Increased Aircraft production rates – Supply Chain risks?

At the start of the year, both Airbus and Boeing announced plans to increase their aircraft production rates significantly over the course of 2014. In a blog I posted in January, I briefly mentioned that while this announcement (and a strong backlog of aircraft orders) is great news for UK industry, suppliers must be ready and willing to take the necessary measures and respond to this ‘ramp-up’ in production.

Over the last few weeks, various industry voices (seen in articles from both Aviation Week and Reuters) have outlined how this ‘ramp-up’ holds many potential risks for the aerospace supply chain;  and requires both OEMs and their suppliers to think seriously about the future of their businesses.

This renewed focus on supply chain risk has come from both the increase in aircraft/ air travel demand and competition amongst airlines. Increasingly, airline operators have tried to attract customers by reducing their air fares; therefore demanding lower build & operating costs of new aircraft from manufacturers, in return for placing sizeable orders to meet this new demand. Whilst a larger order book safeguards future work for suppliers in the medium term, it also ensures OEMs turn their attention to their supply chains (which can make up around 60% of an aircraft’s content value) to find vital cost and efficiency savings.

Any potential ‘squeeze’ on suppliers may mean companies face the risk of losing vital orders if they do not meet OEM requirements; taking on greater financial burdens due to investment in new machinery and skills; or engaging in M&A activity with larger suppliers. Indeed, many of these larger suppliers are looking to invest in smaller companies & take on the financial risks, due to the inherent strength of future demand which has been forecast for the global aerospace industry.

However, despite these risks, there are some positives for suppliers in their ability to meet increasing demand and new pricing pressures. Firstly, larger order volumes from manufacturers can in some cases mitigate any attempts they may need to make in order to decrease overall production costs.

Secondly, OEMs are taking measures themselves to reduce costs – and are therefore more aware of the pressure on their suppliers and more willing to assist them in making any necessary structural changes. OEMs cannot risk ‘squeezing’ their suppliers too hard and cause potential delays to their delivery schedules. Alongside this, if fewer companies are actually able to meet the demands set by OEMs, this may reduce the ability of aircraft manufacturers to achieve real cost-saving flexibility.

Over the last few years, the aerospace supply chain has responded successfully to production demand increases. Significant measures taken include increasing investment in R&D and in-house design/ engineering capabilities; improving risk-sharing strategies with OEMs and suppliers; and investing in new machinery and processes to combat breakthroughs in new technology. The supply chain has also learnt from the delays in delivery seen on recently new aircraft platforms and vastly improved their supply chain management processes.

However, with OEMs increasing their focus on winning market share and benefitting from the current demand for aircraft and air travel, the supply chain must be able to access the finance they need to continually invest; be more open and transparent with OEMs on making the changes required to meet demand and continue to foster innovation in new materials, technology and process management that will have real impact on finding cost and efficiency savings.