By now, many of our Supply Chain Matters readers likely know that a lot of business changes are about to occur at General Electric. Widespread investor concerns for increased short-term earnings growth, fueled by private equity investors and Wall Street activists led to the resignation of Jeff Immelt and the appointment of John Flannery as GE’s new CEO.

After conducting what was termed as a rigorous, in-depth review of the entire company, the new CEO presented investors last week with a set of new strategies which many in business and social media characterize as just falling short of a major breakup of this conglomerate.  The new focused strategy calls for exiting $20 billion in assets, generating more cash through increased efficiencies along with more managed capital allocations over the next two years. No doubt there will be a lot of change occurring for this iconic manufacturing brand.

CEO Flannery has additionally outlined organizational and cultural changes that include an intent to foster more robust business planning, accountability, and business review setting. Executive and employee annual bonus plans are being revised to focus performance objectives tied to individual business segment performance vs. prior company-wide metrics. Such changes are somewhat similar to the era of Jack Welch. Plans call for a centralized capital allocation review process that will likely pit one business with another in advocating and securing needed strategic investments.

In this Supply Chain Matters blog commentary, we will focus on two business segments that we feel will be of importance from a supply chain management lens.

GE Digital and Predix

Readers who have followed along with our General Electric streaming commentary are likely aware that we have consistently admired GE’s efforts both in the company’s global supply chain strategies and IT practices, but also in the vision and strategies surrounding GE Digital Manufacturing and Industrial Internet strategies. We felt that the company came to understand that digital disruption was a major threat as well as a market opportunity. GE was bold in stating that factories no longer need to be sourced where labor is cheaper, but rather to best service major geographical markets. They can compete where educated workers can make the most of advanced technology, and where opportunities can be leveraged to shorten supply chains, invest in Industrial Internet capabilities, additive manufacturing and reduce inventories.

The Predix platform was a fundamental component to the company’s strategies to leverage Internet of Things enablement among physical assets and equipment, both with GE’s businesses and other businesses as-well.

Under the new plan outlined last week, the company is looking to cut $400 million in costs from the Predix platform while targeting $1 billion in revenues for next year, which is essentially a strategy focused more toward GE’s internal core business needs while throttling-back on efforts for broader IoT enablement. Just prior to Flannery’s unveiling of the internal review, there were reports of actual layoffs involving direct sales staff and technical developers within the Predix unit.

Plans call for the Digital Business unit to focus solely on asset models, Edge to Cloud and Digital Twin strategies. That includes a revised strategy that has Predix applications solely supporting GE business’ unit customer outcomes in Asset Performance Management (APM), Operational Performance Management (OPM) and ServiceMax field service applications and business services needs. Capabilities not considered in support this core strategy, for instance the expansion of the Cloud platform itself, will revert towards a partnership strategy. That will likely open-up some lucrative opportunities for existing Cloud and IoT platform providers such as Amazon Web Services, IBM, Google, Microsoft, and Oracle in industry verticals that turn out to be not core to GE’s eventual strategic businesses. Engineering services and IoT software provider PTC could likely benefit as-well.

GE Aviation Business

GE Aviation currently accounts for $26 billion in revenues and 35 percent of GE’s earnings. Of that total revenue number, $8 billion comes from the design and manufacturing of commercial aircraft engines and over $11 billion in revenues come from commercial engine services management programs. With $151 billion in existing order backlog and a reported 39,000 installed engines as of 2016, this remains a strategic and lucrative business for GE with organic revenue growth expected to be in the 7 to 10 percent range for 2018. Part of the revenue growth will likely come from adoption of the Predix strategies noted above applied to increased services revenue for GE, but a competitive battle is looming since both Airbus and Boeing view added IoT enabled services as strategic to growth.

As we have pointed out in our commercial aircraft industry commentaries, engine deliveries are now the critical weak link for the industry’s overall supply chains. The new marching orders for Aviation now focuses on reducing of structural cost, most likely supply chain in-nature, with higher levels of capital efficiencies through increased adoption of additive manufacturing and automation.

What makes this concerning is that GE and its partner, CFM International are currently involved in the massive production ramp-up of the new LEAP family of aircraft engines to be featured on the highly popular Airbus A320 neo, Boeing 737 MAX aircraft. The LEAP is described as the fastest-selling narrow-body engine in history with 14,00 engines already ordered.

It could be argued that competitor Pratt & Whitney, in its development of the new geared-turbofan (GTF) engine might have approached product development and manufacturing ramp-up from an overall lean-based cost and working capital focus. That might have led to some of the  painful start-up challenges related to component designs, specification and longer-term testing of internal thruster components. Pratt has since had to scramble to address unplanned component wear, allocating additional completed engines as off-wing maintenance spares while specific troubled components are redesigned and manufactured.

As GE Aviation addresses required structural cost and manufacturing efficiencies, it must insure that testing and quality processes are maintained or enhanced since the next two years require a steep manufacturing ramp-up.  Another challenge is the balancing of individual business metrics for short-term and longer-term business needs. If such metrics are weighted too-much toward short-term financial objectives, strategic long-term investments may be laggard and could jeopardize continued innovation and delivery performance.  Then again, the GE Aviation may rise to task and provide a case study of breakthroughs in additive manufacturing. Time will tell the ultimate story.

Takeaway

GE Digital and GE Aviation are both embarking on a different journey with revised business vision, business outcome and team performance needs. Some current GE investors clamor for even more cost and headcount cuts.

Such developments will likely be areas for broader technology and aerospace industry observation and monitoring in 2018 and beyond. Both can rise to the current challenge and lead the way toward breakthrough innovation. However, it would indeed be tragic if two such innovative businesses are ultimate casualties of a more narrowly focused investment community.

 

Bob Ferrari

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