The downturn in the industry has forced aerospace prime manufacturers to shake up disjointed supply chains, consolidating and outsourcing parts logistics
No industry is as sensitive to economic and political forces as the aerospace and defence business. In the 21st century, those forces have become ever more turbulent, forcing the business into a period of dramatic change.
At the same time, customers - governments or airlines - are demanding that manufacturers bring new projects to the market faster at lower costs, while continuing to meet the aerospace industry's stringent quality and performance requirements.
These factors are dramatically affecting the way aerospace and defence companies are organising their supply chain - or rather chains, as traditionally the supply chain that serves the production line has not necessarily been linked to the equally vital supply chain providing after-market parts support to keep customers' aircraft in the air.
Supply-chain management is a complex business. It encompasses production planning, material sourcing and management of transport, warehousing and demand. The supply chain links the manufacturer with its materials and parts suppliers, and its customers - taking in distributors, transport and software providers. In the aerospace industry, the supply chain also has a number of features that differ from most other manufacturing businesses. The aerospace industry does not have high volumes, but does manufacture complex products. Safety - and therefore product quality - is of paramount importance.
Consolidation within the aerospace business has left a smaller number of aircraft manufacturers, usually with multiple business units and manufacturing locations. This is a recipe for a disjointed supply chain. Bombardier Aerospace achieved a strong position through acquisition of companies such as Canadair, de Havilland Canada, Shorts and Learjet, but found itself with a disjointed supply chain, both for manufacturing and service support. "Our acquisitions were previously standalone companies that had their own methods of operating," says Des Bell, vice-president of parts logistics for Bombardier Aerospace. "Over the years we had successfully integrated these companies, but we had not focused enough on service parts operations."
New structure
A new organisational structure was announced in April, streamlining the organisation into four business units, but this did not solve the underlying problem with the supply chain, especially for service parts. "Our conclusion was that we should create a single parts-logistics network," Bell says. "We needed to standardise." The decision was also taken to outsource a large proportion of the operation to a third-party logistics company, Caterpillar Logistics.
Caterpillar took responsibility for parts warehousing, one of the costliest elements of the supply chain. "That's where we quickly realised our greatest efficiencies could be achieved," Bell says. The decision was made to close some facilities, and open central warehousing sites in Europe and North America. Bombardier selected Chicago, Illinois for its North American facility, and is closing warehouses in Detroit, Kansas, Michigan and Wichita. Chicago was chosen because of broad international coverage, attractive FedEx air freight drop-off time, international flight coverage, and percentage of deliveries that can be made within 8h. Frankfurt, Germany was chosen as the site of the Europe/Middle East operations for many of the same reasons.
Materials planning and service parts IT were outsourced too, but Bombardier retained responsibilities for materials management and setting strategic targets for fill rate and inventory levels. It also continues to manage customer service, procurement, technical support and pricing. Bombardier aims to deliver aircraft-on-the-ground orders to the majority of its customers in 12h or less, and improve off-the-shelf fill rates by 20%. The total transformation project is expected to take two to three years. "The parts business is a significant sales and margin generator in a business such as ours," Bell says. "When more executives understand this, the supply chain will get the industry attention it deserves."
The 11 September terrorist attacks brought home to manufacturers and suppliers just how precarious the supply chain had become. The sudden collapse in demand for new airliners meant life became difficult for many small specialist suppliers, and when these companies started to go bust, the entire chain was disrupted.
The UK Department of Trade and Industry's 2003 report on the future of the UK aerospace industry spelled out the risks for smaller suppliers: "As supply chains rationalise, the route to market for smaller companies is changing. If they are not supported in repositioning themselves in the global supply chain, they will be 'boxed out' by more effectively organised groups."
These groups - companies with global scale and reach - have been created by mergers and takeovers among suppliers. Large groups such as the merged Honeywell-AlliedSignal business have created "Tier 1" suppliers with greater expertise in product integration. These companies are able to assume greater responsibility in the management of the supply chain, delivering large subassemblies or complete systems to the prime contractor or manufacturer.
These moves are seen as helpful by aerospace manufacturing companies, which have become smarter and more efficient by incorporating initiatives such as Six Sigma and Lean Manufacturing into their design and manufacturing processes. These focus on process efficiency, specifically by moving toward a pull-based supply chain with far lower inventory costs, and fewer suppliers.
Contractor focus
These developments mean suppliers have a more taxing brief, with aircraft manufacturers effectively becoming a true "prime contractor", a systems integrator. This is recognised by senior industry figures. Former BAE Systems chief executive John Weston, now chairman of UK design consultancy Inbis, says: "Prime contractors are looking to focus more on the high end of system integration and subcontract out a number of issues on design and build and subsystem design. More and more are asking themselves what their core engineering competencies are."
Clive Snowdon, chief executive of UK-based logistics provider UMECO, agrees: "There has been some consolidation around the larger groups of suppliers and we know from talking to our larger customers that they want to deal with fewer suppliers." UMECO specialises in low-value components and consumables, an area where sizeable savings can be made. Snowdon adds: "The distribution of low-value products in the aerospace industry had the most inefficient supply chain imaginable. Customers had too much stock, but never the right part." UMECO acts as a Tier 1 supplier, taking responsibility for sourcing components valued at less than £100 ($185), and activities formerly handled directly by the manufacturer's own procurement department.
"We manage the whole of their procurement, their inward goods inspection, normally using our facilities," says Snowdon. "We manage a multiple vendor or supplier list. On some of our larger contracts, that can be 200 or 300 different suppliers and then we deliver the goods normally to point of use." One of UMECO's customers is aeroengine manufacturer Rolls-Royce, which used to have 300 suppliers for 15,000 low-cost parts. Now Rolls-Royce has one point of contact - with UMECO - which deals with the suppliers and delivers about £50 million worth of parts to around 33,000 unique locations within R-R's worldwide facilities.
UMECO is not alone in focusing on the low-cost components area. UK-based logistics software provider Waer Systems claims it has saved Airbus UK over $11 million in three years, following the implementation of a new system to improve the efficiency of the company's supply chain for simple fasteners - items such as nuts, bolts and rivets, used in large quantities in the assembly of Airbus wings.
Airbus UK had identified the operation as an area where improvements were needed, and not just for internal efficiency. The UK Civil Aviation Authority was demanding improved component traceability, and fastener suppliers were asking for greater visibility of fastener use so they could improve their service and profitability.
Waer Systems' software is designed to reduce the reliance on safety stocks and excess inventory. Implementation of the company's replenishment management system (RMS) brought about an 82% reduction of stock; a reduction in fastener use of 15% to 20% achieved by reduced levels of waste; service levels of 98% and a 56% reduction in stores process times. The improvements paid for the cost of the system within six months, Waer says, and the system is now being rolled out at other Airbus locations.
Airbus has recognised a clear need to sharpen up its supply chain. The large subassembly operations in different countries and transport by Beluga cargo aircraft to final assembly lines in France and Germany, complicates matters. Airbus has product integration teams at subassembly manufacturing locations, each responsible for managing its part of the supply chain. But many suppliers are small companies that fail to deliver goods on time. "Schedule adherence and quality rejects remain at unacceptable levels," Airbus procurement executive vice-president Ray Wilson said in late 2003. "Supplier schedule adherence is less than 90% and we reject more than one in every 100 pieces of aircraft equipment." Wilson believes a figure of less than one reject part per 1,000 would be acceptable.
Consolidation
Wilson adds that poorly performing suppliers "will no longer be tolerated". He suggests lean manufacturing has become too lean - larger stock buffers may be necessary to cope with defective parts. In practice, Airbus is likely to shift supply contracts away from the small "cottage industry" suppliers and into the hands of the emerging large Tier 1 groups - companies such as Smiths Aerospace, which has been awarded major supply contracts for the A380.
