Supply Chain Matters and other supply chain focused media has called specific attention to the current wave of mergers and acquisitions impacting the global logistics sector. Yet, it is quite important that supply chain leaders pay close attention to the motivations of such actions, as well as the implications related to providing more one-stop services. Incorporating a logistics provider as an extension of complex and often changing supply chain business processes comes with an expectation that such a provider has the asset, process and technology enabled capabilities that can accomplish the job and meet operational milestones and performance measures.
The Wall Street Journal recently noted that there have been 10 major acquisition deals totaling $18 billion since early 2014. The most notable have been the recent XPO Logistics acquisition of Conway Way, FedEx’s acquisition of GENCO and Bongo International as well as TNT Express, and UPS’s acquisition of Coyote Logistics. Once more, there are strong indications that this trend will continue.
The primary reasons are that globalization, increased process complexity and impacts of online and Omni-channel fulfillment are motivating more and more firms to seek one-stop services or to outsource various value-added logistics processes. In essence, the third-party logistics (3PL) logistics business model is fundamentally moving toward the termed fourth-party logistics (4PL) model. Many supply chain and logistics professionals recognize the 4PL model as one that provides an extension of the customer’s current business process needs, including the integration of information and technology systems. However, the misnomer is that many 3PL’s who have shied from significant investments in technology and processes now look to acquisitions to quickly gain such capabilities.
But alas, the ability to be an extension of a customer’s business processes presents its own challenges, even for the largest and most savvy logistics providers.
The Wall Street Journal published a report indicating how aircraft jet-engine producer Pratt & Whitney’s production was stalled nearly a month because of issues at a UPS logistics center. (Paid subscription). Pratt had contracted with UPS to streamline its manufacturing processes and ramp-up production levels of its newly designed aircraft engine. Readers will recall that that Pratt’s new and more fuel efficient engine will power new aircraft models including the Airbus A320 neo. Pratt’s current customer booking stands at 7000 orders.
A UPS logistics center would receive parts from various Pratt engine suppliers and package them into kits holding 8000 parts and ship them to various final assembly production facilities. According to the report, the logistics center was beset with problems when it first opened in July that slowed Pratt assembly operations to a crawl. Kits were received with what was described as dirty, damaged or missing parts, prompting Pratt production workers scrounge among multiple kits to find a full complement.
Pratt and UPS quickly assembled dedicated teams to address these process start-up issues that included additional training as well glitches in inventory tracking software. The problems are now reported as resolved but Pratt’s production levels in August nearly came to a crawl.
Pratt’s parent is United Technologies and its CEO indicated to the WSJ: “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”
Pratt had turned to UPS to eliminate low-value work and avoid holding extensive inventory on its own books. The engine producer has a unionized work force and the WSJ report indicates that union members were not all that pleased with this new arrangement. Pratt transferred management of parts and inventory to an automated UPS warehouse system.
The Pratt story is somewhat of a typical example of what is currently driving the logistics industry today, along with the challenges for becoming the extension of an existing manufacturing, supply chain or customer fulfillment business process. The fact that a provider the size, scope and resources of UPS initially stumbled is indeed an indicator that beyond business growth through acquisition, the logistics industry has to concentrate on added technology and information integration capabilities.
In the backdrop our previous Supply Chain Matters commentary related to Boeing and its decision to shortly assemble new 737 commercial jets in China, we provide another related development.
In November of 2014, we called initial attention to the announcement that Boeing had initiated a multi-billion long-term supply agreement with Japan based Toray Industries for the supply of carbon fiber composite material. This ten year strategic supply agreement was initiated to provide continuity of supply of carbon fiber material needed for the production of Boeing’s 787 Dreamliner and new 777X aircraft. Apparently Boeing is now considering a supply risk strategy regarding this strategic material.
Last week, The Seattle Times reported that Toray Composites America (TCA) celebrated the completion of a fifth production line at its plant near Tacoma Washington, but further warned that additional expansion will center on other U.S. east coast and overseas investments.
Noted in this Seattle Times report is that each pre-preg carbon fiber assembly line requires a $100 million investment and 14 months of rigorous testing before such line is qualified to produce high specification material. With the addition of this fifth assembly line, executives at parent Toray in Japan now indicate that any further investments will be directed at the existing TCA facility located in Spartanburg South Carolina.
Toray has purchased an additional 400 acres of land with plans to build a $1 billion fully integrated composites production facility that will span precursor chemical to finished carbon fiber tape. According to the article, Toray has signed additional supply contracts with Bell Helicopters and Brazilian jet producer Embraer.
A Toray executive is reported as indicating that diversifying supply in South Carolina is a desire by both Toray and Boeing to insure supply continuity, in the event of a shutdown at the Tacoma based facility. More revealing are statements by this same executive indicating that Boeing’s longer-term thinking centers on the labor cost intensity associated with manufacturing this material in the U.S. , with an eagerness to transfer some composite supply sourcing to perhaps India, which has a growing demand for new commercial aircraft, and could provide more attractive labor costs.
