In October of last year, Supply Chain Matters published a blog commentary: Good and Not So Good News When All Eyes Are Focused on Your Supply Chain. Our commentary focused on ongoing developments involving certain commercial aircraft and aerospace industry supply chains, and specifically aircraft engine manufacturer Pratt & Whitney. We committed to our readers to follow through on this stream of ongoing developments to provide added insights and learning. This week, Pratt parent United Technologies briefed analysts and shareholders on Q4 and 2016 performance and there were even more nuggets of information and learning.
Once again, we alert readers to the overall length of this particular commentary, but we want to make sure that full context is presented.
The commercial aircraft industry remains challenged by conflicting goals. They include the ability to more rapidly scale-up overall aircraft production levels. However, that sometimes conflicts with the industry dynamics of OEM dominants Airbus and Boeing in their respective desires to deliver higher margins, profitability, and more timely shareholder returns.
Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity, process innovation and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings. We will have more to state on this dynamic when we get to our 2017 Prediction deep-dive on unique industry-specific challenges for the coming year.
In response for airline industry needs for more fuel-efficient and more reliable aircraft, Pratt has designed and introduced a revolutionary new geared-turbofan (GTF) aircraft engine. However, a series of supply chain glitches and volume production ramp-up challenges directly impacted the aircraft delivery production plans of both Airbus and Bombardier in 2016, causing both final manufacturers to now incur some financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link was Pratt. There are others as well, such as interior seats for new wide-body aircraft, but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In September, UTC, the parent to Pratt, and specifically CEO Gregory Hayes, warned the conglomerate’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. Haynes acknowledged the obvious in that Pratt’s airline customers were not happy with the news. Neither were UTC stockholders who initiated an immediate 2 percent sell-off in the company’s stock. During that time, Haynes briefed analysts and investors on many of the operational details of Pratt’s supply chain challenges which was an obvious indication of high levels of visibility and detailed briefings that the CEO was obtaining.
Also at that time, Hayes indicated that of the approximately 800 parts for the high-level bill of material for the new GTF Pratt engine, five parts were causing the most pain due to supplier challenges in meeting Pratt’s volume production and quality needs. One critical problem was the heart of this new engine, its newly designed aluminum titanium composite fan blade, noted as a breakthrough in material design and expected performance. Initial production yield problems of the fans had averaged an unacceptable 20 percent.
To help our readers follow developments, we reviewed the entire transcript of UTC’s senior management briefing to equity analysts and shareholders regarding Q3-2016 financial and operational performance delivered in October. It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain, hence the title of this commentary stream. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and it’s going to be fixed this quarter.” He later stated that UTC senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway related to process and yield improvements, lead-time reductions and additional added capacity. The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more of Pratt and its supply chain challenges.
We can now update this Supply Chain Matters commentary stream with some highlights of this week’s Q4 2016 and year-end investor briefing.
CEO Hayes declared a solid year for UTC in terms of business and financial results. He praised the Pratt division on GTF accomplishments and reiterated that this engine is now powering 46 in-service Airbus A320 neo’s with more than 82,000 operational hours.
For the year, Pratt delivered a total of 138 GTF engines, 62 of which were in the final Q4 quarter. Moving to the question and answer period with equity analysts, we noted seven specific questions related to Pratt, the GTF engine, and the Pratt supply chain. Among the more detailed information that was shared in executive responses:
- On the positive news side, executives stressed that Pratt’s supply chain challenges are in a far better state than that of June last year. Production yields on the critical fan blade are now up to 80 percent production yield, a new partner manufacturing facility begins production this quarter and excellent progress is being made in opening a second facility in Michigan scheduled to begin production at mid-year. Reiterated was that Hayes monitors such numbers from his Pratt division on a weekly basis.
