The aerospace and defense industry press is full of stories announcing program delays and cost overruns. From the Littoral Combat Ships to the A400M to the F-35, defense OEMs are pushing out delivery dates. In March of this year the GAO released its annual report on defense acquisitions. The 72 major programs they reviewed that have reached the systems development stage were averaging 23 months delay in delivering initial capabilities. The GAO report correctly points out several factors contributing to delays and cost overruns including shifting performance requirements, limited tenure of program managers, reliance on non-governmental personnel to fill Defense Department program management roles and software management challenges. However, if these factors represented the full story, and the problems facing aerospace and defense OEMs were confined to programs involving the government, then we wouldn't also be reading stories about delays in 787 deliveries and the Eclipse Aviation CEO being forced out by investors. While the GAO report accurately points out several problematic issues, it misses the root cause of many problems in this industry - the fundamental structural change in the A&D supply chain and participants' failure to fully adapt.
Within the last 10 years OEMs began stepping out of detailed design activities and manufacturing of subassemblies and began focusing almost exclusively on program management, systems engineering and final assembly. This is a logical reaction to the extreme technical and cost risks represented by most larger aerospace and defense programs and is a natural extension of the drive to focus on "core competencies" that occurred in the mid- to late- 1990s. However, what the OEMs either failed to recognize or failed to address is that their suppliers were not, and in most cases still are not, prepared to pick up all of the additional activities that "come with" this change. Program management, systems engineering and supply chain management responsibilities have unavoidably cascaded downward into the supply base along with detailed design responsibilities. It is commonplace at OEMs to find them looking at suppliers' engineering capabilities before qualifying them for supply, but it is also commonplace to find them overlooking the need for these other critical capabilities within those same suppliers. This is the structural change in the A&D supply chain that has occurred and this is unquestionably the source of many of the struggles OEMs are facing in getting the parts they need when they need them at the costs they need to achieve.
While many of the delivery and cost challenges result from limited capabilities and skill sets at suppliers, they actually originate with capability shortfalls at the OEMs. The downward shift in responsibilities requires a fundamentally different approach to supplier management than the OEMs have used in the past. Very little of the skills and tools used to manage "piece part" suppliers are applicable for managing the complex supplier relationships that now exist between OEMs and the vast majority of their suppliers. To address their current challenges, OEMs need to develop Supplier Relationship Management and Supply Chain Risk Management capabilities appropriate and necessary for their current situation. Furthermore, OEMs need to recognize their own role in creating difficulties for their suppliers, particularly in the flow down of requirements and production delivery schedules to suppliers.
In order to manage increasingly complex supplier relationships, leading edge companies in other industries that have already completed similar downward shifts in supply chain responsibilities (e.g. High Tech) are deploying Supplier Relationship Management programs to drive cost and performance improvements, manage supply risk, and streamline costs of supplier interaction. These companies are actively deploying the processes, governance mechanisms, and systems to manage suppliers on a day-to-day basis over the full relationship lifecycle. Aerospace OEMs have successfully managed major subcontractors for many years. However, with the shift of responsibilities that has occurred in recent years, the volume of suppliers that need to be managed like subcontractors has grown beyond the OEMs' capacity to manage with their limited staff of skilled subcontract managers. Aerospace OEMs need to deploy SRM programs to put in place the tools and processes necessary to manage and develop suppliers in the manner consistent with their critical role in program success.
OEMs should also strongly consider deploying onsite with key suppliers on a full-time basis at contract award. These arrangements increase communication and create the opportunity to jointly optimizing engineering and operations value streams between the OEM and supplier throughout the life of the program. The sophistication of new programs often demands this type of relationship, as opposed to the arms-length or worse, the adversarial relationships that were often present in the past.
Joint working relationships will:
The shifting of responsibilities downward into the aerospace supply chain has dramatically increased the risks to program success faced by the OEMs. Replacing troubled suppliers, always a difficult proposition on A&D programs, has become almost unthinkable in all but the absolute worst situations. It is simply too costly and too time consuming to switch out suppliers that are now providing complete subassemblies and components, and the suppliers know this. OEMs must have the ability to proactively identify and avoid problems at suppliers before they reach the point where program performance is jeopardized. However, despite the increased risks now built into their supply chains, few OEMs have put in place anything other than rudimentary supply chain risk management programs.
