This is a premiere week for the global aerospace industry and their associated global supply chain partners. This week, the Paris Air Show, a weeklong gathering of a who’s-who of the industry is underway along with the contest for booking orders for new aircraft.
Business media has already positioned this year’s show as the continuing battle between Airbus and Boeing for industry domination for new, more technology advanced and energy efficient wide-body jets. In a previous Supply Chain Matters commentary late last week, we noted the well-timed inaugural flight of the Airbus A350. The reality remains, however, that both of these premiere global aerospace providers have over eight years of current order backlog, and the pressure to ramp-up production output levels is building with each passing month. Any new orders booked this week by either or both of these manufacturers adds to individual and collective supply chain pressures.
The spotlight is not only on the two industry giants but on the other highly competitive segment of single-aisle, more fuel-efficient regional jets. That battle pits Bombardier, Embraer, Mitsubishi and COMAC vying for airline operator attention and new orders. They each share supply chain partners with either Airbus or Boeing.
We were especially curious to note an article in yesterday’s Wall Street Journal that described Airbus CEO Fabrice Bregier new emphasis on efficiency and empowering factory managers with more independence for delivering aircraft on-time and on-budget. Last year, Airbus, the operating group of parent EADS, posted an operating profit margin of 4 percent. That is roughly half of Boeing’s recorded operating margin of 9.6 percent in the same period.
Readers from the high-tech industry OEM community may scoff at such margins, given the double digit margins that they encounter. Then again, high tech OEM’s do not want to own production assets and elect to transfer that burden to contract manufacturers who have to manage in single-digit operating margins.
Mr. Bregier has tasked Airbus teams to improve operating margin to 10 percent within the next two years. The plan is to eliminate complexity as much as possible and to allow factory managers to run their operations as a streamlined business with the ability to make independent decisions. That’s a tall order given the complexity, dominance and influence of engineering and product design teams.
Our aerospace industry readers may well question whether the 10 percent operating margin goal within the next two years is really a stretch goal given the current operating pressures, complexity and complex culture of today’s aerospace industry. Consider that Airbus’s 4 percent profitability came on a total revenue base of €39 billion ($52.3 billion). That is the testament to a rather complex, engineering-driven supply chain with lots of opportunities for added efficiencies and more streamlined suppy chain related decision-making.
Both the WSJ and The Financial Times have declared that for Airbus and Boeing, a new emphasis on profitability is largely dependent on efficiency rather than which manufacturer books the most orders this week and in the weeks to come. That is perhaps a new reality that limitless order flows may be waning and that the industry may perhaps be reaching too much adsorption of new aircraft.
One of the time-tested principles of change management relates to the fact that change only comes when management teams set specific goals as to which metrics and behaviors need to change and subsequently call attention and measure such goals. For aerospace leaders Airbus and Boeing, the corporate culture and executive bonus system is perhaps too focused on declaring industry leadership based on orders booked.
Supply Chain Matters concurs that this may well be the time for the aerospace industry to shift the focus and the measurement systems toward improved production efficiencies, more streamlined decision-making and broader end-to-end supply chain intelligence.
Aerospace industry readers are welcomed to share their perspectives on whether the shift toward supply chain efficiency and more streamlined decision-making is doable given today’s operating norms and management approaches.
Today marked the successful completion of the maiden first flight of the Airbus A350 XWB aircraft, and the beginning of a final phase toward production. The aircraft completed its four hour maiden flight from Airbus’s corporate airfield near Toulouse France amid lots of fanfare. The timing of this maiden flight coincides the opening of next week’s Paris Air Show, one of the largest aerospace industry bazaars where lots of airline, industry and aerospace supplier executives gather to view the latest aerospace products and to conduct lots of deals. The theater is well-timed and well-chosen.
Readers can view a series of videos of this maiden voyage by visiting the dedicated A350 first flight web site. There are some great videos that outline the supply chain flows and advanced final production process of this aircraft on the Airbus web site. We enjoyed watching them and they are very well done.
