UPS United Parcel Service

By Ted Mann 

Jet-engine maker Pratt & Whitney had a problem this summer, one familiar to anyone who has assembled a do-it-yourself bookcase: Not all the parts were in the box.

Production on the company's engines--including a new generation spawned by a $10 billion investment--ground almost to a halt for nearly a month in August as problems with the launch of a custom-built UPS facility for engine parts cascaded into a crisis.

Pratt, a unit of United Technologies Corp., had contracted with United Parcel Service Inc. in an effort to streamline its supply chain as it prepared to ramp up manufacturing. Pratt has a backlog of more than 7,000 orders for the more fuel-efficient commercial engines, and plans to increase annual output to more than 500 by 2018 from dozens this year.

UPS said last year it would set up a logistics center in Londonderry, N.H., to take in parts from Pratt's suppliers, package them into kits holding about 8,000 parts, and ship them to Pratt factories for assembly by company's machinists.

But the 130-person logistics facility was beset by problems after it opened in July, said people familiar with the operation, slowing assembly to a crawl. Some engine kits arrived at Pratt's engine centers in Middletown, Conn., and West Palm Beach, Fla., without all the required require parts.

The union for the machinists that assemble Pratt's engines said some parts arrived dirty and damaged. That forced workers to scrounge together parts for a single engine from multiple kits, ultimately slowing downassembly for weeks this summer.

"Kits are coming in with wrong parts, and some of the parts don't even fit in the allocated slot! It's almost like trying to put a square peg into a round hole!," a union representative wrote in a newsletter to members last month.

After the August disruption, Pratt says parts are now flowing as intended through the logistics center, and that engine output is back to normal.

"UPS personnel have worked closely with the team at Pratt & Whitney to resolve initial implementation issues, and material is now flowing to assembly sites at scheduled production volume," a UPS spokesman said.

Danny DiPerna, Pratt's senior vice president for engineering and operations, acknowledged "a temporary interruption of material flow to our factories" this summer, but said the company chalks the problems up to growing pains.

After the problems emerged, high-rankingPratt executives spent weeks on the ground in Londonderry, training UPS workers who were unfamiliar with jet-engine parts and working out kinks in the companies' inventory software.

The incident highlights the pressure Pratt, which accounts for 22% of United Technologies's $65 billion in annual sales, is under to keep its operations running smoothly as it begins its engine ramp-up--and how efforts to streamline a supply chain can backfire.

"People always ask, 'What's the one thing that keeps you up at night?' " United Technologies Chief Executive Greg Hayes said last month. "It's the ramp. The technology, I'm very confident we've got that right. But you're only as good as your worst supplier. When you've got 8,000 parts in an engine, one of those parts aren't there, you're not building an engine."

By turning over its logistics to UPS, Pratt had hoped that it would eliminate low-value work for its labor force, and avoid holding extensive inventory on its own books, Mr. Hayes said. The company will use the new logistics system for all of its engine models, including for the new F-35 fighter for the U.S. Air Force.

With its older engines in decline and the new design requiring a huge increase in manufacturing, Pratt handed off management of parts and inventory to a highly automated UPS warehouse that it believes will better cope with a much higher rate of production, Pratt's Mr. DiPerna said.

"In the grand scheme of things, this took a few more weeks that we had planned," he said, but the facility will support Pratt's production for decades.

According to a person familiar with the matter, the companies regard the union's complaints as sour grapes from labor leaders whose members had been usurped by UPS's nonunion workforce. Union officials didn't respond to requests for comment.

The New Hampshire missteps are a stumble for UPS, which has been building out its supply-chain service business in recent years as it copes with pressures in its traditional delivery business. While supply chain is still a small part of UPS's overall business, making up only about 15% of revenues when combined with the company's freight division, it is one that executives have touted as a road to growth and part of the delivery giant's core business.

Laura Stevens contributed to this article.

Write to Ted Mann at ted.mann@wsj.com

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(END) Dow Jones Newswires

October 01, 2015 20:26 ET (00:26 GMT)

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