Aerospace and Defense are just starting to break through a funk that has plagued the industries over the past decade. In order to keep pace with the coming changes, A&D companies must be prepared to face old challenges with creative solutions. Manufacturing setbacks, as well as COVID, decreasing government investment, and more have created a challenging environment for A&D companies over the past 10 years or so. A look to the future reveals a mix of both new growth as well as challenges as geopolitical affairs in the east continue heating, and global supply chains continue to be affected. In order for A&D manufacturers to avoid the challenges, and capitalize on growth, they must focus on supply chain resiliency.
Recent Problems in A&D
One of the biggest shocks to the A&D industry was the recent failure of the Boeing 737 MAX. This unprecedented manufacturing failure sent shockwaves through the aviation industry causing disturbances up and down the supply chain. Soon after the 737 MAX problem was resolved, the COVID pandemic caused shipping shutdowns and supply chain stagnation. As if this weren’t enough, Russia’s armed conflict with Ukraine is disrupting the flow of energy and raw materials needed for A&D manufacturing. Due to the recent instability, many primes and manufacturers in Europe, especially Germany, are faced with growing manufacturing difficulties. Farther east, China and Taiwan appear to be on the brink of a conflict as well. It’s not obvious to what degree the USA would involve itself (if it all), but one thing A&D firms must consider are the microchips manufactured by TSMC. Many of the chips produced by TSMC are used in military weaponry and civilian airlines. Full Chinese control of Taiwan or even an increase in conflict between the two countries could have massive implications for supply chains and chip availability.
However, on the bright side, commercial aviation is facing a crunch to become more competitive and decarbonized. These strict standards as well as growth in post-covid commercial air travel are creating a lucrative environment for commercial aerospace manufacturers. On the defense side, the past decade has seen falling investment from governments around the world. However, continued geopolitical disruptions have led to increased defense budgets, and an increase in sobriety in national security, especially in NATO countries. A focus on terrestrial defense as well as space defense are pushing military-grade production to new heights. In order to keep up with all of the projected future demand, A&D companies will need to stay on top of supply chain management.
Raw Materials Supply
The production of military and commercial aircraft hardware is a complex process that involves thousands of primes and tens of thousands of precision machined components. Material sourcing is facing increased difficulty in light of the recent Russian invasion of Ukraine.
Some materials are impossible to re-source due to natural geographic deposits in the earth’s crust. However, to the extent that it’s possible, primes may want to look closer to home for sourcing lower-tier components and raw materials. The bottlenecks caused the breakdown of international supply chains during covid can can be minimized by looking within one’s own country or hemisphere if possible. Additionally, primes must do their due diligence when working with any lower-tier suppliers. These suppliers must be able to commit to certain quality, cost, and delivery schedules.
Unlike other manufacturing industries, like automotive whose end customers are frequently individuals, most A&D contracts are B2B or B2G who have their own set of deadlines. Missing deadlines, even if those delays are caused by lower-tier providers and primes, can be costly. Primes and OEMs should enshrine delivery times and deadlines in whatever contract is signed with suppliers.
Evaluate Alternate Materials
If raw materials can only be sourced from a single location or region and therefore create a single point of failure, companies may want to evaluate using alternative materials. During the prototyping stage, components are evaluated for having the best structural integrity at the lowest cost. However, a third factor of continued availability must now enter into the decision-making process. Components may be cheaper and perhaps even more robust when made with certain materials. However, if it is produced or extracted in a high-conflict area, the long-term consequences of opting for affordability could cost more than any savings from the cheaper material. With these new considerations, A&D firms may want to consider using alternative materials in the manufacturing process.
Inventory of Strategic Components
During normal times with normal operating environments, most OEMs and primes keep enough inventory on hand to cushion expected supply variability. However, given the environment over the last several years, primes and OEMs may want to consider retaining a greater inventory of strategic components. In addition to this, some companies are making use of artificial intelligence technology to help forecast potentially challenging market conditions.
Diversify Suppliers
A key tenet of any risk-management strategy is diversification. OEMs and primes should evaluate alternate suppliers for lower-tier components and raw materials. In the event that one of the suppliers goes offline or suffers some sort of collapse in operations, the prime or OEM can still maintain a certain level of production. Since geography represents the largest portion of risk, companies may want to weigh this criterion more heavily than others.
Vertical Integration and Supplier RElationships
Finally, companies ought to strengthen their relationships with current suppliers or even consider vertical integration. When resources become scarce, the demand curve drives the price up. One crucial way to mitigate this is by bringing lower-tier production in-house to guarantee future supply of any materials that may become scarce.
Additionally, many underestimate the degree to which personal relationships may play a role in retaining preferential business the ability to access crucial information. Companies ought to develop mutually beneficial relationships with supply chain partners and other strategic stakeholders. These types of relationships facilitate transparency and access to end-to-end supply chain data regarding inventory and other supplier capacity limits. With this transparency, companies can drastically reduce the likelihood of single points of failure. With strong relationships, companies will be able to extend financing and provide support to small and medium-sized companies. In return, companies will get access to better data to help plan and mitigate risk.
Conclusion
The future for A&D is somewhat of a mixed bag. The global market is demanding more hardware which presents a large opportunity for A&D companies. However, global tensions and conflicts may stifle growth with disruptions to supply chains. Hiring a specialized consultant like Seraph is one of the best things your company can do to help identify potential supply chain failure and other operational weaknesses. Thanks to our team of specialized operational consultants, Seraph can come alongside a new company and act as a support structure from day one. Our advisors are former management at many suppliers and OEMs and are experts at creating efficient and resilient processes. Contact us today to schedule a discovery call, or see our case studies for more information.