The A350 is the Airbus response to Boeing’s 787 Dreamliner and 777 series aircraft. It is built with composite fiber materials in its fuselage structures and is equipped with two Rolls Royce Trent XWB engines featuring cutting-edge materials and cooling technologies claiming 25 percent less fuel consumption than prior generations. According to Airbus’s web site, the engines themselves are slighter larger in diameter than those that power the huge A380 but they are actually lighter in weight, quieter, and the lowest in carbon emissions. Similar to Boeing’s 787, the supply chain is global, but not as extended. Having had the opportunity to observe developments concerning the ongoing customer introduction of the 787, Airbus elected not to utilize lithium-ion batteries as backup power.
Similar to Boeing’s 787, challenges concerning the overall supply chain lengthened original product development and market release plans. In November of 2011, the CEO of Airbus’s parent EADS expressed a personal apology in announcing a delay in the originally planned A350 program. The market introduction was pushed back from late 2013 to first half of 2014. In the announced delay, Airbus noted: “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” At that time, The Financial Times speculated that Airbus had concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program, which was characterized as a bold but practical decision. At that time, Supply Chain Matters praised the decision, noting that it was far more important to fix any supplier readiness issues earlier than later in the program, when the stakes are far higher. We have since learned that Airbus has added advanced technology to insure that engineering and supplier teams collaborate virtually working with electronic designs and 3D renderings of designs and component parts.
This far, Airbus has garnered 613 firm orders for the A350 from 33 airline and leasing customers. Many of the customers are the emerging airline industry disruptors like Qatar, who are aggressively augmenting long-distance lift capacity and not shy about exhibiting aggressive demands and negotiating skills. They recognize that they are players in explosive emerging markets where air travel will expand quickly, and new, more efficient aircraft need to be ready on-time to meet this demand.
This maiden flight is the prelude to a series of 2500 flight hours of rigorous test flights involving five separate aircraft that should culminate in aircraft certification. The Airbus plan is to have first customer ship to inaugural customer Qatar Airways by the second-half of 2014. In our view, that is a critical milestone for the A350 supply chain community, since the Dreamliner has apparently moved beyond its battery failure issues and is in its production ramp-up stage. As readers know, the Dreamliner program is over three years late, and customers are feeling the financial effects. Meeting the revised A350 time-to-market plan assures that customers have options to meet their planned operational scheduling and financial savings milestones. As our aerospace industry readers also are fully aware, the new wave of combined production ramp-ups involving Airbus, Boeing, Bombardier, Cessna, Embraer and COMAC are both a blessing and enormous stress. Any glitches and or hiccups have implications.
Supply Chain Matters extends its thumbs-up recognition to the entire extended A350 global supply chain community for reaching today’s very important milestone.
We look forward to posting future updates regarding successful production ramp-up and look forward to perhaps taking part in the A350 flying experience on a future journey.
These past few weeks have featured an explosion of business, general media and technology vendor recognition concerning the new era of digital manufacturing that is underway and its profound impacts of how we think about this area. The notions of additive manufacturing, smart devices and predictive analytics applied to products and services are now becoming more top-of-mind for multiple industry executives.
We are moving from an era of predominantly physical to that of digitized and software concentrated aspects of products and services. The sooner your company and organizational teams understand the implications of these trends, the better.
This week, the Wall Street Journal featured a special dedicated insert with the lead article, A Revolution in the Making. The series highlighted the profound impacts that additive manufacturing will have on global supply chains in the not too distant future. Two articles highlight efforts underway at Ford Motor, General Electric, Nike and Mattel in their current applied use of additive manufacturing techniques applied to customized manufacturing. In late May, the Financial Times published an article concluding that the digital based transformation of manufacturing is the key for European based firms to lead in a sustainable recovery from the current economic malaise, but questions if the broader aspects of manufacturing firms fare committed toward change.
Product (PLM) and service lifecycle management (SLM) technology provider PTC is conducting its PTC Live Global customer event this week. Besides reinforcing the themes noted above, this vendor also co-sponsored a research study with Oxford Economics which is titled Manufacturing Transformation. (No-cost sign-up required to download) This report surveyed over 300 manufacturing executives across six industry sectors. By our view, one of the more significant takeaways from the findings was that 68 percent of those surveyed expect to undergo a significant business process transformation over the next three years. Geographically, European based manufacturers expect more of this transformation, no doubt another reinforcement of the FT article noted above.