Aerospace OEMs are not alone in this failing. In a recent Supplier Relationship Management survey by Archstone Consulting, over 93% of respondents reported challenges managing their suppliers and, specifically, that supply risk was increasingly a topic of concern and strategic focus. However, over 60% of those same companies believed that they did not have effective supply risk management practices in place. Aerospace OEMs, however, are compounding their challenges by continuing to structure, size and time programs as though they held significant vertical responsibilities on the program when this is in fact no longer the case. They consistently underestimate the time required to execute work through a distributed supply chain and multiple partners and expose themselves to greater levels of risk then they are prepared for, regularly resulting in missed schedules and cost overruns. To address these shortfalls, aerospace OEMs need to elevate the role of managing supply risk in the organization, systematically identify risk exposures and adopt processes and tools to enable ongoing supply risk visibility and management.
Common shortcomings in supply chain risk management:
Frequent and "inside lead time" changes to program requirements and production schedules are major obstacles to successful cost and schedule attainment for most aerospace and defense programs. The GAO report on Defense Acquisition points out that "sixty-three percent of the programs we received data from had requirement changes after system development began. These programs encountered cost increases of 72 percent, while costs grew by 11 percent among those programs that did not change requirements." Clearly this is a major contributor to the headaches faced daily by program managers. However, the most common refrain heard throughout the industry on this topic is that if only customers would finalize their requirements earlier, all would be better. While that is certainly true, it is equally true that customer requirement changes are simply inevitable.
The appropriate response to the challenges presented by shifting customer requirements is to build a robust and flexible supply chain to make these changes less painful. OEMs need to put in place the tools, processes and supplier relationships necessary to dramatically increase engineering and production scheduling collaboration and visibility across their entire supply chains and to close the information and performance gaps that exist between them and their suppliers. It is not uncommon today to find aerospace suppliers who simply do not trust the information provided by OEMs and who are therefore unwilling to initiate production based on anything other than a firm order. By accepting responsibility for the cost impacts of design changes, increasing visibility to their own build schedules, and by proactively working to regain the trust of their suppliers, OEMs will find their suppliers significantly more willing to invest in timely production, even in advance of firm purchase orders.
While many of the problems faced in the A&D supply chain originate with OEMs and their downward shifting of responsibilities, resolution of those problems most definitely requires substantial changes within the supply base.
The ability to avoid the troubles befalling their competitors represents a significant strategic opportunity for well performing suppliers. Conversely, major delivery failures can severely impact a supplier's ability to compete in this industry for many years. Suppliers need to own up to the shortcomings in the skill sets of some of their people. Managers, engineers, buyers and salesmen that were quite successful in delivering high quality parts to their customers only a few years ago may not possess the unique program management, systems engineering, detailed design engineering and supply chain management capabilities necessary to meet current requirements. Operations once tuned to batch production of standard parts are most likely not well suited for the assembly of complicated subsystems or major subassemblies and supply managers once tasked with ensuring availability of raw stock are probably not properly trained in contract management and supplier development.
These issues cannot typically be addressed either on a "just in time" basis or on a program-by-program basis. Resolution of these challenges requires will require suppliers to make strategic investments in order to maintain and grow their position in the aerospace and defense marketplace. To address these deficiencies, and to capture the competitive advantages offered by doing so, participants in the aerospace supply chain need to quickly define and deploy the capabilities, skill sets and performance improvement initiatives required to meet their current obligations. In short, they need to transform themselves into "sub-system OEMs", capable of acting as systems integrators, partners and team leaders rather than machine shops and board manufacturers.
Probably the most commonly recognized and talked about issue facing aerospace suppliers today is the limited availability of adequate resources possessing the program management and systems engineering skills needed to successfully drive programs. However, simply hiring experienced program manager, systems engineers, design engineers and supply chain managers won't completely address the need. In order to overcome the challenges they're facing, suppliers will also need to systematically build out true capabilities in these areas - putting in place the processes, organizations, information, technology and metrics necessary to properly deploy those resources.
In addition to building out the new capabilities required to succeed today, suppliers need to continue to aggressively pursue performance improvement programs. Even after years of support from the OEMs and countless articles and books on the subject, far too many Tier 1 and Tier 2 suppliers have failed to deploy Lean manufacturing principles throughout their organizations and into their own supply chains. Many of those that have begun their Lean journeys have typically only made limited progress within pockets of their internal value streams. A great deal of potential still exists to improve performance across the machine shops, wire harness manufacturers, circuit card assemblers and distributors serving the aerospace and defense OEMs.
The SRM, supply chain risk management and collaboration requirements lacking at the OEMs are also necessary at the Tier 1 level in the A&D supply chain. In order for these suppliers to successfully complete their transition from piece-part providers to "sub-system OEMs" they will need to aggressively develop and manage their own supply chains as well. Failing to do so will leave them facing the same challenges faced today by their own customers, the OEMs.
The road ahead of the aerospace and defense supply chain is not an easy path but it is a road that other industries have taken and one that offers significant performance improvements for those industry participants willing to take it.