In October of 2014 we alerted Supply Chain Matters readers to a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. Since that time, much as occurred, and this week, there is yet another development, one that perhaps has implications for the upcoming administration of President- Elect Donald Trump.
The headline back in 2014 was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the “T’.
This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract. The further significance was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment, far underbidding other railcar manufacturers. According to local news reports, CNR aggressively courted the Massachusetts transit system to gain a foothold in the U.S. rail equipment market. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow. Major components however, would be produced in China and transported to the U.S. for final assembly of railcars.
Since that time, there have been other developments.
China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. then created a local U.S. subsidiary to administer contract delivery needs involving the U.S. including the MBTA contract.
The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago. This assembly facility is expected to be in operation for a total of 10 years with railcar prototypes coming out in 2019, and initial cars being delivered into operational service in 2020. The CSR Sifang America bid came in $226 million lower than that of Bombardier Railcar Equipment, the most recent manufacturer of Chicago’s railcar fleet. Since that time, competing bidder Bombardier filed a protest with the agency, saying that the bidding process was rigged in favor of a Chinese firm that promised to bring manufacturing jobs to Chicago.
This week, the Massachusetts based MBTA control board voted to authorize as much as $277 million to acquire an additional 134 Red Line railcars as an extension of the existing contract with the China based railcar producer. This amended change to the existing contract bypassed standard bidding procedures because the agency indicated that it was seeking to standardize its entire network-wide fleet of both Orange and Red Line cars. The MBTA considered rebuilding the 184 existing Red Line cars not scheduled to be replaced in the initial contract, but a financial analysis had indicated that brand new cars would cost as much as $310,000 less than overhauling the existing ones. The added Red Line cars are expected to replace the entire existing fleet by the end of 2023.
Specifics of the amended agreement were reportedly revealed publicly for the first time on Monday of this week. Board members were asked to approve the deal that same day, to supposedly avoid a price increase and to secure local manufacturing capacity.
Supply Chain Matters brought initial attention to China’s state-owned railway efforts to make a more sustained equipment presence within the U.S. because it included both global and domestic supply chain implications. The plans calling for many of the major train components to be produced in China and shipped to the U.S. for final assembly within local U.S. final facilities insured some local jobs, which was an obvious big deal for local governments. That theme has more current resonance with the discourse that came out of the recently completed U.S. Presidential election. Voters opted for the candidate they perceived to have a more aggressive protectionist stance on jobs and who would take on China as a perceived currency manipulator and in the consequent outsourcing of jobs to that country.
However, from our lens, the real question will come as the new Trump administration begins to unfold its trade protectionist policies.
Current speculation is that the incoming administration will not be shy in slapping increased tariffs on Chinese parts and components imported into the United States. Some plans call for a revised tax code that would feature a form of a value-added-tax or tariff on imported goods. If that comes to fruition, then the economics related to the existing U.S. subway equipment replacement contracts could well be impacted. The question is how much and whether local final assembly turns into something quite different, or whether new subway cars can indeed be delivered at such attractive pricing.
This is an area worthy of observation over the coming months. On the one hand, U.S. taxpayers are saving money and supposedly gaining use of very modern, technology-laden passenger railcars for urban transportation needs. They also gain some local manufacturing jobs.
On the other hand, China’s existing lower direct labor costs, overcapacity situation in steel production, and needs to insure continuous employment among state-owned manufacturers make the landed cost more attractive for local transportation agencies. It is a delicate balance that may well be subject to change, especially if the expected costs of landed components increase substantially.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This Supply Chain Matters posting serves as another update on our now streaming commentaries related to the ongoing business and supply chain challenges involving Chipotle Mexican Grill. Specifically, we refer to the past series of food related illnesses including E-coli, salmonella, and norovirus that date back to 2015. This week there has been a new development, one that makes us wonder aloud if senior management really grasps the extent of the chain’s continuing challenges.
Our last update commentary in late October reflected on the restaurant chain’s September-ending financial performance. Management appeared to reflect an upbeat perspective and announced several new initiatives directed at broadening menu options and fulfilling online orders including mobile ordering technology, along with consideration for airing more television commercials. To further efforts in improving food safety in restaurants and the supply chain, the chain’s CFO pointed to an establishing an independent Food Safety Advisory Council made up of some of the country’s foremost experts in food safety and food microbiology. There were indications that the chain was expanding regional executive leadership to help improve staff training and the individual guest experience. Our take was one that management may now have grasped that you do not manage a brand crisis solely via sales and marketing tactics to bring previous loyal patrons back. The elephant in the room has been consumer perceptions of ongoing food safety and whether this chain had taken all necessary measures to ensure that the series of incidents that occurred in 2015 would not be repeated, at least by controlled, network-wide management and quality focused practices.