The survey results further uncovered that customer fragmentation is a current major concern for manufacturers which is being translated to a heightened attention to coordination of strategy and planning among engineering, manufacturing and service functions. However, nearly 70 percent of manufacturing C-level executives view talent shortages and labor costs as a critical worry.
When we developed our Supply Chain Matters 2013 Predictions for Global Supply Chains late last year, we considered a prediction on the impact of additive manufacturing but instead noted the trend in our honorable mention predictions. Our thought was that 2013 may well be the year where the momentum of adoption of additive manufacturing techniques across multi-industry supply chains would accelerate. More transformational work remains, but the momentum is clearly accelerating.
In our ten listed 2013 predictions, we identified in Prediction Four that supply chain talent retention, management and development will remain a significant problem across global supply chains. That challenge continues to manifest itself in executive and other surveys, the latest being the Oxford Economics study. Prediction Eight portended that the digitization and the building momentum toward bundled hardware, software and services would facilitate further teardown of functional walls. We believe that it will drive product development, customer fulfillment and service under a common leadership umbrella.
Yes, the keys toward industry competitiveness are quickly moving into dimensions of virtual and additive manufacturing where customer needs are individualized, where time-to-market dimensions are even faster, and where design, build and service anywhere have true meaning. The evidence is quickly building, and the needs for your organization to be prepared to take advantage of these forces are becoming far more compelling. Readiness includes not just technology but ever more important areas of organization, skills development and other enterprise transformational needs.
In the remainder of 2013, Supply Chain Matters will provide added depth to the implications of manufacturing transformation and its implications in organizational and supply chain dimensions. For the time being, we pose two questions for your thoughts:
Are you delivering these manufacturing transformational messages and their implications to your supply chain wide organizational teams?
Are plans and initiatives addressing transformational needs being identified, particularly to help people transform their skills?
Our European readers are acutely aware that the ongoing severe recession affecting the Eurozone has taken a severe toll on manufacturers and retailers. At the same time, time tested principles of market specialization, global outreach, and a highly skilled workforce can often provide a basis for a firm to outlast a recession in one’s home market.
In late 2010, in the midst of the previous global recession, Supply Chain Matters featured a commentary highlighting specialty small and mid-sized manufacturers in Germany, termed the Mittelstand companies. These German companies featured conservative, non-flashy management and came to understand that growth comes from a focus on market niches, sometimes in traditional industrial areas where bigger companies choose not to compete. They viewed the world as one global marketplace for specialty products or materials. Our 2010 commentary highlighted three lessons for growth and surviving a geographic recession:
- Building recognized product innovation, even when that innovation is within traditional industries.
- Understanding that niche markets can be huge when projected on a global scale.
- That small and medium sized manufacturing focused businesses can be an engine of sales and employment growth, providing they have an unwavering focus on operations excellence and continuous improvement in every process.
In 2013, Europe is enduring close to two years of severe economic contraction, yet the above lessons remain as guideposts for surviving the recession. Further evidence has come forth in a series of articles on European industry published by The Financial Times. One particular article, Skilled workers give Italy an edge, (paid subscription or sign-up for free metered view) should capture interest because it reinforces similar principles.
The article highlights Italian manufacturers Guala Closures, a global leader in the manufacture of premium bottle tops, IMA, a global producer of automatic machines for the packaging of pharmaceuticals, cosmetics and other products, Luxxotica, global eyewear manufacturer, and Sogefi, a producer of specialized automotive components. While Italy endures nearly a decade of economic stagnation, these manufacturers are holding their own. As an example, Guala has grown fourfold in the past ten years, selling to more than 100 countries, with a presence of 24 worldwide manufacturing facilities. IMA which garners revenues in excess of €743 million, boasts that 93 percent of those revenues are derived outside of Italy. It sales network includes 70 countries with 23 global manufacturing centers. Sogenfi supplies Audi with a super lightweight spring made of composite materials.
FT points out that each of these companies stress innovative products in niche markets coupled with premium manufacturing skills and lean operations. Sound familiar?
While there are obviously other factors necessary for enduring a severe economic downturn in the host geographic region, including access to affordable credit, time proven principles of product innovation, an unwavering focus on manufacturing excellence coupled with a highly skilled workforce have endured to provide our community continuous evidence of their importance.
