX 8 project including FAA certification actions.
The 737 MAX family came to market with high expectations for Boeing’s sales and profits, and those
expectations were soon exceeded. In 2017, Boeing led the industry in deliveries for the sixth
consecutive year, with the 737 MAX family earning the distinction of “the fastest-selling airplane in
Boeing history.”41 Boeing featured the MAX in its 2018 Annual Report:
The 737 is designed to be 14 percent more fuel efficient than today’s most efficient Next-
Generation 737s [launched in 1997] and 20 percent more fuel efficient than the original Next-
Generation 737s when they entered service. With new CFM International LEAP-1B engines, a
more efficient structural design, advanced technology winglets, and lower maintenance
requirements, the entire MAX family has been designed to offer exceptional performance,
flexibility, and efficiency.42
The 737 family continues to exceed expectations in the single-aisle market, with 745 net new orders
received and a company record of 529 airplanes delivered in 2017. Our 737 backlog now stands at
more than 4,600 airplanes.43
Exhibits 7 and 8 present Boeing’s financial performance during this period.
Anatomy of Two Disasters

In 2010, Airbus announced the development of the A320neo, a fuel-efficient plane that quickly captured
the attention of many carriers. In early 2011, Boeing’s CEO, W. James McNerney, received a phone
call from the head of American Airlines indicating that the company, a long-time customer, was
considering placing an order for hundreds of A320neo airplanes from Airbus.44 For Boeing, the stakes
were high. The American Airlines account represented billions in future revenue, and the loss of such
May 2, 2023 9
a prominent customer could threaten Boeing’s market-share dominance. At the time, Boeing was
considering the development of a brand-new passenger airplane, with an expected development cycle
time of 10 years. To respond to the threat, McNerney and his team scrapped the plan to develop a new
plane, opting instead to update the 737. McNerney told a group of Wall Street analysts: “All of us have
gotten religion. Every 25 years a big moonshot—accumulating technologies and taking risks on some
additional ones and then producing a 707 or a 787—that’s the wrong way to pursue this business… .
The more-for-less world will not let you pursue moonshots.”45
The Boeing team hustled into action, launching the 737 MAX project three months after learning of
American Airlines’ potential defection. An engineer on the 737 MAX flight control team noted, “[The
company wasn’t] going to stand by and let Airbus steal market share.” 46 Months behind Airbus, Boeing
found itself in catch-up mode. As The New York Times reported, “The pace of work on the 737 MAX
was frenetic. … Engineers were pushed to submit technical drawings and designs at roughly double the
normal pace. Facing tight deadlines and strict budgets, managers quickly pulled workers from other
departments when someone left the MAX project.”47 As a Boeing engineer said, “The timeline was
extremely compressed. It was just go, go, go.”48 Management installed a countdown clock in a
conference room where program meetings were held as a constant reminder of “the value of a day.”49
According to a designer who worked on the 737 MAX flight controls, the design team at times found
itself producing 16 technical drawings a week—double the normal pace.50 A technician who assembled
wiring on the 737 MAX reported that many of the blueprints designers provided him were
uncharacteristically sloppy, reporting that management told him “instructions for wiring would be
cleaned up later in the process.”51 Mark Rabin, who worked in a flight test group that supported the 737
MAX, noted, “It was a climate that didn’t reward people willing to buck managers.”52
Behind the scenes, however, employees working on the 737 MAX shared, among themselves, concerns
about the hurried timeline and resulting slip-shod work. Some of their misgivings were revealed after
Boeing turned over internal texts and emails to the U.S. Department of Justice and Congressional
investigators.53 In an email exchange in May 2018, employees working on the 737 MAX lamented the
pressure they were under to quickly approve a large number of open design review issues (DRs):54
The conversation turned darker:
May 2, 2023 10
Prior to the crashes, employees expressed their disdain for the way in which they perceived
management was undermining quality and safety. As one wrote,55
The Origin of MCAS

To compete head-to-head with Airbus’s 320, the 737 MAX needed larger, more powerful, and more
efficient engines. Boeing chose a new engine: the CFM LEAP-1B. However, as an analyst explained,
the new engine required a number of critical design changes:
Because they’re bigger, and because the 737 sits so low to the ground (a deliberate 737 design
choice to let it serve small airports with limited ground equipment), Boeing moved the engines
slightly forward and raised them higher under the wing. (If you place an engine too close to the
ground, it can suck in debris while the plane is taxiing.) That change allowed Boeing to
accommodate the engines without completely redesigning the 737 fuselage—a fuselage that hasn’t
changed much in 50 years.56
Exhibit 9 compares the engine size and placement for the 737 NG and 737 MAX.
In 2012, early in the design phase, engineers gathered at Boeing’s transonic wind tunnel in Seattle to
test the jet’s aerodynamics. Using a scale model with a wingspan comparable to that of an eagle57, they
discovered that the plane’s nose tended to pitch up during a specific “extreme maneuver.”58 As MIT
aeronautics professor R. John Hansman explained, “As I understand it, at high angles of attack the
nacelles—which are the tube-shaped structures around the [engine] fans—create aerodynamic
lift. Because the engines are further forward, the lift tends to push the nose up—causing the angle of
attack to increase further. This reinforces itself and results in a pitch-up tendency which if not corrected
can result in a stall.”59 If that self-reinforcing feedback caused the nose to pitch up high enough to cause
the aircraft to stall, the result could be catastrophic.
May 2, 2023 11
The engineers worked to devise a countermeasure to what they viewed as a highly unlikely occurrence
and, after several attempts, developed new software intended to respond to the problem automatically.
The Maneuvering Characteristics Augmentation System or MCAS was originally designed to activate
only if the flight management computer detected both a high angle of attack (AOA) and high vertical
G-force. A high AOA indicated the nose was pitched up, and high G-force meant it was accelerating
upward. If triggered, MCAS would automatically move the horizontal stabilizer (at the tail of the
aircraft) to push the nose of the plane down (Exhibit 10). MCAS was created as a safety system
intended to correct what was originally believed to be a rare, but potentially dangerous, pitch-up
condition without requiring any pilot action.
Based on tests conducted during the design phase, engineers believed that the potential runaway pitch-
up condition would only occur during certain high-speed maneuvers. Consequently, MCAS was
originally designed to move the stabilizer 0.6 degrees over about 10 seconds, enough, at high speed, to
bring the nose down to a safe trim position. Further testing, however, revealed that the same pitch-up
could also happen at low speeds.60 To address this discovery, MCAS was reprogrammed to operate at
low speeds such as after takeoff and during the climb to cruising altitude. Because lower speeds required
more aggressive control actions, the modified software enabled MCAS to move the stabilizer down 2.5
degrees in about 10 seconds, more than four times faster. Additionally, low-speed maneuvers would
not generate high G-forces, so the G-force condition required to engage MCAS was dropped.61 MCAS
was designed to trigger again if the high AOA condition was still detected after five seconds.
Redundancy Made Optional

Engineers build redundancy into their systems to avoid “single points of failure,” in which the failure
of a single component causes an accident or stops the system from operating. Redundancy is standard
practice for critical components and systems in commercial aircraft. The revised MCAS, which no
longer required both a high AOA and high G-force to be triggered, now depended only on AOA data,
provided by AOA sensors, small vanes located near the nose of the aircraft. The sensors, however, can
go out of alignment or fail altogether due to mechanical and electrical faults, improper maintenance,
icing, bird strikes, and other causes. In 2019, CNN reported that since 2004, the FAA had received at
least 216 reports of AOA sensors failing or having to be repaired, replaced, or adjusted. The FAA had
also issued two directives involving AOA sensors for various Boeing aircraft models before the 737
MAX was released.62
To provide redundancy, the 737 MAX had two AOA sensors, one on each side of the nose. (The Airbus
320 and some other Boeing aircraft have three sensors to provide double redundancy.) However, MCAS
was designed to use data from only one of the sensors (alternating after each flight). Relying on just
one sensor created a single point of failure hazard. To address the possibility that the single sensor in
use failed or gave erroneous readings, the designers created a cockpit display showing the readings
May 2, 2023 12
from both AOA sensors. The display was programmed to activate a cockpit “AOA DISAGREE” alert
if the readings differed by more than a few degrees (Exhibit 11).
However, whereas MCAS was activated automatically, without pilot action, the cockpit crew would
have to notice and act on an AOA DISAGREE alert. Further, the AOA indicator and disagree alert
were not standard equipment on the 737 MAX, although the AOA indicator had been on earlier models.
Boeing offered them as “add ons” at additional cost. Neither feature was required by regulators. Lion
Air, Ethiopian Airlines, and other carriers, including Southwest Airlines, had chosen not to pay extra
for these features. According to government and industry officials, “Boeing Co. didn’t tell Southwest
Airlines Co. and other carriers when they began flying its 737 MAX jets that a safety feature found on
earlier models that warns pilots about malfunctioning sensors had been deactivated.”63
Boeing issued an explanation:
The disagree alert was intended to be a standard, stand-alone feature on MAX airplanes. However,
the disagree alert was not operable on all airplanes because the feature was not activated as
intended.
The disagree alert was tied or linked into the angle of attack indicator, which is an optional feature
on the MAX. Unless an airline opted for the angle of attack indicator, the disagree alert was not
operable.64
Because MCAS relied on data from only one of the AOA sensors, 737 MAX planes that did not have
the optional AOA indicator and disagree alert would not directly report a problem with the sensor. In
fact, as documented in the 322-page report on the Lion Air crash issues by Indonesia’s Aviation Safety
Agency:
The sensor, provided second-hand by a Florida-based company called Xtra Aerospace, was not
calibrated correctly nor did Lion Air maintenance crews detect the error when they installed the
sensor the day before the crash (31 pages were missing from the aircraft’s maintenance log at the
time). The fault in the sensor meant that it was feeding incorrect information to MCAS.
The 737 MAX has a warning light that would have shown that the faulty sensor was disagreeing
with the working sensor on the other side of the aircraft’s nose. But a software bug meant that the
warning light was working only if Lion Air purchased a package of equipment Boeing sold only as
an option.65
FAA Certification
As Boeing engineers worked night and day to ready the 737 MAX for production, others took steps, at
the direction of their managers, to get the FAA to fast-track the certification process. The formal
certification process for the 737 MAX 8 began in 2012. Under FAA protocols, “only the significant
May 2, 2023 13
differences” between the 737 MAX 8 and the previous model required certification.66 Boeing argued
that the differences between the 737 MAX and the previous 737 NGs (next generation) were not
significant and positioned MCAS as a minor addition to existing speed trim functionality, as revealed
in minutes of a meeting on June 7, 2013:67
Boeing succeeded in positioning MCAS as a minor modification to earlier models, as detailed in a 2020
report by the U.S. Department of Transportation Office of the Inspector General:
Early in the process, Boeing included limited information in initial briefings to FAA on the MAX’s
flight control software, MCAS, which subsequently has been cited as a contributing or potentially
contributing factor in both accidents. However, Boeing presented the software as a modification to
the existing speed trim system that would only activate under certain limited conditions. As such,
MCAS was not an area of emphasis in FAA’s certification efforts and therefore did not receive a
more detailed review or discussion between FAA engineers and Boeing. Instead, FAA focused its
efforts on areas it identified as potentially high risk, such as the aircraft’s larger engines, fly-by-
wire spoilers, and landing gear changes. As a result, FAA was not well positioned to mitigate any
risks related to MCAS.68
Meanwhile, in 2016, about one-third of the way through testing, Boeing engineers increased the
stabilizer nose-down deflection each time MCAS was activated at low speeds, from 0.6 degrees to 2.5
degrees, and removed the G-force condition initially required to trigger MCAS. An analyst explained:
“On the stabilizer, maximum nose down is about 4.7 degrees away from level flight. So with the new
May 2, 2023 14
increased authority to move the stabilizer, just a couple of iterations of the system could push it to that
maximum.”69
Mark Forkner, chief technical pilot for the 737 MAX, was apparently not informed about these changes,
but discovered them in the flight simulator, complaining about it to a colleague on November 16,
2016:70
According to the Inspector General’s report, Boeing failed to report the MCAS changes to the FAA
during the certification process:
During this timeframe, Boeing also began modifying MCAS as a result of flight testing, including
significantly increasing MCAS’s ability to lower the aircraft’s nose automatically under certain
conditions. However, Boeing did not submit certification documents to FAA detailing the change.
FAA flight test personnel were aware of this change, but key FAA certification engineers and
personnel responsible for approving the level of airline pilot training told us they were unaware of
the revision to MCAS. Boeing did not communicate to FAA the formal safety risk assessments
related to MCAS until November 2016 and January 2017, more than 4 years into the 5-year
certification process… . Moreover, Boeing’s safety analysis did not assess system-level safety risks
as catastrophic; thus, Boeing designed MCAS to rely on data from a single aircraft sensor rather
than including redundancy, which would have reduced risk.71
Pilot Training
Boeing also sought to avoid the need for extensive pilot training, in particular training in a 737 MAX
flight simulator. Simulation training was expensive and time consuming for airlines, and Boeing feared
it might limit sales. One engineer, who helped design the 737 MAX cockpit and spent 19 years at
Boeing, said the company set a ground rule for engineers: “Limit changes to hopefully avert a
requirement that pilots spend time training in a flight simulator before flying the MAX. Any designs
we created could not drive any new training that required a simulator. That was a first.”72
May 2, 2023 15
Throughout the project, Boeing employees worked to persuade the FAA, their counterparts in other
nations, and customer airlines that MCAS and other changes were minor so as to avoid a requirement
for simulator training for experienced 737 pilots. Forkner repeatedly argued that there were no
significant differences between the 737 MAX and the prior 737 NG. He maintained that computer-
based training (CBT) was sufficient. As he wrote in an email to a customer:73
In their efforts to persuade customers and regulators that simulation training on the 737 MAX wasn’t
necessary and that CBT would be sufficient, Forkner and others referred to using “Jedi mind tricks.”i
On June 7, 2017, Forkner wrote:74
i
As defined on the StarWars.com website, a Jedi mind trick is when an experienced Jedi (heroic protagonists of the Star Wars franchise) uses
the Force to implant a suggestion in the minds of those they encounter, encouraging them to comply with the Jedi’s wishes.
May 2, 2023 16
On December 12, 2017, more Jedi references were made. The DGCA referred to the Directorate
General of Civil Aviation in India:75
Boeing proposed and obtained a “Level B” training plan requiring only CBT for pilots already certified
on prior 737s. As described in the Inspector General’s report:
In 2016, FAA and Boeing began certification flight testing to determine the aircraft’s compliance
with FAA’s requirements. In addition, FAA’s Flight Standards Service conducted separate tests
and subsequently approved a training plan proposed by Boeing—known as Level B training—for
737 MAX pilots who were already qualified to fly the Boeing 737-800. This outcome aligned with
Boeing’s overarching goal of achieving a common type ratingii for pilots moving from the NG
series to the MAX and keeping costs down by avoiding simulator training for 737 MAX pilots.
Pilot response to automated MCAS activation was not included in the required training. In March
2017, FAA issued an ATCiii to Boeing for the 737 MAX 8, which began flying passengers later
that year.76
Inside Boeing, provisional FAA approval of Level B training was cause for celebration by at least one
member of the product marketing team, who emailed Mark Forkner and others on August 16, 2016:77
ii
A type rating is an endorsement on the pilot certificate indicating that the pilot has completed the required training and testing for a
specific make, type, and/or series of aircraft (for example the Boeing 747-400). From
https://www.oig.dot.gov/sites/default/files/F.A.A.%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Fin
al%20Report.pdf, accessed December 17, 2020.
iii
An Amended Type Certificate (ATC) is issued for aircraft deemed to be “derivatives of already-certificated aircraft.”
May 2, 2023 17
Absent simulator training, 737 MAX pilots were limited to learning about important differences
between the 737 MAX and legacy 737 aircraft through “about an hour’s worth of iPad-based training,”
reported one analyst.78 Some employees believed the training was inadequate and shared their concerns
with one another, as in this February 2018 email exchange:79
Many pilots interviewed in the wake of the accidents, including 737 MAX 8 pilots from Southwest
Airlines, expressed no prior knowledge of MCAS or related procedures required to manage or override
the system should it be activated. “We flat out deserve to know what is in our airplanes,” said a member
of the Allied Pilots Association.80
The Indonesian National Transportation Safety Committee (NTSC), which was investigating the Lion
Air crash, determined that inadequate training and flight manual descriptions were contributing factors
to the accidents. The reported concluded, “The absence of guidance on MCAS or more detailed use of
trim in the flight manuals and in-flight crew training made it more difficult for flight crews to properly
respond.”81
Aftermath
In April 2019, shortly after the crash of Ethiopian Airlines Flight 302, CEO Muilenburg established a
committee at the board level to review the company’s aircraft design and development policies and
processes. The recommendations reportedly included flipping the reporting structure so that senior
engineers would report “primarily” to Boeing’s chief engineer, and “secondarily” to business unit
leaders. The committee also recommended the creation of a new safety group to ensure that the
company’s various efforts had adequate independence and were working together and sharing
May 2, 2023 18
information effectively. The new group would report to senior Boeing leadership, as well as to a new
permanent board committee focused on aerospace safety. And, consistent with the systems approach to
safety, the committee recommended that Boeing re-examine cockpit design and operation to ensure
that new Boeing planes were designed for the next generation of pilots, including those with less
training.82
In May 2019, CNN reported that Boeing proposed that pilots attend a CBT program before they
resumed flying the 737 MAX. The program did not involve hands-on simulator training.83 By January
2020, however, Boeing reversed course and began recommending that pilots undergo simulator training
before they resumed flying the 737 MAX.84 In November, the FAA issued new regulations requiring
special training, including ground and flight training in a full flight simulator for pilots operating the
737 MAX.85
Multiple investigations including criminal inquiries followed the crashes. On October 19, 2019, the
first anniversary of the Lion Air crash, CEO Muilenburg, who had just been removed as chair of
Boeing’s board, was called to testify before a U.S. Senate panel. Families of the passengers were in
attendance, holding up photos of those who had been killed. Asked why Boeing did not ground the 737
MAX after the Lion Air crash, Muilenburg responded, “If we could go back, we would make a different
decision.”86
The following week, Boeing fired Kevin McAllister, CEO of Boeing Commercial Airplanes. Then, in
December 2019, Boeing’s board fired CEO Muilenburg, replacing him with David Calhoun, who had
been named chair of the board following Muilenburg’s removal. Calhoun was a veteran of General
Electric and had served on Boeing’s board since 2009.
FAA Safety Personnel Survey

