Multi-year supplier contracts often are associated with the need for strategic direct materials. For large enterprises that have the financial resources, they can well provide a source of industry competiveness or edge in supply.
A prime example is provided in aerospace industry as Boeing has just announced a memorandum of agreement with Japan’s Toray Industries for long-term supply of carbon fiber composite material. Once finalized, this contract extension will take effect in 2015. According to one syndicated report, the contract is estimated to have a value of $8.6B.
This ten year supply agreement represents by Boeing’s words, a significant increase in material provided by Toray. It includes expanded material supply for Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program. According to the announcement, the wingspan of the planned 777x measures 22.8 feet longer than the span of today’s 777-300ER, which in-itself is a large commercial aircraft. Further noted was that in 2013, Boeing contracted for more than $4 billion in goods and services sourced within Japan’s aerospace sector suppliers.
A large portion of the future demand for commercial aircraft stems from Asia and Middle East air carriers. Sourcing strategic materials in these regions assures continuity of product innovation as well as customer related influence.
In our coverage of challenges and learning among aerospace supply chains, we have featured commentaries related to industry dominants Airbus and Boeing, as well as those attempting new innovation such as Bombardier. Our Supply Chain Matters coverage of the C-series program dates back to 2010 as the company’s Aerospace Group cranked-up efforts to introduce a technologically advanced single-aisle aircraft, termed the C-Series that could compete with industry dominants Airbus and Boeing in the smaller single-aisle aircraft segment. Bombardier embarked on a huge strategic gamble with the supply chain deployment and market launch of the new and innovative C-Series aircraft which was originally slated for market introduction in 2013.
Earlier this year, the program experienced a noteworthy setback resulting in a nine-month delay for the program due to a malfunction concerning the aircraft’s technologically advanced power plant. Since that time, program management and global supply chain teams have been working to resolve issues and move the C-Series forward.
Bombardier has now demonstrated what we believe was a rather effective use of social media based product marketing. The company utilized Twitter to broadcast a video link featuring program vice-president Rob Dewer, narrating a visual status report of the program. The video, which can be accessed by double-clicking here, speaks for itself and provides a good example on how to get the word out on program progress. It further points out the important coordinated contributions being made by all production, design engineering and supply chain teams.
How did you respond to this video? Do you view it as an effective means of brand marketing? Do you believe that senior management within your industry is open to such efforts?
Share your thoughts in the Comments section.
Revenues for the aerospace provider’s commercial aircraft division rose 15 percent as a result of stepped-up production deliveries. However, operating margins dropped to 11.2 percent from 11.6 percent a year earlier.
In the earnings report, Boeing’s CFO again indicated that Boeing sells each Dreamliner for less than it costs to manufacture this aircraft, and that the program spending broke through the $25 billon milestone barrier this past quarter. Boeing utilizes accounting measures that allow it to spread program costs and revenues for the 787 program over a longer multi-year horizon.
In its reporting, The Wall Street Journal characterized that development as suggesting that reducing costs on the program is taking longer than expected. This news calibrates with reports in June indicating that Boeing has re-negotiated certain long-term component supply agreements with major suppliers of the 787 and other aircraft.
Also noted by the WSJ in its reporting is that turning cash positive on the 787 program is central to Boeing’s efforts to boost shareholder returns through stock buybacks and higher dividends. In the earnings briefing, Wall Street financial analysts peppered questions regarding concerns that planned production increases across various aircraft programs would delay ramp-up in shareholder’s payments.
That is not a good omen for those participants in Boeing’s supply chain ecosystem who can anticipate further pressures for cost reduction and efficiency gains.
Last week, commercial aerospace manufacturer Boeing announced an increase for its monthly production rate of 737 aircraft starting in 2018. The designated production rate will increase to 52 airplanes per month in order to sustain a production goal of 620 finished 737’s per year, the highest ever volume for this particular aircraft. This boost amounts to a near 24 percent increase from the current pace of producing 42 of the 737 aircraft per month. Boeing is providing an ample two year notice to its supply chain and ecosystem partners in ramping the 737 supply chain to sustain this level.
