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Supply Chain Matters has noted in previous commentaries that Aerospace supply chains are now under stress. Many factors have led up to this condition. A significant recent uptick in airline customer orders for new and more fuel efficient aircraft is locking-up industry delivery capacity for many years to come. Increased outsourcing of major components to suppliers has precipitated significant program setbacks with major OEM’s Airbus and Boeing both struggling with aircraft programs that have experienced multiple year delays for customers. Boeing’s latest Q3 earnings report provided a specific backdrop to the highly visible 787 Dreamliner program, which just entered operational service, but remains three years overdue in production and customer delivery fulfillment of over 800 aircraft. Customers and suppliers now seek financial consideration for these delays while Boeing makes plans for a serious supply chain ramp-up in production and final assembly of 787’s.
But alas, Boeing is not the only OEM dealing with setbacks. Last week, EADS, the parent for Airbus, announced its second delay associated with the new A350 passenger aircraft. Initial delivery will delayed by up to six months because of supplier issues, pushing the time window into 2014. EADS also incurred a €200 million ($271 million)direct charge as an immediate result of this delay. The A350 is made with more lightweight composite materials and is the Airbus competitive alternative to Boeing’s 787.
An article published last week in the Financial Times (paid subscription or free metered view) indicates that this latest Airbus delay was attributed to suppliers being late with planned delivery of key components. Of more concern, Airbus warned that some suppliers were struggling to renew bank loans in the midst of the current Eurozone debt crisis, and there are signs of a new credit availability crunch for European small and mid-range manufacturers. The article reports that EADS has started giving financial support to some subcontractors, and has had to acquire a German supplier, PFW Aerospace. At the height of Boeing’s issues with the 787, it was also forced to acquire some key suppliers.
In a mid-October commentary, Supply Chain Matters noted that that senior supply chain executives should be contemplating scenario plans and contingencies concerning the ongoing Eurozone crisis and its potential impact on global supply chain processes. One of the outlined areas was the availability of credit to finance ongoing inventory and working capital needs. A worsening of bank fragility or outright bank or country specific financial failures could cause an additional credit crisis to cascade across industry supply chains. The latest Airbus announcement is evidence of this growing risk. We suspect Boeing and other OEM’s are not immune since each has key suppliers located in Europe.
Within the aerospace industry there exists a paradox. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy. Airbus alone now has an order book rate above €500 billion. Any company or industry would celebrate at having such a situation. On the other hand, supply chain process and program deficiencies, incidents of supply chain risk, and now the potential of financial crisis, are all compounding the ability to deliver the end product to customers in a timely fashion. This should be an industry humming on all engines, but success comes with a burden.
For aerospace supply chains, continuous scenario and contingency planning coupled with proactive response management may well be the S&OP agenda for many, many months to come.