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Untangling Complexity To Generate More Profits

Manufacturing Group | October 26, 2012

Over the past several years the aerospace and defense (A&D) industry has found itself enduring ongoing cost pressure and continued uncertainty in the global political and economic environment.

Untangling Complexity To Generate More  Profits

Over the past several years the aerospace and defense (A&D) industry has found itself enduring ongoing cost pressure and continued uncertainty in the global political and economic environment. Western economies, traditionally the largest spenders on defense, have operated under a new paradigm that includes spending cuts, new threats such as cyber-security and a shift to service-based businesses. In commercial A&D, key challenges include improving fuel efficiencies, environmental obligations and rising oil prices. The volatility and turmoil in the global economy strains defense and commercial markets.

The result of all this complexity is a disruption and slowing of the A&D product pipeline. The more variables an A&D company must contend with, the less flexible and reliable its performance. Complexity has become the most destabilizing force in the industry with widespread repercussions. For example, traditional supply chains have deteriorated into a fractured network of products, suppliers, markets, new technologies and customers. It’s becoming much harder to connect and integrate all these elements, causing product delays and higher production costs for everyone involved. Furthermore, the number of suppliers is decreasing, causing overdependence on suppliers in certain areas and, potentially, jeopardizing entire programs.

The good news is that aerospace and defense companies recognize the need to adjust to these new market conditions and are looking to make changes. A new Accenture report, Improving Program Profitability in Aerospace and Defense, reveals that companies have room for improvement in the holistic way they manage the profitability of their programs to master this complexity. What’s required is not a single program profitability initiative but an adaptive methodology that can be continually reapplied throughout the lifecycle and supported by appropriate enterprise management and financial metrics.

Accenture estimates this approach has the potential to deliver the following benefits:
•    Reduction of delivery costs by up to 50%
•    Reduction of spares inventory by up to 40%
•    Reduction of procurement costs by up to 30% and
•    Reduction of manufacturing costs by up to 10%.

To drive the best results, Accenture recommends that A&D manufacturers focus on all areas of the lifecycle, from design to procurement, manufacturing to service management, to reveal opportunities for cost reduction, efficiency increases and new revenues. Let’s explore two improvement opportunities in more detail: applying state-of-the-art Product Lifecycle Management (PLM) to improve research and development, as well as design; and establishing supply chain risk management.

Apply State-of-the-Art Product Lifecycle Management to Improve R&D and Design
The industry and supplier landscape has become more complex, as more design work gets done outside the manufacturing company. This and the more complex nature of the products make it essential to  collaborate producing mature, first-time-right solutions to prevent delay or problems downstream. PLM can support this by adding consistency to the product life from conception to disposal. To be effective, PLM must be integrated from the outset across all players in the R&D and design phase creating a common and accurate base in which all participants can see and contribute. To ensure operations and technology mesh, chief operating officers should work with chief information officers to stake out a clear strategy for PLM and apply it throughout the entire enterprise.

Once a base is established, manufacturers should invest in a technology platform that facilitates collaboration and on-time delivery. Consider, for example, a common three-dimensional model accessible across the extended network of an airplane manufacturer. Partners, designers and external parties who help produce the aircraft can use this tool to access the same data as everyone else, ensuring everyone is on the same page. Full access and consistency eliminate errors from the outset. Although initial investments in such tools may be significant, doing so will avoid more serious future problems.

Establish Supply Chain Risk Management
In recent years aerospace and defense companies have embraced the role of an integrator, coordinating their extended supplier and distributor networks so products are made and delivered on time.  Simultaneously, the scope of this network has grown exponentially and internationally.

In the course of vertical disintegration, companies carved out key components of their supply chain creating various tier one suppliers operating under risk and gain share agreements. This lead to a higher degree of dependency on these suppliers, bearing various risks as companies can no longer control delivery and quality in the way they could before. The political, financial, environmental and economic risks have grown accordingly. A&D companies should do a better job addressing this complexity so it doesn’t compromise operations and sabotage the final product. A comprehensive and sustainable approach to manage risks along the supply chain is therefore critical.

Leveraging this approach, an extensive information exchange as well as a “partnership” mindset is essential; manufacturers should know what happens down the supply chain to be able to react in an agile way if disruptions occur. Companies should create a base platform of systems common¬ality used internally and externally by suppliers, distributors and customers, making available shared forecasts and capacity-level reports via browser-based tools compatible with all systems. The data that goes between these systems will be two-way between all collaborating companies, real-time, more consistent and readily available.  Furthermore, it is crucial to ensure delivery capabilities of the supplier and maintain them over time. Manufacturers should frequently perform supplier assessments to meet continuously changing program expectations.

Control and visibility over key raw materials and components are equally important. Volatility in the market can cause component shortages and higher prices. To counteract this scenario, manufacturers should add a layer of predictive availability to their sourcing and procurement. Because manufacturers cannot proactively remove all program risk, they should implement an early warning system that monitors and identifies risks if they occur. Early notification should be coupled with a risk plan they can immediately activate to remedy problems and coordinate among parties.

Profitability in Sight
Few industries have to deal with the variety and magnitude of complexities aerospace and defense companies contend with constantly. Yet if they follow these steps, they can build systems that overcome challenges and improve program profitability. Integration, standardization, collaboration and technology are the keys for making these goals achievable.

Damien Lasou is the managing director of the Aerospace and Defense business within Accenture’s Electronics & High-Tech industry group. He can be reached at Damien.lasou@accenture.com

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