- There have been some issues with GTF in-service reliability, specifically the engine’s combustor liner and an oil seal. Regarding the combustor, issues are related to what was described as harsh operating environments of which India was specifically cited. Hayes indicated a component re-design is underway and will be retrofitted in operating engines later this year. Premature failure of an oil seal was noted as supplier related, with a fix identified with a modified seal available by May. Hayes characterized these issues as “typical of a new product introduction.” Hayes emphasized that the engine’s fuel burn performance metrics are being met right out of the box, its revolutionary designed geared-turbo fan is performing as designed, and again stated his confidence in the Pratt leadership team to resolve any supply chain or component related issues.
- In addressing this year’s production plan for the GTF, Pratt plans to build 350-400 engines, 50 of which, (roughly 7 percent of production) will be designated as spares to support customer uptime while the above described component performance issues are addressed.
- One analyst from Bank of America Merrill Lynch specifically questioned whether this was the fifth iteration of the combustor design. Hayes emphasized that not all airline operators are experiencing combustor performance issues, only those in harsh operating environments. The overall timeline for the combustor seal was described as three design iterations. The first 17 engines had the first design which Pratt was aware had to be upgraded because of durability issues. The ‘B” version was described as not having met expected life in harsh environments and thus the third design is expected to be in-place by the end of this year. Again, spares will be made available to airline customers as these component design changes are completed.
- This same equity analyst asked a follow-up question. If the GTF engine has 30 percent fewer parts, does that translate to a goal that these engines can be sold a breakeven profitability at introduction? Hayes reply was that Pratt is currently losing money on each GTF engine that is shipped, but that is the reality of commercial aircraft engine development. Returns come in later years, and in the case of GTF, that is planned for the 2018 time-period. Another analyst continued to probe on breakeven expectations.
We have highlighted the above year-end UTC briefing summary statements to provide our readers reinforcement as to how visible supply chain challenges can become in today’s world of ubiquitous information and especially on how investors and equity analysts can now hone-in on supply chain vulnerabilities. The supply chain indeed matters, and investors are becoming more well informed to this tenet.
We expect many Supply Chain Matters readers to have added impressions or feelings regarding UTC’s latest supply chain related disclosures. Questions such as whether Pratt teams were aware of combustor or oil seal issues earlier in the program or whether pressures to meet first and subsequent customer ship milestones were overriding. There may be other questions related to multi-tiered supply chain visibility or early-warning from suppliers. That is not for this specific commentary to address. Certainly not without speaking to those with knowledge.
As noted in October, operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. This is where the learning comes in.
The looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast of today’s industry supply chains.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The following Supply Chain Matters commentary has a theme, let’s call it a good news- not so good news theme. Be warned that its length is somewhat longer because it represents a Research and Consulting Advisory that I felt should be shared with our blog readers.
When I deliver presentations on supply chain management topics, I often use the above analogy regarding our community. You see, for many years, the efforts of supply chain management teams and professionals were often perceived as being taken for granted or misunderstood. Teams were frustrated as to why senior managers did not comprehend why supply chains do matter in accomplishing financial, operational and customer business objectives.
Today, the good news is that, more and more, the C-Suite and indeed the board room now have full understanding of the contributions and the value. The not-so-good news is the same, and it comes with higher expectations for delivering on key business goals, both financial and operational, and in the high-level visibility window now focused on any firm’s supply chain performance. Especially when shortfalls in performance cause the need for broader senior management and shareholder visibility.
So, where are we going with this posting?
Let’s revisit the ongoing developments involving certain commercial aircraft and aerospace industry supply chains. In our ongoing multi-year coverage of industry players, we have continually pointed out the extraordinary circumstances of an industry that is designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels is clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns. Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings.
One specific development has been the increasing visibility to the supply chain challenges occurring at aircraft engine manufacturer Pratt and Whitney, specifically its revolutionary new geared-turbofan (GTF) aircraft engines. Supply chain glitches and volume production ramp-up challenges have now directly impacted the aircraft delivery production plans of both Airbus and Bombardier, causing both final manufacturers to now incur the financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link has of-late been Pratt. There are others as well but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In our blog commentary published in mid-September, we highlighted that United Technologies, the parent to Pratt, and specifically the UTC CEO, warned the conglomerate’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. CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news. Neither were UTC stockholders who initiated an initial 2 percent sell-off in UA stock.