In the lens of Supply Chain Matters, this may be an additional indication that growing demand for new commercial aircraft within specific Asian countries may include additional provisions for more supply chain presence and value-add activity.
As a follow-up to our prior Supply Chain Matters posting reflecting on high tech executives meeting with the leaders of China and India last week, came the announcement from Boeing of a significant order for new commercial aircraft along with the pending opening of a Boeing manufacturing facility within China itself.
Boeing indicated that it would sell 300 of its new model 737 jets to China. Of far more concern, this deal includes a plan calling for Boeing to team-up with state-controlled Commercial Aircraft Corp. (Comac) in building and operating a single aisle aircraft completion center in China. This announcement came as President Xi Jinping of China visited Boeing’s facilities near Seattle.
While Boeing indicates that the timing of the completion center has not been finalized, Boeing’s labor unions and certain politicians were quick to weigh-in on this announcement. While Boeing stresses that it will not reduce employment on the 737 program in the state of Washington, the current global hub of 737 manufacturing, the announcement did not garner favor with the likes of U.S. Presidential candidate Donald Trump, State Representative June Robinson and the head of Boeing’s labor union representing aerospace workers.
Readers might recall that in 2011, Boeing reached a labor contract settlement with the labor union representing the company’s production workers at production facilities in the state of Washington. Among other tenets in the ratified agreement, Boeing agreed to source the production of its new 737 MAX aircraft, the newest version, within the union facilities in Renton Washington. The union pressed for such a tenet because Boeing had already had plans to ramp-up model 787 aircraft production at the Charleston South Carolina final assembly facility.
In its reporting, The Wall Street Journal indicates that last month, Boeing increased its forecast for commercial aircraft demand emanating from China to 6330 new aircraft over the next 20 years, 70 percent of which are noted as market growth vs, replacement of older aircraft. That figure represents an average annual volume of upwards of 300 aircraft on an annual basis and that is the friction associated with the announcement of Boeing’s first foreign-based final assembly manufacturing site.
Added to these concerns is that state-owned Comac has been developing the C919 to compete with the 737 and the Airbus A320. That aircraft has thus far garnered orders for 500 jets. Airbus operates an assembly plant in Tianjin to produce aircraft destined for China and Asia based carriers.
Boeing indicates that the new facility will paint the fuselage and install seats and in-flight entertainment systems, but yet one wonders whether China’s leaders will accept such lighter areas of manufacturing as a legitimate presence. One might speculate that value-added composition will be an area for ongoing negotiations related to the China based facility. While in-country value-add is often a tenet of large aircraft deals, coexistence with a declared competitor along with general concerns for intellectual property protection and information security compound a decision related to China in the current environment.
Similar to the themes of the high tech sector, Boeing needs access to China’s growing commercial aircraft market, and in order to gain such access, the company must add a China based production presence to its global supply chain flows, regardless of the expected fallout.
In September of 2014, Supply Chain Matters began calling reader attention to aluminum producer Alcoa and its efforts to collaborate and introduce newer, high-strength and corrosion resistant aluminum alloys for the commercial aerospace industry. At the time, Alcoa struck a multiyear aluminum supply agreement with Boeing’s Commercial Airplane unit to make this producer the sole supplier for wing skins on its metallic structure commercial aircraft along with aluminum plate products used in wing ribs or other structural aircraft components. The supply deal was valued to be more than $1 billion at the time, and the two parties a desire continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications.
In March of this year, we updated our readers with news that Alcoa’s indent 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. RTI’s business focus was 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 at the time that that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector. This RTI acquisition followed the 2014 acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.
Our March commentary noted that the metals producer was further 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.
Last week, the news reverberating across automotive supply chain audiences was that Ford Motor Company had reached an augmented supply agreement with Alcoa for use of aluminum based components. Readers might recall that the Ford F-150 was recently re-designed, making it the first mass market pick-up truck with an aluminum body. As a result of the design of lighter materials, this vehicle’s over weight was lightened by 700 pounds, adding upwards of 29 percent in overall fuel economy. Alcoa worked with Ford on the aluminum component re-design.
According to published reports, this revised supply agreement will allow for the use of more sophisticated alloys for additional use in the F-150 along with production of other exterior metal components such as fenders and door panels for other future Ford models. In its reporting, The Wall Street Journal (paid subscription required) quotes Ford’s product chief as indicating that collaborating on technology at this scale represents a fairly significant commitment by both companies.
While a reportedly large amount of Alcoa’s business still emanates from raw aluminum, the supplier is clearly on a strategic product innovation thrust to target business and product innovation needs in key industries. The WSJ reported that Alcoa is aiming to grow its automotive-aluminum sheet business alone to upwards of $1.3 billion by 2018, from a level of $229 million in 2013.
