Previously and again last week, we alerted Supply Chain Matters readers to the increasing visibility to noteworthy supply challenges occurring at Pratt and Whitney related to its newly developed geared-turbofan aircraft engines. The development is significant since just was we anticipated, the weakest link in commercial aircraft supply chain ramp-up production cadence is indeed turning out to be Pratt.
Late last week, the United Technologies CEO, parent to Pratt warned the company’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers. The obvious question is which manufacturer will take the bulk of the impact.
CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news. Neither were UA stockholders who initiated an initial 2 percent sell-off in UA stock. This development represents yet another real-world example of significant supply chain glitches directly impacting stockholder perceptions.
Mr. Haynes further indicated that: ‘five parts are causing us pain this year”, due to supplier challenges in meeting Pratt’s current volume production and quality needs. There are approximately 800 parts for the high level bill of material for this new Pratt engine. The challenges are expected to extend into 2017.
A particular problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades. Further indicated is that he has personally visited the shop where these blades are produced, an obvious indication of the high levels of management visibility being exhibited on the current supply challenges. Haynes indicated that today: “it takes 60 days of cycle time to build these blades and the through the shop and it needs to get to 30 days.” Obviously, that is a significant challenge for a highly engineered component, a doubling of production cycle time.
In 2014, aluminum metals provider Alcoa and Pratt announced a 10 year $1.1 billion agreement to supply state-of-the-art engine jet engine components. That included the forging of the new aluminum-titanium fan blade along with a proprietary manufacturing process. Pratt’s engineering design is different than that of GE Aircraft and its partners Snecma and CFM International. Whereas the latter has invested in carbon-fiber and ceramic composites for materials and manufacturing automation, Pratt has bet on a revolutionary new gearbox and aluminum-titanium composites to allow the engine to burn cooler, with fewer parts and more fuel efficient technologies. Supply chain design and deployment strategy is different along with approaches to manufacturing automation as well. There further exists a fierce competitiveness among existing aircraft engine manufacturers to demonstrate their new fuel saving gains and build ongoing customer loyalty and long-term commitments to each supplier’s new engine designs
Mr. Haynes assured investors that Pratt has a well-defined plan identified to address the current supply chain ramp-up challenges. Obviously, that should provide some assurances.
At stake is the ongoing production ramp-up of the Airbus A320 neo which first certified with the new Pratt engine. Certification of the neo version with CFM International engines is in-process, and with the current visible challenges for Pratt, Airbus production operations teams must now deal with the option of whether to shift current backlog order fulfillment more to CFM powered versions to insure attainment of Airbus’s 2016 and perhaps 2017 production commitments for the overall market. There is obviously a lot of market visibility on Airbus right now from its A320 customers.
Bombardier, developer and manufacturer of the new C-Series single-aisle aircraft have placed a current singular bet on the Pratt fuel efficient design, and thus have already had to warn its investors of a production cutback.
While a buffering effect has been the current historically lower-cost of aviation fuel, airlines, particularly lower-fare startups want to gain a market advantage in lower operating costs.
Commercial aircraft supply chains will indeed be one of the dominant headlines stories for the weeks and months to come. A significant theme will be the classic trade-offs of product design and design for supply chain scalability.
Stay tuned since further developments are likely.
©Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
These past few weeks have been rather noteworthy for General Electric in terms of acquisitions, most of which point toward continued investment and leveraging of advanced technology for industrial manufacturing and transportation service’s needs.
In late August, GE’s Transportation business unit announced its acquisition of ShipExpress, a provider of Cloud-based software that supports transportation, industrial and commodities businesses to more efficiently collaborate with supply chain partners. According to the announcement, this deal will extend GE Transportation’s portfolio of technology directed at the logistics supply chain, expanding the opportunities to deliver incremental information and transactional services for railroad customers. The acquisition further deepens GE Transportation’s domain expertise, enriching the division with a talent pool of nearly 200 industry, technical, and software development experts.
Last week, GE additionally announced plans to acquire two premiere suppliers of metal-based 3D printing devices, Arcam AB and SLM Solutions Group AG for a combined $1.4 billion. Both companies will report into the firm’s GE Aviation unit, an indication for further leveraging of additive manufacturing techniques in the production of aircraft engines. In addition, GE Aviation will lead the integration effort and the GE Store initiative to drive broader additive manufacturing applications across GE.
According to the announcement, Arcam AB, based in Mölndal, Sweden, invented the electron beam melting machine for metal-based additive manufacturing, and also produces advanced metal powders. Its customers are in the aerospace and healthcare industries. Arcam generated $68 million in revenues in 2015 with approximately 285 employees. In addition to its Sweden site, Arcam operates AP&C, a metal powders operation in Canada, and DiSanto Technology, a medical additive manufacturing firm in Connecticut, as well as sales and application sites worldwide.
