Our newsletter is a more insightful look at global supply chain and B2B/B2C business process, technology and other important trends and is offered to both readers of this blog and clients of our consulting and industry analyst advisory services. Please check your inbox to insure you received a copy.
The Q2-2015 Newsletter includes the following updates and industry supply chain event implications:
- Q2 quantitative and qualitative highlight summaries of global PMI supply chain indices indicating more moderation and slowdown within emerging regions.
- Commercial Aerospace industry assesses supply chain ramp-up realities.
- Confirmed turbulence in global transportation.
- Continued crisis for Consumer Products and Food based supply chains.
If you would like a copy of our latest Q2 newsletter, please send an email with the title Newsletter Request to: newsletter <at> supply-chain-matters <dot> com. Please remember to include your Name, Role and/or company with your email address and we will have a copy sent directly as well as automatically add your email to future distribution.
Bob Ferrari, Founder and Executive Editor
In 2012, The Economist described the dawn of the Third Industrial Revolution, an era that would feature the digitization of manufacturing and the use of new, stronger and more innovative composite materials. And indeed, that trend continues at a rapid pace. Competing in this new era requires manufacturers to invest in new technologies that can provide both product as well as process innovation. General Electric, through its GE Reports series, recently highlighted its billion dollar bet on ceramic super material as a basis of product innovation.
Ceramics has been utilized for many years for certain power and electrical based applications mostly used in kitchen appliances. A visionary GE engineer however, believed that ceramics, which can withstand higher heat than even the most advanced alloys, could be the perfect material for jet engines and other machines that burn fuel and must handle enormous temperatures. Nearly 30 years later, along with nearly $1billion in research investment, components made from ceramic matrix composites (CMC’s) are being incorporated in the next generation of aircraft engines such as CFM International’s LEAP model that will power the upcoming Airbus A320 neo (new engine option) aircraft. The concept of a new and highly more fuel efficient upgrade of the A320, with a shorter new product development time, was prompted by these newer innovations in aircraft engine technologies.
According to the GE report, unlike other alloys, CMC components weigh one-third the weight of metal and do not need to be air-cooled. A GE Research leader indicates: “CMC’s allow for revolutionary change in jet engine design.” This was a tremendous bet on innovation. Now, aerospace, military and industrial customers may soon experience aircraft, helicopters and industrial turbines made from more CMC material based components providing lighter weight higher performance and operational savings.
However, not all suppliers have the deep pockets of global-based manufacturer such as GE. Suppliers that currently exist in commercial aerospace supply chains experience constant cost-control pressures from respective aerospace producers seeking to improve product margins or overcome prior expensive aircraft program delays. Even now, as both Airbus and Boeing are planning for significant production volume ramp-up, there still remains the perspective of who pays for innovation, and who reaps the overall benefit.
So what is the key difference for GE and its joint partners, Italian based Turbocoating, France based Snecma. That difference is that airlines negotiate and contract for aircraft engines directly with engine manufacturers. These manufacturers can translate investments in innovation to bottom line financial outcomes. CFM International has thus far booked orders for 9550 LEAP engines valued at $134 billion at list prices. The margins achieved from this amount of orders are under the direct control of the aircraft engine manufacturers themselves, a benefit that the majority of other aerospace suppliers do not have.
From our lens, the takeaway is twofold. Manufacturers ultimately own the responsibility for overall product design innovation. It is not a task delegated to key suppliers without joint compensation. Several years ago, the industry embarked on a strategy of de-centralized innovation and cost-sharing, one that required key component suppliers to innovate in product and process dimensions but not necessarily harvest the benefits from longer-term production volumes. Principle aircraft manufacturers are investing heavily in final assembly process and test automation, yet seek to offset program costs within other areas of the supply chain.
Much continues to be written on the lessons learned by that strategy, particularly those related to design and cost implications. Now, as the industry faces its toughest test in terms of supply chain ramp-up, suppliers seek due compensation for their innovation efforts. Suppliers must also answer to investors who have a shorter-term horizon.
The Third Industrial Revolution will continue to lead to breakthroughs in many dimensions, and to a new breed of more agile, market responsive manufacturers. The notions of who owns and who is rewarded for innovation will be front and center in this race to the top and will lead to a return to vertical integration supply based strategies.
The manufacturing leaders of tomorrow will be those that master the risk and reward dimensions of product and process innovation.
Supply chain risk management and Sales and Operations planning teams for both Airbus, Boeing and other commercial aerospace aircraft producers are likely hard at work today after news of the powerful explosion at the Zodiac Aerospace factory located in Washington State last night.
