Aerospace Sector Facing Risk of Supply Change Disruption
The global A&D industry is continuing its growth, yet it remains an extremely dynamic marketplace, in which some sectors are booming and others are experiencing pockets of severe turbulence. Commercial aerospace companies represent perhaps the strongest segment of the industry. In contrast to this growth among airlines and commercial aircraft OEMs, the defense sector is shrinking. Given this challenge, A&D companies need to become more efficient and wring costs out of their operations at all levels and across the entire value chain.
Airlines - Growth returns, but profits still languish
Steady traffic growth is leading to improved revenue, and the airlines have become much more disciplined on capacity than they were in the past. The formerly strong European and U.S. markets are in decline, and the industry’s center of gravity has shifted to more rapidly-growing markets in Asia and Middle East.
Defense - A challenging contraction and a shift to the East
The defense sector is experiencing a similar shift from mature Western markets to faster-growing regions. Asian countries outspent European NATO countries for the first time. As two of the largest developing-market spenders-China and Russia - are effectively off-limits for outside contractors, defense players are now fighting to capture the addressable sub-segment of developing markets - primarily India, Brazil, Saudi Arabia.
Commercial aerospace - Booming with new products
The strongest sector within the A&D industry last year was commercial aerospace, which not only expanded but also accelerated its growth. Current projections call for that growth to continue, due largely to a huge backlog of orders. By 2017, the workload volume of OEMs’ main commercial programs is expected to have ramped up by 45 percent and will include a significant surge in major new programs.
Supply chain - Challenges on the horizon
The coming increase in sales volume is a positive sign, but it will create significant challenges for A&D supply chains. New programs also involve more-technologically complex designs aimed at increasing aircraft operating efficiency. The current industry supply chain is not entirely ready for this dual challenge of delivering a greater volume of more-sophisticated aircraft. In fact, there is a real and growing risk of supply chain disruptions. As new-aircraft orders rise and industry focus continues to shift away from defense towards the commercial sector, the entire aerospace value chain faces four major macro challenges:
Shortage of competency
Currently there is limited expertise in supporting several new programs in parallel whilst production is ramping up so steeply. The processes for building these new aircrafts are not established enough to facilitate rapid and effective training to expand the workforce, and there is limited experience available to manage these complex projects.
There is a long lead-time between the planning and the effective availability of new capacities–for example, in forgings–and the cash required to fund such upgrades has been in short supply during the recent downturn.Raw-materialsfsupplyfchain There are long lead-times on key raw materials, such as carbon fiber, and these materials are highly subject to shortages and price increases, added to which their suppliers usually hold only limited inventory of these expensive materials at any one time to manage their cash effectively.
As with the workforce, the newness of the materials and processes used in a new aircraft could lead to issues with quality and repeatability of manufacture, along with reliability issues per some of the materials provided. More and more, OEMs will have to lead operational improvement programs at their key suppliers, and tier 1 suppliers will have to develop similar measures further down the supply chain.
Some major IT challenges in Aerospace:Integration between Design,Engineering and Manufacturing:
In this environment where the manufacturing is under extreme pressure to increase its production rate, IT faces a complex integration issue between design systems (PLM) and manufacturing and enterprise resource planning (“ERP”) systems where changes in downstream at manufacturing level should be fully tracked and controlled for costing, compliance and regulatory issues.
Extended supply chain and IP protection:
In addition, the shift of business paradigm from “manufacturing” to “integrator” has pushed the industry to open its design and assembly systems to its tier 1 and tier 2 suppliers. This requires not only the full extension of design and manufacturing systems to suppliers but also causes a potential major issue for a company to protect its intellectual property (i.e. between the company and its suppliers.) For this reason, cyber security management in conjunction with the relevant legal protection is anticipated to be a hot topic for CIO’s in this industry in the coming years to protect a company’s intellectual property and manage regulatory issues (such as export control reinforced by the U.S. administration).
Carve-outand PMI(Post MergerIntegration):
To accelerate the acquisition of know-how, to increase capacity and to separate non-strategic activities, the Aerospace industry goes through a major evolution through mergers, carve-outs and establishment of new production units. This type of operations has heavy IT impact requiring tight coordination.
The new technology and tools known as “Big Data” have opened a new chapter and given new possibilities applied in Aerospace industry. Currently there are two areas where initiatives are being launched:
• Collection of data from an aircraft to analyze and establish trends used to reduce aircraft downtime and plan/ optimize maintenance.
• Spare parts management for a better pricing to generate growth and also for a better definition of stock policy resulting in inventory reduction. Due to long life cycle of aircraft, this industry handles in general hundred thousands of spares kept in stock many years.
These new activities put a substantial and additional pressure on CIO’s and IT teams to deliver on time and on budget and according to business expectations. Beyond that, the compounding effects of the growing markets in Asia and Middle East, rapidly evolving technologies, and fiscal strains on mature markets in Europe and the US will likely lead to instability for the A&D industry over the coming years. Successful companies will focus on three key priorities:
• Profitability is an ongoing challenge, and companies must redouble their efforts to reduce costs
• Companies should accelerate their diversification into new and faster-growth markets.Innovation continues to be a major theme across all segments.
These are sizable challenges, yet they also point to clear opportunities. A&D operators that can get these three areas right can give themselves that can get these three areas right can give themselves a clear, competitive edge in a volatile industry.