The following Supply Chain Matters commentary has a theme, let’s call it a good news- not so good news theme. Be warned that its length is somewhat longer because it represents a Research and Consulting Advisory that I felt should be shared with our blog readers.
When I deliver presentations on supply chain management topics, I often use the above analogy regarding our community. You see, for many years, the efforts of supply chain management teams and professionals were often perceived as being taken for granted or misunderstood. Teams were frustrated as to why senior managers did not comprehend why supply chains do matter in accomplishing financial, operational and customer business objectives.
Today, the good news is that, more and more, the C-Suite and indeed the board room now have full understanding of the contributions and the value. The not-so-good news is the same, and it comes with higher expectations for delivering on key business goals, both financial and operational, and in the high-level visibility window now focused on any firm’s supply chain performance. Especially when shortfalls in performance cause the need for broader senior management and shareholder visibility.
So, where are we going with this posting?
Let’s revisit the ongoing developments involving certain commercial aircraft and aerospace industry supply chains. In our ongoing multi-year coverage of industry players, we have continually pointed out the extraordinary circumstances of an industry that is designing and manufacturing new generations 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 is 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 of-late have had to respond to key customer requirements for larger cost and productivity savings.
One specific development has been the increasing visibility to the supply chain challenges occurring at aircraft engine manufacturer Pratt and Whitney, specifically its revolutionary new geared-turbofan (GTF) aircraft engines. Supply chain glitches and volume production ramp-up challenges have now directly impacted the aircraft delivery production plans of both Airbus and Bombardier, causing both final manufacturers to now incur the financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link has of-late been Pratt. There are others as well but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In our blog commentary published in mid-September, we highlighted that United Technologies, the parent to Pratt, and specifically the UTC CEO, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers. CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news. Neither were UTC stockholders who initiated an initial 2 percent sell-off in UA stock.
At stake is the ongoing production ramp-up of the Airbus A320 neo which first certified with the new Pratt engine. Certification of the neo version with CFM International engines is in-process, and with the current visible challenges for Pratt, Airbus production operations teams must now deal with the option of whether to shift current backlog order fulfillment more to CFM powered versions to insure attainment of Airbus’s 2016 and perhaps 2017 production objectives. Similarly, financially challenged Bombardier’s new CSeries aircraft has just initiated initial deliveries to airline customers but management was forced to warn that commitments for the overall market must now be scaled back because of the limited supply of finished Pratt GTF engines, the sole certified engine for the CSeries. Bombardier just announced its second round of significant headcount reductions to preserve cash and working capital needs.
UTC CEO Hayes indicated in September that: “five parts are causing us pain this year”, due to supplier challenges in meeting Pratt’s current volume production and quality needs. There are approximately 800 parts for the high-level bill of material for the new GTF Pratt engine. One critical problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades, noted as a breakthrough in material design and expected performance.
This past week, UTC reported on its Q3-2016 financial and operational performance. To follow this story, we reviewed the entire transcript of the senior management briefing to equity analysts and shareholders.
It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain.
CEO Hayes opened the briefing with the review of UTC’s three key priorities: flawless execution, structural cost reduction, disciplined capital allocation. He quickly touched upon the current success of Pratt and its new GTF aircraft engine, noting that the engine is already meeting or exceeding key performance targets and already delivering 99.9 percent dispatch reliability on Airbus A320 neo in-service aircraft.
Thus, the positives related to product design and engineering.
It was not too long before the Pratt near-term challenges and the details of slower deliveries than planned began to come forth. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and its going to be fixed this quarter.” He later stated that UT senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway:
- Process improvements
- Yield improvements
- Lead-time reductions
- Additional added capacity
The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more and more of Pratt and its supply chain challenges.
Highlights of disclosure included:
- In Q3, Pratt delivered 76 GTF engines across all platforms and management anticipates 150 engines to be delivered by the end of this year, meaning similar output level in Q4. The 2017 delivery goal is now set at between 350-400 engines.
- Pratt’s negative margin trend will increase from $650 million in 2016, to $950 million in 2017 because of absorbed engineering and development costs and break-even volumes not expected until way after 2017.
- The GTF titanium aluminum fan blade was again identified as being a prime bottleneck. At the beginning of 2016, the total lead time, from start to test completion, for the fan blade averaged 100-105 days, more than 3 months. First pass test yields were described as 30 percent. Today, the same lead time was noted as 55 days with first pass yield rate of 75 percent. The overall production process related to the fan blade was described as incredibly difficult.
- An additional fan blade production partner is scheduled to come on-line with added capacity by November. Full production of this partner is expected in January.
- Pratt is additionally starting-up a brand new, more automated factory, next to the current owned blade factory in April of next year.
- Pratt has a strategy in-place where no single point of failure resides in the supply chain. In-essence, at least two key suppliers for each of key parts within the GTF engine.
- And finally, UA brought back former Sikorsky Aircraft and GE Aviation senior operations executive Shane Eddy to lead operations at Pratt.
The need for the sharing of all this supply chain operational detail with investors comes back to our original theme of good and not so good news.
Operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. The revolutionary new fan blade was a known critical component, yet now with visibility at the highest levels of management, additional financial and operational resources needing to address disappointing ramp-up needs are now being allocated. Bringing in a new senior operational manager with prior known accomplishments is another potential sign. Another theme we believe is the recurring one of having to balance billions of dollars of investment in stock buy-back with perhaps the need to invest capital earlier in manufacturing automation and worker productivity.
In essence when the CEO of your holding company, under the constant gun for higher shareholder returns, is now disclosing the detailed operational get-well strategies of your supply chain, than you know that the looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast.
The good news of higher visibility is the priority for marshalling all required corporate resources to address existing supply chain challenges and needs. The not so good news is the peril that such visibility can sometimes bring.
This state is one that senior supply chain leaders will have the most difficulty managing.
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