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A Report of Supplier Squeeze Practices Occurring Within Aerospace Supply Chains

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Supply Chain Matters has featured significant prior commentary focused on aerospace and commercial aircraft focused supply chains.  A lot of our focus was on the OEM tier, namely global producers Airbus and Boeing, along with mid-tier OEM’s such as Bombardier, Embraer and CMAC. While we have featured commentary or highlighted developments on various larger-scale suppliers, candidly, we should have provided more in-depth perspectives of various other tiered suppliers.

What has prompted us to this candid conclusion was last week’s published Seattle Times article, Low Wages for Aerospace Workers Despite Tax Breaks for Employers.  After analysis of Washington state data, the Seattle Times reports: “In 2013, outside of Boeing, a third of production workers at local aerospace parts manufacturers- companies that get tax breaks intended to preserve good jobs in the state- earned between $10 and $15 per hour.” That level, equivalent to $31,200 annually, represents the minimum wage level for Seattle. Once more, the report reminds readers that aerospace companies in the state of Washington are entitled to a 40 percent reduction in taxes on corporate revenues for the intention of “providing jobs with good wages and benefits.”

The report describes what is termed the “Boeing squeeze”, that being constant pressure to reduce the cost of component parts. A spokesperson of the Pacific Northwest Aerospace Alliance (PNAA), a trade group of local suppliers indicated to the Times that passing higher wage costs up the line “would encourage Boeing to take the work elsewhere.” Once more, suppliers seem divided on dealing with such a situation, with some indicating that the skills and education required for such production jobs do not warrant higher pay. This report highlights specific conditions and/or examples (pro and con) among local suppliers:

AIM Aerospace

Aviation Technical Services (ATS)

Aero-Plastics

Carlisle Interconnect Technologies (CIT)

Hytek Finishes

Zodiac Cabin & Structures Support

In previous Supply Chain Matters commentaries we have highlighted reports of industry supplier bullying. While many would like to believe that certain supply chains have moved away moved away from squeezing the cost-reduction burden down the value-chain, these types of reports continue to indicate that such practices linger.  Once more, having participants within a multi-billion dollar industry in the enviable position of having in-demand and technology innovative products resulting in upwards of ten years of unfulfilled customer orders would continue to practice squeeze tactics on suppliers would seem to indicate that supplier partnerships and collaboration remain a one-way lens. Why are so many production workers being asked to live and raise families on a minimum wage?

Shame on us for not paying closer attention to developments within all of the tiers of aerospace supply chains. We will do our part to change that including reaching out and researching more mid-market suppliers.

We however would suggest that the large OEM’s would take a similar perspective and examine how supplier practices impact the entire value chain, particularly those involving and setting a role model for social responsibility.

Bob Ferrari


Labor Union Seeks Organizing Vote at Boeing South Carolina Facility

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The largest organized labor union within Boeing has filed with the U.S. National Labor Relations Board (NLRB) for a labor union organizing vote within the aerospace producer’s North Charleston South Carolina production facility. The move comes after a number of workers at this facility signed authorization cards indicating interest in

Boeing 787 first ship from South Carolina facility

Source: Boeing Website

being unionized.

The North Charleston South Carolina production facility was established as a secondary production and final assembly facility for the Boeing 787 Dreamliner aircraft.  Six years ago, among selection criteria for this plant was its existence in the Southern region of the U.S., a predominant non-union regional environment. According to business media reports, the plant has struggled to meet increasing production volume requirements and that seems to be the point of contention among existing workers seeking to be organized. First customer ship of a 787 originating from the Charleston facility occurred in July 2012.

This particular facility has been a flash point concerning Boeing’s dealings with its primary labor union, the International Association of Machinists and Aerospace Workers (IAM) and this latest development will most likely add to ongoing tensions. There have been prior reported and rumored efforts to organize workers at this facility since it was opened.

Prior to the current filing, Boeing had already initiated efforts to dissuade employees from seeking union representation. Reports indicate that in January, Boeing assigned manufacturing executive Beverly Wyse to take over for a retiring executive whom workers and union organizers claim were the root of alleged grievances. According to The Wall Street Journal, Ms. Wyse, who previously managed the 737 manufacturing program in Renton Washington has had a better relationship with organized labor at that facility.

It is unclear at this point as to how the NLRB will rule on the outstanding petition and possibly call for an election process among workers. Local political leaders, including South Carolina Governor Nikki Haley have already spoken out against unionization.

