As published in September issue of Titanium Today, the official publication of the International Titanium Association.
The aerospace supply chain is like the weather: Everyone complains about it from time to time, but no one seems to know how to fix it. Necessary aircraft parts are often out of stock or awaiting production, while those that are available can be difficult to access due to distribution and delivery problems.
Roughly 80 percent of global production of titanium is consumed by aerospace and defense, with estimates of more than 60 percent of that driven by commercial engines and airframes. Even with the introduction of composite fan and fan cases, nickel alloys moving forward in the high-pressure compressor module, and the slow adoption of additive manufacturing threatening to improve the aggregate buy to fly ratio, titanium demand will be driven in large part by new commercial aircraft and commercial aircraft renewals [engine upgrades and maintenance, repair and overhaul (MRO)] for the foreseeable future.
Although domestic air travel has transitioned into recovery after surviving the worst of the pandemic (knock on wood) and the Boeing 737 MAX grounding, there are lingering impacts within the commercial aerospace supply chain that will not be resolved so quickly. The erratic utilization rates of commercial airlines world-wide is still limiting predictability of production rate increases of single and twin-aisle aircraft. As an operations strategy and implementation management consulting firm, focus has shifted across our commercial aerospace clients away from cost transformation and is now being driven by workforce capacity/capability, throughput (including rate-recovery readiness), and supplier risk management especially at the sub-tier levels where visibility is limited. Original equipment manufacturers (OEMs) and Tier 1 supplier business planning processes are frequently not clearly cascaded down to sub-tier suppliers, which create paralyzing ambiguity in the face of theoretical rate increases.
This shift in focus for the C-Suite (executive level managers) signals an increase in supplier power (leverage), in large part due to their own vulnerability, as mitigating threats to schedule and cash flow take precedence over cost reduction for OEMs and Tier 1 system providers. These forces, coupled with shifts in engineering focus (accelerating mobilization for decarbonization, commercialization of space, urban air mobility, etc.), renewed interest in the stability of the defense industry, and a belated international recovery will extend this period of high supplier power in the commercial aerospace supply base well into 2022 and likely 2023 even after demand recovery stabilizes and contrary to projections of healthy long-term commercial air traffic.
While temporary relief from the relentless drumbeat for cost reduction may be a welcome reprieve for the commercial aerospace supply base, it is also worth noting that OEMs and Tier 1 system providers are not going to be comfortable with being uncomfortable for long. Already, the potential energy is building to swing the pendulum back and recapture demand power (customer leverage). While it will take time to enact, the business case for approaches like developing multiple sources, vertical integration, and value engineering/ technology insertion that traditionally stall due to cost risk are being shaped to reinstate the stability the industry needs for efficiency and effectiveness.
In this moment of unique and temporarily increased supplier power, it is the ideal moment to drive increased partnership and align incentives with OEMs and Tier 1 system providers. Due to increased risk at the OEM level, raw material suppliers that have the agility to respond to rate changes and clearly show their systems, processes and people are ready to deliver quality product on time will weather thestorm with OEMs and Tier 1 system providers as key partners.
Long-term agreements are already part of the titanium industry’s “DNA” with the current business environment, enabling the ability to revisit and strengthen those relationships well beyond pricing and volume. Increasing proactive communication with customers at a minimum will create a more balanced view and better demand signal for the titanium value chain. In addition, we see five incremental areas of collaboration worth exploring:
• Integrated business planning: Lead time and capacity are two of the primary, consistent challenges associated with the titanium supply chain. Coordinated short-, mid-, and long-term forecast accuracy and order planning with mutual accountability can help de-risk capacity/asset strategies and reign in excessive lead times. Building trust and transparency across value chain steps is never easy, but it is the area where waste festers and provides an opportunity for win-win scenarios.
• Digital engineering: The sophistication of system simulation has evolved significantly over the last decade and integrating OEM and supplier systems is a viable path to optimize cost, performance,and manufacturability of products virtually. Joint research, development, and new product introduction provides a path to maintaining high supplier power in a competitive landscape by being integral to establishing the next generation of products. Letting the voice of the customer provide an external rallying point for integrated working teams and giving engineers a chance to collaborate builds real partnership.
• Automation and productivity: The most common barriers to investing in productivity improvements through automation are uncertainty about adoption success and realizing a reasonable payback period. Risk and benefit sharing of automation and productivity investments can accelerate adoption and provide a mutual incentive to ensure demand stability and de-risk payback periods. Additional opportunities around data sharing and real-time status sharing with a joint “Control Tower” can remove bureaucracy and drive efficient communication.
• Technology roadmap: Decarbonization, electrification, and additive manufacturing are examples of high-profile initiatives in the commercial aerospace sector, each with its own set of challenges and maturity levels. Getting integrated with the customer to understand, influence, and collaborate on strategic priorities provides an opportunity to be well positioned for future programs. While fuel efficiency has long dictated appetite to progress technologies, we expect industry leaders’ actions to decouple from finite changes in kerosene cost and be more heavily influenced by corporate social responsibility and regulatory drivers.
• Supply Chain illumination: The aerospace and defense market has been no stranger to consolidation and the COVID-19 and 737 MAX pressure on fragile players will likely result in an extended period of continued merger and acquisition activity. This landscape makes the threat of an OEM or Tier 1 system supplier aggressively pursuing a key sub-tier supplier and squeezing mid-tier suppliers credible. Providing sub-tier visibility may be counter intuitive; however, that risk can and should be mitigated to ensure interconnectivity and single points of failure can be addressed mutually with benefits realized across the value chain when delays and reduced rates are managed proactively. Combining contractual data with publicly available subscriptions and data can provide the value chain an opportunity to sense and pivot ahead of unpredictable risk.
A portion of the commercial aerospace industrial base was fortunate enough to be insulated from the worst of the pandemic and 737 MAX grounding through end market diversification, but for most it has been a harrowing experience resulting in scars for this generation of middle and senior leadership that will never fully disappear. It is not surprising to find the depth of COVID-19 challenges and resulting financial strain are magnified further upstream into the value chain where manufacturing represents a larger percentage of value-add activities given the fixed nature of asset intensive operations vs. the engineering services provide by OEMs and tier 1 suppliers. Across the entire value chain, few of us will have come through this without questioning our careers, aspirations, and purpose. This collective step back will reshape our operating models (organization, capabilities, processes, tools, and systems) after more than a decade of unrationalized, evolutionary growth coming out of the global financial crisis of 2007/2008.
Human nature dictates there will be an appetite and need to recover after an extended period of heightened workload and anxiety. Unfortunately, this is not the home stretch, but a moment to reload and opportunistically reset market position and solidify long-term customer relationships. For those that have been able to stave off exhaustion, protect their best people, and maintain their core principals through the darkest months, there is an imperative to double-down on that investment and take advantage of this moment of supplier power to partner with key customers to establish long-term aligned incentives.
(Editor’s note: Jeff Staub is the executive vice president, industry leader, aviation, aerospace and defense at Maine Pointe LLC (website: www.mainepointe.com), a global supply chain and operations consulting firm. He has more than 15 of industry and consulting experience across the end-to-end, plan-buy-make-move, operations value chain, with deep expertise in post-merger integration, network strategy, “four-walls” improvement, supply chain management, and functional excellence. Maine Pointe is based in Boston, with office locations in Canada, China and Europe.)