Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.
This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months. As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.
Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America
Commercial Aerospace Manufacturing Supply Chains
Once again, for many former and now new challenges, we have once again included commercial aircraft supply chains in our industry-specific predictions for 2017.
Commercial aerospace focused supply chains will have an especially challenging year in 2017 from several dimensions. While Airbus and Boeing both declared that they each exceeded operational performance targets in 2016, the numbers indicate that an industry inflection point is at-hand, one that has implications for the collective industry supply chain ecosystems. The overall demand for larger, wide aisle aircraft is now showing signs of contraction. Added challenges remain in the number of planned new product introductions in the coming quarters, and the industry has now discovered some weak links in supply, namely new more technologically sophisticated aircraft engines and certain other troublesome components.
Our stream of research and observations related to commercial aircraft supply chains have painted a picture of an industry that has created extraordinary levels of product demand streams by designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels are clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability, and more timely shareholder returns.
Smack in the middle of these dynamics are relationships among suppliers, a need to continue to invest in expanded production capacity and innovation capability and now meet shareholder return needs. Suppliers have been buffeted by various OEM demands for larger cost and productivity savings. In the specific case of Boeing, suppliers to the wide body 787 program are now being asked to step-down pricing related to prior volume ramp-up needs as Boeing seeks to better balance new order flows with annual production.
A Declared Industry Inflection Point
Aviation Week, a well-respected and highly followed industry publication made a declaration in an early January 2017 commentary: The End of the Airbus-Boeing Supercycle. (Free complimentary sign-up account required)
This declaration declares:
“After a remarkable 12-year boom, world aircraft industry output growth sputtered to a halt in 2016. The market fell 1.2% (in constant dollars) relative to 2015, the first aggregate decline since 2003. While military demand remains robust, most civil segments are feeling the impact of negative macroeconomic and geopolitical developments.”
This commentary further observes:
“The jetliner market is just finishing a 12-year supercycle. Airbus and Boeing guidance, until recently, indicated that they expect a 17-year supercycle. That now looks unlikely to happen. For some time now, there has been a disconnect between airliner market prosperity and the rest of the world economy, which is seeing higher instability and slower growth. The jetliner industry, unfortunately, is falling in line with that macro environment.”
While Aviation Week anticipates some modest growth in commercial aircraft deliveries this year, it will be half-that experienced over the past 12 years. Most order growth going forward is anticipated in the single-aisle segment with the twin-aisle market being declared as flat at best. Meanwhile, jet fuel prices are again rising adding more financial pressures on airlines to operate more efficiently.
For the industry’s respective multi-tier supply chain, the implications of this inflection point are sobering for planning windows through the year 2020. After 2020, the industry may well be in a decline from the current 12-year cycle. The decline of new order flows for higher margin wide aisle aircraft place the major emphasis on narrower margin single-aisle aircraft that must produce higher volumes to meet financial business objectives.
The notions of euphoria in multi-year order backlogs will likely be replaced with more conservative, but far more detailed planning pitting OEM’s and suppliers at-odds with mutual win-win financial performance objectives. The challenge for Airbus and Boeing will be in implementing increased production automation, higher levels of end-to-end, multi-tier supply chain visibility with far more informed supply chain wide insights and business intelligence.
Other Supply Chain Challenges
New Product Introduction
As was the case in the prior three years, the industry again has important NPI milestones this year.
For U.S., based Boeing, the first 737 MAX 8 is scheduled to delivered to Southwest Airlines in the first-half of this year, followed by 737 MAX 9 model later in the year. This aircraft has been five years in development and will feature a far more automated production process that must now be ramped to expected volumes. An expanded 787-10 Dreamliner, designed to carry more passengers and utilizing more carbon fiber content is scheduled for first flight this spring. For the first time, Boeing North Charlestown facility will have sole manufacturing responsibility for this model.
European based Airbus likewise has important NPI milestones this year. The second iteration of Airbus’s revamped single-aisle family, the A321 neo (new engine option), will enter service in 2017. It will represent the largest member of the updated A320 neo family and has significant dependencies on newly designed, more fuel-efficient engines being supplied by CFM International along with Pratt & Whitney. The 366-seat long-range A350-1000 representing the biggest twin-engine jet Airbus has ever designed, with eventually compete with the Boeing 777-300ER. First customer ship to flagship customer Qatar Airways is scheduled for late 2017 and this airline has had a pointed relationship with Airbus regarding meeting expectations.
