More, Faster and On Time: Addressing Today s Supply Chain Challenges in Aerospace and Defense

Transcription

1 More, Faster and On Time: Addressing Today s Supply Chain Industry White Paper Contents 2 Flying high in the airline industry 3 Playing defense 4 Ramp and rate readiness as the key to success 4 The integration of planning and execution 7 Summary

2 There s an air show happening within the aerospace and defense (A&D) industry. The commercial aircraft sector is soaring, while the defense sector is losing altitude due to the general belt-tightening worldwide in the aftermath of the global financial crisis and reduced military spending. In spite of these differing trajectories, today s A&D players are faced with the same array of unique challenges to keep pace with the industry s current build-to-demand model that requires an elevated level of supply chain performance. This white paper examines the four core competencies that every A&D company needs to master to be successful. In turn, these core competencies will help A&D companies fully harness the potential that s deep within the supply chain so they can keep pace with today s business demands. Flying high in the airline industry Commercial aircraft manufacturers are experiencing their third consecutive year of record sales, resulting in more orders, bigger deals and larger backlogs than ever before. 1 In addition, an improving economy in emerging markets such as China and Latin America, along with steady traffic growth and increasing ticket prices, are together accelerating the demand for new planes. Airline industry customers who traditionally have focused on capacity rationalization are now eyeing fuel efficiency as a way to improve operational costs. They are also looking to differentiate their service levels by introducing new planes with varied types of cabin interiors and entertainment systems. For example, the number of production lines at a leading aircraft manufacturer is expected to double or triple over the next 12 to 24 months. This means that their supply chain will need to double the velocity of material supply to achieve these order promise rates. The company is keenly aware of the risks involved in doubling the achieve rate and is putting proactive new business processes in place to orchestrate its extended supply chains. As customer expectations for delivery performance are rising, supply chain execution quickly is becoming the key decision criteria behind many large contracts. Given this competitive landscape, commercial aircraft leaders are taking the following proactive measures: Implementing multi-tier inventory and order visibility to detect disruptions sooner Instilling supplier confidence of requirements by collaborating with partners around demand 1 Aerospace & Defense: 2012 year in review and 2013 forecast, PwC, May 2013: Page 2

3 Focusing more intently on logistics visibility to project inventory levels as available supply Adopting more Partner Managed Inventory (PMI) or Vendor Managed Inventory (VMI) cost-sharing programs to improve continuity of supply and drive down working capital Engaging in fewer offshoring activities to gain firmer control over critical component supplies Playing defense While the aerospace industry is poised for takeoff, the defense industry is staying closer to the ground. According to a recent McKinsey survey, defense executives based in Europe, the Middle East and the Americas project that global defense spending will be on a decline over the next three years. 2 In that vein, ever since March 2013, when the U.S. government s sequestration policy went into effect, defense companies profit margins have been under pressure, reducing more than US$43 billion dollars from FY13 planned purchases. 3 More importantly, as federal budget negotiations continue to progress, there s a climate of uncertainty around the defense sector, which is beginning to impact supply chain readiness. A similar picture of cutting spend unfolds in Europe, due to mounting pressure from the European Union to limit budget deficits. As a result, life cycle cost reduction and business model transformation emerge as two areas that the defense industry will focus on to drive demand in this declining budget environment. 4 Defense companies also are beginning to seriously address affordability issues that their customers have raised, particularly around the cost structures embedded deep within the supply chain and how working capital is being managed on their behalf. There is also a significantly greater focus on appropriate inventory stocking levels, carrying costs and supplier financing as customers now more often inquire about what is being done to address the issue of program affordability. We see the A&D industry, as a whole, entering a new period of value-engineering their supply chains and bringing an increased level of focus on delivery 2 Defense outlook 2015: A global survey of defense-industry executives, McKinsey, April 2013: 3 Aerospace & Defense: 2012 year in review and 2013 forecast, PwC, May Outlook on Aerospace & Defense: Interview with Tom Captain, Deloitte: view/en_us/us/industries/industry-outlook/482fbd7affa3c310vgnvcm f70arcrd.htm. Page 3

