In their quest to push the limits of science and build new, state-of-the-art passenger jets, aerospace manufacturers are relying more than ever on their global suppliers.
But with the increased reliance on global suppliers comes increased risk as well, and aerospace manufacturers are ever more vulnerable to disruptions in their supply chains that can set back production schedules and lead to lost sales and corporate upheaval.
Chicago-based Boeing, for instance, has delayed initial deliveries of its 787 Dreamliner by six months in part because of supply-chain problems. Deliveries of the Dreamliner are now slated to begin in late November or December 2008, compared with an original target of May 2008.
Delivery of the Airbus A380, meanwhile, was delayed by about two years because of a supplier problem. Airbus lost millions in sales to Boeing, and two Airbus CEOs in three months lost their jobs as a result.
"If you look at the aerospace supply chain, one thing that's been evolving lately is that there's a higher degree of outsourcing going on," says Mike Burkett, vice president of the value chain strategies group at Boston-based research firm AMR Research.
"They are trying to leverage their supply chain more, but what does that do? That obviously introduces risk," Burkett says.
Boeing, for instance, is using dozens of suppliers from around the world and has outsourced more than 50 percent of the design and construction of its new 787 Dreamliner, the first commercial aircraft to be made out of carbon fiber plastic composite materials.
Manufacturers are relying on global suppliers, many of them sole source suppliers, for several reasons.
For one, by outsourcing some of the work, manufacturers are spared from having to make significant capital investments themselves. They also can take advantage of suppliers who often have specialized knowledge or expertise.
It is also one of the realities of doing business in a global marketplace. Some countries, for instance, require that manufacturers provide jobs for their citizens before they will agree to make any purchases.
In their analysis of whether to outsource to a supplier, however, many manufacturers overlook or underestimate the risk that is involved with such a decision.
"A company that only does a financial assessment and makes that decision (to outsource) only based on cost could be exposing themselves to a lot of risk," Burkett says.
The failure of a supplier to provide the right product at the right time can have serious consequences.
"The risk can be financial, it can be reputational, it can be regulatory, there can be penalties," says Jim Pinzari, director of business-continuity management for Aon Global Risk Consulting. In their contracts with customers, aerospace manufacturers often face significant penalties for failing to deliver an aircraft when promised.
The job of designing and then putting together an aircraft, of course, is no small feat.
With parts arriving from all corners of the globe, aerospace manufacturers have become subassembly assemblers, says Jim Molloy, head of commercial aerospace and defense at McLean, Va.-based management and technology consulting firm Bearing Point Inc.
Aerospace manufacturers now have to coordinate massive amounts of information through all the levels of the supply chain to make sure that everything is designed to the correct specifications and shows up at the right time.
"That creates a whole new network of informational challenges and control challenges and scheduling challenges," Molloy says.
One small glitch or miscalculation can disrupt this finely choreographed dance.
A shortage of titanium fasteners, for instance, was a key factor in the delay of Boeing's 787 Dreamliner.
Airbus had its own problems when wire bundles made in Germany were just a little too short and had to be sent back. The problem came about because the German supplier had the wrong version of a computer program used in the design of the plane, says Dick Slansky, senior analyst and director of product lifecycle management at ARC Advisory Group, a research and advisory firm in manufacturing and supply-chain solutions based in Dedham, Mass.
"There's a lot to manage here," Slansky says. "There's a lot of steps and processes and resources that all have to come together at just the right time, so it's quite an orchestration," he says.
Aerospace manufacturers also tend to rely very heavily on one supplier for specific parts, and that raises the stakes because if something goes wrong, there may not be an alternate supplier.
"It's been very common for aerospace companies to be very dependent on single and sole-source suppliers for critical components for their own operations and also for what is a big part of the industry, which is the maintenance, repair and overhaul business," says Martin Fessey, a Windsor, U.K.-based vice president of FM Global International.
By experimenting with the use of new materials and by pushing the envelope on aircraft designs, aerospace manufacturers are further testing their supply chains.
Boeing's 787 Dreamliner has been dubbed the "Tupperliner" because so much of the aircraft will be made from composite materials rather than from the standard aluminum and steel. Obtaining those materials can sometimes be a challenge.
"Material availability becomes a challenge because they use these very unique materials," Burkett says.
The innovative design of these aircraft also changes the risk equation. By using composite materials, Boeing has reduced the number of parts and components it needs to build the Dreamliner.
By manufacturing a one-piece fuselage section, for instance, Boeing is eliminating 1,500 aluminum sheets and 40,000 to 50,000 fasteners.
That will help to reduce some of its supply-chain risk because there are fewer parts to go astray. On the other hand, if anything were to go wrong with the one large fuselage section, the ramifications could be far more serious than if there were a problem with some smaller part.
MORE DEPENDENT ON MORE RISKY CHAINS
While aerospace manufacturers have become more dependent on their suppliers, other new developments are putting those global supply chains under a lot more stress than in the past.
Take how original equipment manufacturers have been reducing their safety stock.
"Everyone is looking to rationalize supply chains," Fessey says. "In the past, even though you might be using a single source supplier, you would probably have safety stocks of components," he says."Of course, that has potential risk management issues in that you no longer have that safety stock, and that has focused attention on the sustainability and reliability of that supply chain."