This week, investors once again punished Chipotle stock after the firm’s co-CEO Steve Ells indicated at an investor’s conference that he was not at all satisfied with the rate of recovery and specifically: “I’m particularly not satisfied with the quality of the experience in some of our restaurants.” At face value, that might have been a positive statement by a senior leader in the early stages of addressing a quality crisis.
Mr. Ells apparently went on to declare that slow customer service threatens to turn off people if they come back to restaurants and that the current service experience is not perfect. In its reporting, The Wall Street Journal pointed out that employee turnover rates among Chipotle outlets, according to the firm’s CFO, was averaging 130 percent in July. An equity analyst was quoted as noting that workers were leaving for higher wage rates at other establishments.
In somewhat of a conflicting goal situation, declining sales, volumes and ultimately margins take away from the ability to pay higher wages and demand higher standards in food preparation and service. Now this week, a chain-wide hiring freeze has been imposed.
In one of our earlier Chipotle focused commentaries, we noted that a review of SEC documents indicated that compensation bonus performance payouts for the firm’s executives were solely based on meeting future higher stock price milestones. We questioned why operational performance milestones related to quality and service did not appear to be weighted as high. A few weeks ago, business media reported that a small group of activist investors were now pressuring management for change in board leadership and for greater value for the company’s stock.
Thus, the management vice impacting Chipotle tightens. Sales and stock growth comes from increased consumer loyalty, based on a fundamental tenant that the quality of the food and the overall experience is suburb. Restoring integrity in the quality and safety of food requires certain investment and remediation, and more importantly, continued training, audits, oversight and periodic testing.
Efforts directed at improved employee training and higher consciousness towards food safety likely has been for naught when high numbers of recently trained employees up and leave. The same holds true for local management. The long-term efforts of the Food Safety Advisory Council are now pressured by senior leadership concerns related to slower service. It could be that slower service comes from understaffed and under-compensated employees.
There are obviously many take-away learnings that can be derived from what is occurring at Chipotle but the chapters are still ongoing.
The questions raised are what comes next?
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
While industry supply chain teams continue to work on achieving 2016 year-end strategic, tactical, operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of the year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.
As has been our custom, our scoring process is based on a four-point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.
In our Part Two posting, we revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.
In our Part Three posting, we revisited and reported on our industry specific supply chain predictions for this year.
2016 Prediction Six: Certain Industry S&OP Processes Would Morph to Broader Forms of Integrated Business Planning and Product Management.
Self-Rating: 2.5 (Max Score 4.0)
The term integrated business planning is often depicted as a specific technology vendor term but in reality it is a desire that all functions of a firm be aligned at a single set of financial, business, supply chain operational and tactical business outcomes.
Multiple surveys of multi-industry Sales and Operations Planning (S&OP) processes consistently point to existing frustrations in setting the right key performance indicators, investing more time in collecting data than in analyzing implications of decisions and insuring expected business results. Some point to the need for the S&OP process to be able to more directly influence top-line revenue growth along with closing the product demand and supply gaps of existing plans.
A lot of these challenges remain driven by lack of integration among various financial, line-of-business and supply chain decision-support systems, not to mention integration to new product planning and portfolio management. All exist as islands of information that were not pre-designed to integrate into a singular decision-support process. The unfortunate reality is that the decision process supporting S&OP remains firmly rooted in spreadsheets linked to various disparate internal and structured applications and unstructured information.
For 2016, we anticipated that certain S&OP teams, those experiencing high levels of value-chain complexity and business change, would begin to morph S&OP process and decision-making with broader information and contextual decision-making components and begin to identify and address obstacles for incorporating key information integration from product management and financial systems. We predicted that S&OP teams have new options and paths towards their need for more integrated business planning and that the attractiveness for such movements will increase in 2016 and beyond.
The latter part of our prediction has indeed become far more evident in that there are today, far more defined business process and supporting information technology paths directed at IBP. For the former prediction, our sensing of such efforts lead us to believe that such morphing has generally not occurred.
While certain very large enterprises may have had the dedicated financial, IT and people process support e resources to augment their S&OP processes into broader forms of IBP, the clear majority did not have the bandwidth, senior management support or resources to undertake such efforts. Organizational barriers and cultures remain to be overcome, as is the compelling business case.