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 objectives. Similarly, financially challenged Bombardier’s new CSeries aircraft has just initiated initial deliveries to airline customers but management was forced to warn that commitments for the overall market must now be scaled back because of the limited supply of finished Pratt GTF engines, the sole certified engine for the CSeries. Bombardier just announced its second round of significant headcount reductions to preserve cash and working capital needs.
UTC CEO Hayes indicated in September 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 the new GTF Pratt engine. One critical problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades, noted as a breakthrough in material design and expected performance.
This past week, UTC reported on its Q3-2016 financial and operational performance. To follow this story, we reviewed the entire transcript of the senior management briefing to equity analysts and shareholders.
It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain.
CEO Hayes opened the briefing with the review of UTC’s three key priorities: flawless execution, structural cost reduction, disciplined capital allocation. He quickly touched upon the current success of Pratt and its new GTF aircraft engine, noting that the engine is already meeting or exceeding key performance targets and already delivering 99.9 percent dispatch reliability on Airbus A320 neo in-service aircraft.
Thus, the positives related to product design and engineering.
It was not too long before the Pratt near-term challenges and the details of slower deliveries than planned began to come forth. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and its going to be fixed this quarter.” He later stated that UT senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway:
- Process improvements
- Yield improvements
- Lead-time reductions
- Additional added capacity
The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more and more of Pratt and its supply chain challenges.
Highlights of disclosure included:
- In Q3, Pratt delivered 76 GTF engines across all platforms and management anticipates 150 engines to be delivered by the end of this year, meaning similar output level in Q4. The 2017 delivery goal is now set at between 350-400 engines.
- Pratt’s negative margin trend will increase from $650 million in 2016, to $950 million in 2017 because of absorbed engineering and development costs and break-even volumes not expected until way after 2017.
- The GTF titanium aluminum fan blade was again identified as being a prime bottleneck. At the beginning of 2016, the total lead time, from start to test completion, for the fan blade averaged 100-105 days, more than 3 months. First pass test yields were described as 30 percent. Today, the same lead time was noted as 55 days with first pass yield rate of 75 percent. The overall production process related to the fan blade was described as incredibly difficult.
- An additional fan blade production partner is scheduled to come on-line with added capacity by November. Full production of this partner is expected in January.
- Pratt is additionally starting-up a brand new, more automated factory, next to the current owned blade factory in April of next year.
- Pratt has a strategy in-place where no single point of failure resides in the supply chain. In-essence, at least two key suppliers for each of key parts within the GTF engine.
- And finally, UA brought back former Sikorsky Aircraft and GE Aviation senior operations executive Shane Eddy to lead operations at Pratt.
The need for the sharing of all this supply chain operational detail with investors comes back to our original theme of good and not so good news.
Operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. The revolutionary new fan blade was a known critical component, yet now with visibility at the highest levels of management, additional financial and operational resources needing to address disappointing ramp-up needs are now being allocated. Bringing in a new senior operational manager with prior known accomplishments is another potential sign. Another theme we believe is the recurring one of having to balance billions of dollars of investment in stock buy-back with perhaps the need to invest capital earlier in manufacturing automation and worker productivity.
In essence when the CEO of your holding company, under the constant gun for higher shareholder returns, is now disclosing the detailed operational get-well strategies of your supply chain, than you know that the looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast.
The good news of higher visibility is the priority for marshalling all required corporate resources to address existing supply chain challenges and needs. The not so good news is the peril that such visibility can sometimes bring.
This state is one that senior supply chain leaders will have the most difficulty managing.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
No sooner had Supply Chain Matters raised our awareness to the collective march to the bottom of the U.S. airline industry came this week’s network-wide computer systems disruption impacting Delta Airlines. As we observed, it is looking more and more like the industry is being led by financial types who seem to have completely ignored the tenets and principles of basic operations and network management.
But, Supply Chain Matters wants to extend direct praise to Delta Chief Executive, Ed Bastian. The primary reason- as the CEO he stepped-up and took full responsibility for the systems failure resulting in the cancelling of thousands of flights and inconvenience to countless customers. He further praised all of his employees for the extraordinary effort in delaing with this crisis and efforts to assist impacted customers.
