Aircraft manufacturing is entering a period of productivity, said Dr. Kevin Michaels, president of business consulting firm AeroDynamic Advisory, speaking to a packed auditorium at the recent Pacific Northwest Aerospace Alliance (PNAA) Competitive Edge conference near Seattle, Washington. Michaels foresees a decade of growing aircraft production – with Boeing and Airbus eager to increase production rates of single-aisle aircraft to generate revenue as sales for new aircraft crest after several record-setting years. The good news is that even with sales softening a bit, there are still seven or eight years of single-aisle backlog to work off.
Because neither company has been able to raise prices to offset their increased costs, Michaels explained that both companies will focus on increasing profitability – which they’d like to see in the double digits – by ramping up deliveries of single-aisle Boeing 737s and Airbus A320-family jetliners.
“They’re going to turn that dial [on the ramp-up], which brings $12 billion into the equation,” he said.
The original equipment manufacturers (OEMs) are changing the rules for the supply chain, Michaels noted, listing the implications for all the tier suppliers. Following the lead of automotive manufactures, the aero OEMs are looking to reduce their numbers of subcontractors, and are expecting more parts to be delivered as complete sub-assemblies. Tier 1 suppliers must leverage operations either by vertically integrating or consolidating, even if their new partners are more diverse than complementary (such as engine company Safran buying interiors firm Zodiac). Tier 2s will see customer consolidation, as will the Tier 4 mill-product suppliers.
However, the thousands of Tier 3 suppliers – the machine shops that make up the supply chain’s backbone – will face the biggest challenge: delivering more components faster, with zero defects, 100% on time, at lower cost. Michaels warns that to survive, “Successful sub-tier suppliers must focus on competitive differences.”
Examples of companies showcasing their competitive edge were evident at the PNAA conference’s co-located suppliers’ fair, where contract manufacturers boasted of their range of capabilities in machining difficult parts, providing post-processing services such as heat-treating, rapid prototyping, or logistics services. Clearly, a marketing trend is offering more capabilities under one roof by expanding facilities or investing in new equipment.
In one of the PNAA presentations, several smaller suppliers discussed their success in partnering to combine their expertise (metalworking, electronics assembly, and wire harness work as examples) to strengthen their market offering to upper tier suppliers. A word of warning, though: the OEMs and Tier 1s are wary of doing business with loose partnerships. They prefer to do business with incorporated entities because they promise greater stability and accountability. This has the potential to drive consolidation of smaller enterprises, if only for legitimizing partnerships of convenience.
If you are a manager of a smaller enterprise, have you taken steps to promote your advantage in the coming era of production? What steps are you taking to stand out from your competition as the tiers above you – your source of business – become more selective? I’d be curious to find out. – Eric