In August 2020, the media reported on results from a survey of FAA safety personnel. Respondents
indicated they “faced ‘strong’ external pressure from industry.” The survey quoted one employee as
saying that the message was, “Don’t rock the boat with Boeing.” Nearly half of survey respondents
disagreed that the FAA “makes data-driven decisions on safety regardless of external pressure.” Agency
employees stated that they could be “over-powered in meetings with industry.” One employee said: “It
feels like we are showing up to a knife fight with Nerf weapons. It is a challenge to be an equal match
with Boeing in the meetings/conversations.”87
When the results became public, the FAA’s Ali Bahrami, an associate administrator for safety, told his
team he was “troubled by the findings and would work to rebuild trust.”88 Earlier in his career, Bahrami
led the FAA’s Transport Airplane Directorate in Seattle, and, reportedly, pursued “the FAA’s new
business mantra with gusto.” When FAA “specialists raised technical issues, they’d be told to stand
down—often by Bahrami himself.”89 Under pressure from many in Congress, victims’ families, FAA
staff, and others, Bahrami announced his retirement in June 2021.
May 2, 2023 19
Financial and Reputational Damage

Estimates of the financial and reputational damage to Boeing, its shareholders, employees, suppliers,
and the U.S. and global economy varied. One concluded that Boeing faced over $21 billion in direct
costs and $67 billion in lost sales of 1,200 aircraft. Direct costs included:
• $8.6 billion in compensation to customers for having their aircraft grounded;
• $5 billion for unusual costs of production;
• $6.3 billion for increased costs of the 737 MAX program;
• $600 million for aircraft storage, pilot training, and software updates; and,
• An estimated $500 million in settlements to victims’ families.90
There were also indirect costs, including the costs of organizational changes, increased regulatory
oversight, and higher capital costs due to downgrades in Boeing’s debt ratings and drops in its stock
price. Both Boeing and Airbus experienced sharp declines in their share prices once COVID-19 hit.
Airbus’s stock began to recover as people started to travel again in early 2021. But by mid August 2022,
Boeing’s shares were 52% below their level just before the first 737 MAX crash. Airbus shares were
20% higher (Exhibit 12).
Conclusion
By mid 2022, air traffic was rebounding and the outlook for the aircraft industry had turned up. Yet
Boeing, the industry, the U.S., and other nations continued to face profound and challenging questions:
How could the tragedies have been avoided? What prevented engineers and other Boeing employees
from making their voices heard to managers who could have changed the course of the 737 MAX’s
design and development? Why did so many otherwise responsible employees and managers fail to stand
up for quality and safety under the pressure to hit aggressive schedule and cost targets? Could Boeing,
and other firms, be trusted to self-regulate? What reforms were needed at the FAA and other agencies
to assure their independence and effectiveness? What ongoing oversight of the industry—and the
regulators—would be needed?
Meanwhile, the families of the 346 victims continued to grieve.
May 2, 2023 20
Exhibit 1 U.S. General Aviation Safety Data – 1975 to 2018
Note: Accidents on foreign soil and in foreign waters are excluded.
Source: Bureau of Transportation Statistics, “U.S. General Aviation Safety Data,” https://www.bts.gov/content/U.S.-general-
aviationa-safety-data.
May 2, 2023 21
Exhibit 2 Commercial Aircraft Orders (top) and Deliveries (bottom) for Boeing and Airbus*
*Note: Data through 2019 (before COVID-19 pandemic impact).
Source: Wikipedia, https://en.wikipedia.org/wiki/Competition_between_Airbus_and_Boeing#cite_note-Time_Period_Reports-

107, accessed 24 October 2020. See also https://www.statista.com/statistics/264493/airbus-worldwide-aircraft-deliveries/ and
https://www.statista.com/statistics/273968/number-of-delivered-aircraft-by-boeing/. All cite Boeing and Airbus as the underlying
sources for the data.
May 2, 2023 22
Exhibit 3 Boeing 737 Family of Aircraft – 1967 to 2017
Source: U.S. Department of Transportation, Office of Inspector General, “Timeline of Activities Leading to the Certification of
the Boeing 737 MAX 8 Aircraft and Actions Taken After the October 2018 Lion Air Accident,”
https://www.oig.dot.gov/sites/default/files/F.A.A.%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline
%20Final%20Report.pdf.
Exhibit 4 Boeing Aircraft Pricing Data
Average prices for Boeing aircraft as of March

2022, by type (in million U.S. dollars)
737-700 89.10
737 MAX 7 99.70
737-800 106.10
737-900ER 112.60
737 MAX 8 121.60
737 MAX 200 124.80
737 MAX 9 128.90
737 MAX 10 134.90
767-300ER 217.90
767-300 Freighter 220.30
787-8 248.30
787-9 292.50
777-200ER 306.60
787-10 338.40
777-200LR 346.90
777 Freighter 352.30
777-300ER 375.50
777-8 410.20
747-8 418.40
747-8 Freighter 419.20
777-9 442.20
Source: Statista, “Airbus and Boeing,” https://www.statista.com/statistics/273941/prices-of-boeing-aircraft-by-type/, accessed

November 9, 2022. Originally sourced from www.boeing.com.
May 2, 2023 23
Exhibit 5 Boeing Commercial Airplanes “Go Ahead” and “Initial Delivery” Schedules
Source: Boeing Company 2019 Annual Report.
May 2, 2023 24
Exhibit 6 Timeline of Significant Events for the Certification of the Boeing 737 MAX 8
Source: U.S. Department of Transportation, Office of Inspector General, “Timeline of Activities Leading to the Certification of
the Boeing 737 MAX 8 Aircraft and Actions Taken After the October 2018 Lion Air Accident,” p. 11.
https://www.oig.dot.gov/sites/default/files/F.A.A.%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline
%20Final%20Report.pdf.
May 2, 2023 25
Exhibit 7 Boeing and Airbus Revenue and Profit, 1995–2021
Revenue
Net Income
Source: Orbis.
May 2, 2023 26
Exhibit 8 Cumulative Five-Year Returns
Source: Boeing 2018 Annual Report.
May 2, 2023 27
Exhibit 9 737 NG Engine (left) versus the 737 MAX Engine (right)
Source: U.S. Department of Transportation Inspector General Report,

https://www.oig.dot.gov/sites/default/files/FAA%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Final%20Report.pdf, p. 6.
May 2, 2023 28
Exhibit 10 Overview of MCAS

