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The Reality of Aerospace Supply Chain Challenges Becomes Ever More Visible

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Supply Chain Matters has previously declared that Aerospace supply chains, those that are building the next generation of aircraft, are stressed and face a paradox of challenges.  While some industries would envy an environment in having upwards of five years of customer order backlog, the challenges take on a far different perspective, and the stakes, in many cases, become far higher. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy.  This should be an industry humming on all engines, but success comes with a burden. When the two largest global OEM’s, Airbus and Boeing, are involved in an outright brawl for ultimate market supremacy, suppliers, both large and small, get the added distress of having to figure out how to satisfy the extreme ramp-up needs for both while maintaining profitability momentum. Supply chain process and program deficiencies, incidents of supply chain risk, and now the unfolding European financial crisis, could all compound the ability to ultimately deliver backlogged aircraft orders to customers in a timely fashion.

That reality was once again reinforced by a newly announced research study issued by Alix Partners which concludes that aerospace supply chains face the harsh reality of having to deliver a huge backlog of orders, an unprecedented 45 percent ramp-up in production rates over the next three years, with the major OEM’s and suppliers challenged with different profitability challenges. The latter conclusion notes that while some “super Tier One” suppliers may have become so big that they represent a risk to OEM’s ramp-up performance, lower tier suppliers may provide even more risks to ramp-up needs, especially in the light of the ongoing European financial crisis.

This week, in conjunction with the Farnborough International Airshow and Trade Exhibition being held in the U.K., the Financial Times featured a revealing interview with Boeing CEO, Jim McNerney. (paid subscription or free metered view) In the interview, McNerney emphasized that Boeing will strike back at Airbus in the race to win additional orders for more efficient, single-aisle aircraft, predicting another 1000 orders for the newly announced Boeing 737 Max aircraft by the end of this year, adding to 549 existing orders for the aircraft. Rival Airbus currently has orders for 1400 A320 Neo aircraft, thus the race goes on. In its reporting, the FT pointed out that Boeing’s Commercial Business contributes upwards of 53 percent of Boeing’s current revenues, and a separate CNN Money article in late June reported that the 737 program alone accounts for half of the commercial division profits.

Also, for the first time in public, Mr. McNerney acknowledged: “that “in retrospect”, Boeing should have made its decision to proceed with a revamped version of its narrow-body workhorse , rather than a brand new aircraft, “six to nine months” earlier.Supply Chain Matters recently commented on the sudden senior management change at Boeing Commercial Airplanes, and one can now speculate from Mr. McNerney’s interview comments why the decision was made.

Also in the interview, McNerney played down the impact of the Airbus announcement to open its first commercial production facility in the U.S.. Upon being reminded of 1997 when Boeing plunged to a net loss after suffering production level setbacks, the Boeing CEO expressed his confidence that Boeing’s current ramp-up production goals will be achieved, and that the lessons of the past have made their mark in scars and management changes. He was also quick to point out that Boeing might not execute all of its ramp-up plans of single and twin-aisle aircraft if the current business prediction of low to moderate growth in the global economy proved too optimistic. Instead, Boeing will modify its last production rate increase planned for aircraft production.

As a supplier to Boeing, Airbus, or other aerospace OEM’s the stakes are increasing every day.  The competition for added OEM orders will invariably include customer incentives in pricing as well as attractive delivery slots to win additional business. An engineer-to-order (ETO) focused supply chain does not respond well to constant changes in planned delivery times of customer configured aircraft unless information flows and cross-functional collaboration is seamless. In a supply chain that is at maximum capacity, classic MRP mentality is of little benefit unless it is coupled to scenario-based panning and response practices. Multi-tier supplier collaboration and B2B focused execution management is no doubt essential.

The ongoing financial crisis adds another risk concerning small to mid-sized suppliers, that being access to financing of working capital and added efficiency needs. As which occurred in the 2008-2009 financial crisis, the OEM’s may well find themselves in situations of having to financially assist or support suppliers or risk further interruptions in planned supply.

In our Supply Chain Matters 2012 Predictions for Global Supply Chains, (available for no charge download in our Research Center) Prediction Four stated that three industries, the B2C sector, Pharmaceutical and Healthcare, and High Tech and Consumer Electronics would undergo significant supply chain challenges in 2012. Our stated wildcard early in the year was the Aerospace industry. As we turn toward the second-half of 2012, that wildcard is turning toward being the fourth industry supply chain with visible and quantifiable challenges.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LCC and the Supply Chain Matters Blog.  All rights reserved.

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