Case Interview Question #00169: Our client Lockheed Martin (NYSE: LMT) is a United States aerospace, defense, security, and advanced technology company formed by the merger of Lockheed Corporation with Martin Marietta Corporation in 1995. In the early 1970’s, Lockheed Corporation manufactured L-1011 TriStar, a three-engined wide-body aircraft seating up to 400 passengers for commercial airlines.
The industry was very cyclical with swings in demand occurring as frequently as every 6 months (see attached figure below). During the down months, Lockheed would have to layoff employees and shutter the plants, which created turmoil for the company and the local community. Jet aircraft were normally built to the order specification of the purchasing airline. To alleviate the costs of cyclical swings, Lockheed considered building aircraft to a predetermined schedule based on average expected aircraft sales over the next five years (see attached figure). Do you think this is a good idea and why? What are the pros and cons of pursuing such a plan?