May 2, 2023 29
Exhibit 11 AOA Disagree Alert and AOA Indicator

May 2, 2023 30
Exhibit 12 Boeing and Airbus Stock Prices
Index: Share prices on 10/22/2018 = 100.
Source: Data from Yahoo Finance. Weekly closing price, adjusted for splits, dividends, and capital gains distributions.
May 2, 2023 31
Endnotes
1
Megan Specia, “What We Know About the Lion Air Flight 610 Crash,” The New York Times
(https://www.nytimes.com/2018/11/09/world/asia/air-lion-crash-610.html, accessed July 3, 2020).
2
Joint Authorities Technical Review, “Boeing 737 Max Flight Control System: Observations, Findings, and
Recommendations,” October 11, 2019
(https://www.F.A.A.gov/news/media/attachments/Final_JATR_Submittal_to_F.A.A._Oct_2019.pdf, accessed
September 15, 2020).
3
https://boeing.mediaroom.com/news-releases-statements?item=130336.
4
U.S. Department of Transportation, Office of Inspector General, “Timeline of Activities Leading to the
Certification of the Boeing 737 MAX 8 Aircraft and Actions Taken After the October 2018 Lion Air
Accident,” June 29, 2020
(https://www.oig.dot.gov/sites/default/files/F.A.A.%20Oversight%20of%20Boeing%20737%20MAX%20Ce
rtification%20Timeline%20Final%20Report.pdf, accessed December 17, 2020).
5
Dennis Muilenburg interview on Fox Business, November 13, 2018.
https://www.foxbusiness.com/business-leaders/boeing-ceo-our-airplanes-are-safe, accessed August 15, 2022.
6
Peter Robison, Flying Blind: The 737 Max Tragedy and the Fall of Boeing. New York: Doubleday, 2021, p.
5.
7
Ibid, p. 194.
8
Hadra Ahmed, Nori Hadra Ahmed, et. al., “Ethiopian Airlines Plane Is the 2nd Boeing Max 8 to Crash in
Months,” The New York Times, March 10, 2019
(https://www.nytimes.com/2019/03/10/world/africa/ethiopian-airlines-plane-crash.html, accessed December
15, 2020).
9
Ibid.
10
Dominic Gates, “How Much Was Pilot Error a Factor in the Boeing 737 MAX Crashes?”, The Seattle
Times, May 15, 2019 (https://www.seattletimes.com/business/boeing-aerospace/how-much-was-pilot-error-a-
factor-in-the-boeing-737-max-crashes/, accessed November 10, 2020).
11
U.S. Department of Transportation Office of Inspector General, “Weaknesses in FAA’s Certification and
Delegation Processes Hindered Its Oversight of the 737 MAX 8,” February 23, 2021
(https://www.oig.dot.gov/sites/default/files/F.A.A.%20Certification%20of%20737%20MAX%20Boeing%20
II%20Final%20Report%5E2-23-2021.pdf, accessed August 15, 2022).
12
Dominic Gates, “Boeing Wins Zero New Orders, Delivers Few Jets and Sees 737 MAX Backlog Shrink,”
The Seattle Times, November 10, 2020 (https://www.seattletimes.com/business/boeing-aerospace/boeing-
wins-zero-new-orders-delivers-few-jets-and-loses-more-737-maxs/, accessed December 15, 2020).
13
FAA Updates on Boeing 737 MAX, https://www.F.A.A.gov/news/updates/?newsId=93206, accessed
November 18, 2020.
May 2, 2023 32
14
Boeing. “Enter Air to Purchase up to Four Boeing 737-8 Jets (https://boeing.mediaroom.com/news-
releases-statements?item=130724, August 19, 2020. Accessed August 15, 2022).
15
International Civil Aviation Organization, https://www.icao.int/annual-report-
2019/Documents/ARC_2019_Air%20Transport%20Statistics.pdf#search=2019%20air%20transport%20statis
tical%20results, accessed August 18, 2022.
16
International Civil Aviation Organization, “State of Air Transportation in 2018 and the Role of Air
Transport Connectivity,” Istanbul, Turkey, July 10, 2019 (https://www.icao.int/Meetings/aviation-data-
analysis-
seminar/Presentations/State%20of%20Air%20Transport%20in%202018%20and%20the%20Role%20of%20
Air%20Transport%20Connectivity.pdf#search=Presentation%20of%202018%20Air%20Transport%20Statist
ical%20Results%20page, accessed December 15, 2020).
17
Boeing Statistical Summary of Commercial Jet Airplane Accidents, Worldwide Operations, 1959–2018
(https://www.boeing.com/resources/boeingdotcom/company/about_bca/pdf/statsum.pdf, accessed July 27,
2020).
18
Federal Aviation Administration, “Human Error and Commercial Aviation Accidents: A Comprehensive,
Fine-Grained Analysis Using HFACS,” July 2006
(https://www.F.A.A.gov/data_research/research/med_humanfacs/oamtechreports/2000s/media/200618.pdf,
accessed July 23, 2020).
19
Nancy Leveson, Engineering a Safer World: Systems Thinking Applied to Safety. Cambridge, MA: The
MIT Press, 2016.
20
James Reason, “Human error: models and management.” BMJ, 18 March 2000, 320(7232): 768-770. doi:
10.1136/bmj.320.7237.768https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1117770/, accessed August 15,
2022.
21
John Newhouse, Boeing versus Airbus, First Vintage Books, January 2008, p.3.
22
Fortune Magazine, “Fortune 500 Database,”
https://archive.fortune.com/magazines/fortune/fortune500_archive/full/1990/.
23
Ibid.
24
Ibid.
25
Boeing, “Brief History and Chronology,” https://www.boeing.com/history/, accessed July 20, 2020.
26
Leon Grunberg and Sarah Moore, Emerging from Turbulence, Rowman & Littlefield, 2016, p. 2.
27
Ibid. p. 2.
28
Ibid, pp. 2-3.
May 2, 2023 33
29
Patricia Callahan, “So Why Does Harry Stonecipher Think He Can Turn around Boeing?,” The Chicago
Tribune, February 29, 2004 (https://www.chicagotribune.com/chi-0402290256feb29-story.html, accessed
December 15, 2020).
30
Brian Knowlton, “Boeing to Buy McDonnell Douglas,” The New York Times, December 16, 1996
(https://www.nytimes.com/1996/12/16/news/boeing-to-buy-mcdonnell-douglas.html, accessed December 15,
2020).
31
Edward S. Greenberg, Leon Grunberg, Sarah Moore, Patricia B. Sikora, Turbulence, Yale University Press,
2010, pp. 48-53.
32
Edward S. Greenberg, Leon Grunberg, Sarah Moore, Patricia B. Sikora, Turbulence, Yale University
Press, 2010, p. 14.
33
John Newhouse, Boeing versus Airbus, First Vintage Books, January 2008, p. 13.
34
Leon Grunberg and Sarah Moore, Emerging from Turbulence, Rowman & Littlefield, 2016, pp. 34-35.
35
Peter Robison, Flying Blind: The 737 Max Tragedy and the Fall of Boeing. New York: Doubleday, 2021,
pp. 142-143.
36
Leon Grunberg and Sarah Moore, Emerging from Turbulence, Rowman & Littlefield, 2016, pp. 42-43.
37
John Newhouse, Boeing versus Airbus, First Vintage Books, January 2008, p. 7.
38
Ibid.
39
Ibid, prologue, p. x.
40
Statista, “Airbus and Boeing,” Originally sourced from Boeing Company Website, www.boeing.com.
41
Boeing 2017 Annual Report, pp. 3-4
(https://s2.q4cdn.com/661678649/files/doc_financials/annual/2017/2017-Annual-Report.pdf, accessed
August 4, 2020).
42
Boeing 2018 Annual Report, p. 129
(https://s2.q4cdn.com/661678649/files/doc_financials/annual/2019/Boeing-2018AR-Final.pdf, accessed
August 4, 2020).
43
Boeing 2017 Annual Report, p. 3 (https://s2.q4cdn.com/661678649/files/doc_financials/annual/2017/2017-
Annual-Report.pdf, accessed August 4, 2020).
44
David Gelles, Natalie Kitroeff, Jack Nicas, and Rebecca R. Ruiz, “Boeing was ‘Go, Go, Go’ to beat Airbus
with the 737 Max, The New York Times, March 23, 2019
(https://www.nytimes.com/2019/03/23/business/boeing-737-max-crash.html, accessed August 20, 2020).
45
Steve Wilhelm, “Boeing’s McNerney: Just Say No to Betting the Company on Technological Leaps,”
Puget Sound Business Journal, May 21, 2014
May 2, 2023 34
(https://www.bizjournals.com/seattle/news/2014/05/21/boeings-mcnerney-just-say-no-to-betting-the.html,
accessed October 4, 2022).
46
47
Ibid.
48
Ibid.
49
p. 135.
50
51
Ibid.
52
pp. 142-143.
53
https://int.nyt.com/data/documenthelper/6653-internal-boeing-
communications/606e3fda752a935bc0df/optimized/full.pdf#page=103, accessed August 18, 2022.
54
communications/606e3fda752a935bc0df/optimized/full.pdf#page=68, accessed October 7, 2022.
55
56
Kent German, “2 Years After Being Grounded, the Boeing Max Is Flying Again,” cnet, June 19, 2021
(https://www.cnet.com/news/boeing-737-max-8-all-about-the-aircraft-flight-ban-and-investigations/ accessed
August 30, 2020).
57
Dominic Gates and Mike Baker, “The Inside Story of MCAS: How Boeing’s 737 MAX System Gained
Power and Lost Safeguards,” The Seattle Times, June 24, 2019
(https://www.seattletimes.com/seattle-news/times-watchdog/the-inside-story-of-mcas-how-boeings-737-max-
system-gained-power-and-lost-safeguards/, accessed August 4, 2020).
58
Power and Lost Safeguards,” The Seattle Times, June 24, 2019 (https://www.seattletimes.com/seattle-
news/times-watchdog/the-inside-story-of-mcas-how-boeings-737-max-system-gained-power-and-lost-
safeguards/, accessed August 17, 2020).
May 2, 2023 35
59
Peter Cohan, “MIT Expert Highlights ‘Divergent Condition’ Caused by 737 Max Engine Placement,”
Forbes, April 2, 2019 (https://www.forbes.com/sites/petercohan/2019/04/02/mit-expert-highlights-divergent-
condition-caused-by-737-max-engine-placement/#3d078ab940aa, accessed August 4, 2020).
60
Robison 2021, p. 158.
61
Jack Nicas et al., “Boeing Built Deadly Assumptions Into 737 Max, Blind to a Late Design Change,” The
New York Times, June 1, 2019 (https://www.nytimes.com/2019/06/01/business/boeing-737-max-crash.html,
accessed August 17, 2022).
62
Curt Devine and Drew Griffin, “Boeing relied on single sensor for 737 Max that had been flagged 216
times to FAA,” CNN, April 30, 2019 (https://www.cnn.com/2019/04/30/politics/boeing-sensor-737-max-
F.A.A., accessed August 17, 2022).
63
Andy Pasztor, “Boeing Didn’t Advise Airlines, FAA That It Shut Off Warning System,” Wall Street
Journal, April 28, 2019 (https://www.wsj.com/articles/boeings-enduring-puzzle-why-certain-safety-features-
on-737-max-jets-were-turned-off-11556456400, accessed August 17, 2022).
64
Boeing Statement on 737 MAX Disagree Alert. Undated. https://boeing.mediaroom.com/news-releases-
statements?item=130426, accessed August 17, 2022.
65
Sean Keane and Kent German, “Report on 737 MAX 8 Crash Blames Boeing Design, Lion Air Staff,” cnet,
October 25, 2019 (https://www.cnet.com/news/investigators-report-on-737-max-crash-blames-boeing-design-
lion-air-staff/, accessed August 30, 2020).
66
rtification%20Timeline%20Final%20Report.pdf, accessed December 17, 2020, p. 8).
67
communications/606e3fda752a935bc0df/optimized/full.pdf#page=84
68
69
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May 2, 2023 38
08-060
April 24, 2017
Toyota Supplier Relations: Fixing the Suprima Chassis

Charles H. Fine, Donald Rosenfield and Jamie Bonini
To say that Walt Bernstein, director of production control for Toyota Motor Manufacturing’s Macon,
Georgia (TMMGA) operation, was frustrated in late 2004 was an understatement. “This situation is
one of the most challenging I have faced in my 20 years with Toyota,” he admitted to David
McDonald, the plant manager with ChassisCo, a Toyota supplier.
We’ve utilized all of our supplier support resources to solve the problems, but we still have not
made adequate headway. Not only are the rear suspension cradles for the new Suprima crossover
out of conformance, but the entire system for supplying and building this key subsystem for the
Suprima vehicle chassis needs much more control and improvement. Your standard production
rate is barely 60% of what it’s supposed to be, the parts you are sourcing are frequently
nonconforming, and you need to improve your ability to track the problems you do find.
We’ve sent our engineering people, our project management people, our stamping experts, our
welding experts, and our automation experts to your plant in Athens. After a year of making these
rear suspension cradles, the rate of improvement is not sufficient. If we don’t turn this around, the
entire vehicle program could be at risk. Quality could be impacted. We need to indentify and
address any potential quality and conformance issues immediately.
Bernstein, responsible for managing relations with ChassisCo’s Athens, Georgia plant, was an expert
in Toyota production principles. He was recognized throughout Toyota’s North American production
network as one of its most seasoned leaders, with considerable expertise in welding, stamping, and
body systems assembly. Bernstein had spent much of his career in Toyota manufacturing, often
This case was prepared by MIT Sloan Professor Charles H. Fine and Senior Lecturer Donald Rosenfield, and Jamie Bonini,
Vice President, Toyota Production System Support Center. This case was developed solely for educational purposes. Some
names, data, and facts are fictional to protect confidentiality and improve pedagogical use. Therefore, this case may not be
used as a source of primary data.
Copyright © 2017, Charles H. Fine, Donald Rosenfield, Jamie Bonini. This work is licensed under the Creative Commons
Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit
http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San
Francisco, California 94105, USA.
TOYOTA SUPPLIER RELATIONS: FIXING THE SUPRIMA CHASSIS
working to improve the performance of suppliers who shipped parts and subsystems to Toyota’s
assembly plants.
ChassisCo was a large international automotive supplier that provided a wide range of automotive
systems and served many of the largest vehicle producers in the world. ChassisCo’s Athens plant was
a 120,000 square foot facility dedicated to welding rear suspension cradles for one customer and one
product: Toyota’s Suprima crossover vehicle. The Athens plant’s 350+ person workforce turned out
approximately 200,000 rear suspension cradles per year, with 27 shipments per day leaving the plant.
“We’re working as hard as we can,” replied McDonald, ChassisCo’s plant manager.
As you know, we are doing much more on this model compared to what we did on the 1997
Suprima model. Taking Toyota’s lead, we have increased the automation in our plant
dramatically. The number of robots has gone from 13 to 102 and the amount of welding on each
rear suspension cradle has doubled from the previous model. We have taken responsibility for the
development and supply of virtually every one of the 85 parts in the Suprima rear suspension
cradle, and we aggressively worked the prices on second tier parts supply to meet the extremely
aggressive target price demanded by Toyota. We’ve doubled the amount of value-added work
content but are only utilizing about half the factory footprint we had before. We’ve reduced our
production cycle times, and we’ve added a second Toyota plant that we service from our factory.
Furthermore, our quality staff has grown from 18 to 90 people, we’ve added two warehouses to
store the incoming parts for the Suprima rear suspension cradle, we installed all of the automated
equipment specified by Toyota’s engineers, and my staff and I are working 12 hours a day, seven
days a week. What more do you want me to do?
“Well, it’s November 2004,” replied Bernstein. “We’ve been in production for 14 months and
although there have been process changes and improvements, there are still major quality concerns.
We need to take action.”
The Toyota Production System and Just-in-Time