The airline further posted a video where the CEO directly apologized to Delta customers.
According to Bastian, the disruption began when a power switch failed causing a power outage that subsequently led to other cascading incidents including a transformer blow out in Delta’s data center. The entire system crashed and backup systems did not perform as expected. Bastian indicated openly: “This is our responsibility- the buck stops here.”
What impressed us even more was Bastia’s statement:
“It’s not clear the priorities in our investment have been in the right place. It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”
Unlike some other airlines, Delta has invested in operational capability both in aircraft and in supporting systems. In 2012 we praised Delta’s bold supply chain vertical integration initiative in acquiring its own oil refinery. We have also highlighted innovation in aircraft re-purposing.
Yet, this week, the system failed, and the airline has taken full responsibility to find out why and hopefully correct flaws.
Too often in times of major operational or supply chain disruption, CEO’s turn silent and de-facto let operational executives take the arrows and blowback. Some are arrogant enough to openly blame disruption on suppliers, partners or equipment, not acknowledging the principles of ownership and accountability.
Hopefully this week’s incident may provide a watershed for the U.S. airline industry. The compass of services focused on customer needs for a convenient, somewhat pleasant and reliable travel experience has been pointed in the wrong direction, and the consequences and cost of these decisions are coming home to roost.
Praise to a CEO who demonstrates accountability and leadership. We need more of this.
Last week, Tesla founder and CEO Elon Musk penned a blog posting that essentially updated the master plan for the company that called for a broader product development thrust into hybrid trucks and buses. This places a far broader emphasis on the firm’s supply chain ramp-up challenges, one with the implication that Tesla will, by our view, have to seriously consider adding to existing final assembly production capacity beyond its current Fremont California facility.
The commentary itself not only provides an argument for why the electric car company must merge with SolarCity, but a further expansion of the master plan that includes:
- Create stunning solar roofs with seamlessly integrated battery storage
- Expand the electric vehicle product line to address all major segments
- Develop a self-driving capability that is 10X safer than manual via massive fleet learning
- Enable your car to make money for you when you aren’t using it
New product offerings were described as a new form of pick-up truck, and beyond the consumer vehicles market, an innovative heavy-duty trucks and high passenger density urban transport vehicle. Regarding the latter, Musk envisions a smaller footprint of urban busses with a transition from the role of individual bus driver to one of fleet manager. Both are noted as in the early stages of development at Tesla and should be available for unveiling next year, and will follow the availability of the more affordable Model 3 currently due in 2017.
Supply Chain Matters previously highlighted efforts of truck maker Nicola Motor Company in developing a Class 8, 2000 horsepower electric powered semi-tractor truck that will be named the Nicola One. This manufacturer has to-date booked 7000 reservations, each accompanied by a $1500 deposit, totaling more than $2.3 billion in cash to secure a reservation for this new vehicle, hence the sense of urgency for Tesla to enter such a market.
To state that the latest master plan is audacious or ambitious is an understatement. It places a far more concentrated focus on whether product development and the supply chain can rise to the challenge in such a short timeframe.
As noted, our last Supply Chain Matters commentary on Tesla concluded that the company remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs of existing announced vehicles. Musk has literally accelerated by two years, his goal to have the California final assembly facility output 500,000 vehicles per year. In his latest blog post, Musk once again re-iterated that this will be addressed as a function of engineering:
“What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine — turning the factory itself into a product.”
The adding of commercial vehicles with more innovative hardware and software designs implies no choice but to accelerate capacity, strategic commodity and supply chain wide resources. Just today, The Wall Street Journal reports (Paid subscription required) that Tesla’s new $5 billion “gigafactory” near Sparks Nevada to produce the combined company’s battery component needs is currently one-sixth of its planned future footprint. Currently, 1000 construction workers are working two shifts per day, seven days per week to prepare for 2017 needs in the output of lithium-ion cells. Primary battery supplier Panasonic admits to the current challenges of finding qualified production workers, and with the addition of even more models of transport vehicles, the scale of the battery plant’s capability become crucial. But so does final assembly and distribution as well, in an area that is noted for rather expensive real estate and distribution space.