SLM Solutions Group, based in Lübeck, Germany, produces laser machines for metal-based additive manufacturing with customers in the aerospace, energy, healthcare, and automotive industries. SLM generated $74 million in revenues in 2015 with 260 employees. In addition to its operations in Germany, SLM has sales and application sites worldwide.
Business media has noted that GE has long been a proponent of industrial 3D printing, utilizing the techniques to produce customized fuel nozzles for GE Aviation’s new LEAP jet engines. The LEAP engine is the new aircraft engine produced by CFM International, a 50/50 joint company of GE and Safran Aircraft Engines of France. More than 11,000 LEAP engines are on order with up to 20 fuel nozzles in every engine,
GE has invested approximately $1.5 billion in manufacturing and additive technologies since 2010. According to the announcement, this investment has enabled the company to develop additive applications across six GE businesses, create new services applications across the company, and earn 346 patents in powder metals alone. In addition, the additive manufacturing equipment will leverage Predix and be a part of GE’s Brilliant Factory initiative. Investing an incremental $1 billion in this area is another important indication of the seriousness that GE attributes to additive manufacturing techniques, particularly given the backlog of thousands of orders for new more technologically advanced and fuel efficient jet engines.
We recently highlighted the challenges of rival aircraft engine producer Pratt & Whitney, currently experiencing a number of supply chain challenges related to its new geared turbo-fan commercial aircraft engine. Pratt has exercised a different manufacturing and supply chain strategy than rival GE, one that places more emphasis on component suppliers as opposed to in-house manufacturing automation and production capability.
It seems quite evident that August and September have featured quite a lot of significant developments involving multi-industry supply chains and Supply Chain Matters continues in the following subsequent postings to highlight those with significance or either short or longer-term implications.
We have previously alerted our readers to percolating supply chain related challenges concerning Pratt & Whitney, and specifically the aerospace engine provider’s newly released geared turbofan engines. In our July commentary related to mid-year operational performance results for both Airbus and Boeing, we highlighted that Airbus’s first-half shipping performance related to the new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed of the new model A320 were reported at the time as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.
This week featured an announcement from Bombardier, designer and manufacturer of the new C-Series single aisle aircraft targeted to compete with Airbus and Boeing. The Canadian based aerospace provider was forced to cut its 2016 delivery guidance down to 7, from a prior planned 15 completed aircraft, specifically citing delays in engine deliveries from Pratt. In its formal operational update, the president of the firm’s commercial aircraft operations indicates that Bombardier is working very closely with Pratt to address “supplier ramp-up” issues. In its reporting of the Bombardier development, The Wall Street Journal includes a statement from a Pratt spokesperson acknowledging that while there are some pressures on new engine deliveries, some progress is being made on delivery commitments.
The C Series delivery adjustment announced this week will result in lower revenues for Bombardier Commercial Aircraft for the year and the manufacturer is indicating the cutback will not materially affect operational earnings. None the less, Bombardier has much at-stake since the new Pratt geared turbo-fan engine is currently the sole engine specified for the C-Series. Obviously, Pratt is also trying to balance the needs of Airbus, with far higher short and longer-term order commitments with that of competing Bombardier. Once again, in times of delivery shortfalls, a de-facto balancing of prioritization in deliveries comes to the forefront.
In a related development and reinforcement, a Reuters published report this week features the head of the world’s largest independent aircraft leasing company, AerCap Holdings NV, which currently has outstanding orders for over 100 Pratt powered Airbus A320 neo’s, voiced concern that a delay in delivery of the Pratt engines could ripple out and affect AerCap’s ability to receive a new Airbus jetliner due in the next few days. A Pratt spokesperson subsequently indicated to Reuters: “”To meet what has been incredible demand for the GTF engine, we are working collaboratively across our entire manufacturing process to ensure maximum performance, and we are keeping our customers apprised throughout the process.”
In June, executives from Pratt indicated to The Wall Street Journal that roughly half of the company’s suppliers for its new geared turbofan engines were not delivering parts and materials at expected levels as seamlessly as the company expected. United Technologies Chief Executive Gregory Hayes further indicated to the WSJ that at the time, 44 percent of the company’s 1,600 suppliers—including the 500 to 600 who supply parts and materials for the engines themselves—weren’t meeting the company’s on-time delivery and quality control targets. The WSJ further observed that unlike previous generations of engines, 80 percent of parts for the geared turbofan are produced by entities other than Pratt itself, then shipped and assembled in the company’s engine manufacturing centers in Connecticut, Florida, Canada and Germany. This is a similar supply chain sourcing strategy as practiced by today’s leading aircraft manufacturers themselves.
Pratt has reportedly invested upwards of $10 billion in development of its revolutionary geared turbo-fan engine. Yet, with the June report indicating 44 percent of suppliers not meeting on-time delivery commitments during the engine’s initial production ramp-up phase, it brings into question how much was invested in overall supplier production process needs. Pratt’s engine component supplier base is also shared with rivals such as General Electric and CFM International, providing yet another dynamic as to which engine manufacturer features the more aspects of design for manufacturability and design for volume.