According to various news reports, the explosion that occurred at Zodiac’s Newport Washington plant was felt miles away, injured at least seven persons, and prompted the evacuation of surrounding homes and businesses due to strong chemical odors. At least one person was reported to be in critical condition. A report indicates that that the power of the explosion lifted an entire floor off its foundation, caused multiple areas to collapse and toppled large pieces of machinery. Thirty people were reported to be working at the plant at the time of the explosion.
According to a published Reuters report, the plant itself produces resin-impregnated honeycomb core and composite panels used by various other Zodiac production facilities to produce aircraft lavatories, galleys, overhead bins and other structures. Zodiac serves as one of the largest suppliers of aircraft interiors for multiple commercial aircraft producers.
In a mid-December posting, Supply Chain Matters called attention to a media report indicating that a component shortage involving new lie-flat airline seats occurring at Zodiac was suspected of causing delayed shipments of brand new Airbus and Boeing airplanes. Three months ago, the head of Airbus’s passenger jet business called attention to suppliers of cabin equipment, speculated to include Zodiac, indicating their failure to get to grips with chronic production delays was “unacceptable”. Thus the pressure on this supplier to step-up and meet production requirements might have been high.
This incident will, in all likelihood, continue to be of concern to commercial aircraft producers for the coming weeks as Zodiac assesses and communicates the potential impact on current and future interior equipment supply commitments.
Commercial aircraft industry eyeballs were focused on this week’s Paris Air Show, a biannual event with enormous significance to major aircraft manufacturers and their respective supply chain partners. Each event is a competition as to which manufacturer walks away with bragging rights to the most landed customer orders or most buzz regarding a new aircraft model. Beyond the headline buzz as to whether Airbus or Boeing landed the most orders, the global supply chain takeaway is an additional $100 billion plus in customer orders and another obvious extension of multi-year backlogs. The overall pressures on aerospace focused supply chain have clearly and unquestionably turned toward fulfillment execution.
Reports indicate that Airbus booked $57 billion for 421 new aircraft orders at list prices while Boeing landed $50 billion worth of orders representing 331 new aircraft. Combined, it represents nearly another 6 to 9 months of customer order backlog at current monthly production volumes.
Aircraft engine providers also shared in the order bonanza with consortium based CFM International reporting a combined $19 billion in orders related to its LEAP family of engines, and other models, while General Electric Aerospace reported orders valued at $5.4 billion for its new GE9X engine. Interesting enough, as a literal follow-up to our previous Supply Chain Matters commentary related to CFM International, the CEO of that engine supplier publically warned the two major OEM’s not to request additional production volume beyond aircraft currently scheduled for delivery through 2020, and that the consortium is currently stretched to capacity in fulfilling what has already been booked in orders. Likewise, the President of Rolls Royce’s aircraft engine business indicated that supplier was booked out to 2021 and the current industry message is about production and supply chain ramp-up.
On the topic of engines, Airbus had previously planned to feature its new A320neo aircraft at this week’s show but a component problem within the new model Pratt and Whitney engine grounded the aircraft.
A further industry implication is that more and more of added industry orders are originating from new and up and coming discount based carriers. Indonesia based Garuda was reported to be one of the most active buyers this week, placing orders for both Airbus and Boeing aircraft. Many are opting for termed “power by the hour” or included service management contracts where manufacturers guarantee a specified level of operational up-time and assume annualized aircraft maintenance costs. The longer the industry backlog continues, the less likely that OEM’s and engine suppliers can take advantage and leverage these incremental recurring revenue streams.
On the product design front, the reported buzz centered on a potential new Boeing model termed “Mom”, billed as a likely replacement of current discontinued Boeing 757 fleets. The aircraft does not exist and is more in the pitching stage, but talk of the new model was enough to reportedly generate a lot of interest and a lot of differing views. Postings by Business Insider and Bloomberg provided added color to Boeing’s potential new model. Industry participants are quoted as indicating that Boeing has no choice but to pitch such an aircraft because of current functional advantages offered by arch rival Airbus with its new A320neo aircraft. According to these postings, Boeing is indicating a “clean sheet” design. However, the current realities of the current highly capacity constrained industry are already adding to the discussion as to the time-to-market timetable for such a new model. Once more, the current operational 757 fleet is noted as more than two decades old and will need replacement rather soon. This author alone is rather frustrated in having to fly coast-to-coast across the United States in aging and dull United Airlines 757’s. It is akin to driving a station wagon with 200,000 miles on the odometer with seats and upholstery worn out. The notion of “Mom” will undoubtedly place enormous pressure on Boeing’s design engineering and program management teams at a crucial time when other new aircraft need to meet delivery and volume milestones.