Toyota’s Suprima crossover vehicle was built by Toyota’s vast TMMGA automotive assembly plant
primarily for sale in the North American market. The plant had won numerous quality awards over
the years and was considered to be one of the best automotive assembly plants in the hyper-
competitive North American automotive market. In addition to opening TMMGA in the mid-1990s,
Toyota had built a significant network of automotive factories in North America, and was expected to
have a total of eight assembly plants and five engine plants by 2007.
Through the latter part of the 20th century, Toyota posted an enviable record of growth, profits, and
customer satisfaction. Its market valuation of over $200 billion illustrated how operational excellence
April 24, 2017 2

could be the cornerstone of industry-leading value creation and capture, and its vaunted Toyota
Production System (TPS) was the envy of many manufacturing companies around the world. As
described on Toyota’s website, TPS was based on two concepts: the first “jidoka” (translated as
automation with a human touch), meant that when a problem occurred, the equipment stopped
immediately, preventing defective products from being produced; the second concept, “Just-in-Time,”
referred to each process producing what was needed by the next process in a continuous flow. (See
Exhibit 1 for more detail about the TPS concept.)
Outside observers believed TPS worked as well as it did because it was designed and operated as a
system of interlocking pieces. The approach to employee and organization development, factory and
job design, product engineering and manufacturing, supplier relations and collaboration, sales
strategy and production planning, and quality improvement and inventory reduction were all pieces
that fit together and were mutually reinforcing.
While some argued that none of the individual components of TPS were unique, others pointed out
that it was the integrated system of practices and policies that was. In that sense, TPS was like a
Toyota vehicle. The ride, handling, smoothness, and efficiency of Toyota vehicles were a result of
the integrated collaboration of the vehicle’s many subsystems. While no single subsystem necessarily
stood out as extraordinary, collectively the subsystems worked together to deliver the overall
excellence in performance that was so highly valued by automotive customers.
While TPS was easy to describe, putting it into practice was less so because it required careful
attention to many components of the organization. One senior Japanese executive explained it this
way:
Learning the Toyota Production System is a little like learning to play golf. In golf, you step up
to the tee with the club, and then hit the ball a few times until you get it into the hole. The game
can be explained in five minutes. However, mastering the game of golf requires practice,
coaching, and persistence over many years. The same is true for TPS – it is simple to explain, but
mastering it is a challenge over a lifetime.
TPS grew out of the just-in-time (JIT) system that Toyota developed in the 1950s. Some in the
industry originally viewed JIT as an inventory management system in that by synchronizing a group
of production and distribution steps, JIT allowed the reduction of inventory in between these steps.
This allowed significant savings in overall inventory as well as major improvements in lead-time
through any process.
But JIT was much more than an inventory management system for the factory. It was a system that
required coordination of the entire production and distribution system, not just what was going on in
the factory. Thus suppliers had to be coordinated with the factory in terms of schedule, quality
management, product development and other areas. When American companies started to implement
JIT in the 1970s and 1980s, many viewed its benefits for their own purposes, namely shifting
April 24, 2017 3

inventory back to their suppliers. But this approach failed to capture the benefits of the systematic use
of JIT for the entire supply chain.
Thus, JIT, and the TPS system that grew out of it, was not just a system for managing a factory;
rather, its reach extended throughout the entire automotive value chain. The bedrock principles of JIT
and TPS were continuous improvement and respect for people. Toyota made every effort to treat all
of its stakeholders — employees, suppliers, customers, dealers, and shareholders — with respect.
Relationships of mutual respect encouraged stakeholders to feel loyalty to the Toyota enterprise,
which, in turn, motivated them to contribute to the continuous improvement of the enterprise. This
intensive collective and creative effort aimed at continuous improvement generated superior
performance highlighted by Toyota’s lower costs, superior quality, higher sales, and faster product
development. Toyota took the fruits of this high performance and reinvested it across the stakeholder
body. Employees, suppliers, dealers, and shareholders all received a surplus of value from their
interactions with Toyota, further encouraging them to invest in greater enterprise improvement.
There was a second important principle of JIT that the inventory-centric view did not capture. JIT
created conditions that enabled inventory reduction, including the reduction of waste and variability
in demand and supply (for example, making sure that production steps were consistent, so that little
inventory was required for protection against uncertainty).
Most importantly, in order to reduce waste and variability, JIT was about problem solving and being
able to adapt to changing conditions. In order to address the wide array of variables that
manufacturing companies dealt with, such as changing market demands, process reliability, adapting
processes to new market conditions, evolving product design, changing suppliers, and giving
suppliers new responsibilities, the system had to be able to solve problems and adapt.
Problem solving capabilities were particularly important for new locations. As TPS was implemented
at a new location there were frequent routine challenges such as machine reliability or inconsistency,
or particular types of defects that might show up periodically. These might be discovered though
checklists and standard procedures. But then there were more significant challenges such as major
gaps in quality or output or yield. Depending on the degree of the challenge and the skill level of the
supplier, Toyota might suggest different levels of support for the supplier. These would involve a
much higher level of collaboration. A supplier with relatively advanced TPS skill might very easily
have the problem solving skills for routine problems, but without advanced skills, a major challenge
could lead to more significant problems.
Toyota approached all members of its value chain, including suppliers, as long-term partners. This
was the best way to develop problem-solving capabilities and the process capabilities that were
required. Toyota selected suppliers carefully, looking for willingness to adapt just as much as for their
technological capabilities. Once chosen, Toyota invested in a supplier organization’s education in
TPS and capabilities wherever needed, whether it was in manufacturing, product design, or managing
April 24, 2017 4

its own supply chains. It placed high value on frequent and open communications and expected
suppliers to alert Toyota personnel to problems very quickly so corrective action could be taken.
Toyota encouraged a supplier’s people to get to know its people. The company expected suppliers to
give it low prices because they had low costs, not because they were willing to lose money by doing
business with Toyota.
For some companies, adopting TPS required simultaneous changes to many parts of the organization,
a level of change that some would find hard to tolerate. Such change typically had to happen
gradually, requiring great patience. Nevertheless, many companies had seen great leaps in
improvement by creating better systems through learning about TPS and customizing the ideas behind
it to fit their own situations. Not willing to become complacent, Toyota continued to improve and
maintain a competitive edge from its use and improvement of TPS.
Some observers believed that if Toyota were run with a short term, shareholder value maximization
mentality the company could squeeze more surplus out of employees, suppliers, and dealers so as to
accrue more short-term profits for shareholders. Such an act, however, might be likened to “killing
the goose that lays the golden egg.” Toyota stakeholders put much effort into building “golden eggs”
for the Toyota enterprise exactly because they were confident that Toyota would continue to treat
them well. Continuous improvement and respect for people were mutually reinforcing pillars of what
was called “The Toyota Way.”
The 1997 Suprima Launch

The beginnings of Toyota’s relationship with ChassisCo had all the hallmarks of classic Toyota
relationship building. In 1993, when planning for the launch of a new crossover vehicle in North
America, Toyota thought long and hard before deciding to outsource the rear suspension cradle
assembly to a North American supplier. Building rear suspension cradles was a difficult process; it
required heavy parts, was technically complex and physically challenging, and was resource
intensive. In Japan, Toyota built all of its rear suspension cradles internally. However, the TMMGA
assembly plant, where the new Suprima would be built, was already space constrained. Furthermore,
Toyota’s growth and globalization strategy required the development of a strong network of suppliers
across all markets where the company had a significant presence. Toyota did not want to be vertically
integrated and preferred to leverage its supply base with a supplier relations model that was robust
and efficient.
After considering three suppliers, Toyota chose ChassisCo to make the Suprima rear suspension
cradles. ChassisCo, which had built rear suspension cradles for Detroit’s “Big Three,”1 agreed to
build a greenfield site to support TMMGA production in Athens, Georgia, less that two hours away
from the TMMGA plant. (Exhibits 2 and 3 provide organizational charts showing some of the
relevant Toyota and ChassisCo groups involved in the Suprima program. Exhibit 4 provides some of
1
The Big Three are General Motors, Ford and Chrysler.
April 24, 2017 5

the key dates in the Suprima program history.) Lucy Martinez, a TMMGA general manager who
worked in purchasing at the time, recalled the relationship’s initial phases:
The Suprima rear suspension cradle contract was ChassisCo’s first experience working with
Toyota. Their personnel were not familiar with how we did purchasing, engineering, or cost
analysis. However, ChassisCo engineers were enthusiastic and technically excellent. I was
impressed by their plant managers as well. Toyota engineering had to hold ChassisCo’s hand
during the development phase, but they were enthusiastic learners of the Toyota Way. We even
placed an experienced production manager from the Kuzukanai plant in Japan on site at
ChassisCo in 1997 for the first full year of production to mentor the Toyota Way and support
interface and problem solving with Toyota. We did have some quality problems at launch time in
1997, but ChassisCo’s people stayed on top of things and managed to bring their processes under
control. We gave them a quality award in 2002, and I recall they did some innovative work in
applying TPS principles to their inventory management.
The rear suspension cradles were complicated structures that involved welding a number of
assembled steel structures. (Exhibit 5 shows a diagram of the structures and how they are put
together. Exhibits 6 shows the type of auto body structures that are similar to the rear suspension
cradle.) This type of structure required a great deal of sophisticated manufacturing skills, particularly
in establishing standards. For example, it was important to eliminate the type of incongruent gap seen
in Exhibit 7. In order to work with ChassisCo on this type of structure, Toyota had limited its risk by
simplifying certain aspects of assigned tasks. For example, all of the stamped parts were designed and
manufactured by Toyota and its affiliates in Japan and shipped first to TMMGA where they were
kitted for shipment to ChassisCo in Athens. Because part conformance was high, incoming
inspection in Athens was not required. Toyota engineers had designed the plant and its equipment to
ensure successful integration of product and process.
This also limited the amount of “tuning,” that needed to be done in the United States. Tuning
involved making minor adjustments to parts after the prints were completed. Even though parts might
meet individual print specifications, assembly problems, such as a large gap resulting in poor weld
quality, could occur when the parts were in the welding fixtures. Informal processes such as tuning
were often instrumental in improving the original design. As Justice Bickford, an engineering
manager at Toyota, explained,
For the 1997 Suprima launch, Toyota engineers had ‘tuned’ the stamped parts for improved
welding quality. In Japan, Toyota engineers spend a lot of time studying such conditions and
working with their Japanese suppliers to establish tighter standards. This collaboration among
Toyota design, process engineering, the supplier, and manufacturing allows for parts to meet
manufacturing needs much better. However, this process relies heavily on tacit knowledge —
knowledge that is in the heads of the Toyota engineers, but not written down anywhere.
April 24, 2017 6

Richard Roberts, who had been the Athens plant quality manager for ChassisCo, recalled feeling
confident after the 1997 Suprima launch: “We thought we were pretty good. We were doing material
flow kaizens (improvement projects), we had established a team leader system, and we had a strong
training system for incoming welders. Of course, we did run into quality problems from time to time,
but each time we were able to get things back under control. We were very proud of the awards we
won during that time period.”
The Responsa Success

Subsequent to the 1997 Suprima launch, ChassisCo turned its attention to another Toyota program
that once again called for rear suspension cradles for the new 1999 crossover vehicle, the Responsa.
For the Responsa launch, ChassisCo opened a new plant in St. Louis, Missouri. For this new model,
manufacturing involved considerably more automation. There were now 50 robots added to the line,
which posed a new level of challenge for ChassiCo, and potentially increased the need for tuning.
However, the rear suspension cradle production ramp-up was gradual and went quite smoothly. For
the Responsa launch, the parts were initially sourced from Toyota in Japan, but were subsequently
transferred to ChassisCo and, from there, to North American suppliers.
The success of the Responsa launch at ChassisCo’s St. Louis plant, including the local sourcing of its
rear suspension cradle parts and dies, led Toyota planners to believe that the 2003 Suprima launch
would constitute a natural progression of increasing capability and responsibility for ChassisCo.
Toyota agreed to give ChassisCo ownership of project management for the components parts during
launch with Toyota providing technological support.
The 2003 Suprima
Learning Curves
While Toyota felt confident in giving ChassisCo project management responsibility for the 2003
Suprima, some within the Toyota organization had concerns. As Carol Kinsley, who worked in
TMMGA production control at the time, explained, “Although the Toyota engineers in Japan planned
to design all the parts and equipment for the new line that would be required, they decided to let
ChassisCo do all the parts sourcing and incoming logistics and inventory management. We knew the
complexity facing Athens would be much higher for the new model.” TMMGA’s Lucy Martinez
concurred:
ChassisCo had been asking for several years to supply the parts as well as do the rear suspension
cradle assembly. We knew this would be a big leap for them and, frankly, some of us at
TMMGA were quite surprised when Toyota approved this for the new model. The new rear
suspension cradle for the 2003 Suprima was a lot more complex than the cradle for the earlier
model and it had far more parts.
April 24, 2017 7