Weak or Critical Links
Commercial aircraft supply chains are often described as constantly dealing with exceptions or surprises. Whether it is an unexpected notice of late-delivery from a key supplier, components that unexpectedly slip from meeting highly engineered conformance standards, or having full visibility to events or risks occurring across the extended supply chain. With the current wave of new, more technologically laden aircraft models, engineering specifications are more demanding and new process technologies such as 3D printing and other additive or automated manufacturing techniques are now present. Yet, amid such an environment, the industry is now hard at work meeting and sustaining higher volume production and supply chain cadence needs.
One of the most critical supply links in 2017 will be that of aircraft engine manufactures, which collectively must now transition revolutionary new designed engines into meeting high- volume manufacturing and customer delivery requirements of aircraft OEMS.
In the single-aisle aircraft category, two prime manufacturers, CFM International (joint venture of Safran Aircraft Engines of France and General Electric Aircraft Engines) and Pratt & Whitney, are prime power plant options based on airline selection. CFM had planned to deliver a total of 100 of its new LEAP engines in 2016, but could deliver but 77. For 2017, 500 LEAP engine deliveries are being planned. For Pratt, a series of highly visible supply chain related challenges related to the new geared turbo-fan (GTF) PurePower engines contributed to a delay in deliveries for the Airbus A320 neo and Bombardier C-Series programs. In 2016, Pratt delivered 138 GTF engines, 62 of which were in the final Q4 quarter. Pratt plans to produce between 350-400 engines in 2017, but some identified component reliability issues have some of these engines designated as spares to support airline uptime requirements. Any subsequent slippage or delivery disruptions from either of these two engine suppliers will likely impact planned OEM deliveries to customers.
In the wide-aisle, long distance aircraft segment, Rolls Royce and its family of Trent engines have served as the workhorses of these larger, more fuel-efficient aircraft. For the past three years, Rolls has been challenged with profitability performance as well as allegations of bribery practices related to sales of various products. Revenues from commercial aircraft engines currently make-up upwards of one-half of revenues, yet Rolls has not been able to control costs related to design and manufacturing. A new restructuring plan calls for this aerospace engine provider to double production levels by 2020, which is being described as the fastest ramp-up in its history. The company is headquartered in the United Kingdom, and thus any effects of Brexit in terms of currency, trade, or tariff issues are a further open question.
While on the topic of Brexit, the United Kingdom hosts several aerospace providers who serve the technology and equipment component needs of various global commercial aircraft manufacturers. Depending on the outcome of the European Union and British exit terms related to currency, tariffs, taxes, trade and population movement, aircraft model producers may well have to assess any impacts to costs, pricing and added risks.
This concludes our 2017 prediction related specially to commercial aerospace supply chains.
In our next posting, related to Prediction Ten, we will dive into consumer packaged goods and beverage focused supply chains.
Readers are reminded to review all our prior 2017 predictions postings. And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week, there was a noteworthy announcement concerning efforts directed at ensuring global wide interoperability standards related to Internet of Things (IoT) technology deployments.
The Industrial Internet Consortium (IIC), the global member supported organization that is promoting accelerated growth of IoT adoption, announced that it had signed a memorandum of understanding (MoU) with the China Academy of Information and Communications Technology (CAICT) to work together in helping to insure ensure interoperability for the Industrial Internet across China. IIC has released a framework to support development of best practices and standards related to IoT data security and has further developed a Business Strategy and Innovation Framework that defines at a high level, efforts of process, people, and technology that an enterprise will need to address to effectively capitalize on IoT enablement initiatives.
CAICT serves as a research arm under China’s Ministry of Industry and Information Technology. This academy serves a specialized think tank and development lab for China’s industry and government efforts. Joint CAICT and industry development efforts have involved areas such cloud computing, big data, intelligent manufacturing and 5G mobile networks. The academy has been collaborating with ARM, Intel, and Huawei Technologies to establish the Edge Computing Consortium, an effort to ensure that information and operational technology elements of the Industrial Internet can integrate.
IIC is also collaborating with its European counterpart, Platform Industrie 4.0, in pooling interoperability expertise that can insure a compatible systems and security framework.
With an active Liaison Working Group, the IIC is helping to move the needle in global standards consistency, and now with collaboration in best practices and standardization efforts that umbrella China, Europe and the United States, there is potential to streamline and accelerate efforts toward consistency in standards and practices in a timelier manner.