Our sensing of systems integrators and consultants specializing in S&OP augmentation indicate that multi-industry teams were far more concentrated in understanding what Cloud computing options meant to their various processes, and what various technology vendors were offering for IBP support. Some of the larger ERP platform providers such as SAP remain in the process of trying to integrate the various dimensions. Integrators and consultants found more engagements related to establishing S&OP or overall business planning groundwork initiatives.
For these reasons, we have scored this prediction in a lower quadrant. However, we still believe that IBP efforts will drive substantial business benefits. The question now reflects a reasonable timeframe.+
2016 Prediction Seven: Internet of Things (IoT) Initiatives Would Continue to Dive into Realities of Line of Business Strategy and Deployment
Self-Rating: 3.5 (Max Score 4.0)
Our 2015 prediction was that cross-industry interest levels surrounding products and services leveraging IoT would continue to attract wide multi-industry interest. Indeed, that high level of interest and initial investment continued.
We predicted that in 2016, the realities in the lack of consistent global-wide standards addressing data security concerns would provide visible challenges for broader industry deployments, and that challenge will remain. On Supply Chain Matters, we highlighted one expert’s observation indicating a territorial battle among operations technology focused teams and those responsible for the security of company networks that centers squarely on information security concerns. We joined others in predicting that information hacking will provide additional headline visibility in 2016, increasing the pressure on technology providers and device producers to focus more on information security remediation techniques. Hacking incidents indeed dominated both business media as well as the U.S. Presidential election news with many high-profile incidents of information cyber-attacks. In October, we posted a Supply Chain Matters commentary noting that more powerful and widespread cyber-attacks were the wake-up call for IoT. In the late October incident that struck DNS provider Dyn, Inc., the hackers created a malware program that was carried out, in part, by calling into service unsuspecting devices connected to the Internet, and said devices included digital video recorders and webcams in people’s homes that were taken over by malware and used to help execute the massive cyberattack. Once more, hundreds of thousands of existing devices were believed to have been infected with the malware. The reality of information security did occur and the IoT community is compelled to address this ongoing challenge.
It is rather important to not get caught-up in the multiple predictions of billions of devices connected to the Internet. Rather it is very important to differentiate B2C consumer focused and consumer market use cases from those of broader B2B needs, often referred to as the Industrial Internet. The consumer device sector may well be quagmire in conflicting standards, protocols and security vulnerabilities.
In 2016, we anticipated that B2B focused manufacturers and services providers will broaden their perspectives on connected devices and services, especially in the notions of the realities for being a software-driven vs. a hardware-driven enterprise. That included leveraging intellectual property and software knowledge into more innovative products and services that result in new revenue streams. Enhancing customer engagements and value-added services is the obvious priority. The value of products will increasingly be defined by the embedded sensors, software and consequent added services that products provide for customers. Innovators such as Flex, Cardinal Health, General Electric, John Deere, Siemens, Tesla and others, where senior management embraced the potential of connected devices we believed would continue to lead in these development and deployment efforts. Indeed, the above has occurred and by our lens, the most visible and active player is turning out to be GE and its Digital Business unit. (See subsequent posting related to GE Digital)
We expected some IoT initiatives to stumble in the year because of conflicts in approach and stakeholder interests. We believed that efforts championed and funded by line-of-business groups directed at customer value would have more success than those championed by internal functional groups and focused solely on the “Things.” It was rather important for supply chain and product development teams to align efforts with LOB needs and sponsorship and avoid data silo approaches, particularly with over emphasis on singular software applications. We believed that successful IoT initiatives would stem from data streaming architecture that can feed many different software applications. We anticipated most IoT initiatives in 2016 to be elementary in scope with plans for more peer-to-peer device interaction to come in later years when standards matured.
The above stated, this was a prediction area that was difficult to gage and score. Feedback from our network of contacts among system integrators indicated that many clients did not initially express needs related to IoT initiatives, but with further probing and investigation, integrators and consultants were able to educate prospects on taking initial pilot steps toward connected device applications or business pilots. While attending PTC’s LiveWorks’s IoT technology conference in June, we reported on a panel of systems integrators indicating most customers are not seeking out a specific IoT initiative per-se. Instead, they were seeking technology to assist in resolving use cases involving ongoing business challenges in manufacturing or supply chain or tapping new business opportunities and revenue streams. One panelist indicated that the current hype surrounding IoT has many teams “scratching their heads” in terms of selecting start points or understanding what business problems IoT will solve. From our lens, that feedback reflected needs for broader market education. Where projects lean toward IoT, the sales and approval cycle tends to be elongated, cited in the range of 6-12 months, with indications that discussions representing different business functions such as IT, manufacturing, service management and other functions are involved.