For the 2003 Suprima rear suspension cradle, stamped metal parts arrived by the truckload from Tier
II suppliers to a ChassisCo warehouse managed by a third party logistics company. After being
unloaded and put onto small “totes,” materials were pulled into Athens’s parts receiving room several
times a day. These parts then entered one of two main lines: either where the left and right “cradles”
were assembled, or to feeder stations scattered around the plant, which built up subcomponents (with
either welding or riveting) that eventually were fed into one of the two main lines. Exhibit 8 shows a
simple diagram of the process flow at the Athens plant.
With the additional responsibilities, it became clear that ChassisCo would need to show capabilities in
many areas such as sourcing and logistics, and project management. In general, they would require
the full range of skills in TPS. In particular they would need to demonstrate the problem solving
skills that were such a key part of TPS.
But it would soon become quite apparent that the problems in the Suprima were significant and that
concerns of people such as Kinsley and Martinez were justified. As Kinsley stated,
For the new Suprima model, I assumed ChassisCo would have competence in project
management and I treated them that way. Over time, I came to realize that they did not have this
capacity. ChassisCo was responsible for all second tier parts sourcing and development, but they
had no system for tracking parts. We created a parts tracking system for them once we observed
this deficiency. Systemically, ChassisCo was not organized to respond to Toyota’s need for
integrated project management. Their organization silos were very strong.
“ChassisCo did not have the project management skills they needed,” added Lucy Martinez. “They
did not even have a stage gate process in place. Their people worked very hard, but without
processes to support them, they struggled to respond to our requirements.”
According to Walt Bernstein, we “failed to recognize how much more [TMMGA] needed to do to
make the ChassisCo Athens plant successful, particularly in the areas of quality certification and
inventory management.
We just didn’t realize the extent of the gap between ChassisCo’s capabilities and what we were
asking them to do. We took for granted that they could develop the supply for the second tier
parts. By the time we actually went and visited those suppliers ourselves, and we saw how far
behind they were, it was very late. Several months before the launch date, they knew they were
in trouble and we knew we were in trouble.
Bernstein identified significant capability gaps in the parts and tool tuning processes. For the 2003
Suprima launch, Toyota production engineers in Japan had done the tuning work for a handful of the
most critical parts, expecting the ChassisCo staff to do all the rest (total of 85 parts). However the
April 24, 2017 8

majority of the ChassisCo engineering staff and, for that matter, Toyota’s North American supply
base utilized for the second tier components were not familiar with the tuning process.
John Roach, global director of manufacturing engineering for ChassisCo, explained some of the
internal challenges ChassisCo was confronting:
Given the successful launches of the 1997 Suprima and the 1999 Responsa, Toyota assumed that
we could handle even more responsibility for the 2003 Suprima launch. What they did not see,
however, were two forces internal to ChassisCo that hurt us significantly in the 2003 Suprima
launch. First, ChassisCo’s global development organization was decentralized in 2000. One
result of this decentralization was that experienced people were ‘split up’ to cover three
independent geographic groups, significantly weakening our capabilities to support new launches
for some customers in the United States. Effectively, the organization’s memory of the 1999
Responsa launch was dissipated and not fully available to support the 2003 Suprima.
Second, at the time we won the business for the 2003 Suprima launch, ChassisCo had an
unprecedented number of new launches in the works, for a wide range of customers, all around
the globe. Our engineering support people were stretched very thin —in maintenance, materials,
tool and die, and supplier management. In retrospect, we were stretched far too thin.
Bob Curtis, ChassisCo’s program manager for the 2003 Suprima launch, put Roach’s comments in
perspective:
No matter how loud I yelled, I could not get the resources I needed to support the Suprima launch
in Athens. We needed to qualify 102 sets of tools for the new rear suspension cradle and I only
had two tool and die engineers to do it. I should have had a dozen. We had no supplier
management group. I asked for a materials manager for the program and was repeatedly turned
down by senior management. I couldn’t make them understand that this launch was going to be
much more challenging than the first Suprima launch and that we would have to staff
accordingly. I felt like I was yanking the proverbial andon cord2 like crazy, but no help was
coming.
We had no executive review process where problems could be highlighted and resourced.
Furthermore our accounting system did not recognize and separate operations expenses from pre-
production or launch expenses. We should have had more resources in the plant helping to
prepare for the launch. However, the Athens plant was busy producing the old Suprima rear
suspension cradles and they didn’t want their reported costs to go up by adding staff for a
program that was two years from launch.
2
Invented at Toyota, the andon cord is a cord that workers pull any time something in the manufacturing process goes wrong that would compromise the
quality of the product or safety of the people.
April 24, 2017 9

I even went to the Toyota engineers and asked them for some design relief. If they only would
have let us change the attachment methods, it would have simplified the assembly process. But,
the Toyota engineers were adamant that their new design, with many rivet attachments, was a
lower cost process and that cost was paramount. Adding to this challenge was the fact that
Toyota rotated the engineering team we had developed relations with. I guess they thought that
we had progressed and we no longer needed their most seasoned engineering support.
Richard Roberts explained the challenges he faced as the Athens plant quality manager:
At the plant level, we did not have the capabilities or infrastructure to meet the requirements of
the new launch but everyone on the Toyota side as well as the ChassisCo side was very slow to
realize this. Toyota introduced us to the TIS — Technical Instruction Sheet — which specified
for every part several pages of detailed technical requirements that we needed to work on with
our parts suppliers. This was our first exposure to a TIS and we did not know enough about how
to use it. We thought we could do it, but we couldn’t. Other ChassisCo plants that served other
ChassisCo customers managed the wide range of activities that we were being asked to do. But,
Toyota’s requirements were far more stringent. Our other customers seem to care primarily that
the assembled rear suspension cradle meets specs. They don’t place nearly as stringent
requirements on the individual parts.
The increased level of automation in the welding processes for the new Suprima compounded the
challenges for the ChassisCo plant staff and operators. In the manual welding processes used for the
1997 Suprima cradles, a weld operator could visually inspect his work in real time, observing the
contours of the two surfaces to be joined and continually adjusting the location of his weld gun and
the amount of welding done to assure a quality weld. With the new automated welding robots used
for the 2003 Suprima cradles, however, no such real time, closed loop feedback system existed. If a
part was off spec by a small amount or a weld gun was out of alignment, the weld would just miss or
imperfectly join the parts, requiring significant inspection and rework to identify and repair the
defects. Additional resources would then be required to trace down the source of the defects and
adjust the welding system and/or work with the part supplier to improve its part conformance. These
resources did not exist in the Athens plant when the 2003 Suprima was launched.
According to Ben Berkner, ChassisCo’s vice president of business development, the required
resources were not available for a number of reasons:
The aggressive target prices that Toyota set for the new rear suspension cradles compounded the
project’s problems. ChassisCo erred in even trying to reach the price that was set. We needed
more plant space, but decided to cram the new line into the very tight existing space to save
money. To try to meet the target price, we accepted low bids from parts suppliers, but failed to
realize the implications for parts quality and delivery frequency. We chose one Georgia supplier
April 24, 2017 10

that had never made structural auto parts, did not understand the durability required, and had only
produced simple, lightweight parts for computers and automotive interiors. Late in the process
we had to abandon that supplier and replace the dies it had planned to use. Compounding these
problems, we made errors in cost estimation, dramatically underestimating our logistics costs.
Perhaps our biggest mistake was that we did not communicate to Toyota that we did not think the
price was realistic.
TMMGA’s Walt Bernstein spent the entire summer of 2003 traveling to ChassisCo suppliers in the
Midwest trying to set up and debug the stamping processes for the parts to be sent to Athens. Core to
the practice of TPS was genchi genbutsu, or “go to the source and see things yourself.” However,
ChassisCo had not visited its suppliers. In fact, the company had a limited number of people skilled
enough to effectively audit its suppliers and identify problems. TMMGA typically practiced “go and
see” only at the first tier, and by the time Bernstein realized the extent of the problems and went on
the second tier visits himself, the project was in deep trouble. “I knew we were in trouble when I
heard Walt’s reports from the supplier visits,” recalled Carol Kinsley. “Toyota stringently follows a
communications policy of ‘bad news first.’ We want to identify problems early in the process, but the
problems in the second tier had not been made visible to us. We discovered them much too late.
From the viewpoint of some on the Toyota side, this was a big blow to our relationship.”
The other big problem Bernstein uncovered was at ChassisCo’s Tulsa, Oklahoma plant:
That plant was supposed to make some of the largest and most complex stamped parts for the
Suprima rear suspension cradle. The plant had provided similar parts for one Detroit automaker,
but they added new capacity for our stampings. They had a myriad of problems with their die
automation equipment. They underestimated the complexity of the job and had not allocated
sufficient human resources to get the job done. They were not capable of meeting the required
production rates at startup. By summer of 2003, we were in crisis mode. The problems were
escalated to the top of ChassisCo’s corporate structure where they got attention, but ChassisCo
did not have well-defined processes to fix the problems quickly.
The Launch
To the surprise of some, the Suprima launched on time in September of 2003, although the production
rate out of Athens was barely 60% of the target. The launch proceeded despite the fact that the
Athens plant had failed three times in August to pass the high volume production trial (HVPT)
required by Toyota. This trial required that the Athens plant demonstrate that it could continuously
deliver the required production volume at required quality levels for one continuous hour.
Two months after launch, Athens was producing rear suspension cradles that had been specified at
two-thirds the production rate. Many of ChassisCo’s suppliers also were not producing at the required
rates adding a significant amount of overtime and cost overrun into the process. Among other
April 24, 2017 11

shortcomings, ChassisCo was not practicing standardized work: the plant did not have a defect
feedback system nor had it created an inspection system with second tier suppliers.
The first year of Suprima production was extremely stressful for all involved. Scrap rates were high,
as was downtime, parts quality was poor, and parts inventories were subjected to a great deal of
inspection. TMMGA sent several people to work full time at the plant. Management and hourly
employees put in a great deal of overtime.
The left cradle line seemed to be responsible for a large fraction of the defects found in final
inspection. The line was highly automated in terms of welding robots, although some of the materials
handling was manual between stations. For the previous 1997 Suprima model, the vast majority of the
welding work was done manually.
The right cradle, in contrast, had much more riveting than welding in the assembly process. Riveting
was a new process for Athens, introduced only when the new Suprima model was launched. The
right and left cradles were mated in a highly automated welding process, after which the fully
assembled rear suspension cradle was put through an e-coat line, essentially a paint bath which coated
the entire rear suspension cradle, primarily to improve rust resistance. Final inspection occurred
under a canopy after the e-coat process. Organized by rear suspension cradle type, the inspected rear
suspension cradles sat outside in stacks where they were kitted to TMMGA orders, and then shipped
in batches of 30 rear suspension cradles per truck, approximately 27 times per day.
Throughout 2004, TMMGA found rear suspension cradles that were highly problematic. A Toyota
audit in March 2004 found that some assembly-critical welds were out of conformance and then
found additional assembly-critical concerns in November related to welds in key structural
components. Assembly-critical problems rendered the rear suspension cradle unfit for final assembly
and necessitated scrapping the entire cradle. Furthermore, in November 2004, Toyota performed a
complete arc welding process audit at Athens in which the plant scored only 13% out of 100%. In
addition, a sample of external defects (those reaching TMMGA) increased from 565 defects per week
in July 2003 with the old Suprima model to 2845 defects per week in July 2004 with the new model.
Exhibit 9 shows a quality analysis of internal Athens defects during 2004.3
Stopping the Bleeding

Although he had numerous responsibilities, Walt Bernstein spent a large fraction of his time in late
2004 wrestling with the challenges at the ChassisCo Athens facility. He visited the plant at least
twice a week, helped ChassisCo personnel identify and prioritize problems, and developed checklists
of activities for the plant to work on. He followed all the standard procedures for overseeing a
problematic supplier situation where the supplier had significant responsibility to improve operations.
3
Although defective rear suspension cradles were found in outgoing inspection at the ChassisCo final inspection, outgoing quality for the Suprima from the
Macon plant, as measured by both Toyota and external quality rating agencies, was excellent.
April 24, 2017 12

Progress was quite elusive, however. Since the line output was so low due to defects and downtime,
the Athens plant was averaging approximately four hours per day in overtime (over two shifts), plus
many Saturdays throughout 2004. Some TMMGA personnel feared that burnout could take the plant
into a downward spiral from which it could not recover. One TMMGA analyst prepared the chart in
Exhibit 10 to illustrate the risk.
Another major frustration for TMMGA personnel was the Athens plant’s weak quality information
system. Particularly troubling was the absence of a defect flowout control system. When a major
defect was discovered on a rear suspension cradle in the Athens plant, TMMGA needed to know how
many rear suspension cradles had this defect and which defective rear suspension cradles, if any, had
flowed out of the Athens plant into TMMGA. “We absolutely do not want to be building vehicles
with rear suspension cradles with known defects,” explained Ray McMasters, who had been a
purchasing manager at Toyota in North America.
The problems reached a boiling point in the fall of 2004. TMMGA continued to put a lot of pressure
on Athens for fixing the underlying problems and Athens was not able to respond at a level close to
what was expected. “We can’t continue like this,” said David McDonald, Athens’s plant manager.
“This plant is bleeding money. We’ve flooded the facility with workers and inventory to try to keep
up, but we are not making headway fast enough. We are going to have to ask Toyota for a significant
price increase to cover our added costs.”
“This is more than a cost issue,” replied Bernstein. “More importantly, it is a quality concern. We
must fix the underlying problems.”
“I understand that’s the Toyota Way,” replied McDonald. “But I do not have the resources to do any
more than what we’re doing.”
“I have to admit,” replied Bernstein. “Our resources on this project are taxed to the limit. TMMGA is
not resourced to solve supplier problems with this much complexity. We have already devoted far
more resources to the rear suspension cradle problems than to any other part of this vehicle program.
As I said before, we need a breakthrough and we need to consider the critical next steps to address
these issues immediately.”
What could Toyota do to address the situation? Was this a typical challenge that they could apply
TPS to, or was some other type of approach needed? If so, what would that be?
April 24, 2017 13

Questions (please prepare answers to be discussed in class)
1. What are the main contributors (causes) of the crisis at ChassisCo’s Athens plant in late 2004
(14 months after SOP)?
a. ChassisCo’s responsibility?
b. Toyota’s responsibility?
2. Considering these causes:

a. What are ChassisCo’s options for resolving the crisis?
b. What would you do if you were in charge?
3. Considering these causes:

c. What are Toyota’s options for resolving the crisis?
d. What would you do if you were in charge?
April 24, 2017 14

