Executive Briefings

Delivering Value While Managing Risk in the A&D Supply Chain

Aerospace and defense companies face an uncertain world in 2009 with a new presidential administration and a looming financial crisis. Supply chain professionals have a unique opportunity to deliver value to the business by bringing scale through an innovative and reliable partner network. Leaders will put the talent in place that can move beyond the traditional reactionary supply chain organization to one that helps achieve the goals of the business.

The aerospace and defense supply chain is under pressure to perform more strategically than in the past. The supply chain has always been critical in A&D, but the heightened pressure to better execute programs while reducing risk across a partner network has taken on increased intensity. The General Accountability Office has highlighted a number of high-profile programs for cost over-runs, including the F35 Joint Strike Fighter and the Future Combat System among others. Meanwhile, a Pentagon review committee is recommending the cancellation of big-ticket programs in light of budget constraints expected from the incoming administration amid the recent global economic crisis. Commercial aviation is experiencing similar challenges to their defense brethren though without the unique scrutiny and requirements of the Department of Defense.

Five areas where A&D supply chain professionals must focus in the year ahead include:

1. Program risk management-supply chain must play a stronger role in reducing program risk. This can be addressed in a number of ways, including early involvement during bidding to establish an accurate baseline cost and schedule, improving product development visibility to approved supplier capabilities, and supplier risk mitigation strategies, including supplier profiles and scorecards aligned with risk exposure.

2. Global sourcing-business expansion into emerging markets, such as Brazil, Russia, India and China, will require local sourcing to satisfy international offset agreements. Establishing a reliable supply chain will be difficult when the infrastructure and supplier capabilities are not established, requiring improved supplier development and partnering with third-party service providers.

3. Multi-tier supplier management-as the supply chain expands at the lower tier, it is a greater challenge to communicate information. Improved capability is required for the flow-down of technical requirements or design and schedule changes.  Visibility to all tiers of the supply chain for critical items reduces risk through supplier failure.

4. Service supply chains-aftermarket service and performance-based logistics contracts will provide a steady and long-term revenue stream as defense and commercial customers look to suppliers to deliver outcome-based support, such as available flight hours. The supply chain must become value-driven by understanding total customer needs and how to fulfill those requirements.

5. Supply chain organizational talent - achieving the aforementioned goals cannot be accomplished with the old-fashioned, reactionary buyer-planner approach of yesterday. Advanced skills are required to become a value-driven and strategic supply chain professional. Managing supplier relationships shifts from a focus on cost to negotiating more complex and long-term agreements as suppliers are asked to be innovators.

Achieving these goals requires supply chain leadership that thinks strategically and recognizes the role of the supply chain in achieving the goals of the business. 

The Outlook

AMR Research expects the A&D industry to see pressure on government and commercial spending due to budget constraints and the struggling economy. Supply chain leaders will be those that contribute to program performance by reducing their supply chain risk. Top performers will contribute to value creation in the business by using the supply chain as a competitive differentiator on performance-based logistics and service contracts, and by delivering the supplier network needed to support global growth.

The aerospace and defense supply chain is under pressure to perform more strategically than in the past. The supply chain has always been critical in A&D, but the heightened pressure to better execute programs while reducing risk across a partner network has taken on increased intensity. The General Accountability Office has highlighted a number of high-profile programs for cost over-runs, including the F35 Joint Strike Fighter and the Future Combat System among others. Meanwhile, a Pentagon review committee is recommending the cancellation of big-ticket programs in light of budget constraints expected from the incoming administration amid the recent global economic crisis. Commercial aviation is experiencing similar challenges to their defense brethren though without the unique scrutiny and requirements of the Department of Defense.

Five areas where A&D supply chain professionals must focus in the year ahead include:

1. Program risk management-supply chain must play a stronger role in reducing program risk. This can be addressed in a number of ways, including early involvement during bidding to establish an accurate baseline cost and schedule, improving product development visibility to approved supplier capabilities, and supplier risk mitigation strategies, including supplier profiles and scorecards aligned with risk exposure.

2. Global sourcing-business expansion into emerging markets, such as Brazil, Russia, India and China, will require local sourcing to satisfy international offset agreements. Establishing a reliable supply chain will be difficult when the infrastructure and supplier capabilities are not established, requiring improved supplier development and partnering with third-party service providers.

3. Multi-tier supplier management-as the supply chain expands at the lower tier, it is a greater challenge to communicate information. Improved capability is required for the flow-down of technical requirements or design and schedule changes.  Visibility to all tiers of the supply chain for critical items reduces risk through supplier failure.

4. Service supply chains-aftermarket service and performance-based logistics contracts will provide a steady and long-term revenue stream as defense and commercial customers look to suppliers to deliver outcome-based support, such as available flight hours. The supply chain must become value-driven by understanding total customer needs and how to fulfill those requirements.

5. Supply chain organizational talent - achieving the aforementioned goals cannot be accomplished with the old-fashioned, reactionary buyer-planner approach of yesterday. Advanced skills are required to become a value-driven and strategic supply chain professional. Managing supplier relationships shifts from a focus on cost to negotiating more complex and long-term agreements as suppliers are asked to be innovators.

Achieving these goals requires supply chain leadership that thinks strategically and recognizes the role of the supply chain in achieving the goals of the business. 

The Outlook

AMR Research expects the A&D industry to see pressure on government and commercial spending due to budget constraints and the struggling economy. Supply chain leaders will be those that contribute to program performance by reducing their supply chain risk. Top performers will contribute to value creation in the business by using the supply chain as a competitive differentiator on performance-based logistics and service contracts, and by delivering the supplier network needed to support global growth.