The facility has proven to be a flash point for Boeing and the IAM. In 2011, the NLRB ruled that the plant selection was retaliation for a two-month strike conducted by organized workers among Boeing’s Seattle production sites. That NLRB action resulted in Boeing and the union eventually coming to terms to keep production of single-aisle commercial aircraft contiguous to the Renton Washington facilities.

Boeing is in the process of organizing a far reaching social-media based campaign that includes a special web site, a dedicated Facebook page and other outlets to express its views regarding union organizing efforts. The IAM will continue to be active as well.

This development adds further tensions to Boeing’s ongoing efforts to ramp-up monthly production volumes for the 787 Dreamliner and will warrant further monitoring.


Boeing Production Head is Confident of Supply Chain Wide Capabilities

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In a previous Supply Chain Matters commentary focusing on aerospace focused supply chains, we brought forward how the voice of commercial aircraft customers is growing ever larger.  Influential customers and industry observers are increasingly indicating that both Airbus and Boeing should be focusing more on delivery commitments on existing new aircraft rather than indicating intentions to develop even newer technology-laden aircraft models. Among strategic plans for both of these aerospace global leaders are efforts towards added investments in supply chain capabilities including long-term strategic supply or added production capacity.

A recent published report by Reuters  featured on Yahoo Business provides the perspective of Boeing’s chief of airplane production programs on efforts underway to ramp-up production specifically that related to Boeing’s cash cow, the iconic 737 aircraft family. This specific single-aisle aircraft is especially important since it is today’s workhorse of the termed lower-cost, budget airlines such as Ryanair or Southwest Airlines, that are growing faster than long established carriers.

In the article, Pat Shanahan, Boeing’s Senior Vice President for Airplane Programs indicates that his company is not only well positioned to scale-up 737 production rates, but learning from past mistakes. He further points to needs for an integrated plan that includes not only internal manufacturing but the broader supply chain.  An important quote: “When I think about the mistakes we made back then (referring to 1997), we didn’t have an integrated plan that included the supply chain.”

In 2014, Boeing increased 737 model production to the rate of 42 aircraft per month, which was up from the 38 per month level experienced in 2013.  Current plans call for production of this popular single-aisle aircraft to ramp to a rate of 52 per month by 2018, along with a transition to a the newer 737 MAX model version.  Besides the 737 family, Boeing has additional plans to ramp-up monthly production volumes of the 787 family from the current level of 10 per month. The Charleston South Carolina facility now serves as a second production facility for the 787.

Boeing is not alone in these efforts.

Airbus who produces the rival A320 aircraft currently matches the 737 output of 42 aircraft per month has ramp output to 46 per month this year, and 50 per month by 2017.

Within the article, Mr. Shanahan outlines a risk-based approach for evaluating the readiness of the integrated supply chain. Unfortunately, there are not a lot of specifics related to people, process and information technology enablement specifics being addressed, but that seems to be par for the course when two high-profile, highly competitive aerospace  companies attempt to outpace themselves in product development and operational execution capabilities.  In some cases, both of these producers share common suppliers of components and technologies.

From our Supply Chain Matters lens observing both of these aerospace giants for the past eight years, it is clear that efforts towards major global supplier-based product development, outsourcing and supply chain risk mitigation have brought painful, but important learning on the importance of total supply chain wide visibility and fulfillment synchronization.  We recall the vivid images of multiple fabricated 737 fuselages sitting on the banks of a river after a rail derailment.

Both now take a far broader view of operational capabilities that umbrella both internal manufacturing and the global, end-to-end  supply chain.

A recent commentary appearing on the investor site, The Motley Fool, Are Boeing and Airbus Building Too Many Jets, calls to question the delicate balance for investing in too much production capacity if a bust in airline demand occurs sometime in the next few years. This commentary cites Boeing’s 2014 Current Market Outlook projecting existing demand for over 25 thousand single-aisle aircraft over the next 20 years. That is obviously a lot of airplanes and accordingly works out to and annual sales and production rate of over 1200 aircraft per year for all manufacturers. Noted in the commentary is that within a few years, Airbus and Boeing will likely be producing close to or exceeding this average volume. Hence, there is fear by investors of potential overcapacity.

As noted in our prior commentary, senior management at both of these major aerospace firms cannot rest on the laurels and enviable position of having 8-10 years of product demand backlog.  A very delicate balance involving even more product development, investing in supply chain and production capability and satisfying today’s Wall Street’s more short-term focused investor expectations, has such executives, and their supply chain and manufacturing teams,  constantly challenged.