Just when we began believing that Johnson and Johnson was on the road toward more responsive quality and production management, it has happened again, yet another major product recall.
J&J is voluntarily recalling 32 million packages of the birth control pill Cilest, which is primarily distributed to patients in Europe, Asia and Latin America. This product is produced and distributed by business unit Janssen Pharmaceuticals Inc.. The recall was initiated because one active ingredient did not lead to a “defined specification” in a designated quality check. In other words, there is a problem with the consistency or composition of a batch of active ingredient. The recall involves 179 lots or batches of product that were manufactured in or after 2011. Each lot contains 180,000 packages.
That, in our view, it a rather long cycle of production exposure.
J&J has been quick to note that the product remains safe and effective but apparently has not elected to issue a formal press release announcing this recall. Cilest is not sold in the United States.
This latest recall was initiated higher in the supply chain, at the wholesaler and pharmacy level, and requires supply chain channel partners to return all unsold product. Thus, J&J is trying to avoid a direct consumer-facing recall campaign that further
Frequent readers of this blog will be all too familiar with the history of quality and production snafus originating across multiple J&J business units. A long series of past product recalls in over-the counter (OTC) medicines involving Tylenol, Benadryl, Motrin and Zyrtec date back to 2009 and resulted in the outright temporary closing of a manufacturing facility in Pennsylvania. In July of 2011 there were revelations of an internal investigation led by Johnson & Johnson’s independent directors which points to a direct connection from certain headcount reductions, along with “periodic headcount freezes’ as contributing factors related to product quality breakdowns at the company’s McNeill Consumer Healthcare unit. In May of 2012, there was yet another product recall involving the McNeill OTC unit. Efforts to resolve these issues and re-dedicate efforts toward insuring various past supply chain and product quality issues were permanently addressed in various company-wide performance improvement initiatives were launched. Unfortunately, in now appears that more process issues remain to be addressed. A posting on Domain-b.com makes note that the recall of Cilest comes a month after J&J recalled children’s Tylenol products in South Korea for containing an overdose of medicine while India based health officials revoked a license to manufacture cosmetics at a facility in Mumbai after determining that an unauthorized process was utilized to sterilize a baby powder product.
In our last Supply Chain Matters January commentary regarding J&J, we applauded the company for its continued renewed initiatives in addressing quality and supply chain production conformance issues.
It would now appear that more work, concentrated leadership and dedicated efforts remain.
At the All Things Digital conference held this week, Motorola, now part of Google, confirmed that it will introduce a high-end smartphone to be named Moto X and that it will be produced in the United States. The company will manufacture this device at a facility near Fort Worth Texas, but many essential supply chain components will be sourced overseas. The Texas facility will employ upwards of 2000 people by August.
Our readers are probably aware that the competition between Google and Apple has heated-up, of late. We therefore found this announcement from Motorola to be both significant and “in your face.”
Apple garnered lots of media headlines regarding its December announcement that the company would move some manufacturing back to the U.S… In a previous Supply Chain Matters commentary we viewed the announcement that Apple will have some Mac production in the U.S. this year as one of political expediency. Apple had been feeling lots of attention regarding the incidents of labor unrest among Foxconn plants in China along with the numerous traditional and social media discussion focused on why the company has stashed hoards of its cash across foreign entities to avoid U.S. taxation. Apple was also a topic in the past U.S. Presidential debates, with the direct question; “What will you do to encourage companies like Apple to shift more jobs to the U.S.?” Apple expeditiously responded with its U.S. sourcing announcement, indicating that it would invest $100 million in this effort. As we approach the mid-way point in 2013, very little detail has come forward regarding Apple’s U.S. production plans.
By our view, the Motorola’s announcement is far more significant because it involves a line of smartphones, one that manufacturing industry interests openly declare can never be competitively manufactured in the United States. While Motorola has not disclosed specific detail on the features and pricing of the Moto X, the decision to source final assembly in the U.S. is a bold one and far upstages that of Apple.
Motorola may not garner all the media eyeballs that Apple can garner but its bold decision to return some smartphone production to the U.S. is the one to watch in the coming months.