Opinion: Developing A Shared Investment Supply Chain Strategy

The commercial aerospace industry has had a tough several years. While resiliency has overall been strong for most of the supply chain, it also looks more tenuous than after past downturns such as after Sept. 11, 2001, and the 2008 financial crisis. Now is the time for “shared investment” across the industry versus financial engineering.

Balance sheets now are heavier with debt, and material and labor costs are increasing because of 40-year-high inflation. Airframer OEM production volumes are still lower overall, with slower recovering demand and excess inventory from overproduction during the pandemic-induced economic downturn.

Supply chain managers arguably are in a uniquely challenging position at this juncture, as multiple industry headwinds and several years of exogenous events remain. Unlike past recoveries, uneasiness and instability will characterize a return to “normal operations” and will continue to test supply chain management reactively.

Supply chain strategies once developed and implemented within the business are vulnerable and could rapidly morph due to exogenous events and the outcomes from unmitigated risks that are affecting the commercial aerospace industry.

Such challenging times increase the focus on supply chain actions and decision-making process. Supply chain leaders are pushed to reduce costs and ensure work transfers are successful while cost ratios are positive. Make/buy strategies are adjusted per management guidance while having to simultaneously ensure high-quality parts are delivered on time.

The OEMs in the past took actions such as the Airbus SCOPE+ and Boeing Partnership for Success (PFS), which have led to supplier profitability challenges. SCOPE+ pressed its suppliers to reduce costs, renegotiate contracts and trim expenses. PFS was focused on supplier cost-reduction sharing, extending supplier invoice settlement periods and negotiating revised terms.

But today’s downstream business situation does not warrant those OEM supply chain strategies and some currently in progress. Recent initiatives such as negotiating prices down to secure a renewed contract and applying debits to suppliers for quality rejections are becoming increasingly detrimental to supplier relationships. At this point, positive engagement with the supply chain should be the focus.

The OEMs will need Tier 1s to invest their own capital expenditures (CAPEX) for future activities. It is likely that past OEM supply chain cost initiatives will further constrain CAPEX investments in future programs. Consequently, when the OEMs launch a new airplane program, they will need supplier partners to help shoulder the burden of development, which could be strained if new cost initiatives are pursued.

Further down the supply chain, key Tier 2 suppliers with which the OEMs directly contract are experiencing operating-margin pressures. The graph below indicates how these suppliers are also feeling the “crunch,” as recently discussed on Aviation Week’s Check 6 podcast. The Tier 2s have a contractual misalignment in that they have longer contract periods with the OEMs but shorter contract periods within their subtier suppliers.  This could create sourcing challenges with suppliers that walk away after one- or two-year contracts, leading to the additional expense of requalifying new sources.

The OEMs have previously exercised supply chain strategies that can help. For instance, Boeing consolidated raw materials through TMX Aerospace and aggregated volume orders for the supply chain, which—along with a focus on streamlining fasteners—were a win-win for Boeing and its suppliers.

The OEMs further can work with suppliers on technical synergies for product improvements by reviewing requirements, specifications and engineering changes that could yield cost-reduction opportunities on a shared basis. Once a supplier’s nonrecurring engineering expenses are paid back through the cost-reduction changes, overall cost reduction could be split 50-50.

OEM relationships with suppliers are important for the long-term viability of the commercial aerospace industry. Commercial suppliers now have more choices to diversify into defense, space and even urban air mobility markets, among others. In today’s environment, working through the principles of a shared-investment strategy with OEMs and suppliers will prove to be more successful for the entire industry.

Alex Krutz is managing director at Patriot Industrial Partners, an aerospace and defense advisory firm that focuses on manufacturing strategy and supply chain optimization.