Obviously, the industry question centers on whether both Airbus and Boeing have learned from past supply chain snafu’s with prior models and can effectively instill added agility, cadence and responsiveness to global-based supply chains. Supplier resiliency and contingency planning will be crucial as will supply chain risk mitigation. Advanced technology is already playing a crucial role in areas of additive manufacturing, RFID, IoT and more extensive end-to-end supply chain visibility. Both OEM’s, along with key suppliers, would be wise to increase their investments in more predictive planning and supply chain wide business and operational intelligence.
As Supply Chain Matters has noted often, an industry with engineering based culture having upwards of a current ten year order fulfillment backlog while enviable, has unprecedented challenges and requires more innovative approaches by all its players. The focus is now flawless and synchronized execution.
Supply Chain Matters calls special attention to readers who are involved in either commercial aerospace or engineer-to-order focused internal and supply chain environments. Today’s printed edition of The Wall Street Journal features a front-page article, Airbus-Boeing Speed Race Increasingly Takes Place on the Ground. (Paid subscription or metered view) By our lens, this article should be mandatory reading.
The article itself is well written and very insightful in pointing out how two rival commercial aerospace OEM’s are learning important lessons in consistent manufacturing and supply chain execution.
We cite two opening excerpts:
“After years of racing to develop and market new models, both have clear product lines for the next decade. Their order backlogs stretch as long.”
“Now, the world’s two biggest jet makers are squaring off on execution. Each aims to grab market share by building its planes faster and more efficiently than the other—a gambit both have struggled with in the past.”
Specific examples are provided on how Airbus and Boeing have addressed inter-organizational and supplier cooperation, more streamlined and focused processes, and a reoriented focus towards how aircraft will be built vs. what they would look like. It is a focus toward design for manufacturability as well as supply chain. In the specific example of the new Airbus A350 program, insights are brought forward in organizational design, workforce selection and manufacturing process design.
Included is a powerful quote from Boeing Chief Executive Jim McNerney:
“It is not just about building more airplanes but also building them more efficiently, with higher first-time quality, greater component reliability and improved employee safety.”
Well stated and an important reference for both internal and supplier based teams.
In this Supply Chain Matters posting, we provide some background to our prior commentary noting that Airbus is in the process of evaluating a further ramp-up of the production cadence of its A320 aircraft. The most significant suppliers involved in these ramp-up decisions are often aircraft engine suppliers, fuselage and airframe components suppliers as well as the myriad of avionics and electronic component suppliers. A recent commentary from General Electric’s GE Reports, provides added perspective on how the prime aircraft engine provider for the new A320 NEO model is preparing. It further reflects on the challenges for ramping-up newer materials sourcing and production process technologies, including deployment of 3D printing techniques.
The new next generation A320 NEO aircraft will be offered with twin LEAP jet engines supplied by CFM International, a 50/50 joint venture between GE Aviation and Safran (Snecma). To date, CFM has recorded a backlog of more than 2500 orders for the LEAP-1A model that powers the new A320 NEO. Other versions of the LEAP power plant will be available as engine options for the newly designed Boeing 737 MAX as well as the Comac C919. Thus, with a total combined backlog of 8900 orders related to the LEAP engine, CFM is indeed a strategic linchpin for commercial aerospace supply chain output planning. The first operational LEAP engine is scheduled to enter service sometime next year.
The GE commentary reports that the newly designed LEAP engine will include 19 3D-printed components to include fit-to-print fuel nozzles and static turbine shrouds produced from super strong ceramic composite materials. There are currently 30 prototype LEAP engines supporting all OEM three manufacturers, going through final assembly or testing phases among global based facilities. The report provides a rather fascinating photo of the flying GE Aircraft test aircraft as the engines are tested for operational performance.
As noted in our prior A320 focused commentary, Airbus has already announced plans to increase its monthly A320 production rate to 50 aircraft by early 2017, but is now actively evaluating an even larger 60 per month cadence. As the LEAP engine moves through its initial prototype assembly and testing phases this year, and operational service in 2016, CFM must gear-up its own production volumes to match both Airbus and Boeing production volumes, while incorporating new leading-edge processes such as custom 3D printing.
It’s a tall order which obviously palaces CFM International as being one of the most key commercial aerospace suppliers to observe in the coming months and years. If further provides perspectives on how challenging such commercial aircraft output volumes will become.