As for technology vendors, we predicted that AT&T, Cisco Systems, Google, Microsoft, PTC, Symantec to be high profile market participants. We anticipated that the battle of IoT platforms will rage again in 2016, which will become very confusing for businesses and selection teams to follow. This was about vendor market positioning and jockeying for being the adopted standard. Regarding our listing of high profile vendors, we actually observed GE and Microsoft, and to a lesser extent Cisco and PTC, to be the higher profile participants. Major ERP providers Oracle and SAP upped their game in strategic alliances and initiatives directed at capturing streaming information produced by edge devices into various manufacturing or supply chain management support applications.
We alerted our readers and clients to expect a high amount of M&A activity in 2016 associated with the IoT segment, as various providers jockey for market dominance or broad and deep expertise. This was an obvious no-brainer prediction and 2016 featured a litany of billion dollar M&A deals that had deep-pocketed technology vendors making strategic moves for entry into various industry specific segments and applications, not to mention additional efforts of strategic alliances. Some highlights included:
- PTC’s acquisition of software developer Kepware
- SAP’s alliance efforts tapping PTC’s IoT technology stack
- To some degree, IBM’s acquisition of The Weather Company
- Cisco’s acquisition of Jasper Technologies for $1.4 billion
- Announced strategic alliances involving Microsoft with both GE Digital and SAP
- Rockwell Collins acquisition of B/E Aerospace
- Numerous acquisitions by GE Digital that included ServiceMax, Bit Stew Systems, io, among others
- Samsung’s acquisition of Harmon International for $8 billion
- Qualcomm’s acquisition of NXP Semiconductor for $39 billion.
Overall, our 2016 IoT prediction missed on implementation momentum but was spot-on related to technology and software vendor M&A and alliance efforts to gain footholds in the market.
We come to the end of Part Four in our scoring series of this year’s predictions. In Part Five, we wrap-up with our final two predictions, those being geopolitical events such as TPP impacting global supply chain strategies, and our final prediction that Amazon and Alibaba would broaden their investments in last-mile fulfillment.
Now that we have revisited 8 of our original predictions related to this year, we welcome reader comments and observations related to any of our predictions and consequent events. As always, you can add your voice in the Comments section appearing at the end of any of our postings.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
Supply Chain Matters has provided ongoing commentary and has pledged to keep our readers updated regarding the ongoing brand and supply chain related challenges that have impacted Chipotle Mexican Grill. Specifically, we refer to the past series of food related illnesses including E-coli, salmonella and norovirus that date back to 2015.
This week, the restaurant chain announced its September-ending financial performance and, according to financial media sub-headlines, the effects of the prior food safety breakouts that sickened restaurant patrons appear to be still evident.
On the financial side, the restaurant chain reported that same-store sales fell by a worse-than-expected 21.9 percent in the third quarter. Profitability dropped by 95 percent, yet that is better than previous bottom-line results.
The chain’s Co-CEO indicated on the briefing call: “. while we are on the road to recovery, we’re not satisfied and we’ll continue to work extremely hard to make the necessary adjustments necessary to restore our business and deliver results as quickly as possible.”
Further indicated: “We are focused on delivering a safe and extraordinary guest experience in every restaurant, restoring trust and building sales, restoring our economic model and enhancing the guest experience through innovation.”
Announced were several new initiatives directed at broadening menu options, fulfilling online orders including mobile ordering technology, along with consideration for airing more television commercials.
To further efforts in improving food safety in restaurants and supply chain, the chain’s CFO pointed to an established an independent Food Safety Advisory Council made up of some of the country’s foremost experts in food safety and food microbiology. This advisory council is charged with continuously reviewing food safety programs and looking for opportunities to strengthen them even more. Further indicated was significantly expanded training, food safety inspections, third-party and internal audits of individual restaurants. However, there were statements related to need for local restaurant management to maintain “high throughput.”
On the positive side, there were indications that the chain is adding to regional executive leadership to help improve staff training and the individual guest experience. However, there was another statement: “we are keenly aware that safe food alone will not bring people into our restaurants. Instead, they come for delicious food and an excellent guest experience.” Reiterated was a commitment to serving the best tasting food that is made with ingredients that are raised with respect to the environment, animals and the people that produce them.