Line-of-business and functional supply chain teams currently contemplating or directly contributing to internal IoT or Industrial Internet focused initiatives should monitor the ongoing efforts and planned deliverables of IIC and its global-wide strategic partners.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In case our automotive and high tech industry focused readers were not aware, Tesla Motors made a very significant announcement this week regarding efforts to ramp-up manufacturing and supply chain volume expansion needs.
The innovative electric car manufacturer announced its intent to acquire Grohmann Engineering of Germany, a noted manufacturing automation design firm. A Tesla blog posting regarding this deal indicates that when this deal closes, the design firm will be renamed Tesla Grohmann Automation and will serve as the foundation of Tesla Advanced Automation Germany. The automaker further indicated that it expects to add over 1000 advanced engineering and skilled technician jobs in Germany over the next two years.
In disclosing this deal, company founder and CEO Elon Musk declared to analysts; “This will really be our first acquisition of significance in our whole history.” Terms of this proposed acquisition have not been disclosed and the automaker indicates that it hopes to gain full regulatory approval by early 2017.
Grohmann is recognized for designing automated manufacturing plants in the semiconductor, electronics and automotive industries as well as the biotechnology and medical technology sectors, among others.
As we have highlighted for our Supply Chain Matters readers, Tesla’s ongoing challenge is the need for increasing annual production output to 500,000 cars per year by 2018. A posting appearing on TechCrunch indicates that both firms have been working in a partnership for the past few months and found that team cultures complemented each other, thus the decision to move forward in a formal relationship.
At its most recent annual meeting of shareholders earlier this year, CEO Musk declared that Tesla will “completely re-think the factory process.” He repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. Advanced reservations with associated deposits for over 300,000 of the announced mass-market appeal Model 3 helped in the realization of such principles. He challenged Tesla engineering teams to the principles of “you build the machines that builds the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.
Adding a significant amount of additional manufacturing process design engineering resources in Germany has, by our lens, added significance that may well reveal itself over time.
By our lens, this week’s announced intent to acquire a noted external manufacturing process design firm is an acknowledgement from Tesla that it must seek external expertise, experience and outside process innovation thinking in achieving its production volume ramp-up goals by 2018. While Musk recently noted that he would move his office to directly on the company’s factory floor in Fremont California to better understand the exact needs for the production machine, the current aggressive goals for ramp-up had to compel this latest action to acquire external, proven experience. With a mere two-year planning and implementation window remaining, and with industry competitors now more keenly focused on Tesla, it was time to make a bold move.
Readers will recall when online retailer Amazon acquired warehouse automation and robotics firm Kiva Systems in 2012. The industry was initially puzzled with the move along with the hefty acquisition price, only to discover a few years later that Kiva technology now serves as a foundation for Amazon’s vast and quickly expanding global network of customer fulfillment and logistics centers.
Obviously, this is a significant announcement, one that merits industry attentiveness in the coming months.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Note: This is the second of two postings providing more specific evidence that a shift in the contract manufacturing services is now underway and involves multiple industry sectors. We began with a commentary related to automotive industry product design supply chain strategy. In this posting, we focus on the changing services model of Jabil Circuit.
As far back as 2011, this analyst began to share observations on a growing reality of a changed model of contract manufacturing services (CMS) among high tech and consumer electronics supply chains. The reasons were obvious five years ago, and far more obvious today. The ability to continually experience a mere one to two percent in operating margins, regardless of volume scale, was unsustainable for the industry as a whole. Once more, with direct labor costs increasing in major manufacturing hubs across China and other areas, and with technology cycles changing more quickly, the need for constant capital infusion in investments in the newest technologies and automation further requires an increased return for such investments. Remember that the CMS model evolved from a need by OEM’s to avoid the need to invest in manufacturing assets and process automation. More and more now, the industry is moving to umbrella capabilities in product innovation and design, supply chain network design as well as digitally enabled manufacturing capabilities.
In our last commentary specifically related to Jabil published in May, we shared highlights of our interview with the Vice President of Supply Chain Solutions and Global Logistics. Our byline was that if readers had any perceptions that CMS firms were laggards in advanced technology adoption, our interview led to quite a contrary perception.
This week the $18 billion manufacturing partner to some of the most well-known high tech and consumer brands made a rather significant announcement, one that places this contract manufacturer in the category of original design manufacturer as well as a managed services provider.