Customers require new aircraft orders be delivered on-time to meet business growth, efficiency and productivity needs while investors require higher investment returns and profitability.  We all know that in a ten or even twenty year horizon, many business and market assumptions can change, sometimes dramatically.  Who would have believed five years ago that the price of crude oil would drop below $50 per barrel?

It is a delicate balance and aerospace supply chain ecosystems and internal supply chain and product development teams sit in the middle of this dynamic.

Bob Ferrari

 


Alcoa’s Strategic Positioning within Commercial Aircraft and Aerospace Supply Chains

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In the prior Supply Chain Matters commentary, we reflected on some current commercial aircraft industry developments from the lens of product demand reflected by the building voice of the industry’s most influential customers.  In this commentary, we focus on the strategic supply aspects of aerospace supply chains and provide background to this week’s news regarding another strategic acquisition announcement from AlcoaBoeing 787 production line

Earlier this week, this aluminum producer announced its intent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. According to business media reports, RTI’s business focuses is centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft.  The Wall Street Journal reported that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector.

The RTI acquisition follows last year’s acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.

Titanium is a very essential and critical commodity and component aspect for aerospace and commercial aircraft design and production.  The country of Ukraine currently is a prime source of the concentrates used for the fabrication of titanium. During the recent building political tensions among Russia, the United States and Europe over hostilities in Ukraine, Boeing and United Technologies augmented safety stocks of this key metal provided by VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. Last August’s report indicated that Boeing and UT had amassed upwards of six month’s supply of safety stock of highly customized titanium forgings.

Another rather important strategic commodity for newer, lighter and more efficient aircraft is that of carbon fiber.  So much so, that in November of last year, Boeing initiated an $8.6 billion long-term supply agreement with Japan based Toray Industries. The ten year supply agreement was initiated to support Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program.

Strategic sourcing teams for both Airbus and Boeing have to further consider mitigation of global supply risk and must practice a balanced component sourcing strategies to avoid too much dependency on a single region or suppler.

With current huge multi-year order backlogs, Alcoa’s strategic moves into key strategic commodity areas of commercial aircraft production assure a faster and perhaps more profitable growth prospect. The metals producer is also positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.

In July of 2010, Boeing’s CEO candidly admitted that industry-wide growth was highly dependent and/or constrained by many of the key suppliers to this industry. Six years later, with even heavier order backlogs that supplier dependency remains, particularly when it concerns key commodities and fabricated components. Thus, Alcoa’s strategic moves to tap into the key component needs of this industry may prove to be rather interesting in the months to come, with prospects for additional high dollar multi-year supply agreements.

As the pressure mounts on Airbus and Boeing to step up delivery volumes for vast backlogs of newly designed commercial aircraft, strategic suppliers of key commodities and advanced components will ultimately be the linchpins for successful customer fulfillment.

It should therefore be no surprise that other global producers are positioning to harvest some of the benefits.

Bob Ferrari


The Voice of Commercial Aircraft Customers Grows Louder

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Supply Chain Matters has penned multiple commentaries related to the unique and ever more complex challenges within today’s commercial aircraft focused supply chains, in particular, Airbus and Boeing. One would optimistically believe that having upwards of ten years of booked orders would be an enviable position, and perhaps it may in certain other industries.  Airbus A380

But such a situation provides added dynamics for managing and fulfilling customer demand as well as insuring long-term supply and capacity in strategic supply areas. Commercial aircraft is very much an engineer-to-order, make-to-order supply chain framework involving thousands of different moving pieces.

In the subsequent two commentaries, we focus on some current news developments from the lens of product demand and strategic supply perspectives.

On the demand front, Jon Ostrower, aviation columnist for The Wall Street Journal penned a column this week (paid subscription or free metered view) indicating that some of the world’s largest and perhaps most influential aircraft lessors are indicating that Airbus and Boeing should be focusing more on delivery commitments on existing new aircraft rather than indicating intentions to develop even more newer technology-laden aircraft models.

This dialogue was prompted by speculation that Boeing was in discussions with United Airlines on a possible replacement for the older workhorse Boeing 757 model aircraft.  There have also been published reports that Airbus and Boeing have been in separate discussions with Middle East carriers such as Emirates on even larger, more efficient wide-body aircraft. In the WSJ report, the CEO of one of the largest jet lessors by fleet value indicated that aircraft producers should be focusing on completing and delivering the thousands of aircraft currently on-order. In essence, the statement can be translated to stop confusing the market with more product choices and options, and deliver on the commitments made.

