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GE Aviation Moves Toward Supply Chain Vertical Integration

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Today’s Wall Street Journal article reflecting on General Electric and its GE Aviation division (paid subscription required or free metered view) is impeccably timed.

The article opens with the following introduction: “As Boeing pays a price for having farmed out crucial parts on its new Dreamliner, General Electric Co.’s aviation division is busy bringing work on its engines back in-house.”

That statement uncovers a rather important consideration for today’s senior supply chain executives who’s supply chains support market innovative products, namely whether the needs of intellectual property protection, more intimate access to product development and the all-important protection of intellectual property assets (IT) outweigh savings garnered in supply chain outsourcing. These past months, this author has been leaning more toward vertical integration of the supply chain, as we continue to comment on companies who have elected to change course and pursue this strategy.

The WSJ notes that GE Aviation must fulfill a delivery rate of more than 4,000 engines per year for the next two years amid increasing customer orders for its new GE90, GEnx and CFM56 engine models. A backlog of orders for 15,000 new generation aircraft engines between now and 2020 is a compelling motivation for the supply chain to focus on risk avoidance and resiliency, which GE Aviation is in the process of doing.  GE Aviation’s supply chain executive Colleen Athans is quoted by WSJ; “We want more under our control.  Rather than pay a supplier to do it, we would protect our intellectual property,”

The WSJ article describes how acquisitions of Italian parts supplier Avio, additive manufacturing company Morris Technologies, and a joint venture with supplier SeaCast Inc. to secure access to key raw materials as recent evidence of this supply chain vertical integration strategy.

Within Supply Chain Matters, we have featured supply chain vertical integration strategies practiced by Hon Hai Precision, Hyundai and Delta AirlinesReaders are welcomed to review each. Each of these instances had either specific business goals to support, a key commodity or product innovation strategy to enhance or protect.  There are probably other examples which readers are welcomed to share here.

The takeaway is that a blind follower strategy regarding supply chain outsourcing is not always the best decision.  Supply chain strategy needs to be tailored to certain business needs and outcomes. A singular business focus to positively impact Return on Assets (ROA) by wholesale outsourcing of strategic supply chain product components is one dimensional, and needs to be balanced with other measures of supply chain risk and resiliency. Having the industry leading benchmark in ROA may not be all that wise if the ability to consistently deliver industry breakthrough products is compromised.  Today’s supply chain executive should practice broader-based general management skills that provide the analysis and insights to the tradeoffs of outsourcing vs. insourcing.

Bob Ferrari

 

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