Exhibit 1 TPS Concept
Jidoka: Just-in-Time:
Highlighting/visualization of problems Productivity improvement
Quality must be built in during the Making only "what is needed, when it is
manufacturing process! needed, and in the amount needed!"
If a defective part or equipment malfunction is Producing quality products efficiently through the
discovered, the machine concerned automatically complete elimination of waste, inconsistencies, and
stops, and operators stop work and correct the unreasonable requirements on the production line.
problem. In order to deliver a vehicle ordered by a customer as
For the Just-in-Time system to function, all of the parts quickly as possible, the vehicle is efficiently built within
that are made and supplied must meet predetermined the shortest possible period by adhering to the
quality standards. This is achieved through jidoka. following:
1. Jidoka means that a machine safely stops when 1.When a vehicle order is received, a production
the normal processing is completed. It also instruction must be issued to the beginning of the
means that, should a quality or equipment vehicle production line as soon as possible.
problem arise, the machine detects the problem
on its own and stop, preventing defective 2.The assembly line must be stocked with small
products from being produced. As a result, only numbers of all types of parts so that any kind of
products satisfying the quality standards will be vehicle ordered can be assembled.
passed on to the next processes on the
production line.
3.The assembly line must replace the parts used by
retrieving the same number of parts from the parts-
2. Since a machine automatically stops when producing process (the preceding process).
processing is completed or when a problem
arises and is communicated via the "andon
(problem display board)," operators can 4.The preceding process must be stocked with small
confidently continue performing work at another numbers of all types of parts and produce only the
machine, as well as easily identify the problem numbers of parts that were retrieved by an operator
cause and prevent its recurrence. This means from the next process.
that each operator can be in charge of many
machines, resulting in higher productivity, while
the continuous improvements lead to greater
processing capacity.
Source: Toyota website.
April 24, 2017 15

Exhibit 2 Toyota Organization Chart
Toyota
Japan
Toyota Eng.
TMMGA
& Mfg.*
PC Purchasing Quality Engineering Purchasing
Exhibit 3 ChassisCo Organization Chart, 2003
Structures Vice President**
VP VP USA
VP Canada* Director Purchasing
International*
Director Athens Plant Mgr

Director Sales St.Louis Plant Mgr
Engr.
Program Mgr Quality Mgr
*other VP’s had similar org charts

** report thru SBU President to CEO
April 24, 2017 16

Exhibit 4 Timeline for Key Case Facts and Events
1993;
1997; 1999; 2000; Sept 2003; Nov 2004;
Initial
Launch of Launch of the Initial Launch of Bernstein
planning
first Toyota planning second seeks help
for first
generation Responsa for second generation
generation
Suprima with generation Suprima
Suprima
ChassisCo Suprima
rear
suspension
cradles
Exhibit 5 ChassisCo Suprima Cradle
April 24, 2017 17

Exhibit 6 Photograph of a Vehicle Structure Similar to Suspension Cradle
Exhibit 7 Close Up of Structure and Gap After Welding
weld
gap
April 24, 2017 18

Exhibit 8 Suprima Rear Suspension Cradle Assembly Line: Original Layout for 2003 Launch
100-
--
1
11
9
-
8
Paint
Shipping
April 24, 2017 19

Exhibit 9 Athens Internal Quality Defect Trends, 2004
1,000
MAY 2004
800
654
# of Defect
600
400 350
282
234 218 199
200
1,000
843
800
# of Defect
600
400
JULY
400
353 2004
157
200 100 98
April 24, 2017 20

Exhibit 10 ChassisCo Athens’ Potential Downward Spiral
TMMGA SUPRIMA production levels are expected to peak in October 2004 to

approximately 790 vehicles/day
ChassisCo Athens current production is achieving 43 rear suspension cradles per
hour as of 8/23/04.
Impact of this shortfall: approx. 4 hrs/day of production O.T. to produce 790 rear
suspension cradles/day.
ChassisCo Athens improvement trend does not provide TMMGA with confidence
that ChassisCo can meet TMMGA quality & delivery expectations consistently &
without disruption.
Quality defects & unplanned downtime are main contributors to current lack of
confidence.
Without systematic improvement, Downward Spiral is possible
Quality Defect
Unplanned Downtime
T/M Burn Out

High Over Time
Low Morale
April 24, 2017 21

13-149
August 27, 2013
Nissan Motor Company Ltd.: Building Operational

Resiliency
William Schmidt, David Simchi-Levi
On March 11, 2011 a 9.0-magnitude earthquake, among the five most powerful on record, struck off
the coast of Japan. Tsunami waves in excess of 40 meters high traveled up to 10 kilometers inland
and three nuclear reactors at Fukushima Dai-ichi experienced Level 7 meltdowns. The impact of this
combined disaster was devastating, with over 25,000 people dead, missing or injured.1 Governments,
non-government agencies, corporations and individuals in Japan and around the world responded with
relief teams, supplies and donations to help ease the suffering and support the recovery.2 In truth, the
disaster was three calamities in one – an earthquake, a tsunami and a nuclear emergency. Recovering
from such a catastrophe was unprecedented.
The event was not just a humanitarian crisis, but also a heavy blow to the Japanese economy: 125,000
buildings were damaged and economic costs were expected to be ¥16.9 trillion.3 In the weeks
following the disaster, approximately 80% of Japanese automotive plants suspended production and
Mitsubishi UFJ Morgan Stanley Securities estimated utilization at other plants were below 10%.4
1
Ministry of Foreign Affairs, Government of Japan, http://www.mofa.go.jp/j_info/visit/incidents/index2.html, accessed July 15, 2012.
2
Ministry of Foreign Affairs, Government of Japan, http://www.mofa.go.jp/j_info/visit/incidents/pdfs/r_goods.pdf, accessed July 15, 2012.
3
Ministry of Economy, Trade and Industry, Government of Japan,
http://www.kantei.go.jp/foreign/policy/documents/2012/__icsFiles/afieldfile/2012/03/07/road_to_recovery.pdf, accessed February 27, 2012.
4
Tsuyoshi Mochimaru, “Auto sector: Our Stance in Wake of Recent Earthquake,” Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., April 12, 2011.
This case was prepared by David Simchi-Levi, MIT Professor of Civil and Enviornmental Engineering and Engineering Systems
and Co-Director, Leaders for Global Operations, and William Schmidt, PhD candidate, Harvard Business School.
Copyright © 2013, David Simchi-Levi and William Schmidt. This work is licensed under the Creative Commons Attribution-
Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit
http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San
Francisco, California, 94105, USA.
NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY
Across the industry, monthly production dropped nearly 60% in March and April 2011 compared to
2010, and did not fully recover until October.5 Production for all of 2011 was down 9%.6
Markets outside of Japan were affected as well. Toyota, Honda and Nissan, the three major Japanese
automotive original equipment manufacturers (OEM), exported a significant amount of their Japanese
production to serve foreign markets (Exhibit 1). Declines in Japanese production impacted product
availability in those export markets. In addition, overseas production had expanded in recent years,
but only 70% - 80% of the production components were sourced locally with the remaining 20%
coming from Japan.7 Disruption to the Japanese supply base affected firms and factories around the
world.
Toyota, Honda and Nissan were all impacted by the disaster (Exhibit 2). In particular, Nissan
suffered damage to six production facilities and about 50 of its critical suppliers were impaired.
Nevertheless, the company was prepared to withstand the shocks.
History of the Japanese Automotive Industry

Prior to the 1930’s the domestic automobile manufacturing capability in Japan was essentially limited
to military-sponsored initiatives, hand-built models and imported automotive kits.8 The industry’s
nascent steps toward mass production started in 1933 when Aikawa Yoshisuke established Jidosha
Seizo Company, the predecessor of Nissan Motor Company.9 Around the same time, Toyoda Kiichirō
established an automobile department within Toyoda Automatic Loom, which would eventually grow
into Toyota Motor Company.10 In spite of protectionist government policies restricting imports and
direct foreign investment, prior to World War II the Japanese subsidiaries of Ford and General
Motors dominated the automobile industry in Japan. After the war, Nissan and Toyota were hobbled
by low production productivity and were at risk of slipping into bankruptcy if not for a combination
of huge governmental loans and special orders from the United States Army during the Korean War.11
Japanese automotive firms initially relied heavily on technology transfer from the United States and
Europe. Toyota was more aggressive in developing internal research and development capabilities, a
strategy eventually adopted by other Japanese automobile manufacturers.12 Japanese automotive
manufacturers also concentrated on process improvements, with Toyota being an early innovator. In
5
“Japan Production by Month, 2005-2011,” WardsAuto Group, 2012.
6
Ibid.
7
Ibid.
8
Koichi Shimokawa, The Japanese Automobile Industry: A Business History (London: Atlantic Highlands, NJ, Athlone Press, 2001).
9
Nissan Motor Company, http://www.nissan-global.com/en/history/, accessed August 3, 2012.
10
Michael A. Cusumano, The Japanese Automobile Industry: Technology and Management at Nissan and Toyota (Cambridge, MA., Published by the Council
on East Asian Studies, Harvard University, 1985).
11
Ibid.
12
Ibid.
August 27, 2013 2

the late 1940’s through the early 1960’s, Toyota transitioned away from push manufacturing
techniques that were ubiquitous in the United States automobile industry. The firm reduced buffer
stocks and instead adopted the principles of just-in-time manufacturing. Raw materials and work-in-
process were no longer pushed from early production stages to final assembly, but were instead
pulled forward only when needed. Components were produced and received in lots as small as
possible, with no stockpiling and Toyota modified its equipment to allow for rapid set-up so it could
be quickly transitioned to different jobs.13
The manufacturing principles pioneered by Toyota were also adopted, in varying degrees, by other
manufacturers inside Japan and globally. Toyota remained at the vanguard of refining and
formalizing these principles into what would eventually be known as the Toyota Production System
(TPS). TPS required close coordination across manufacturing processes and helped identify problems
that could otherwise go unnoticed in a system with a larger buffer. The system, however, was not risk
free. If something disturbed the flow of information or material, it could idle manufacturing stages
downstream of the disturbance.
The Japanese automotive industry began to hit its stride. By the late 1960’s, both Toyota and Nissan
had rapidly increased both their production and exports. By the late 1970’s, exports accounted for
over 50% of Japanese production and by 1980 Japan overtook the United States as the world’s top
automobile producing country.14 Japanese automobile companies began building manufacturing
facilities in North America, with Honda, Nissan and Toyota moving first and Mazda, Mitsubishi,
Suzuki, and Isuzu eventually following. The rapid appreciation of the yen after agreements made at
the G-5 meeting in September 1985 led to further expansion of foreign production in both advanced
and developing countries.15 The three largest Japanese firms globalized their operations at different
paces, however, with Honda and Nissan expanding their foreign manufacturing footprint much more
aggressively than Toyota.16
Nissan’s Supply Chain Philosophy: A Focus on Flexibility

In contrast to the close supply chain control that is a hallmark of TPS, Nissan leveraged a regional,
decentralized supply chain structure, but imposed strong central control and coordination when crises
affecting global operations occurred. Maintaining a flexible organization and integrating a variety of
perspectives were important cultural attributes at the company. As an indication of the way the firm
embraced diversity, Nissan’s corporate officers represented a range of nationalities and most of them
had extensive experience in overseas operations – traits that were not shared by other Japanese
13
Ibid.
14
Ibid.
15
Ibid.
16
Ibid.
August 27, 2013 3

OEM’s.17 Nissan considered this diversity to be a source of strength in managing a large global
operation and it valued that the executive team could speak first-hand to the unique constraints and
opportunities that were present in each market.18
Complementing this focus on flexibility, Nissan maintained a simplified product line compared to its
competitors. The company adopted a build-to-stock strategy for just a few SKUs in each model and a
build-to-order strategy for the rest. Management believed that this strategy had not only helped it to
simplify its operations and product offerings, but it actually contributed to a significant increase in
sales. As explained by John Martin,19 the company’s SVP of manufacturing, purchasing and supply
chain management:
Nissan was a company reborn from crisis. In 1999 Nissan was rescued from impending
bankruptcy by Renault who put in place a revitalized management team led by Carlos Ghosn.
This sense of crisis persists in the organization to this day. This ‘crisis mentality’ was critical to
our recovery from the 2007/2008 Global Liquidity Crisis, the Great Japan Earthquake and
subsequent Thai Floods in 2011. Our supply chain philosophy is one of vigilance and extreme
responsiveness allied with single point responsibility. It is the supply chain management
organization’s responsibility to keep the production plants running. This clarity of purpose and
responsibility engenders confidence and decisiveness both of which are crucial to disaster
recovery.
Risk Management at Nissan

Nissan’s attitudes toward risk and emergency response emerged through the company’s experience in
overcoming daunting challenges. In 1999 the company faced severe financial difficulties that were
only resolved when it formed an alliance with Renault. Under the terms of the alliance, Renault
bought 36.8% of Nissan’s outstanding stock and Nissan agreed to buy into Renault when it was
financially able to do so.20 This deal forced Nissan to confront entrenched practices and biases and to
take proactive action to ensure the company’s survival and ultimate success. (See Exhibit 3 for
financial performance.)
Nissan’s risk management philosophy was born out of its near-death experience. It focused on
identifying and analyzing risks as early as possible, and planning and rapidly implementing
countermeasures. The company established a dedicated risk management function which was
responsible for these activities. There was also an executive-level committee that made decisions on
corporate risks, designated “risk owners” to manage the specific risks, and regularly reported to the
17
Interview with John Martin, February 25, 2012.
18
Interview with John Martin, May 28, 2012.
19
At the time of the crisis John Martin served as Corporate Vice President for Nissan’s Global Supply Chain division in Japan.
20
Nissan eventually bought a 15% stake in Renault. Renault has subsequently increased its stake in Nissan to 44.4%.
August 27, 2013 4

Board of Directors on progress. Each division was empowered and expected to take preventive
measures to minimize the realization and impact of risks that did not require corporate coordination.
Nissan’s continuous readiness process included activities such as ongoing seismic reinforcement of
facilities, improvement to its business continuity planning (BCP), and disaster simulation training.21
Nissan had an earthquake emergency-response plan in place well in advance of the 2011 earthquake,
which was described in its 2010 annual report (Exhibit 4).22 The principles of Nissan’s emergency-
response plan included a priority on human life, prevention of follow-on disasters, rapid disaster
recovery and business continuity, and support for the neighboring community, companies, and
government. It designated a Global Disaster Headquarters that, in the aftermath of a disaster, was
responsible for gathering and distributing information concerning employee safety, facility damage,
and business continuity planning for Nissan’s operations and those of its suppliers. In addition, the
plan required that Nissan conduct earthquake simulation training to test and improve upon the
effectiveness of the organization and its contingency plan.
Nissan’s Response to the Disaster