The Jabil announcement outlines the introduction of what is being termed as: “Innovation Acceleration services that compress the entire product lifecycle” New services include:
- Digital Prototype Lab and associated services to deliver enhanced speed to product innovation
- Managed Supply Chain Services to enhance supply chain network visibility and mitigate risk.
- Managed Procurement Services to boost purchasing efficiencies and drive cost saving opportunities.
- Additive manufacturing and 3D printing services to accelerate new product introduction for larger-scale volume manufacturing.
To gain additional perspectives, Supply Chain Matters was invited to speak with John Caltabiano, Vice President of Supply Chain at Jabil along with Chuck Conley, Director of Product Marketing, Digital Supply Chain solutions. We learned that Jabil’s value to clients has expanded across different industry markets, engineering, supply chain and contract manufacturing capabilities. With this week’s announcement, Jabil is transitioning to an expanded services model that is enabled through broader strategic capabilities and digital based services that can speed time-to-market and provide added opportunities to reduce supply chain wide costs.
In essence, Jabil is now positioning services to support product strategy, product design and innovation, supply chain network performance and customer services, thus moving upstream in the product value-chain.
These new services come about from Jabil’s prior acquisition of radius in product innovation, development and prototyping services. The Digital Prototype Lab includes capabilities in 3D Printing technology, CT Scanning and rapid iteration off existing CAD data.
The 3D Printing capabilities are underscored by a partnership with HP Inc. and other printer device providers. Jabil considers itself to be a leader in additive manufacturing and the new services in this area provide materials development and certification, process validation and 3D supply chain integration. This can allow customers to move beyond use of 3D printing for product prototyping and more into the rigors of leveraging additive techniques for higher volume manufacturing needs.
As for the two new services, Procurement as a Service is designed to encompass procurement strategy and vision, sourcing of direct materials, purchasing execution and business process outsourcing for supporting procure-to-pay (PTP) processes. We were informed that this service leverages Jabil’s own knowledge in the procurement and supplier capabilities of thousands of various components globally.
Supply Chain as a Service is more consultative and strategy focused, providing customers assistance in supply chain network optimization, design for supply chain strategies, supply network inventory optimization and supply chain risk management. While availability for network optimization and compliance and conflict materials tracking is now available, the other elements of end-to-end visibility, risk management and inventory optimization are planned for a Q1-2017 release.
Underpinning both of the above new services is Jabil’s own developed Jabil InControl and Procurement Intelligence Platforms. They include 45 various applications connected together in a management utility. There are elements of SAP backbone applications, a unique PDM application, Kinaxis Rapid Response supply chain planning, along with newly developed capabilities directed as normalizing data feeds across all Jabil support applications. Regarding the latter, Jabil has been working with Microsoft to build capabilities for analyzing massive amounts of structured and unstructured data. Our previous check-in with Jabil in May explored enabling end-to-end planning and customer fulfillment visibility and the context of ‘actionable visibility’ supported by ‘in-control’ digitized streaming of information that is anchored in analytics-driven decision support capabilities.
As our readers may be aware, one of the more sensitive concerns for OEM based manufacturers involve intellectual property protection (IPP) related to product designs, particularly when they are shared with contract manufacturers or ODM’s. IPP can often be a concern or roadblock in an outsourcing decision. Our briefers addressed that concern by indicating that Jabil has no intentions to be viewed as a product company, and that product design IP will also remain with client. However, in this new era of digital-enabled manufacturing and supply chain, process-focused IP remains with that of the manufacturing or supply chain partner. Further, through its relationships with existing 3D printing and additive manufacturing partners, contract manufacturers themselves may be bounded by the process protection rights of the individual additive manufacturing technology providers.
We would hasten to add that certain industry disruptors may be willing to trade-off production and supply chain IP rights to gain faster market entry, enable more accelerated new product introduction cycles and avoid the costs of investing in the costs of more automated and digitally enabled manufacturing. It relates to strategy trade-off decisions.
Obviously, Jabil is not alone in this industry-wide transition. Globally based CMS providers Flex and Foxconn are moving upstream as-well while making augmented investments in additive and digitally enabled manufacturing and supply chain capabilities supported by more predictive based sly chain applications and decision-making.
More and more, traditional CMS providers are moving to umbrella capabilities in product innovation and design, supply chain network design as well as digitally enabled manufacturing capabilities. Once more, these capabilities have resonance with more and more industry settings beyond high-tech and consumer electronics. We previously highlighted capabilities for the automotive industry and these new models have attraction in many other industry sectors as well.