Our sense is that sales and marketing efforts still prevail over visible efforts directed at improved food safety and quality. To add that impression, the chain’s Vice President of Marketing was part of the financial performance briefing team, somewhat of an unusual occurrence in these types of events. This executive took the opportunity to outline three major marketing campaigns that occurred during the quarter, each with different but complementary objectives. The first was a food safety advancements campaign designed to communicate what has been done to ensure the safety of the chain’s food. The other two campaigns were directed at love of Chipotle and on the quality of its ingredients. Food giveaway coupons were further part of such campaigns. The chain’s marketing executive further pointed to paid research of loyal patrons indicating a 90 percent sentiment that the chain has appropriately addressed the food safety issues, and that trust has risen to pre-crisis levels. In our February blog commentary, we observed that the restaurant chain had entered what we believed was a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. We had consistently perceived that perhaps the chain was more focused on emphasizing broadened sales and marketing focused initiatives to bring previous loyal patrons back as opposed to efforts at expanding food safety practices across the supply chain. That now appears to be changing somewhat.
One fact remains with Chipotle. Neither U.S. government regulators nor Chipotle ever definitively identified the specific root causes of the prior disease outbreaks. That is the irony and the ongoing challenge since many suspicions were identified that included food sourcing with the chain’s supply chain. While there have been no subsequent incidents, we continue with the view that prior loyal patrons are obviously either unconvinced or have moved on to other experiences. This author for one, remains of that view,
We all know that supply chain snafus, especially those related to food safety, can and will have a lasting effect for businesses. In the specific case of Chipotle, that effect continues and so does the rebuilding of brand and supply chain food safety trust.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This weekend featured some significant news directly focused towards aerospace and commercial aircraft supply chain dynamics. The first is the announced acquisition by Rockwell Collins to acquire B/E Aerospace, and the other was the announcement of another round of significant headcount reductions at Bombardier, which will be highlighted in a subsequent posting.
Rockwell Collins and B/E Aerospace, yesterday announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt.
The announcement notes that this transaction combines Rockwell Collins’ capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management systems with B/E Aerospace’s range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, modular galley and lavatory systems for commercial airliners and business jets.
This cash and stock deal will obviously require approval from global regulators and represents a reported 22 percent premium to the closing price of B/E stock on Friday. From the lens of Supply Chain Matters, the deal further represents an evolving trend of key suppliers attempting to gain greater leverage in strategic product design and supply arrangements among global aircraft manufacturers.
In our ongoing multi-year coverage of commercial aircraft supply chain related developments, we have continually pointed out the extraordinary circumstances of an industry that has designed and manufactured a new generation 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 are 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 whom of-late have had to respond to key customer requirements for larger cost and productivity savings. Further at-stake are the opportunities for benefiting from multiple years of service parts and service focused revenues and margins related to ongoing aircraft operating maintenance needs along with desires to upgrade older aircraft with more Internet connected entertainment and business services.
Yesterday’s announcement indicates that this proposed acquisition significantly increases Rockwell Collins’ scale and diversifies its product portfolio, customer mix and geographic presence. Rockwell Collins CEO Kelly Ortberg indicated to The Wall Street Journal that the combination offered substantial cost synergies and the ability to cross-sell electronics and plane fittings, and positions the combined companies to lead in the development of “smart” aircraft. The latter can be interpreted to mean more connected aircraft in relation to passenger entertainment along with more predictive maintenance and services.
The proposed acquisition further provides more negotiating power and leverage. Readers may recall that in a Supply Chain Matters prior commentary, we highlighted a development in late July when Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments representing 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. We interpreted this development as a trend of more aggressiveness among key suppliers.
Similarly, our ongoing commentaries related to the industry have noted that current production shortfalls for new aircraft have come down to more timely availability of interior cabin components such as seats and lavatory outfitting components. This has become a more visible challenge to produce larger, dual aisle aircraft such as the Airbus A350 and Boeing 787.
The announcement points to the additional benefits of the cost synergies among the two companies, indicating the generation of run-rate cost synergies of approximately $160 million ($125 million after tax) over a six-year period. More than likely, that will reflect elements of both companies’ manufacturing and supply chain related activities.
This latest aerospace and commercial aircraft industry acquisition announcement may, more than likely, motivate additional announcements. It further reinforces our prior advisory for product management, procurement and supply chain teams to best be prepared for the new consequences of added supplier influence and push back via enhanced strategic positioning. The days of one-sided or tops-down supplier management seem to be numbered, especially in industry settings where revenue and growth potential are significant.
A final note relates to smarter machines and service management revenue potential. While original equipment manufacturers are certainly focused on the new business models brought about by more connected machines. Key component suppliers also understand such potential, and desire their portion of the incremental revenue and profitability benefits, and there lies the next frontier of collaboration and control.