As the recovery in civil aerospace continues, and orderbooks go from strength to strength, the bullish share prices of small- and medium-sized companies are masking some of the struggles they face to keep up with the production increases of their customers.
Safran subsidiary Turbomeca’s creation of a dedicated supply chain division to streamline its logistics, production and purchasing in order to increase productivity demonstrates the importance of the issue. Newly-appointed chief executive of the division Pierre-Yves Morvan says the initiative will allow the company a “more complete view of production”.
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In some cases, the likelihood of further consolidation has buoyed up the share price of companies that represent a likely takeover target, says a London-based analyst. Ultra Electronics is an obvious example, with speculation over its takeover potential and a share price that has risen by more than a third over the past year to its current level of almost £10.00.
Boosting capacity is a serious issue for suppliers: with record order backlogs, the supply chain needs to keep up with the production increases of Airbus and Boeing. Ramping up production rates to meet the demands of the primes means significant investment, says Cobham’s head of procurement Russ Bradley. “The difficulty for suppliers is in trying to balance investment in additional capacity with the forecasts,” he says. Airbus and Boeing help their suppliers by giving the best visibility they can, but suppliers generally need to meet the needs of more than one customer, he adds.
According to the London-based analyst: “There are concerns across the business as to how smaller suppliers can keep going. The issue is having the up-front cash involved to grow, and the liquidity to invest in shop floor upgrades, manpower and machinery.”
Growing through acquisition allows companies to add capabilities, customers and, in some cases, markets to their portfolios and Cobham has taken this route, with several acquisitions in recent years. But suppliers are also having to look within their existing businesses for ways to improve performance, and Bradley agrees that the trend towards suppliers “moving up the value-added scale” will continue. “In developing its business Cobham aspires wherever possible to consolidate its technologies and capabilities to offer a higher level of value-added systems integration to the primes,” he adds.
“There are signs that companies like Meggitt and Cobham are looking to make savings through aggregation. In particular a more central role for procurement in areas such as materials and energy can help. Energy and material prices are at record levels and manufacturers and heavy energy users are feeling the pinch. They can account for high levels of general spend,” the analyst says.
To deal with this pressure on margins, manufacturers are paying more attention to smarter procurement and leaner manufacturing processes to eliminate waste. Cobham is looking to make savings through aggregation – rationalising key areas of spending to save on margins. In particular, central procurement of indirect spend – materials, energy and manpower – can help, and smaller companies are catching on to this. Cobham, “which historically has not procured centrally”, is now launching initiatives to allow central procurement of the “most heavily used direct commodities” and is also looking at joint purchasing of services and machined items across divisions. Low-cost sourcing is a possible solution for commercial aerospace suppliers, and Cobham is exploring offshore manufacturing “more aggressively” for certain components, Bradley says.
The involvement of primes is also necessary: although suppliers can generally pass on the higher material costs to their customers, they face difficulties with procuring the materials in the first place. Martyn Brown, Airbus’s vice president metals procurement, says the aircraft manufacturer itself is well-covered by hedging contracts, but concedes that the industry at large is facing a problem. “All major raw materials are under extreme pressure at the moment,” he says. Airbus is able to help some of its suppliers negotiate reasonable contracts with metal producers, or in certain cases give suppliers access to its own supply. In an extreme example, Rolls-Royce was forced to invest in struggling supplier Gardner Aerospace to protect a key part of its supply chain. Gardner faced difficulties with high metal prices and the need to increase production rates.
HELEN MASSY-BERESFORD / LONDON
Source: Flight International
