Loss of contract spurs reshuffling at Boeing satellite. (Up Front).

In the wake of losing a $900 million contract earlier this year to help build next-generation communications satellites for the Air Force, Boeing Co. is restructuring its El Segundo manufacturing operation.

Boeing Satellite Systems has undergone a series of changes in management and manufacturing as part of an effort to boost efficiency and productivity at its local unit including 1,000 layoffs, or 11 percent of its 9,000-employee workforce, by the end of May.

Plans for the restructuring have been underway for some time, but losing the contract forced the company to focus more intensely on the changes.

Loss of military contracts is troubling for the Boeing unit because the company is looking for more government business to make up for a slump in the commercial telecommunications industry, where two-thirds of its work comes from. Only 11 of its current 38 satellite orders come from the military.

Boeing was to have helped develop and build the first two of five Advanced EHE Security Communications Satellites, which will replace the Air Force's aging Milstar satellites. The Advanced EHF vehicles are designed to increase by 10-fold the amount of data that can be transmitted via satellites.

Boeing was to have built the telecommunications payload, which would be integrated by subcontractor TRW Inc., with prime contractor Lockheed Martin Corp. handling the final assembly of the satellites.

But before the contract was awarded, Boeing's role in the project was diminished, cutting its revenue potential by more than half, but not reducing any of its financial responsibility should design and production problems arise.

"We determined there was too much risk and we walked away from it," said George Torres, a spokesman for Boeing Satellite Systems. Boeing officials would not elaborate on why the company's role was reduced.

TRW gets job

TRW will now assume most of Boeing's responsibilities, said Air Force Lt. Col. Steve Lauder, advanced EHE program manager in the Military Satellite Communications unit at Los Angeles Air Force Base. Neither Lockheed nor Air Force officials would comment on why Boeing's role was reduced.

Boeing Satellite Systems has had its share of problems in the past. For instance, in November 2000, the backup control processor of a Boeing commercial satellite failed, rendering the vehicle useless and forcing the company to file a $130 million insurance claim.

Last summer, its insurance carrier refunded as much as $32 million to NASA after the main antenna on a next-generation Tracking and Data Relay Satellite performed well below specifications.

"It's a risky business because it's so easy to make a mistake and lose an awful lot of money for your customer and yourself," said Paul Nisbet, a partner in JSA Research Inc., a Newport, R.I., defense consulting firm.

Over the next year, Boeing will construct a 30,000-square-foot addition to its 300,000-square-foot testing area - part of the 1 million-square-foot plant that Boeing purchased from Hughes Electronics Corp. in late 2000.

The additional space will be filled with state-of-the-art equipment to conduct testing for satellites under development, including the Spaceway communications satellite for Hughes Network Systems and the Wideband Gapfiller communications satellite for the Air Force.

While the expansion work is underway, the company will reorganize its facility in phases to a "lean manufacturing" system, which keeps employees in one place, thereby reducing wasted time caused by moving around the factory. The system also conserves space and saves money by using just-in-time inventory ordering.

"Boeing wasn't getting the performance that they wanted, so they felt it was necessary to make these changes," Nisbet said. "They've got some stiff competition. "Undoubtedly they are striving to stay No. 1 in the business,"

Four high-level executives have been hired or promoted to restructure the operation:

* Bill Ballhaus has been promoted from general manager of system engineering, which oversees satellite designs, to the newly created position of senior vice president of the design operation.

* Mark Weltman has been promoted to senior vice president for manufacturing after serving in the same position for Boeing Space & Communications in Seal Beach. He replaces Al Wyatt, who is now on special assignment for Boeing Satellite Systems President Randy Brinkley.

* David Ramey has been made vice president of finance after his transfer from St. Louisbased Boeing Aircraft & Missiles, where he was director of business operations.

* Daniel Bridleman, whose position as general manager for supply chain management was elevated to one that reports directly to Brinkley.

"We're looking at every step of our operations," Torres said.

Despite the loss of the Air Force contract, Boeing Satellite Systems still generates $2 billion annually and is the No. 1 producer in the business. Company officials said part of their restructuring is designed to increase productivity to vie for more military business.

"We're chasing some major military satellite business right now," said Torres.