4 performance improvement. In light of these challenges, leaders in the defense sector are moving forward on the following initiatives: Outsourcing higher-level system modules instead of buying parts to decrease supply chain complexity and reduce value-added costs Paying more attention to multi-tier inventory liabilities accumulating as a result of single-tier purchase order (PO) processes; this means greater multi-tier order and inventory visibility will be necessary Expanding beyond siloed procurement activities to include total acquisition and landed costs Finding new ways to control and allocate freight costs using autoadvanced shipping notice (ASN) creation from PO processes Helping system integrators gain multi-tier visibility and collaboration access into the PO creation process Ramp and rate readiness as the key to success In spite of the turbulent operating environment for the A&D industry, supply chain performance was a key success factor for A&D companies globally in 2012, leading to one of the best years ever in terms of revenue and profit. Revenues were up four percent over 2011, while operating profits rose by two percent. Large commercial aircraft production increased a robust 18 percent, while record backlogs continued to grow. 5 The challenge for the commercial aircraft sector now is to be able to ramp up supply chains to build more planes faster and orchestrate a multitude of components arriving at the same time. Commercial aircraft assembly is the ultimate just-in-time business case because of the sheer size of the items such as the fuselage, wing and tail assemblies. To that end, the ability to track multi-tier PO creation, ASNs and shipments all the way to their assembly plants is critical, as it reduces the continuity of supply risk and helps organizations achieve targeted production rates. The integration of planning and execution To expand capacity this quickly, A&D companies will inevitably need improved capabilities in a number of areas. These areas include more outsourcing and supplier performance management, more lean manufacturing programs such as VMI, and a move toward more centralized procurement, such as Buy/Sell programs of module acquisition that are often found within 5 Aerospace & Defense: 2012 year in review and 2013 forecast, PwC, May Page 4

5 a complex Department of Defense environment. This will naturally lead to improved spare parts management and better control over repairable assemblies and consumables. Reaching this deep into the supply chain will entail a much higher level of information aggregation and analytics to improve operational performance. Commercial aircraft manufacturers and defense companies also are looking for ways to reduce costs while simultaneously increasing responsiveness. They have reached the conclusion that their trusted, tier one suppliers hold the key to their success as orchestrators within the extended supply chain by eliminating out-of-sequence deliveries to their factories. While these tier one suppliers are reporting strong operating margins, they are often achieving them, in part, by passing along unnecessarily high supply chain execution costs caused by lack of visibility or collaboration. To improve overall supply chain cost structures, brand owners know they will need to provide better insight into their demand and sub-tier suppliers performance readiness so tier one suppliers and integrators can meet higher production levels in a costeffective manner. In addition, many A&D companies have experienced line-downs within the past decade due to various natural disasters, logistics carrier breakdowns, and/or political unrest in markets around the globe. Many organizations are now taking a new approach to multi-tier risk management by mapping hierarchies of exposure and connecting this information to real business process rules that can operationalize recovery actions by event type. To meet these new A&D challenges, companies will have to master the following four competencies: 1. Going beyond simple visibility to achieve supply chain predictability The need for predictive visibility into supply chain performance has become more important than ever as commercial and government customers struggle to meet demand. This means not just knowing about current material shortages, but also future shortages so they can be prevented. Spending more time predicting and less time reacting requires more process automation so the supply chain can manage by exception. This shift will require: A greater level of procurement automation to manage request dates More third-party logistics (3PL) monitoring to project late deliveries More cross-site inventory visibility to detect impending stock-outs A continuous risk analysis of disruptions and excess and obsolete (E&O) liability Page 5