Thus, any experienced or even entry level supply chain and manufacturing professionals that enjoy an environment of fast-paced innovation and creativity in business process and physical supply chain processes best route your resumes to Tesla. We anticipate a razor-like focus that harnesses the fusion of engineering, product development and supply chain management into a kaleidoscope of expansion that will test current norms and thinking.
First-Half 2016 Delivery Performance for Airbus and Boeing Reflect Continued Supply Chain Challenges
As the commercial aircraft industry moves into the second-half of 2016, it is time for our usual Supply Chain Matters six month industry review of performance. Reflecting on delivery performance thus far, there are continued signs of industry supply chain supply challenges.
Let’s begin with Airbus which reported the booking of a total of 227 confirmed orders in the first six months of the year. That number may be somewhat understated since at the industry’s recently completed Farnborough Air Show, Airbus achieved bragging rights for announcing orders and commitments for 279 commercial aircraft, more than half originating from a single airline customer, that being AirAsia who ordered 100 A320neos.
Airbus recorded the delivery of a total of 298 aircraft in the first-half, which consisted of the following:
- 160- Single aisle aircraft (Variants of A319, A320, A321)
- 38- A330’s
- 27- A350’s
- 2- A380’s
In the above, tell –tale signs of supply disruption are reflected in two key aircraft. There were only 8 completed deliveries of the brand new A320neo, no doubt reflecting the ongoing catch-up in delivery of the brand new Pratt & Whitney geared turbofan engines. Airbus had delivered just 5 A320neos in Q1 meaning that just 3 were delivered in Q2. As noted in our prior commentary, nearly a dozen of completed A320neos have been reported as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The exiting delay is associated with fixing the engine’s cooling design through a combination of software and component modifications. Pratt engine deliveries were not expected to catch-up until after June and there are continued reports that Pratt’s supply chain remains strained. The other new engine offering, the new LEAP model from CFM International is expected to be available in the second-half of this year as-well. With a stated target to have a production level of 50 A320neo’s per month by 2017, there is a lot more planning and execution remaining.
A further problematic area acknowledged by Airbus has been supply and bottleneck challenges associated with newest model A350 production, and first-half completion of 27 reflects that ongoing challenge. Supply challenges have been noted as interior seating and structures and Airbus senior management has expressed public frustration regarding ongoing supply glitches.
Turning to Boeing, the aircraft producer reported the booking of a total of 321 orders in the first-half. At the completion of the Farnborough event in July, Boeing was able to announce orders and commitments for 182 aircraft but just 20 actual new firm orders.
Boeing further recorded the delivery of a total of 298 aircraft reflecting its previously announced scaled-down expectations for delivery cadence this year. The breakdown was:
- 3- 747’s
- 5- 767’s
- 51- 777’s
- 68- 787 Dreamliners
In the above, a challenged area remains completed deliveries of Dreamliners although the cadence has improved slightly beyond 10 per month. There is still a long way to go in ramp-up and lots of internal pressures remain since the program remains cash negative until delivery performance dramatically improves. Both Boeing’s Seattle and South Carolina assembly facilities are now producing completed Dreamliners.
With current order backlogs of nearly ten years for Airbus and over seven years for Boeing at current production cadence levels, both manufacturers have been concentrating on increased production automation and longer-term strategic supplier agreements. In June, key suppliers urged both manufacturers to move cautiously on demand noting that there are definitive restrictions on the ability to ramp-up the industry supply chain to expected volume output cadence. Another growing concern is the ability of aircraft engine producers to be able to support higher output volumes given the increased technical sophistication of the new generation engines. Pratt alone is in the midst of managing five different new engine models and with both commercial aircraft dominant manufacturers continuing to book further orders and explore newer model introduction, the pressure builds.
Again, only time will prescribe the course of events in an industry that is clearly reflecting supply chain distress.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved