Boeing says that it may be late delivering some aircraft this year, because neither it nor its suppliers can keep up with its delivery schedule. Rolls-Royce says that its results are not as good as they should have been because it is working too much overtime and because its suppliers cannot keep up with demand. Clearly, the industry is in another of its supply/ demand imbalances - but is this one its own fault?
The industry has been through a massive downsizing in the last few years - and by all the normally accepted measures of industrial-efficiency, there is still a good deal of downsizing yet to come.
Downsizing is not a simple art: in fact, this is one industry to which the politically correct fluffiness of "rightsizing" can be rightly applied. It is one thing to reduce the size of a company or sector; another thing entirely to make that company or sector more productive by reducing its size. Then there is the difference between absolute downsizing - in which the capacity of a whole sector is reduced - and the sort of relative downsizing in which prime contractors improve their own performance by transferring responsibility for large parts of their activities to subcontractors. In the latter case, the prime contractor may shrink, but the subcontractor should grow.
That is good for the subcontractor - especially as each of the primes is looking to use fewer, bigger suppliers - but only if the subcontractor is capable (and brave) enough to cope with the consequences. Prime contractors use subcontractors for two reasons: to do the things which they themselves cannot do efficiently; and to absorb the peaks and troughs of demand.
While an efficient, focused subcontractor can do very well from the former activity, it runs the risk of severe trouble if it allows too much of its own business to be governed by the latter. Just as the primes try to avoid building their workforces and their capital equipment beyond a sustainable median level, so must the successful subcontractors, otherwise they, too, can be faced with being over-resourced for the inevitable slumps in demand.
The solutions available to the subcontractors are just as limited as they are for the primes. They can either expand to meet cyclical demand, or they can further subcontract to smaller suppliers. Somewhere, however, somebody has to take ultimate responsibility for getting the end-product built and delivered. The buck cannot be passed endlessly down the line.
In the end, the right size for the aerospace industry is the one which is small enough to allow all the companies in it to make realistic profits in the bad times, but big enough to be able to absorb the peaks of demand in the good. Obviously, there has to be some movement at either end, but shedding expensively trained skilled workers in the bad times is just as bad as trying to shift work on to untrained workers in the good times.
The smaller the company, the harder it is to be flexible in accommodating such changes. It is therefore unrealistic of the large primes to expect their subcontractors to absorb all of the ups and downs of the market in the interests of helping themselves to sail serenely on.
Part of the problem may well stem from the fact that consolidation among the primes, at least in the USA, has run so far ahead of the restructuring further down the food chain. The merged Boeing/McDonnell Douglas is now one of only two world players in the large aircraft market, with annual group sales of around $48 billion. Rolls-Royce is, equally, one of only three mainstream turbofan manufacturers.
Yet the supply base on which they increasingly rely has barely started to consolidate, leaving a yawning gulf in scale between them and their networks of subcontractors and equipment suppliers. Until recently, a supplier with sales of $1 billion could consider itself a major player. Today that would need to be closer to $5 billion to stay in line with the Boeings and Lockheed Martins that they supply.
Consolidation will no doubt begin to feed down through the industry, creating fewer but more robust suppliers, better able to deal with the booms and busts of the aerospace cycle. Until then, however, the giants will need to take more of the responsibility, and allocate less of the blame, for delivery shortfalls.
Source: Flight International