By developing new casting technologies for fabricating both aluminum and titanium based component parts, the door is being opened for joint product design collaboration and more strategic longer-term supply agreements to insure adequate supply. In its reporting of the Ford supply agreement, the WSJ spoke with Alcoa CEO Klaus Kleinfeld who indicated a focus on growing dozens of niche downstream businesses from aerospace to truck wheels, and in developing supply agreements with eight other auto makers.
Supply Chain Matters brings Alcoa to light as an example of joint supplier and OEM production efforts paying rewards in multiple strategic industries and boosting bottom-line results for both supplier and customer.
Continuing on this week’s theme of developments in commercial aerospace supply chain, a Puget Sound Business Journal posting this week penned by Steve Wilhelm describes why Boeing is moving slowly and deliberately on ramp-up of production of the newly designed 737 Max aircraft.
Boeing has elected to separate the production line of the newest model until initial start-up production volumes can ramp to the existing higher volumes of current 737 model production. Current output of 737 production is 42 per month, nearly one a day. Overall production volumes of all 737’s are planned to increase to 47 per month by 2017, and 52 per month by 2018. According to this latest report, Boeing will gradually transfer the existing two volume lines to 737 MAX aircraft.
The differences in the Max version are noted as more advanced winglets along with larger, heavier, but more fuel efficient engines. The PSBJ commentary indicates that further modifications to the framing of the wings and the front landing gear are called for so that the newer engines will fit.
In a previous Supply Chain Matters commentary in August, we called reader attention to a report that a key supplier within the 737 Max program is currently wrestling with production ramp-up supply issues related to an engine thrust reverser. Difficulties in consistently manufacturing this part are apparently been flagged by Boeing as a significant development challenge for its commercial aircraft business.
Thus, the strategy for separating production lines to shield ramp-up needs is indeed a wise one. Boeing’s product design engineering, procurement and supply chain teams continue to work on overcoming expected ramp-up challenges while the “core of the company’s cash generation”, namely the 737, continues with its consistent output mission.
As noted, Boeing gained considerable learning from the mistakes and/or early supply chain snafus of the 787 Dreamliner program. Even though the Max is not of the changed engineering design scale of the former, methodical planning, proactive identification of potential design and supply issues and careful production ramp-up are all interrelated. It implies a very close relationship and communication among product design and supplier teams.
There was a noteworthy development for the commercial aerospace sector earlier this week, as Airbus officially opened it’s first-ever U.S. manufacturing facility. The other twist to this story was that the new facility was original conceived to produce air tanker aircraft for the U.S. Air Force, but has been re-purposed for commercial aircraft manufacturing.
The $600 million plant, located in Mobile Alabama is destined to produce various Airbus single-aisle aircraft for the U.S. market, which the European OEM describes as the largest regional market for single-aisle aircraft. The plant was original announced in 2012, when the state of Alabama offered Airbus a package of what was reported to be $100 million in incentives. At the time, Boeing was not pleased with the announcement, one that an arch-rival was establishing manufacturing presence on its home turf. In 2012, Airbus acknowledged that up to 40 percent of the value-chain of Airbus planes was already sourced from U.S. based suppliers. At the plant opening ceremony held this week, Airbus indicated that its supplier spend across the United States equates to a range of $16-$17 billion.
Planned production for the new facility includes the A319, A321, and A320 models, as well as the new A320 Neo model. According to the announcement, the first production model, an A321 is scheduled for delivery in the spring of 2016.
Plans for this U.S. facility call for of a production rate of 40-50 single-aisle aircraft annually, and while that volume level equates to nearly all of Airbus’s planned monthly production levels from all of its production facilities, it does represent a significant anchor for a U.S. manufacturing presence. The other Airbus commercial aircraft final assembly facilities are located in Hamburg Germany, Tianjin China and Toulouse France.
In 2011, Airbus had partnered with another military contractor to bid on a U.S. Air Force contract for a fleet of new air tankers. That contract was eventually awarded to Boeing. To the credit of Airbus senior management, instead of abandoning plans for Mobile site, plans were re-cast to provide this new presence for commercial aircraft manufacturing. This was despite what one Airbus executive described as input that it was too risky to consider commercial manufacturing in the U.S. while others thought that the European based producer was overstepping its bounds.
As Supply Chain Matters noted in our 2012 commentary, the U.S. Southeast region has since become a rather important supply chain manufacturing and logistical hub for automotive and other manufacturing industry. The Ports of Charleston and Savannah, along with Huntsville International Airport remain important logistical hubs serving this vibrant manufacturing region. Boeing’s second final assembly production facility is located in this same region, in North Charleston South Carolina.
Supply Chain Matters extends its congratulations to Airbus and the entire Mobile Aeroplex manufacturing team for this week’s important milestone. Best wishes for continued achievements in U.S. based manufacturing.