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Yesterday’s announcement from American Airlines indicating a split order for new aircraft to be supplied by Airbus and Boeing has a tremendous amount of significance from many business dimensions, not the least of which are supply chain strategy related.  For those unfamiliar as yet with the announcement, currently noted as the largest aircraft purchase in history,  American, which was a former loyal customer of Boeing, announced that it would purchase 260 Airbus A320neo, along with 200 Boeing 737 aircraft. Deliveries of both aircraft are slated to be in the 2017-2018 time period.

In a few short months, airlines have voted with their wallets, with a driven need to bring more fuel efficient and lower operating cost aircraft into their fleets.  Since announcing the A320neo in December, which promises 15 percent better fuel efficiency, Airbus has managed to capture more unit backlog than what currently exists for Boeing’s 787 Dreamliner, an aircraft three years overdue and targeted at lower operating costs. Backlog for the new A320 is approaching 1000 while the Dreamliner stands at 880. With continued new orders now pushing deliveries out seven years, other airlines will be compelled to make their own fleet decisions or risk having a disadvantage over competitors in operating costs.  A buyer herd mentality is occurring. As an example, discount carrier Southwest Airlines has yet to announce a replacement plan for its single aisle aircraft.

Readers who currently support the aerospace industry are obviously feeling lots of optimism since the current backlog of orders among Airbus and Boeing combined is now seven years and rising.  While elation is in order, we would advise that the time for celebration be brief, since aerospace related supply chains will have many challenges to overcome in the coming months. These challenges will also require different supply chain competencies.

This week, the Financial Times provided a pre-cursor introduction to this new era in a published article (paid subscription or metered view required) that noted that swollen aerospace supply chains, already showing signs of stress, have been increasingly concerned as to whether suppliers will be able to meet surging demand.  Aerospace is an engineering-driven environment where specifications and conformance to quality are strict, and qualified raw materials and suppliers are limited.  The latest wave of innovation in components has been breakthrough, but has added many new challenges. Capacity has been and will remain a significant challenge, but other capabilities will also be required. A snafu or failure from one supplier can stop an entire OEM final production line, and with this level of growing combined order backlog, a stoppage will be ever more expensive in dollars and reputation.

The aerospace supply chain dominants, Airbus and Boeing, remain intensively competitive and reputations are at stake. Other OEM players like Bombardier, Embraer and Comac want their share of orders for their aircraft offerings. Snafus and delays surrounding outsourced supply chain of programs such as the Boeing 787 Dreamliner or Airbus A380 programs speak for themselves and Supply Chain Matters has provided multiple commentaries regarding the lessons learned. Candidly, the industry has not presented a stellar record around sourcing criteria, program management, operational consistency two-way communication and predictability.

The FT article noted through select interviews with suppliers that that was the past, and this new era will be different.  Some suppliers have been proactive in leveraging delay time to enhance capacity and their own value-chain capabilities. We certainly hope so for everyone’s sake, since as FT indicated, the stakes are now ever higher. To echo the words of Jim Albaugh, head of Boeing’s commercial aircraft business, the supply chain needs to be ready and able to deal with the implications of this amount of business, the pressure is now on, not only Airbus and Boeing, but the other OEM players as well. Airline and carrier customers remain under pressure to find all means to reduce operating costs and cannot afford any future delays in aircraft deliveries. In short, the stakes are higher and growing.

Supply Chain Matters offers some recommendations to aerospace industry participants, and encourages readers to add their own as well.

For the OEM’s:

Continue to extend supplier collaboration efforts and practice win-win vs. other strategies. Much learning has hopefully occurred from previous supply chain outsourcing efforts and that learning needs to be quickly translated toward insuring suppliers are ready People, processes, and tools are indeed the criteria, but also consider two-way program management, communication and timely visibility to schedule or engineering changes. In our view, Airbus has demonstrated that it has learned from past setbacks, and the introduction of the A320neo is a demonstration of active supplier collaboration and involvement.

S&OP processes for OEM’s should consider including more key supplier participation and involvement.  Contrary to traditional S&OP methodology, it would wise for OEM’s to also extend the planning windows of the S&OP process, both deeper into the value-chain, and broader in time windows. Some form of an executive level S&OP in our view, is mandatory to insure no surprises. Automation of S&OP processes should garner serious consideration if has not done so.

For value-chain suppliers and trading partners the challenges are more acute:

Total upstream and downstream supply chain visibility is essential in an environment that has coordinated or synchronized scheduling.  That includes visibility among all suppliers to OEM production schedules and early warning to any planned or unplanned supply disruptions.

More emphasis will be required in response management and business intelligence capabilities.  Utilizing standard MRP or lean six sigma methods coupled with static logic can fall short in the forthcoming highly dynamic backlog environment.  OEM schedules will surely change, orders will be shifted in priority and supply disruptions are inevitable.  Airlines who desire earlier delivery of new aircraft may opt to select an OEM other than Airbus or Boeing, and those OEM’s may come knocking for your capacity. Suppliers who have current business supporting other industry or service parts needs will have to make intelligent decisions on smart allocation of existing capacity, balancing different customer needs. Having agile business processes that incorporate more real-time planning and execution information coupled with supply chain intelligence helps suppliers to proactively respond to additional business opportunities as well as changing day-to-day operating priorities from existing OEM’s.

Supply chain risk identification and mitigation will be a significant competency.  The Japan earthquake and tsunami was our wake-up call to the reality that any single-sourced component, compound or material can affect the entire value-chain.  Boeing and other OEM’s are initiating supplier risk assessments and suppliers should be doing the same for their value-chains. Supply chain disruption due to political, governmental or natural disaster events is a new reality for more occurrences, and all suppliers need to have a plan to identify risk areas and insure business continuity.

The aerospace industry is in a very enviable position with lots of business and robust demand.  Unfortunately, business processes of the past will not cut the mustard in this more dynamic and looking-glass environment.  Consistent execution, end-to-end visibility, constant collaboration and timely response are the new business stakes for participants.

Bob Ferrari

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