As we have noted in our commentaries, 8-10 years of backlog provides a rather long window to potential changes and uncertainties in the world economy or to the overall volume of air travel. Over a decade, there can be many economic growth or severe contraction scenarios.  Throw in today’s extraordinary low-cost of crude oil, along with major shifts in foreign currency values, and you get the picture of how events can change in such an extended window.

There is a continued tone of concern regarding whether the world’s airline carriers have collectively underestimated the overall impact of thousands of new aircraft added to global fleets and to existing aviation infrastructure, air traffic control needs as well as the supply of qualified and experienced pilots. Recent airline disasters and accidents across coastal Asia including recent tragedies related to Malaysian Airlines have added to this concern.

For aircraft producers themselves, executive leaders continue to respond to various strategic options, initiatives and business challenges. They include the potential launch of a another new aircraft development program which can cost upwards of $10-$15 billion dollars and according to industry participants take 8-10 years of planning and deployment.  Some newer models such as Boeing’s 787 Dreamliner program have yet to meet break-even profitability, requiring added years of stepped-up delivery. When Boeing announced development of its new 777X replacement program, it played hardball with governments and suppliers in its strategic sourcing decisions, garnering leverage for longer-term product margins.

A further option is to placate investors with lucrative added dividends or stock buyback programs which provides added value for stockholders. A third option is added investments in supply chain capabilities including long-term strategic supply or added production capacity.  For this industry, such long-term strategic supply strategies often are linked to production sourcing within global regions that will influence long-term demand, such as Asia, China, Japan, and the Middle East where commercial air travel and resident air carriers are expected to grow the most. That results in today’s globally extended and complex aerospace supply chain ecosystem.

It would seem that judging from the current lens of the majority influential customers, the voice of the industry’s most influential customer’s is for commercial aircraft producers is to step-up on supply and delivery commitments.

Bob Ferrari

 


New Senior Executive Changes at Bombardier Portend More Scrutiny of the CSeries Program

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In our industry specific coverage of commercial aerospace supply chains, Supply Chain Matters has featured a number of prior commentaries concerning Bombardier’s CSeries aircraft program, and its efforts to penetrate single-aisle commercial aircraft market with the likes of an Airbus, Embraer or Boeing. Recent program setbacks have impacted the CSeries program and in January came the announcement that Bombardier’s senior head of commercial aircraft sales had resigned due to personal reasons.  Bombardier C-Series First maiden Flight

Now comes this week’s news that Bombardier is undergoing a senior executive shakeup, switching its chief executive and chairman as it adjusts to the soaring cost of the new CSeries passenger jet.

Laurent Beaudoin, a member of the family that has controlled Bombardier since it was founded will be replaced as chairman of the board by his son Pierre, who is stepping down as CEO after nearly seven years. Reports indicate that Mr. Beaudoin was the executive sponsor of the CSeries program. The Canadian diversified transportation manufacturer has now tapped former United Technologies aerospace executive Alain Bellemare to be its new CEO.

Mr. Bellemare, with Canadian background, departed his post as president and CEO of UTC’s Propulsion & Aerospace Systems business unit in mid-January after two and a half years at the helm. Reports indicated that his departure came after a new CEO was selected at UTC.

Our online background searches indicate that Mr. Bellmare’s participation in UTC’s aerospace businesses provide him a deep understanding of global aerospace supply chains and ecosystems. At UTC, Mr. Bellmare’s leadership responsibilities included the Pratt and Whiney and Aerospace Systems business units. He has a manufacturing and engineering background and overseen program ramp-up programs.

The new CEO will have a lot on his plate. The aerospace manufacturer reported a $1.6 billion loss in its most recent quarter after incurring a $1.4 billion write-down associated with cancelling its Learjet 85 program. This week it unveiled plans to raise up to $2.1 billion additional capital and suspended its dividend payments. According to a published report from The Wall Street Journal, Bombardier’s controlling family has collected roughly $20 million dollars in annual dividends. Reports from Canadian business and general media further indicate that the CSeries program’s cost has risen to $5.4 billion from $4.2 billion a year earlier. A report from Canada’s Financial Post indicates that the new CEO may be on a short leash and calls into question whether this is just an executive shuffling of chairs.

Obviously, the CSeries aircraft has to meet its in-service milestone later this year. Its supply chain ecosystem must execute to all milestones.  This aircraft’s success is now clearly dependent on its in-service performance for airline customers.

 

 


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