Nissan’s actions after the earthquake and tsunami adhered to the principles detailed in its earthquake
emergency-response plan. Immediately after the disaster, Nissan’s Global Disaster Control
Headquarters, headed up by the chief operating officer, was convened to evaluate the impact on
operations and to oversee the restoration of activities. A Recovery Committee was established to
coordinate the global recovery actions, in particular the work of optimizing the entire supply chain.
As Nissan’s Chief Recovery Officer Colin Dodge wrote in the company’s 2011 Annual Report,
The impact on our business [of the disaster] was felt in all regions. Nissan’s manufacturing
operations are thoroughly global in nature, and disruption to the supply structure in Japan spreads
quickly through our supply chain all around the world. In the past months Nissan has been
implementing countermeasures in every region where it does business.
In Europe, for example, where we maintain production bases in the United Kingdom, Spain and
Russia, we took steps immediately after the quake to ensure supplies of needed parts. The
European regional team worked closely with the Japan side to share information about the status
of the Japan-sourced parts supply, swiftly reflecting these updates in the regional supply side. The
level of depth and accuracy of this information sharing has been truly amazing. It has allowed us
to constantly update our regional production forecast, so that we can align our production
calendar with conditions in production sites in Japan.23
21
Nissan 2011 Annual Report.
22
While similar response plans may have been in place at Honda and Toyota, neither organization provided visibility of them in their annual reports.
23
Ibid.
August 27, 2013 5

The Recovery Committee emphasized a few simple yet meaningful practices in coordinating the
company’s response to the disaster:
1. Sharing information – Nissan brought all of their global regions into the response process.
Management recognized that the non-Japanese operations would want information, but the
effort to provide it would be a distraction to those on the ground handling the crisis. They
also recognized information might be used selfishly by dependent facilities optimizing
against its own needs. To address these two concerns, each region was asked to send two staff
members to Japan to gather their own information and to help solve problems holistically.
Instead of becoming a drain on the local response effort, the other regions and plants
contributed to solutions. In addition, the regions had complete visibility into what was
happening in Japan and could help the organization improve the response.
2. Allocating supply – Given the capacity constraints in the weeks and months after the
disaster, and the dependencies that existed across the Nissan operational network, allocation
of component parts was critical. The sales, marketing, and the regional supply chain
management functions were brought together to identify how to globally allocate supplies to
focus on highest margin goods. For example the supply of integrated Global Positioning
System (GPS) units was constrained by the disaster. Nissan identified which car models
required integrated GPS to meet customer demands, and allocated resources accordingly.
Low-end models did not receive the allocation of available GPS since they did not have
commensurately high margins, and customers were willing to purchase those models without
an integrated GPS. This process was completed within two weeks of the earthquake and
continually updated as the supply situation became clearer.
3. Managing production – Nissan slowed their production lines in a targeted way.

Management closely considered in-stock and in-transit inventory within their network and
slowed production upstream and downstream of anticipated bottlenecks. For example, the
company was able to ramp down production, and thereby decrease costly overtime, for
operations that were expected to be bottlenecked. Management also pulled vacation time into
April and May in order to free up capacity later in the summer when upstream bottlenecks
were projected to have cleared.
The company used the time bought by having in-transit inventory to identify and implement
supply alternatives. For example, the lead-time for ocean transport from Japan to the west
coast of the United States was 15 days, plus five days to move material to plants in Tennessee
and Mississippi. This meant that management had as many as 20 days to identify how to
access alternative supplies of critical components. They were also able to secure air freight
out of Japan so they could get critical parts out of the country faster and mitigate the
reduction of in-transit stocks.
August 27, 2013 6

4. Empowering action – Nissan emphasized rapid and flexible action. Management was
empowered to make decisions in the field without lengthy analysis from a central authority.
To speed critical decision-making process on recovery-related issues, the company modified
its delegation of authority rules for a limited period. The decisions were iterated upon as new
information surfaced so that the company could course correct, if necessary. As Nissan’s
Chief Operating Officer Toshiyuki Shiga explained,
The disaster response simulations we have carried out regularly served us particularly
well. By envisioning a full range of potential situations arising from a major disaster and
preparing for them, we successfully enabled ourselves to take prompt actions when the
time came.
At a time of disaster, it is essential to make speedy decisions while grasping the latest
situation, including details on employees’ safety and damage caused, and to take
appropriate actions based on this. We launched the Global Disaster Control Headquarters
just 15 minutes after the earthquake occurred. The team immediately gathered and
assessed damage while overseeing restoration efforts at various facilities.24
Recovery by the Big Three Japanese Auto Manufacturers

In the six months following the earthquake, production across all auto manufacturers in Japan
declined 24.3% compared to forecast.25 The big three Japanese manufacturers each contended with
different issues associated with the disaster. Toyota had significant exposure due to its large size and
its high rate of Japanese production (including for export). Nissan had several plants in close
proximity to the disaster area. While Honda was partly insulated due to its large localized U.S.
production, recovery from the disaster was still slow. Honda attributed its production problems to
constraints in its supply chain,26 a problem that Nissan had successfully insulated itself from. As
Nissan’s Chief Financial Officer Joseph Peter remarked,
Most of the steps we have taken in response to the March 11 disaster have been continuations of
strategies, priorities and plans that were already in place. One example of this is the localization
strategy we have been pursuing to better balance our manufacturing and sourcing footprint to our
sales footprint. Our actions in this area date back to the start of the financial crisis in 2008, when
our primary objectives were to reduce volatility from foreign currency movements, particularly
the appreciating yen, and to reduce cost.27
24
Ibid.
25
“Japan Production by Month, 2005-2011,” WardsAuto Group, 2012.
26
Q2 2012 Honda Motor Co Ltd Earnings Presentation.
27
Ibid.
August 27, 2013 7

Going Forward
In January 2012, Nissan announced that it would increase the localized production of its cars in the
Americas from approximately 70% to 90% by 2015.28 The company also set aggressive targets to
reduce its reliance on Japanese-made components in its foreign factories. For instance, the company
was hoping to reduce the number of components brought in to North America from Japan by 50% by
the end of fiscal 2013.29 The company, according to Peter, was also making a concerted effort to
better understand critical dependencies that exist within its supply chain beyond the first tier of
suppliers:
We are learning fresh lessons from the earthquake, too. Moving forward we will be modifying
our purchasing process to enhance our business continuity plan at the parts level, particularly for
critical components, and to mitigate potential supply risk concentration beyond the Tier 1 level.
These are evolutionary kaizen changes, though, as opposed to fundamental shifts in our sourcing
strategy.30
As COO Shiga pointed out, despite its preparedness, Nissan had work to do to be even better
protected the next time disaster struck:
Many challenges still lie ahead. Some parts suppliers have yet to restore their operations. Our
supply chain requires rehabilitation. This experience has instructed us in the necessity of an
actionable BCP (business continuity plan) that encompasses all our suppliers, including those in
the second and third tiers. Development of a more robust supply chain and comprehensive risk
management are imperative in making our business more sustainable.31
Case Discussion Questions
1. The case identifies several aspects of the Nissan response that were particularly beneficial.
Expand on the points made in the case to identify the potential costs and benefits of these actions.
2. What else could Nissan have done to prepare for and respond to the disaster? Try to articulate the
costs and benefits of your suggestions.
3. What could Nissan have done to assess the risk of disruption in their supply chain?
4. How did Nissan’s product line strategy help or hurt its ability to respond to and recover from the
disaster?
28
Chester Dawson, “Nissan Aims to Boost North American Production,” The Wall Street Journal, January 9, 2012.
29
Ibid.
30
Ibid.
31
Ibid.
August 27, 2013 8

5. How will the operational changes announced in 2012 affect Nissan’s exposure to future
disruptions? How will it affect its steady-state operations? What trade-offs is management
making and why?
August 27, 2013 9

Exhibit 1 Production to Sales Ratios for Select Japanese OEMs
Source: Chester Dawson and Neal E. Boudette, “Too Big in Japan, Toyota Struggles,” Wall Street Journal, May 12, 2011.
Exhibit 2 Initial Damage Reports from Major Japanese Automotive OEMs
Company Damage status

Nissan Motor ü Fires broke out at Tochigi Factory and a foundry in Iwaki
ü Damage to the Tochigi Factory, Iwaki Factory (engines), Yokohama
Factory (engines, etc.), Oppama Factory and Zama Works (lithium-ion
batteries, etc.)
ü It will take some time before the Iwaki Factory is repaired
Toyota Motor ü Partially damaged facilities at the Iwate Factory (subsidiary Kanto Auto
Works), Miyagi Factory(subsidiary Central Motor), and Tohoku Factory
(parts)
Honda Motor ü Some damage in to facilities in Tochigi Prefecture
Mazda Motor ü No major direct impact
Suzuki Motor ü No major direct impact
Source: Kohei Takahashi, “Autos and Auto Parts,” J.P. Morgan Equity Research, March 22, 2011.
August 27, 2013 10

Exhibit 3 Select Nissan Financials, 2009-2011, (millions of yen)
2009 2010 2011

Revenue 8,436,974 7,517,277 8,773,093
Cost of Goods Sold 7,118,862 6,146,219 7,155,100
Gross Profit 1,318,112 1,371,058 1,617,993
Operating Expenses
Sales, General & Administrative 1,456,033 1,059,449 1,080,526
Operating Income (137,921) 311,609 537,467
Net non-operating income (34,819) (103,862) 347
Net special gains (losses) (46,031) (66,127) (57,673)
Earnings Before Taxes (218,771) 141,620 480,141
Total Income Taxes 36,938 91,540 132,127
Income (loss) attributable to
(22,000) 7,690 28,793
minority interests
Net Income (233,709) 42,390 319,221
Source: Nissan 2011 Annual Report.
Exhibit 4 Excerpts from Nissan 2010 Annual Report
Risk Management Measures & Actions (Related to Earthquakes)
Nissan is assuming earthquake (EQ) as the most critical catastrophe. In case of EQ which intensity is
5-upper or over in Japan, First Response Team (organized by main functions of Global Disaster
Headquarters) will gather information and decide actions to be taken based on the information. If
necessary, Global Disaster Headquarters and Regional Disaster Headquarters are set up and gather
information about employees’ safety and damage situation of facilities and work for business
continuity.
At the same time, efforts to develop Business Continuity Plan (BCP) are being done involving
suppliers, such as, each and every function assessed its priority work, develop countermeasures to
continue the priority works. BCP will be reviewed annually in the process of rotating PDCA cycle.
Policy & Principle in Case of EQ
1. First priority on human’s life (Utilization of Employees’ safety confirmation system, EQ

preparedness card to be carried on a daily basis)
2. Prevention of second disaster (In-house firefighting organization, stockpiling, provision of
disaster information)
August 27, 2013 11

3. Speedy disaster recovery and business continuity (Measures for hardware, improvement of
contingency plan and development of BCP)
4. Contribution to local society (cooperation / mutual aid with neighboring community,
companies, local and central government)
Global Disaster Headquarters and Regional Disaster Headquarters conduct simulation training
assuming large EQ to prepare catastrophe. The drill tests the effectiveness of this organization and
contingency plan, and clarifies the issues to be improved. The contingency plan is reviewed based on
the feedback.
Nissan Global Headquarters Building where Global Disaster Headquarters is supposed to be set up
(built in August 2009) has EQ resistant structure by vibration controlling brace damper. The safety is
assured even in case of maximum level of EQ assumed at the site.
EQ: Earthquake
August 27, 2013 12

Operational Audit: Overview and Guide
Operational audit is a crucial component of any business performance and future outlook, yet it
still remains a mystery to many entrepreneurs and business owners. Often confused with internal
audit, operational audit goes beyond financial checks and balances to provide a comprehensive
evaluation of a company’s operations, systems, and processes. An operational audit looks for
areas where the company’s business operations might be improved. To truly unlock business
success, understanding the ins and outs of an operational audit is essential.
What is an Operational Audit? A Brief Overview

An operational audit is a comprehensive evaluation of a company’s operations, systems, and
processes. Unlike a financial audit, which focuses solely on financial statements, an operational
audit digs deeper to assess the efficiency, effectiveness, and overall performance of a company’s
business and its processes.
The purpose of an operational audit is to identify areas where improvements can be made to
streamline processes or implement more effective organizational activities. It examines all
aspects of a company’s operations, including its internal policies, procedures, and controls. By
evaluating these key components, an operational audit provides valuable insights into how well a
company is managing its resources and whether it is operating in compliance with relevant laws
and regulations.
The process of conducting an operational audit involves several steps. First, the internal audit
team or external auditor defines the scope and objectives of the audit, taking into account the
company’s specific needs and goals. Then, the auditor collects and analyzes data, reviews
relevant documentation, and conducts interviews with key stakeholders. This information is used
to identify any gaps or deficiencies in the company’s operations and to make recommendations
for improvement.
Key Components of an Operational Audit

Operational audits consist of several key components that are essential for a comprehensive
evaluation of a company’s operations. These components ensure that all aspects of the business
are thoroughly examined, providing valuable insights into areas of improvement and future risks.
The first key component is the evaluation of internal controls. Internal controls are the policies,
procedures, and systems put in place by management to ensure the integrity of operations and
protect company assets. The auditor assesses the effectiveness of these controls, identifying any
weaknesses or deficiencies that could expose the company to risks or fraud. By analyzing internal
controls, the operational audit helps businesses strengthen their risk management practices and
safeguard their assets.
Another important component is the audit program, which outlines the audit procedures and
workflow to be followed during the process. The auditor develops an audit program tailored to the
specific needs and goals of the company, ensuring that all areas of operations are thoroughly
examined. The audit program serves as a roadmap, guiding the auditor in collecting relevant data,
reviewing documentation, and communicating operational improvements to key stakeholders.
Human resources is another key component often assessed in an operational audit. The auditor
evaluates processes such as recruitment, training, performance management, and employee
relations. This assessment ensures that the company has the right people with the right skills in
place to support its business operations and achieve its objectives.
Additionally, an operational audit includes a review of management’s control over operations.

