Navigating the acceleration economy

Photo courtesy of Celestica imagery archives

Times are good and getting better in aerospace. Boeing’s Current Market Outlook 2018-2037 reports the commercial sector has recorded eight straight years of steady, above-trend growth and predicts the trend will continue for the next 20 years, requiring 42,000 new airplanes by 2037. For original equipment manufacturers (OEMs), this positive outlook is tempered by the fact they are under enormous pressure to lower costs of operations while continuing to provide the highest product reliability and faster time to market. Success requires re-evaluating existing partner networks and consolidating the number of suppliers to create modern supply chains that are more responsive and resilient to emerging market demand shifts.

The speed of business is faster than ever, and strategic partnerships have never been more important to fostering innovation, speeding time to market, and enhancing competitive advantage. We call this the Acceleration Economy, and OEMs must embrace a new normal where disruptive change is met with innovation, new ideas strengthen competitive advantage, companies collaborate across deep networks and bring new products to market faster, and technological adoption secures a lasting market presence.

The reality is, the aerospace and defense (A&D) supply chain remains stuck in the 20th century and cannot keep pace.

Supply chain pain points

Constrained materials and long lead times for critical parts plague the industry. Lead times on some parts have gone from 26 weeks to more than 50, seemingly overnight. Too often, notices of delays from supply chain partners come without warning, and that one hiccup creates a domino effect that delays deliveries all the way to the aircraft integrator.

One key reason: forecasts for more aircraft sales do not trickle down to all levels of the supply chain. Boeing, Airbus, and other OEMs annually publish how many aircraft they’re going to build and provide forecasts for the next 10 years. But there’s no way OEMs can take the time to reach out to all suppliers and ask them to update their production rates to match forecasts. There are simply too many layers of the supply chain with suppliers numbering in the hundreds, even thousands. That makes it virtually impossible for an OEM and all suppliers to be proactive in anticipating production volume increases ahead of an actual change to a purchase order.

The sheer volume of suppliers is perhaps the most significant obstacle OEMs face to succeed in the Acceleration Economy. OEMs are looking to build more financial flexibility across the supply chain. They must, therefore, work to simplify their supply chains by consolidating suppliers to save life cycle cost, improve quality, and gain more value.

Redesign the supply chain

This requires a more aggressive approach to inventory management, beginning by figuratively cleaning out the slow movers to make room for future growth so as to not adversely affect the balance sheet. OEMs will then be able to link multi-year aircraft forecasting down to the chip level with a robust digital factory system that allows for inventory fluctuations without incurring financial hardship. The goal is to gain the ability to tell a supplier to build 120 units and be able to revise that number up or down, without creating delays. If an OEM and supplier can be proactive in tying a contract back to the end user for the aircraft and get the estimation before generating the purchase order (PO), the OEM will encounter far fewer shortages and delays.

Three key ways for OEMs to address the need to lower life cycle costs include:

1. Partner with a trusted manufacturer early in the design cycle to ensure the parts selection is robust and alternate options are identified so constraints in supply are not exacerbated.
2. Be proactive in pushing future aircraft forecasts down through all levels of the supply chain and allow for inventory flexibility in the contract terms so vendors can keep the production flowing. This will help them better manage costs and eliminate delays because aircraft won’t be sitting on the deck waiting for a single part to arrive.
3. Reduce the number of suppliers by partnering with those suppliers who possess a broader set of end-to-end product life cycle capabilities that drive value from product design to repair, service, and long-term maintenance.

These suggestions can automatically trigger fears that fewer suppliers will increase risk and limit an OEM’s flexibility. However, the opposite is true. A broader product life cycle provider can balance the financial risk across multiple products and services which typically allows for better value to the OEM.

Larger organizations traditionally are not as nimble or agile as a niche supplier. That places the onus on suppliers to improve their responsiveness and ability to meet an OEM’s changing needs by providing early communication on their forecasts and creating more flexibility in their inventory management methodologies.

Vendors, trusted partners

All partners are vendors, but not all vendors can be labeled trusted partners. OEMs rely on vendors to deliver a set number of products or services on a regular schedule. The expectations both sides have for one another rarely fluctuate, and the focus is always on meeting an OEM’s immediate business needs.

A trusted partner helps the OEM take a long-term view of how its supply chain must evolve. In addition to delivering on the current fiscal quarter’s contract, it also helps the OEM develop and implement long-term strategies to solve supply chain issues and challenges the Acceleration Economy creates.

Identifying these trusted partners requires basing supplier evaluation on three questions that will help OEMs create a network of end-to-end suppliers who can drive greater agility and flexibility:

1. Is the supplier positioned to meet performance specifications?
2. Are they considering the entire value chain and industry, technical, and supply challenges the OEM is facing?
3. Are they tailoring their strategies and investing in capabilities and processes that will carry over to the OEM and generate significant value?

The Acceleration Economy demands that A&D OEMs redesign the supply chain to save life cycle cost, improve quality, and gain more value through the complete value chain. Coming out of redesign, each OEM’s supply chain will look drastically different, customized to the needs of their operations. However, the most successful will embody a more agile supply chain fueled by fewer suppliers who possess a broader set of end-to-end capabilities that drive value from product design to repair, service, and long-term maintenance – building in resilience to disruption.

Celestica Inc.
https://www.celestica.com

About the author: Jack Jacobs is Celestica’s vice president for aerospace and defense. He can be reached at jjacobs@celestica.com.