Understanding upstream supply chain risk: How smaller Aerospace and Defense vendors can protect their relationships with OEMs
Smaller vendors are being forced to radically overhaul their operating costs while driving innovation in order to protect relationships with their major OEM customers. In the piece below Kevin Deal, vice president for Aerospace & Defense, IFS North America, looks at the three steps to enterprise management: map, monitor and manage.
We are witnessing unprecedented numbers of commercial aircraft being produced as the industry grows at 4.7 percent annually - witness the recent Airbus announcement that production of its A350 model will rise from 15 in 2015 to 60 in 2016, and up to 120 by 2018. Operators are looking to pass customer expectations of ever-lower air fares on to manufacturers and their supply chains as they refresh their fleets. This will have a significant effect on those upstream suppliers.
As aerospace OEMs have transformed over the past decade with digital design and manufacturing, they now expect their suppliers to change, taking on one-off R&D costs in new aircraft production, and in some cases to manage a range of lower-tier suppliers themselves.
A wake-up call for Tier 1 and 2 suppliers
The challenges facing the aerospace supply chain are likely to lead to further consolidation across the industry, with some smaller producers not being able to invest in the race to introduce more innovative products. Some commentators are suggesting that the trend will continue amongst Tier 1 and 2 suppliers to consolidate their operations.
Will we end up with as few large Tier 1/2 suppliers as we have OEMs, concentrating on single areas of technology and product ranges?
I think maybe not. The legacy of the larger OEMs such as Boeing and Airbus is starting to evolve, with smaller producers making inroads into the market. New technology and an increasing market is making space for new entrants and suppliers who can offer attractive packages. If they can provide products with lower operating costs and features, there is scope for high-performing suppliers from Tier 2 and below to flourish. But how do these smaller innovative enterprises become effective enough to remain economically attractive to customers downstream in the supply chain, but agile enough to stay innovative and increase their production processes in such a volatile high-tech market?
Supply chain, supply chain, supply chain
Research highlights that more than 80 percent of companies are concerned about their supply chain resilience. Risks are also magnified by the way supply chains are configured. The complexity of the supply chain makes these risks difficult to identify and manage, and being able to understand how suppliers are managing risk and volatility is becoming more important, especially in the A&D arena.
Suppliers therefore need to be able to continually demonstrate the qualities of resilience and agility by showing that they fully understand their own business as well as that of their customers, and that they can manage increased and, just as importantly, decreased production when necessary. But how?
Future risks identified
Let's look at what the risk landscape is likely to be in the next five years. Recent research shows that some risks will actually reduce over the period, including product quality. Some will remain consistently low - outsourcing, globalization and natural disasters - while others remain consistently high, especially supply chain viability and demand volatility. Some are expected to increase significantly, and these include operational complexity and regulatory compliance. So let's look at these areas.
IT holds the key. Modular Information System (IS) solutions are available that will allow these smaller Tier 2 players to easily and quickly increase or change their production processes, show more transparency in their production controls, and give instant visibility of their margins – delivering a 360 degree view of operational business processes. With this business knowledge, suppliers can grow confidence with their Tier 1 customers by showing that they are aware of and comfortable with their own business environment.
The most valuable form of business knowledge comes from being able to assemble a clear, comprehensive and accurate view of the past, present and future status of products, projects, customers, assets, infrastructure and employees, across even the most complex of global operations or projects.
Modular technology comes into its own here. By adding specific elements as and when required, technology investment can keep pace with business vision, running in parallel and adapting to new needs and trends, and delivering value. These applications clearly need to provide the required knowledge for all of the leadership team and subordinate managers - be they Finance, Operations or HR - that’s easy for them to achieve a 360 degree view of operational business processes. In this way executives can interpret the results using their preferred device, gain actionable insights, and put those insights into action – quickly.
OK, so assuming that the 'deciders' across the enterprise now have knowledge at their fingertips, how do they actually use it to support important decisions?
Three steps to enterprise management
Map the enterprise. In order to reach the nirvana of well-informed decision making, the first step is to have a top-down corporate business management process that gives the leadership 'Visual Insight'. Most traditional VI solutions are limited by using a bottom-up approach, a legacy of patching in siloed functional systems without real interconnectivity and common data warehouses. New ERP systems incorporate a modular approach that integrates within an overarching system that can develop a holistic, dynamic and graphical view of the unique value chain and define business priorities.
Monitor performance. Management needs a system that monitors the performance of their activities against business goals and can monitor real-time performance specific to each functional area - for example be able to calculate the impact of raw material price or quality changes on the bottom line in real-time. In this way, functional leaders can direct their energies towards those tasks that matter the most to achieving the corporate strategic goals.