United Technologies, the parent of Pratt, also provides a recent history of investing heavily in lean process, overall cost and production methodologies. That, by our lens, provides a further looking glass as to whether such methodologies or organizational approaches impacted needs to adequately plan for the ramp-up and the production volume requirements for the new engine.
Obviously, Pratt will remain under an intense industry and media looking glass for some time to come as it attempts to deal with its ongoing challenges in meeting engine delivery needs.
The open question will be how long will airline customers and certain manufacturers tolerate such delays without taking other actions. Since the cost of aviation fuel remains historically low, Pratt may have some leeway in addressing its ongoing engine delivery challenges. Pratt’s goal is the ability to ramp-up production levels of the geared turbo fan model to upwards of 1200 engines annually by 2020 in order to address its current overall order backlog of upwards of 7000 engines. As some supply chain leaders would opine- it is better to flush-out and adequately address overall supply chain issues during the initial ramp-up than to have to experience such challenges on a continual basis. There indeed is the current challenge for Pratt’s sales and operations planning teams and its supply chain ecosystem and we trust that teams will rise to such challenges.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
As Supply Chain Matters blog readers are aware, one of our objectives in providing supply chain management focused education is to point out and reference significant industry milestones that we believe should be monitored. Two very recent examples were the announcement of China’s first flexible display production line and our declaration of a new phase of online and Omni-channel fulfillment. We now call attention to a third significant development, one that involves the aerospace and commercial aircraft industry and its associated supply chain ecosystem.
This week, the government of China announced the creation of a new state-owned firm, Aero Engine Corp. of China (AECC). The mission of this proposed manufacturing firm is to accelerate the development, production and testing of advanced jet engines within China. In conjunction with Sunday’s state media announcement, China’s President Xi Jinping indicated that the creation of AECC is a “strategic move” to help develop homegrown aerospace companies, part of China’s current five-year plan to foster more high technology industries that can fuel future economic growth. The company would be funded with 50 billion yuan ($7.5 billion) of initial capital investment with three investors that include the government of China, Aviation Industry Corp. of China, an aerospace conglomerate, and Commercial Aircraft Corp. of China (COMAC), a manufacturer of commercial aircraft. According to a state-media report, AECC will eventually employ upwards of 100,000 workers.
It is common industry knowledge that the explosion of demand for new commercial aircraft designs was fueled by the ongoing and future air travel needs involving Middle Eastern countries as well as China. Currently, China’s current two homegrown passenger jet designs rely on non-Chinese manufacturers such as CFM International, General Electric and Pratt & Whitney. The newly announced COMAC C919 relies on CFM International engines for its two power plants. A homegrown jet engine designer and producer strategically allows China to less dependent on foreign manufacturers for its military aircraft needs.
As various business media are pointing out, the design and manufacturing of advanced jet engines is a very complex task requiring a lot of engineering intellectual property and production process capabilities. Today’s more advanced and fuel-efficient aircraft engine designs stem from billions of dollars and multi-year investments in component design, more advanced materials and turbine technologies.
Then there is the longstanding challenge of occurrences of multi-industry industrial espionage that often involve China’s state-owned firms. In one example, when China initially had desires to enter the high-speed industry, the country elected to partner with French and Japan producers leveraging technology transfer arrangements. Eventually, China’s state-owned railway firms managed to copy the advanced design of components and now provide high-speed rail trains not only for China’s domestic needs but other countries as well. In a 2013 Supply Chain Matters commentary, we called attention to a Financial Times report indicating that a quarter of U.S. companies conducting business in China at that time had indicated that they have had trade secrets stolen or compromised through cyber related attacks on their China operations. China has since made overt efforts to crackdown on industrial espionage but such threats and concerns remain.
Thus far, existing aircraft engine producers have resisted technology transfer arrangements with China’s aerospace industry. However, both Airbus and Boeing, requiring broader market access to China’s new aircraft needs, have established respective local manufacturing assembly presence in the country along with significant component suppliers as part of respective new aircraft supply chains.
The obvious question is when will AECC eventually come up with a viable aircraft engine design and production capability. The reports that we reviewed thus far currently predict a realistic 5 to 10-year timeline window. In its reporting, The Wall Street Journal observes that while Chinese engineers have since developed military jet engines, they have yet to master technologies required to produce more powerful and reliable turbofan engines suitable for commercial transport needs.
Thus, August 2016 provides yet another milestone, that when China declared its intent to eventually be a home-grown designer and producer of commercial aircraft engines. The open question is now design methodologies and timing.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow. However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.
To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.
Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.” In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.
Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.
The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.
And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.
The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.
In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.
In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.
Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.
The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.
Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.
In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.
Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.
We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.
The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers. They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.