From SCDigest's On-Target E-Magazine
May 8, 2012
Supply Chain News: Spirit Aerosystems Finds Creative Approach to Labor Relations Pays Big Dividends
Variable Pay, New Approach to Layoffs in Return for Commitments to Keep Jobs in USA; Typical Win-Lose Nature of Contract Negotiations had to Change, CEO Jeff Turner Says
SCDigest Editorial Staff
When Spirit Air was spun out from aircraft maker Boeing in the mid-2000s, then new Jeff Turner was convinced that the traditional approach to labor relations with its heavily unionized factory workers wasn’t right for them or the company.
Having been through the types of problems that labor strife had brought Boeing in the past, and believing deeply that the dominant model for contracts with the unions was a bad strategy for the highly cyclical aerospace industry and its workers, Taylor challenged the unions to consider a different way – one that has paid off big for both sides of the equation.
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An even greater departure from the traditional approach was how employees would be handled if a downturn was severe enough to cause layoffs under normal conditions.
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Taylor made his observations at the Future of US Manufacturing Conference at MIT university in Cambridge, MA this week. The two-day event was developed by MIT’s Leaders for Global Operations, an academic program, and co-sponsored by MIT’s Forum for Supply Chain Innovation, led by Dr. Bill Killingsworth, where Dr. David Simchi-Levi is also actively involved.
Spirit Aerosystems, headquarter in Wichita, KA, makes systems for both commercial and military aircraft, focused primarily around fuselage sections and pieces of the wing assemblies. It currently has sales of about $5 billion, spread across three factories near Wichita and one in the Southeast area of the US.
Spirit inherited labor contracts with several unions after the spin-off, but soon entered a new round of negotiations as the existing three-year agreement was set to expire.
Turner noted several issues with the status quo. First was that each new negotiation fostered a “win-lose mentality.†Every agreement led to a sense that either the company or the union won that battle, and which side won was usually a reflection of economic conditions for the aerospace industry at the time. In better times, the union tended to “winâ€, while the company would usually be seen as prevailing in weaker economic periods.
Second, when the inevitable downturns hit the industry, Turner said the usual pattern of steep layoffs would occur, giving the employees, especially newer ones, little in the way of job stability or security.
“That’s no way to run a business, a family, or a nation,†Turner said.
The issue was especially salient for Spirit given its age demographics. The average age of factory employees was already 50 at the time the company was spun out, Turner said. If there was a large layoff resulting from a major industry downturn, that average age would likely rise to an incredibly 60 years old.
The traditional contract with the unions would be for three-years, and provide guaranteed, substantial wage increases during the course of the contract, on top of a wage that was already well above general manufacturing averages.
With growing complexities and challenges from customers and competitors worldwide, “We just couldn’t sustain the business in that environment,†Turner said.
When the negotiations for a new contract were beginning a couple of years after the spinoff, Turner said he decided to personally visit the offices of one of the major unions, where national leadership was training local union officials on best practices in negotiating techniques. During this unexpected visit, Turner said he described to union leadership how he viewed the situation, and the risks to the company from the status quo. At the same time, he listened to the union, and found the biggest fear was simply that the company had no commitment to the workers, and would be happy to jettison them if a better deal – such as offshoring – came along.
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There was more: Union pay became more variable. Factory workers could earn s much as 10% additional pay - or take home 4-5% less – depending on how well Spirit performed in the market and financially. Critically, that variable pay approach didn’t just apply to apply to blue collars factory workers, but management and executives as well, who had a lot more upside but also a lot more downside in terms of compensation. This approach would allow Spirit to share the rewards from factory floor to executive suite when it was enjoying prosperous times, and also to reduce its losses when the market went the other way. The approach would also motivate blue and white collar employees to focus hard on efficiency, innovation and customer service, which would accrue to their own benefit.