Manage the business. Managing the business isn't just about watching stuff happen, it is about doing things when necessary. When business leaders have gained the required enterprise intelligence from the first two steps, they need the ability to execute decisions supported by real-time ‘what-if’ analysis that drives their specific business and gives them a competitive edge. What sort of 'what-if' analysis you ask? Whatever is specific to your role.
Another hurdle - export controls
Another area of significant risk, especially in the A&D sector with its global supply chains and complex customer bases with layers of regulatory controls, is export controls. The complexity faced by A&D manufacturers is significant, starting with the multiple regulatory documents with which manufacturers are confronted. In the US alone, the Commerce Control List (CCL), and the United States Munitions List (USML) both mention different items which must be controlled - and other global regions have their own constraints and regulations.
Keeping abreast of regulation, such as ITAR, on each and every order and transaction is not a process that can be effectively handled manually – at least not on a level that ought to inspire confidence from management. Manufacturers and contractors involved in the aerospace and defense industries, as well as other industries dealing with materials and equipment of strategic importance, will need to rely on more automated systems so they can profitably and efficiently meet customer demands without exposing themselves to legal repercussions.
ERP software that incorporates a module designed specifically for export control and particularly ITAR may offer the most direct route to an export control process that will inspire confidence while protecting the company and its directors. It can be easily incorporated into a corporate performance management system, increase customer confidence and reduce the perceived level of risk.
What does this mean in the real world?
A case in point is Gables engineering, a 69-year old avionics manufacturer that builds custom flight deck controls for the airline and airframe industry. It manufactures traffic collision avoidance systems (tCAS) panels, radio control panels and audio systems. Besides designing and building the electrical assemblies, Gables also designs and builds the switches, housings and LCD display modules. Customers include Boeing and Airbus Industries. A major challenge was dealing with demand volatility.
The company had a pseudo-MRP system based on reorder points. The system looked at current customer demand, as well as historical demand, and then the buyers had to fudge and figure out, “What do I really need to buy?” This caused Gables to buy and build unnecessary parts, which in turn would load the shops with unnecessary work and inflate purchased inventories. It was a process best described as moving forward by looking backward, and was unsuited for the unpredictable A&D market. They needed to order and build parts by looking at forecasts and not at history.
By introducing IFS ERP/e-business system including a true MRP module, Gables reduced work in process by 50 percent and overall inventories by 30 percent. The software also facilitated such APICS functionality as inventory and sub-assembly control. It used to take two days to get a spare part shipped out from time of order to time of shipment. With IFS, same day shipping is now possible. The software seamlessly interfaces with other third party systems - key to maintaining customer confidence in their part of the supply chain.
So what does a successful solution look like
Today, change is the only constant in the A&D market. Business agility is more important than ever. Choosing the right enterprise software to support your vision is a major agility challenge, because the future direction of travel for companies should be dictated by business leaders, not their software.
The bond between business strategy and technology investments should be one of the strongest in any company, especially in the high-tech A&D environment. Too often today, enterprise software limits business options and is often inflexible and monolithic, hampering agility and, ultimately, innovation that is necessary for survival. What business needs is core ERP with more modular application capability to support long-term strategic change as well as rapid shifts in the market, variations in customer demands, and new ways of doing business.
Over the next five years - just as the aerospace market is taking off - the SCM software environment is also changing rapidly, with the introduction of innovative supply chain planning architectures. Concurrent optimization, unstructured text mining, streaming data and sensing, and cognitive learning are likely to redefine supply chain planning into learning systems within five years by finding and resolving exceptions without management intervention. Demand sensing through pattern recognition and sensors will shorten cycles for response. This will transform planning, making the system less reliant on manual data touches and the traditional business planner.
So we need software that will adapt to meet our needs, regardless of how our business, the market or the regulatory environment changes. The right modular enterprise software lets businesses extend and reconfigure as they need to, in a unified plug-and-play environment. The key is to have long-term technology investments that support the business strategy, whatever changes. The flexibility to adapt and incorporate new types of data and analytics is inherent in the IFS model design with a 'wall of capability modules'. We feel this is reinforced by a recent Gartner Magic Quadrant study that showed IFS to be a leader amongst mid-market ERP vendors for the second year in a row.
Modularity means enterprises can pick and mix the elements of their chosen application to meet their particular points of need and, to avoid the expenses traditionally associated with full blown ERP systems, they can even opt for an Opex rather than a Capex model by deploying through the cloud. Whatever they decide, they need to build a springboard for the future, and innovation is a must.