How Business Networks Can Help Stabilize the A&D Supply Chain

December 1, 2023

While supply chain problems eased in some markets as the pandemic ran its course, aerospace and defense is among the industries where not only do issues still linger, new supply challenges are surfacing.

“The COVID-19 pandemic caused a shock and desynchronization of the aerospace and defense supply chain,” Matteo Peraldo, a partner at the consulting firm Alix Partners, wrote in a June 2023 post to LinkedIn. “This disruption has had a negative impact on inventory levels that persists today.”

Uncertain OEM take-rates, depleted safety stocks to offset supply chain disruptions, along with operational and quality issues during aircraft production, have exacerbated the problem, Peraldo goes on to explain. So have short-term disruptions in inbound supply caused by uncertainties with raw material and component deliveries, which have prompted companies to increase buffer stock.

Supply chain issues like those experienced recently by some of the industry’s foremost original equipment manufacturers suggest there’s a lingering post-pandemic supply chain hangover, at least for certain companies. Pratt & Whitney’s parent, RTX, reported in September that a material-related manufacturing flaw for PW1100 GTF engines, which power A320neo airplanes, would diminish pre-tax operating profit to the tune of as much as $3.5 billion over the next several years. Hundreds of aircraft across multiple airline groups reportedly were removed from service as a result of the issue.

Supply chain issues also are impacting majors like Airbus, which in July reported a record order backlog of close to 8,000 commercial aircraft as of the end June. Boeing also recently disclosed an issue with one of its parts suppliers that would impact production of its 737 Max engine.

Meanwhile, sourcing components like computer chips remains challenging for the A&D industry, in part because it lacks the volume to compete with other industries like automotive. Issues with other parts

Persistent issues like these are casting doubt on whether aircraft OEMs can meet planned supply ramp-up targets. Demand for aircraft is high. But it’s unclear whether manufacturers and their supply chains will be able to increase output to meet it. And now, with ramp-ups expected to continue, there’s a growing sense of urgency to stabilize what today is a highly oscillating A&D supply chain. But in light of some of the looming issues people across the industry have been buzzing about at recent events like the Paris Air Show, the question is, how? One issue is attrition and inexperience within the A&D skilled labor force, which appear to be negatively impacting manufacturing output, efficiency and quality. Meanwhile, capital constraints are limiting flexibility with safety stock and buffers, and multi-tier issue-resolution remains a major challenge.

If the A&D industry is to meet higher ramp-up targets and quiet that troublesome supply chain oscillation, in my estimation companies should be focusing on two areas in particular: (1) increasing inventory resilience, and (2) improving planning. More streamlined approaches in these two areas — especially with Tier 2+ suppliers — will be critical to reducing delays and making production more efficient. The fewer in-production aircraft that sit on the factory floor because of bottlenecks in sourcing a key part or component, the better.

To build inventory resilience, there needs to be better inventory transparency across the supply chain, with improved reporting, tracking of KPIs, and channels that provide relevant parties with an early warning of potential inventory issues. Suppliers must find ways to gain more insight into their operations and production capabilities, so they can optimize working capital inventory and make better-informed decisions.

Improving planning is another complex but necessary step toward stabilizing the A&D supply chain. To get there, companies across the supply chain need to arm themselves with capabilities that give them a clearer understanding of different planning parameters for batch size, lead times and reorder quantities. They also need the ability to flexibly update those parameters on the fly in response to changing conditions, so production aligns with demand. Tools that synthesize data from multiple sources along the value chain to forecast more reliably also can be helpful in striking the right production and inventory balance. Ultimately, companies must be able to develop planning strategies that enable them to tightly manage inventory while accommodating expected production ramp-ups.

While making significant progress toward stabilizing the supply chain will take work on a number of fronts, there’s one area that’s especially ripe for improvement. If the A&D industry can find ways to evolve its supply chains so they function as data-driven, digitally connected and highly collaborative business networks, that could go a long way toward resolving many of the other issues that are feeding the current supply chain instability.

The vision here is to create supply networks where OEMs and multiple tiers of suppliers are willing and able collaborators, with the digital capabilities — and an adequate level of trust — in place to share important data in a timely way, from inventory levels to demand information to production plans to potential disruptions. By sharing their data in real time, each member of the supply network would essentially be working off a single source of truth so they then can freely communicate and collaborate to share risk, create opportunities and resolve issues.

The concept isn’t farfetched. In fact, it’s already being applied in industries like automotive, with the European-focused Catena-X consortium. Such a network in the A&D world could be built on trust, with data exchange standards, sovereign control of data, cross-company applications and the like to ensure it runs smoothly, without participants having to risk exposure of their competitively sensitive data. The success of Catena-X has led to discussions about launching a similar ecosystem called Manufacturing-X that would include aerospace and defense.

These business networks could become the catalyst to a wide range of improvements that help to stabilize the A&D supply chain, including:

1. Optimizing inventory for maximum resilience. Using data from across the supply chain, companies can develop a clear, up-to-date picture of current inventory, production and demand so they can develop better-informed inventory approaches that improve availability, minimize stockouts and make more efficient use of working capital.

2. Solidifying planning and forecasting. The business network provides the framework not only for more on-point forecasting and planning by individual companies using shared demand and production data, but also for joint planning among multiple companies.

3. Optimizing transportation by collaborating with logistics providers to minimize potential disruption. This could entail developing alternative pathways to provide greater flexibility to adapt to fast-changing circumstances.

4. Proactively identifying and socializing potential disruptions. The supplier of an important material or component issues an alert across the network about an expected short-term supply disruption. With enough advance notice, other segments of the supply chain can switch to another supplier and adjust their production and inventory plans accordingly.

5. Better, faster issue resolution. The business network brings together multiple stakeholders who can pool their resources and perspectives to work through issues related to quality, etc. — hopefully before they escalate.

6. Sourcing skilled labor. Through the business network, participants can socialize their specific need for highly skilled workers and seek help from other participants. Likewise, participants can alert others that they have a temporary surplus of skilled workers who could be loaned to other organizations in a pinch.

7. Negotiating flexible payment schemes. In the spirit of partnership, stakeholders can work collaboratively to provide relief to a particular company that may be under temporary financial duress, for example.

8. Meeting sustainability goals and targets. The business network provides the framework for individual companies (and entire supply chains) to track and trace carbon footprint, material origin and the like. Here’s another area where Catena-X provides a working model.

If the disruptions of the past few years have taught us anything, it’s that supply chain issues can’t be solved in a vacuum by an individual company, however much leverage that company may wield in the marketplace. These days, it takes a village to keep supply chains humming along. The business network can become that village.

This article was written by Torsten Welte, Global Vice President and Head of the Industry Business Unit for Aerospace & Defense, SAP. For more information, visit here  .

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