The common business phrase among many C-suite executives is that in today’s business world you either disrupt or be disrupted. That includes contract manufacturers who have now figured out that their futures rest with broader support for industry disruptors.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In 2011, this analyst began to share observations on a growing reality of a changed model of outsourced contract manufacturing services (CMS). The following two postings provide some specific evidence that this shift is now underway and involves multiple industry sectors. We begin with commentary related to automotive industry supply chain strategy.
Product strategy change within the automotive industry is now underway, and will continue to involve industry disruptors.
Looking back, initial reports of high tech and consumer electronics Apple potentially entering the electric car business came to speculation light in early 2015. In a Supply Chain Matters commentary published in February of that year, we called attention to published reports by both the Financial Times and The Wall Street Journal indicating that Apple was working on a secret research lab possibly directed at developing a concept electric car. According to the reports at that time, the code name “Project Titan” was assigned to the effort and hundreds of automotive engineers were recruited. Apple, of course, has declined comment to any of these publications.
Since that time, business media has reported that the effort shifted its product development strategy away from internal development of an electric vehicle and more towards a potential autonomous electric self-driving vehicle that could rival that of Tesla. Once more, information leaks indicated that without a definitive deliverable, Project Titan was waning, leading to informed sources indications of layoffs and talent exits occuring within the Project Titan team this summer.
A recent new report from the Financial Times cited informed sources as indicating that the consumer electronics giant was in talks to potentially acquire luxury sports car manufacturer McLaren. Both companies have been quick to deny the occurrence of such talks.
As our readers are aware, manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it was of little surprise that in 2015, Apple was already investigating existing contract manufacturing options. The February 2015 WSJ report specifically cited Canadian based contract manufacturer Magna International as an option and reported that that Apple executives had flown to Austria to meet with the Magna Steyr unit of the Canadian based auto parts supplier.
In the latest edition of Bloomberg Businessweek, a report titled: The Foxconn of the Auto Industry, indicates that Magna has taken more proactive actions to position itself as the contract manufacturer of choice for self-driving vehicles. The premise is that if Apple, Google, Uber or other technology focused firms want to manufacture a self-driving vehicle than Magna may well remain as the first step as the design and manufacturing outsourcing option, freeing up resources of the automotive or transportation services provider to concentrate on a software and managed services business model.
According to this Bloomberg report, CEO Don Walker has initiated plans for Magna to be the one-stop option. Walker has tasked his Chief Technology Officer to establish an effort across Magna’s various component divisions to develop an autonomous self-driving vehicle capable of transporting four to five people within the next two years. A noted strategy shift is that rather than waiting for a customer to engage with Magna to respond to certain design specifications, Magna will instead provide a vision and capability for where the transportation market is headed, and a pre-designed Magna product platform that can be leveraged for more responsive time-to-market entry into the market.
The premise of this new strategy is twofold. First, there is a belief that in the coming five years, the core of product design expertise and IP for hybrid or electric powered self-driving vehicles will rest in software and services, rather than automotive component design such as bodies, engines and transmissions. Second, the contract manufacturing industry itself is moving more towards a one-stop shop for product design as well as more automated manufacturing processes including additive manufacturing techniques. Such a shift allows contract manufacturers to broaden their margins while increasing a presence up and down the automotive value-chain.
As Bloomberg, other business media, and we at Supply Chain Matters continually point out, Tesla, after reaping the benefits of thousands of consumers providing up-front deposits to secure a slot for the new Model 3, must now figure out a supply chain wide scaling process to internally manufacture this new vehicle in sufficient volumes to meet customer delivery and product margin expectations.
Magna on the other hand has a premise that industry disruptors will pursue an asset-light strategy, preferring to outsource physical component design and final assembly to a competent and trusted contract manufacturer.
Magna already has relationships with BMW, Land Rover and Mercedes for the outsourcing of model production. As noted in the report, Magna has been producing the Mercedes Benz G-Class vehicle for decades., and has now brought on BMW. This latest Bloomberg report further indicates that Magna has assigned nearly a dozen engineers to work with the Apple team in Sunnyvale California in vehicle development.
As noted, the contract manufacturing model is now quickly changing placing more responsibility for product and supply chain network design with the contract manufacturer. We will all likely observe the consequences of this new model in the not too distant future and it will involve many more industries and products.