With a reported 4000 unfilled orders for both the named Next-Generation 737, and even more fuel-efficient 737 MAX models, Boeing has to crank-up the pace in order to satisfy customer operational and business timing needs. Once more, the global economic environment can change very quickly. We suppose our readers among other industries would relish a two-year window for planning.
Meanwhile, Boeing also announced its report of aircraft deliveries in Q3. Deliveries included 120 of the Next Generation 737 aircraft and 31 of the 787 Dreamliners, which reflect meeting current quarterly production goals. Year-to-date, Boeing has delivered 79 Dreamliners utilizing two final assembly sites with quite a ways to go in reducing the current backlog of that aircraft family.
This week, a significant milestone occurred for the global supply chain ecosystem of the new generation Airbus A320 aircraft. The first Airbus A320neo completed its maiden flight at 2:22pm local time yesterday after its two-and-a-half test run flown by Airbus’s experimental test pilots over southern France. The maiden flight comes weeks ahead of prior program expectations. Video and a complete program overview can be viewed via the Airbus web site.
The Neo (new engine option) of the workhorse A320 includes newly designed more fuel-efficient aircraft engines with incremental innovations in aerodynamics and updated cabin features. That aside, the most significant customer feature for the Neo and its promised, more enhanced fuel burning efficiency expected to be upwards of 20 percent more efficient. The A320neo family will consist of A319 and A321 variants as well, the latter offering seating up to 240 passengers. Airbus touts the A320 as the globe’s best-selling single aisle aircraft and thus the program stakes are especially high. To date, the A320neo has garnered 3200 orders involving 60 customers and thus more innovative, stepped-up production cadence will be an important requirement for the end-to-end supply chain.
The aircraft for the maiden voyage was powered by two of the newest Pratt and Whitney PW1100G-JM engines which features that supplier’s new geared-turbofan technology. According to Pratt, the engine successfully completed its first development flight in May of last year and has completed 11,000 hours of testing across the supplier’s PurePower engine family. The stakes for Pratt are additionally high with its newest innovative geared turbofan technology. The Neo is also offered with CFM International’s LEAP-1A power plant as an airline customer option. The LEAP-1B engine was selected as the prime power plant for Boeing’s planned 737 MAX aircraft, which is the prime competitive offering in contrast to the A320neo. According to CFM, there are already orders amounting to 6770 LEAP family engines.
This maiden flight milestone kicks-off 3000 hours of rigorous flight test process involving upwards of eight aircraft with various options and engine options. As Supply Chain Matters has noted in many prior aerospace industry highlighted commentaries, many things can be discovered in the flight testing process, some with reverberations up and down the supply chain. The A320neo with Pratt engines is currently planned to enter service in the fourth quarter of 2015, with the first airline customer being Qatar Airways.
In our streaming Supply Chain Matters commentaries related to Boeing’s supply chain efforts in commercial aircraft production, we have highlighted that the global aerospace provider has been re-negotiating its key commodity and specialty supplier agreements in an effort to reduce long-term costs.
Last week, Alcoa announced a multiyear aluminum supply with Boeing’s Commercial Airplane unit valued to be more than $1 billion. According to the announcement, the agreement makes Alcoa the sole supplier for wing skins on its metallic structure commercial aircraft, while aluminum plate products used in wing ribs or other structural aircraft components. The two parties indicate that they will continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications. This supply agreement represents nearly a 25 percent potential boost to Alcoa’s existing aerospace industry business unit. Details of the new supply agreement were not disclosed and thus how much Boeing was able to save remains an open question.
Earlier this year, Alcoa previously announced its intention to acquire United Kingdom based Fifth Rixson, a reported leader in aerospace jet engine components. The deal was reported to be approximately $2.9 billion.
In its reporting, The Wall Street Journal noted that Alcoa has been strategically targeting aerospace amid declining aluminum supplies amid a current glut in global aluminum supply, and a reduction of 1.2 metric tons of smelting capacity since 2007. Combined industry production cuts have enabled to boost raw aluminum prices to above $2000 per ton for the first time in 18 months.