The auditor assesses how well management is overseeing and directing the company’s day-to-
day activities, ensuring that there are clear goals and objectives in place and that performance is
monitored and measured. This evaluation provides valuable insights into the effectiveness of
management in driving the company toward success.
Lastly, an operational audit may also include compliance audits, which assess whether the
company is operating in compliance with relevant laws and regulations. The auditor reviews the
company’s policies, procedures, and practices to ensure they align with legal requirements.
Compliance audits help businesses mitigate legal risks and maintain a strong ethical and legal
framework.
The Importance of Operational Audits in Enhancing Business Performance

Operational audits play a vital role in enhancing business performance. This type of audit goes
beyond the surface-level financial checks and balances to provide a comprehensive evaluation
of a company’s operations, systems, and processes. By conducting an operational audit,
businesses gain valuable insights into their operations, identify areas for improvement, and
develop strategies to achieve their goals and objectives.
One of the main reasons operational audits are important is because they help businesses
optimize their operations and improve efficiency. By evaluating internal controls, audit findings
can highlight areas where processes can be streamlined, leading to cost savings and increased
productivity. Additionally, operational audits can uncover inefficiencies in resource allocation and
identify opportunities for automation or technology adoption, further enhancing business
performance.
Operational audits also play a crucial role in mitigating risks. By assessing compliance with
relevant laws and regulations, businesses can ensure they are operating within legal boundaries,
reducing the risk of fines or legal action. The audit findings can also identify areas of vulnerability,
such as weak internal controls or inadequate risk management practices, allowing businesses to
implement measures to strengthen their operations and protect their assets.
Types of Operational Audits

Operational audits can take on different forms, depending on the specific areas of focus and
objectives. Here are seven different types of operational audits that businesses can undertake:
IT Audits: These audits evaluate the efficiency and effectiveness of a company’s IT systems and
infrastructure. They assess areas such as data security, network performance, software
utilization, and IT governance.
Financial Audits: Financial audits focus on the accuracy and reliability of a company’s financial
records and reporting. They analyze financial statements, transactions, and controls to ensure
compliance with accounting standards and regulations.
Departmental Audits: These audits target specific departments or functions within a company,
such as human resources, procurement, or production. They aim to identify operational
inefficiencies, improve processes, and enhance departmental performance.
Marketing Audits: Marketing audits evaluate a company’s marketing strategies, campaigns, and
activities. They assess the effectiveness of marketing initiatives, customer targeting, branding
efforts, and return on investment to help streamline marketing efforts and improve outcomes.
Compliance Audits: Compliance audits ensure that a company is operating in accordance with
applicable laws, regulations, and industry standards. They review policies, procedures, and
practices to identify any non-compliance issues and mitigate legal and regulatory risks.
Investigative Audits: These audits are conducted when there is suspicion of fraud, misconduct,
or irregularities within a company. They involve an in-depth examination and analysis of financial
records, transactions, and employee activities to uncover any potential wrongdoing.
Follow-up Audits: These audits are conducted after previous operational audits to assess the
implementation and effectiveness of recommended changes. They provide an opportunity to
evaluate progress, address any lingering issues, and ensure continuous improvement.
By understanding the different types of operational audits available, businesses can tailor their
audit approach to target specific areas based on risk and optimize their operations. Whether it’s
streamlining IT systems, improving financial controls, or enhancing marketing strategies,
operational audits provide valuable insights for the management team members to make informed
decisions and drive business success.
Step-by-step Guide to Conducting an Effective Operational Audit

Are you ready to dive into the world of operational audit and start unlocking the secrets to business
success? In this step-by-step guide, we will walk you through the process of conducting an
effective operational audit.
Step 1: Define the Scope and Objectives - Begin by clearly defining the scope and objectives
of your operational audit. Consider the specific needs and goals of your company, and outline
what areas you want to focus on. This pre-audit step will help you stay focused throughout the
audit process and ensure that you gather the necessary data and information.
Step 2: Collect and Analyze Data - Gather relevant data and documentation to support your
audit. This may include financial statements, operational reports, policies, procedures, and other
relevant documents. Take the time to thoroughly analyze the data, looking for patterns, trends,
and areas of concern.
Step 3: Conduct Interviews - Interview key stakeholders within the company to gain a deeper
understanding of the operations, systems, and processes. This will provide valuable insights and
perspectives that may not be evident from the data alone. Be prepared with a list of questions
and actively listen to the responses.
Step 4: Identify Gaps and Deficiencies - Based on the data analysis and interviews, identify
any gaps or deficiencies in the company’s operations. Look for areas where improvements can
be made to enhance efficiency, effectiveness, and overall performance. These gaps will serve as
the foundation for your recommendations.
Step 5: Make Recommendations - Based on your findings, develop a set of actionable

recommendations to address the identified gaps and deficiencies. These recommendations
should be specific, measurable, achievable, relevant, and time-bound (SMART). Communicate
these recommendations to the relevant stakeholders and ensure they understand the reasoning
behind each recommendation. Finally, ensure that a target timeline is agreed upon with
stakeholders to implement any agreed-upon action plans.
Step 6: Implement and Monitor - The final step is to implement the recommended changes and
monitor their effectiveness. Work closely with the relevant stakeholders to ensure the
recommendations are successfully implemented and measure the impact of these changes over
time. Make adjustments as needed and continuously monitor the performance of the company’s
business operations. Set up some time with internal audit team members to reflect on
improvements made so far and what can be done better in working with management to
implement recommendations.
Common Challenges in Operational Auditing and How to Overcome Them

Operational auditing, while essential for business success, is not without its challenges. In this
section, we will discuss some common challenges faced during operational audits and provide
strategies to overcome them.
One of the main challenges in operational auditing is obtaining accurate and reliable data.
Many businesses struggle with data management, leading to incomplete or inaccurate
information. To overcome this challenge, it is crucial to establish clear data collection and
documentation procedures. Implementing automated systems and standardized processes can
help ensure the accuracy and consistency of data.
Another challenge is resistance to change. Operational audit results often reveal areas needing
improvement, which can be met with resistance from employees and management. To address
this challenge, it is important to involve stakeholders as early as possible through the audit
process and communicate the purpose and benefits of the audit. Creating a culture of continuous
improvement and providing training and support can also help overcome resistance.
Resource constraints can also pose challenges during operational audits. Limited time, budget,
and staff can make it difficult to conduct a thorough audit. To overcome this challenge, careful
planning and prioritization are necessary. Identifying critical areas to focus on and utilizing
technology and automation tools can help streamline the audit process and maximize efficiency.
Lastly, ensuring audit recommendations are implemented can be a challenge. Often,

businesses struggle to follow through with recommended changes due to competing priorities or
lack of accountability. To overcome this challenge, it is essential to create a plan for implementing
recommendations, assign responsibility to specific individuals, and establish monitoring and
reporting mechanisms. Regular follow-ups and reviews can help ensure that recommended
changes are implemented and their effectiveness assessed.
Real-world Examples of Successful Operational Audits

Real-world examples of successful operational audits can provide valuable insights into how this
process can drive positive change and enhance business performance. Let’s take a look at a few
examples.
Example 1: Company ABC, a manufacturing firm, conducted an operational audit to identify areas
of inefficiency and improve their production process. The audit revealed bottlenecks in their supply
chain and identified opportunities to streamline inventory management. By implementing the
recommendations from the audit, Company ABC was able to reduce production costs, optimize
its inventory levels, and improve its overall operational efficiency.
Example 2: Retail Company XYZ conducted an operational audit to assess its customer service
processes. The audit revealed long waiting times, ineffective communication channels, and
inadequate training for customer service representatives. By implementing the recommendations,
Company XYZ was able to improve its customer service response times, enhance communication
with customers, and increase customer satisfaction, leading to improved sales and customer
retention.
Example 3: Technology Company DEF conducted an operational audit to evaluate its IT

infrastructure and data security measures. The audit identified vulnerabilities in their network
security, data backup protocols, and disaster recovery plans. By implementing the audit
recommendations, Company DEF was able to enhance its data protection measures, reduce the
risk of cyberattacks, and ensure the availability and integrity of its critical systems.
Tips for Streamlining Your Company’s Operational Audit Process
Are you ready to take your company’s operational audit process to the next level? Here are some
tips to streamline the process and maximize its effectiveness:
1. Clearly define your objectives: Before starting an operational audit, clearly define what you
want to achieve. Identify the specific areas or processes you want to focus on and set measurable
goals. This will help you stay focused throughout the audit and ensure that you gather the
necessary data and information.
2. Use technology and automation: Embrace technology and automation to streamline the audit
process. Utilize compliance management software tools to collect and analyze data, automate
repetitive tasks, and generate comprehensive audit reports. This will not only save time but also
improve the accuracy and consistency of your audit findings.
3. Involve key stakeholders: Engage key stakeholders in the beginning and throughout the audit
process. Seek input from different departments and individuals to gain a holistic perspective of
the operations. This will not only provide valuable insights but also help build support for
implementing the audit recommendations.
4. Prioritize your findings: Once you have identified gaps and deficiencies in your operations,
prioritize them based on their potential impact and feasibility of implementation. Focus on
addressing the most critical issues first, ensuring that resources are allocated effectively.
5. Develop a clear action plan: Translate your audit findings into a clear action plan. Define
specific steps, responsibilities, and timelines for implementing the recommended changes. This
will ensure accountability and facilitate the monitoring of progress.
6. Monitor and evaluate: Continuously monitor and evaluate the effectiveness of the
implemented changes. Regularly review key performance indicators and measure the impact of
the audit recommendations. This will help you track the progress and identify any areas that
require further improvement.
Conclusion
An operational audit is a powerful tool that businesses can use to optimize their internal
processes, enhance efficiency, and achieve their goals. By conducting a comprehensive
evaluation of a company’s operations, systems, and processes, operational auditors provide
valuable insights and recommendations for improvement. From evaluating internal controls to
assessing human resources practices, operational audits cover all aspects of a company’s
operations.
Through the step-by-step guide provided in this blog post, businesses can effectively conduct
operational audits and implement corrective actions to drive positive change. By involving key
stakeholders, using technology and automation, and prioritizing findings, businesses can
streamline their audit process and maximize its effectiveness.
Real-world examples of successful operational audits demonstrate the impact that this process
can have on enhancing business performance. Whether it’s reducing production costs, improving
customer service, or enhancing data security, operational audits provide actionable
recommendations that lead to tangible results. By understanding the ins and outs of operational
audits, businesses can unlock their full potential and achieve long-term success. The expertise
and guidance of operational auditors are invaluable in identifying areas for improvement and
implementing changes that drive continuous improvement. So, don’t underestimate the power of
operational audit in unlocking business success and ensuring a competitive edge in today’s
rapidly changing business landscape.

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20-199

Boeing’s 737 MAX 8 Disasters

The Boeing Company

Thornton “T” Wilson

Acquiring McDonnell Douglas

The 737 vs. the A320

The 737 MAX Program

Exhibits 7 and 8 present Boeing’s financial performance during this period.

Anatomy of Two Disasters

The conversation turned darker:

The Origin of MCAS

Redundancy Made Optional

Boeing issued an explanation:

FAA Safety Personnel Survey

Financial and Reputational Damage

Meanwhile, the families of the 346 victims continued to grieve.

Exhibit 1 U.S. General Aviation Safety Data – 1975 to 2018

Note: Accidents on foreign soil and in foreign waters are excluded.

*Note: Data through 2019 (before COVID-19 pandemic impact).

Source: Wikipedia, https://en.wikipedia.org/wiki/Competition_between_Airbus_and_Boeing#cite_note-Time_Period_Reports-

Exhibit 3 Boeing 737 Family of Aircraft – 1967 to 2017

Exhibit 4 Boeing Aircraft Pricing Data

Average prices for Boeing aircraft as of March

Source: Statista, “Airbus and Boeing,” https://www.statista.com/statistics/273941/prices-of-boeing-aircraft-by-type/, accessed

Source: Boeing Company 2019 Annual Report.

Exhibit 7 Boeing and Airbus Revenue and Profit, 1995–2021

Exhibit 8 Cumulative Five-Year Returns

Source: Boeing 2018 Annual Report.

Source: U.S. Department of Transportation Inspector General Report,

Exhibit 10 Overview of MCAS

Source: U.S. Department of Transportation Inspector General Report,

Exhibit 11 AOA Disagree Alert and AOA Indicator

Source: U.S. Department of Transportation Inspector General Report,

Exhibit 12 Boeing and Airbus Stock Prices

Index: Share prices on 10/22/2018 = 100.

Accident,” June 29, 2020

Toyota Supplier Relations: Fixing the Suprima Chassis

“We’re working as hard as we can,” replied McDonald, ChassisCo’s plant manager.

The Toyota Production System and Just-in-Time

April 24, 2017 2

April 24, 2017 3

April 24, 2017 4

The 1997 Suprima Launch

April 24, 2017 5

April 24, 2017 6

The Responsa Success

The 2003 Suprima

April 24, 2017 7

April 24, 2017 8

April 24, 2017 9

April 24, 2017 10

April 24, 2017 11

Stopping the Bleeding

April 24, 2017 12

April 24, 2017 13

Questions (please prepare answers to be discussed in class)

2. Considering these causes:

3. Considering these causes:

April 24, 2017 14