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A Premiere Week for Aerospace Industry Supply Chains and a New Challenge

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This is a premiere week for the global aerospace industry and their associated global supply chain partners.  This week, the Paris Air Show, a weeklong gathering of a who’s-who of the industry is underway along with the contest for booking orders for new aircraft.

Business media has already positioned this year’s show as the continuing battle between Airbus and Boeing for industry domination for new, more technology advanced and energy efficient wide-body jets.  In a previous Supply Chain Matters commentary late last week, we noted the well-timed inaugural flight of the Airbus A350. The reality remains, however, that both of these premiere global aerospace providers have over eight years of current order backlog, and the pressure to ramp-up production output levels is building with each passing month.  Any new orders booked this week by either or both of these manufacturers adds to individual and collective supply chain pressures.

The spotlight is not only on the two industry giants but on the other highly competitive segment of single-aisle, more fuel-efficient regional jets. That battle pits Bombardier, Embraer, Mitsubishi and COMAC vying for airline operator attention and new orders. They each share supply chain partners with either Airbus or Boeing.

We were especially curious to note an article in yesterday’s Wall Street Journal that described Airbus CEO Fabrice Bregier new emphasis on efficiency and empowering factory managers with more independence for delivering aircraft on-time and on-budget. Last year, Airbus, the operating group of parent EADS, posted an operating profit margin of 4 percent.  That is roughly half of Boeing’s recorded operating margin of 9.6 percent in the same period. 

Readers from the high-tech industry OEM community may scoff at such margins, given the double digit margins that they encounter.  Then again, high tech OEM’s do not want to own production assets and elect to transfer that burden to contract manufacturers who have to manage in single-digit operating margins.

Mr. Bregier has tasked Airbus teams to improve operating margin to 10 percent within the next two years. The plan is to eliminate complexity as much as possible and to allow factory managers to run their operations as a streamlined business with the ability to make independent decisions. That’s a tall order given the complexity, dominance and influence of engineering and product design teams.

Our aerospace industry readers may well question whether the 10 percent operating margin goal within the next two years is really a stretch goal given the current operating pressures, complexity and complex culture of today’s aerospace industry.  Consider that Airbus’s 4 percent profitability came on a total revenue base of €39 billion ($52.3 billion). That is the testament to a rather complex, engineering-driven supply chain with lots of opportunities for added efficiencies and more streamlined suppy chain related decision-making. 

Both the WSJ and The Financial Times have declared that for Airbus and Boeing, a new emphasis on profitability is largely dependent on efficiency rather than which manufacturer books the most orders this week and in the weeks to come.  That is perhaps a new reality that limitless order flows may be waning and that the industry may perhaps be reaching too much adsorption of new aircraft.

One of the time-tested principles of change management relates to the fact that change only comes when management teams set specific goals as to which metrics and behaviors need to change and subsequently call attention and measure such goals.  For aerospace leaders Airbus and Boeing, the corporate culture and executive bonus system is perhaps too focused on declaring industry leadership based on orders booked. 

Supply Chain Matters concurs that this may well be the time for the aerospace industry to shift the focus and the measurement systems toward improved production efficiencies, more streamlined decision-making and broader end-to-end supply chain intelligence.

Aerospace industry readers are welcomed to share their perspectives on whether the shift toward supply chain efficiency and more streamlined decision-making is doable given today’s operating norms and management approaches.

Bob Ferrari

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