Smiths has grown through merger and acquisition, taking over companies such as Invensys Aerospace, Marconi Actuation Systems and Fairchild's defence division in the late 1990s, before merging with the TI Group, including Dowty Aerospace, essentially doubling its size. The added capabilities that these acquisitions brought meant Smiths, which has its core strength in cockpit instrumentation, was able to offer larger, integrated systems incorporating its new capabilities, such as electrical power management and electromechanical actuation systems. "Instead of the airframe manufacturers buying these different pieces of equipment themselves, there was an opportunity for suppliers like Smiths to start offering a more integrated-system solution," says Smiths president Dr John Ferrie.
Smiths' increased capabilities are already paying off. Earlier this year the company was selected by Boeing to provide the Common Core System (CCS) for the Boeing 7E7. Smiths will be the premier integrator of the CCS, which forms the backbone of the aircraft's computers, networks, and interfacing electronics, and will host all the avionics and utilities functions. Smiths will integrate third-party supplier-developed applications and associated software on to the CCS.
In July, the company delivered the first A380 landing-gear extension and retraction system to Airbus France. The system includes the mechanical engineering and electronic control of the landing-gear deployment system and brings together Smiths' skills in systems integration and programme management, hydraulic and electrical actuation, electronics and software control. Ferrie says: "By integrating our mechanical and electronic capabilities, we provide both the brain and the muscle to deploy and retract the A380's landing gear."
Smiths will also provide product support from entry into service. This is a significant trend within the supply chain - a convergence of the original equipment manufacturer and after-market supply chains into a whole-life approach, where manufacturing, supply, after-market and maintenance become part of an integrated service.
"The integration of maintenance and supply chain optimisation has the potential to bring tremendous value to the aviation business," says Doug Brouse, executive vice-president of Mxi Technologies, a specialised maker of aviation maintenance and engineering software. "Maintenance is a key area for airlines to reduce their cost structure." Mxi last year announced a joint venture with supply chain management and logistics provider Manugistics to develop software that can optimise maintenance, repair and overhaul and supply chain planning operations.
But such moves tend to make the supply chain even more complex and difficult to manage, hence an increasing trend toward outsourcing management of entire logistic operations to third-party logistics providers. Many of the leading logistics companies - such as BAX Global, Caterpillar Logistics, Penske and Ryder System - have targeted the aerospace industry as a market in which they can grow their business.
Ryder System founded specialist aerospace division, Ryder Aerospace Supply Chain Management, in 2001, but the group had already carried out high-profile supply-chain integration projects for leading aerospace firms, notably for Northrop Grumman's Electronic Systems, and Integrated Systems divisions, which between them had more than 7,000 suppliers worldwide.
Ryder combined the two chains into one, and manages the suppliers for Northrop Grumman. The move delivered cost reductions of 15% in the first year of the contract, a combination of reduced shipping costs, inventory reductions and better cashflow associated with a shorter order cycle. These savings are split in an equitable fashion between Northrop Grumman and Ryder as part of a gain-sharing agreement.
Ryder's Aerospace Supply Chain Management team targets companies across the industry - OEMs, Tier 1 suppliers and airlines. Each project is individually tailored: "There are no 'cookie-cutter' solutions in supply chain management and that truth is particularly evident in the aerospace sector," says Randle Bales, Ryder's vice-president of sales and solutions development. Services designed for OEMs and suppliers tend to be related to demand and supply chain management planning, purchasing, transport management, distribution and warehousing and positioning of inventory to meet customers' operating requirements. Services for airlines concentrate on co-ordination of planning and management of activities among maintenance and engineering, purchasing/procurement and materials management, Bales says.
Ryder has also signed an accord with Taiwan's Industrial Development Bureau to set up an aerospace maintenance and logistics support centre on the island. The project aims to provide a receiving, storage and shipment complex for aerospace-related parts and components distributed to customers in the Asia-Pacific region.
Mark Bursa / London
Source: Flight International