6 Only by having a shared global view of both consigned and non-consigned inventory will this be possible. 2. Managing secure collaboration within an A&D environment Connectivity to all trading partners has become a necessity as customers are increasingly requiring more data and deeper levels of integration with their internal systems. This level of integration within an A&D environment requires a much tighter level of information security and is often subject to national standards, such as the U.S. government s International Traffic in Arms Regulations (ITAR). These rules are a step beyond those of other industries, as information exchange becomes a matter of national security. It means that system-level access and authentication must be rigorous and specific to the individual. Achieving secure collaboration across multienterprise supply chain platforms requires extensive identity management and two-factor authentication. 3. Network risk analysis: mitigating or preventing disruptions The balance between transparency and security is critical when managing an end-to-end supply chain, especially within the A&D industry. Role-based authentication to a business process has to be controlled to ensure each participant in the supply chain has a defined need to know and access to data required to complete their portion of the business process. The workflow is then controlled by these access permissions, which pave the way for seamless and secure collaboration. Once the extended supply chain is working collaboratively within a secure framework of data exchange, it allows all participants to work together to prevent disruptions. As trust is built, partners begin to work toward the overall supply objective of meeting end customer needs. If they see something, they are more likely to say something to prevent supply chain disruptions from occurring in the first place. 4. The Big Data opportunity in the A&D industry Once the right data is visible, it becomes actionable information. Then, the question of the potential benefit of Big Data arises. Is it possible to spot industry macro trends or understand industry capabilities by simply measuring supply chain performance? Could companies gain insight into increasing market demand and respond sooner, thereby reducing backlogs? Business networks now provide the ability to aggregate market demand information and connect it to a view of supply by commodity, by part or by location that is useful in determining the ability of an industry, such as A&D, to meet new orders. This is where a portfolio view of aircraft platforms and their dependent supply streams would be immensely helpful. Page 6

7 Summary The A&D industry is transitioning from a steady-state production model to a build-to-demand model that now requires a significantly greater level of supply chain agility. While simple supply chain visibility is needed, it is not sufficient to respond to demand surges like the one commercial aircraft manufacturers are now facing. Visibility on its own is also insufficient to reduce costs locked deep within the end-to-end supply chain structures defense companies are facing. Only when visibility is combined with deep and secure collaboration throughout the supply chain will the A&D industry be able to do more, faster and on time. E2open and Exostar have helped leading A&D companies like Raytheon and Boeing to overcome the following supply chain challenges: Managing the outsourcing of non-core competency activities Integrating an internal enterprise resource planning (ERP) system with external material requirements planning (MRP) supply chain execution processes Developing Control Tower capabilities to provide a panoramic view of the extended supply chain Managing outsourced PMI/VMI/3PL partners actively to increase visibility and reduce risk Heat mapping the supply base to identify points of risk by geographic location Reducing the strain on trusted tier one suppliers by collaborating on capacity, shipments and inventory To learn more about how E2open and Exostar can help your company master these challenges unique to the A&D supply chain, please contact aerospace@e2open.com. Page 7

8 About E2open E2open (NASDAQ: EOPN) is the leading provider of cloud-based, ondemand software solutions enabling enterprises to procure, manufacture, sell, and distribute products more efficiently through collaborative planning and execution across global trading networks. Enterprises use E2open solutions to gain visibility into and control over their trading networks through the real-time information, integrated business processes, and advanced analytics that E2open provides. E2open customers include Celestica, Cisco, HGST, IBM, Lenovo, L Oréal, LSI, Motorola Solutions, Seagate, and Vodafone. E2open is headquartered in Foster City, California, with operations worldwide. For more information, visit About Exostar Exostar powers secure business-to-business information sharing, collaboration and business process integration throughout the value chain. Exostar supports the complex trading needs of many of the world s largest companies in aerospace and defense, life sciences, and other industries. Exostar s cloud-based identity assurance products and business applications reduce risk, improve agility and strengthen trading partner relationships and profitability for over 100,000 companies in 150 countries worldwide. The Exostar community includes market leaders such as AstraZeneca, BAE Systems, Bell Helicopter, The Boeing Company, Computer Sciences Corporation, Lockheed Martin Corp., Merck, Newport News Shipbuilding, Northrop Grumman, Raytheon Co. and Rolls-Royce. For more information, visit E2open, Inc East Third Ave., Suite 400 Foster City, California www. Tel: Toll Free: E2open e2open_us@ 2014 E2open and the E2open logo are registered trademarks of E2open, Inc. All other marks are trademarks, service marks or registered trademarks of their respective owners. All rights reserved _White_Paper_More,_Faster_and_on_Time_ Addressing_Today s_supply_chain_challenges_in_aerospace_and_defense_cl_d1.indd