Meanwhile, supply chains are moving to Eastern Europe and Asia. By using suppliers from these countries, manufacturers are often able to achieve significant cost savings by reducing manufacturing costs. But there is also a greater risk of something going awry as a result of infrastructure problems, political instability and cultural differences. And logistical challenges grow as more OEMs use suppliers based in these far-flung locations. The farther away a supplier is from the OEM, the greater the risk that something could prevent the product from reaching its destination safely.
"The OEMs are having to make sure that the risks associated with those suppliers are being very carefully managed and very carefully analyzed," Fessey says.
Many manufacturers have also underestimated the potential for a natural catastrophe, such as flood or an earthquake, to disrupt a supplier's operations. "We do sometimes find that the physical risks don't get the same attention as other risks associated with suppliers," Fessey says.
OEMs and their suppliers are increasingly offering performance guarantees on their products as well, Molloy says. To be sure they can deliver on these promises, manufacturers need guarantees from their own suppliers and an even greater level of information about their manufacturing processes. This presents a whole new risk profile for manufacturers as they try to figure out what they can promise in their contracts with their buyers, Molloy says.
Aerospace manufacturers are using a variety of strategies to try to manage their global supply-chain risk. Although some losses are covered by a manufacturer's business-interruption insurance, that insurance cannot cover all the various types of losses a manufacturer may encounter.
"Insurance is a good way to transfer risk, but it's no way to guarantee against a loss of market share," Pinzari says.
One of the most crucial tasks for aerospace manufacturers is to find a way to manage information. Manufacturers need to be able to provide their suppliers with up-to-date, real-time, accurate design and engineering data to make sure that the components meet the correct specifications. They also need a way to efficiently communicate any changes in demand forecasts.
The original equipment manufacturers also have to worry about making sure the right information gets to their suppliers' supplier, several tiers down the supply chain.
One way that manufacturers are doing this is through an Internet hub called E2open.
E2open has been used by high-tech companies for some time, but Boeing is the first aerospace company to use E2open on a project, Burkett says. It has begun using the application for its 787 program to keep its suppliers connected and informed about the status of the program.
"As an OEM, I can go on to the Internet and look at E2open application and look at the status of inventory multiple tiers down the supply chain all related to the product I'm trying to build," Burkett says.
"In the old days, even letting tier one know that something changed was a hassle, never mind letting someone two or three levels down know," he says.
Managing information is just one part of the risk management equation. Manufacturers are also expanding their relationships with their suppliers. Rather than taking a hands-off approach, they are taking an increasingly active role in working with their suppliers to help those suppliers manage their own supply-chain challenges.
"You are seeing more companies actually look multiple tiers down into their supply chain and assess risk, and then they'll take the appropriate strategy depending on what that risk is," Burkett says.
Many suppliers are sophisticated and have very strong risk management and supply-chain management programs in place. But other suppliers may be smaller and may not have much of a risk management operation in house.
"Our clients are absolutely asking us to help them to ensure that their supply chains are protected in the same way against fires and windstorms and floods as their own manufacturing facilities are," Fessey says.
Some suppliers have been quick to pick up on the fact that they can gain a competitive advantage by having a strong risk management practice.
"Interestingly, on the other side, we work with a number of suppliers to the aerospace industry and they want to make sure they can demonstrate to their customers, the OEMs, that they are managing risk appropriately," Fessey says.
"Rather than risk management perhaps being seen as a cost, they are addressing risk management as an investment, or even potentially a competitive advantage, to make sure their OEMs are properly protected," he says.
Manufacturers are also increasingly treating their suppliers as risk-sharing partners so that they share together in the successes as well as the failures and financial losses.
Traditional carrot-and-stick methods are also in use. Many contracts, for instance, are written to include penalties for suppliers who fail to meet the terms of the contract from a risk management standpoint.
There are also some efforts underway to help manufacturers do a better job of identifying their operational risks, says Tom Wrobleski, managing director and head of Bearing Point Inc.'s supply-chain practice.
"One of the biggest issues I'm confronting globally with clients is how to operationalize risk management," Wrobleski says. At the moment, he says, "there's not a lot of structure and codification of what those risks areas are."
He says he is trying to provide more structure through the use of a survey with 200 questions that try to pinpoint the potential risk issues.
Manufacturers also need to have business-continuity plans to help them identify the potential problems in their supply chain and to then develop strategies to be able to work around those possible disruptions.
There's much that aerospace manufacturers can do to help mitigate their supply-chain risks. They can use technology in new and innovative ways to manage information; they can build stronger, more collaborative relationships with suppliers; and they can focus on improving their operational risk management expertise. A business-continuity plan can help manufacturer identify risks and prepare strategies in case something does go wrong.
But because aerospace manufacturers are so dependent on their suppliers, the supply chain will always be one of the biggest risk management challenges for the makers of commercial passenger jets.
"Some companies have a lot of variability on demand," Burkett says. "They never know what's going to go off the store shelf at any time." Aerospace manufacturers typically have a pretty good idea of what the demand for their products is.
"Their risk is on the supply side," he says.
PATRICIA VOWINKEL lives in New Jersey.
January 1, 2008
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