Paris Air Show

Second-tier suppliers will have more say in new OEM designs

 - December 13, 2006, 9:42 AM

IBM predicts a sea change in the aerospace industry over the next five to 10 years, one that will transform the prevailing business model from one dominated by what IBM aerospace and defense industry sector partner Michael Hackerson called vertical silos to a more egalitarian and cooperative approach.  

As a result, integrating and streamlining workflow will prove vital, said Hackerson, as collaboration between suppliers and OEMs demands more information sharing and sophisticated supply chain management. Of course, as the industry moves away from a culture of pure self interest and toward collaboration, process consistency across companies becomes all the more important.

The 787 program, where Boeing acts a systems integrator more than an aircraft builder, provides one of the most recent and vivid examples of the trend. Second-tier suppliers participate much more in the design of the airplane. At the end of the supply line, Boeing takes delivery of much bigger sections of the airplane, speeding assembly immeasurably. Consequently, the company expects to be able to build a 787 in three or four days and sell them at a price the ailing airline business can afford.

For too long, said Hackerson, “dominator” companies such as Boeing have found themselves caught between the pursuit of industry dominance and the need for increased collaboration, resulting in a steady decline in the effectiveness of traditional business models and jeopardizing the health of the industry as a whole. To foster growth over the long term, the big industry players need to adjust their strategy and turn themselves from OEMs into what IBM calls OEPs (original equipment providers).

To gain insight into the challenges the industry faces over the next decade, IBM interviewed executives of the industry’s leading companies. The financial pressures of three straight years of airline losses and coming defense spending cuts has created problems in several areas, said the IBM report. Aside from the 787, OEPs and suppliers generally have not adapted well, it added.

The need for collaboration and integration has quickly increased, but companies’ processes, infrastructure and culture haven’t kept pace, according to the survey. It still isn’t unusual to see six or seven tiers of suppliers between the prime contractor and lowest member of the supply chain. Even when companies have tried to establish an infrastructure to integrate their networks of suppliers and partners, they often cannot afford to maintain and operate it. Engineering in particular relies on homegrown or heavily customized applications, a situation that results in a high number of disparate product lifecycle management systems.

As a result, companies have found that technology in and of itself isn’t sufficient to differentiate their products. Technological sophistication must match a customer’s ability to pay, according to the report.

Despite efforts to integrate, too many so-called dominators populate the industry “ecosystem,” said Hackerson. As a result, dominators have all adopted different technologies, platforms and applications, forcing suppliers that serve them to develop separate or highly customized systems for routine activities.

“The challenge is to optimize a supply chain that moves very slowly,” said Hackerson. “It’s not like making high-volume, low-dollar-value products. But we’re seeing progress. For a long time, the aerospace and defense business has been reluctant to look at the auto industry’s model. Now we’re seeing moving assembly lines, for example.”

Of course, better efficiency translates into a more affordable product, something the airline industry and militaries badly need in this era of shrinking profits and military budgets. But affordable means more than just lower prices. Lowering the cost of upkeep is just as important.

“The model is changing from pay for breakage to pay for usage,” said Hackerson. “Customers are willing to pay a premium for reliability.” Simply put, contracts will include more penalties for time out of service, for example. “That can either mean more risk [for the OEMs] or an opportunity,” said Hackerson.