Sponsored by EY
By Raman Ram
After two years under the cloud of the COVID-19 pandemic, business as usual has become a distant memory, but the outlines of a post-pandemic future are slowly coming into focus. Across the aerospace and defense (A&D) sector, executives face a mixed outlook, with lot of reasons for optimism overshadowed by a persistent concern around supply chain.
Within commercial aerospace, passenger air traffic has been recovering gradually, and cargo has spiked 18.7%, according to the International Air Transport Association, fueled by manufacturing output, low inventory levels, continued e-commerce growth and vaccine transportation needs. While the recovery is encouraging, concerns abound as airline debt level has almost doubled amid a sustained reduction in business travel, continued uncertainty in the wide-body recovery, and the expected reversion of the near-term cargo surge back to historical levels in an economic slowdown.
The outlook for the defense industry changed dramatically when Russia invaded Ukraine, sparking near-instantaneous reversals of long-established policies and budget frameworks across Europe. Over the next five years, we could see US$500 billion to $800 billion in unplanned defense spending as US and NATO countries continue investing toward immediate concerns as well as enduring strategic goals. The increased funds will be used to procure defense equipment, improve the readiness of existing equipment, and enable new warfighting capabilities in a large-scale conflict against a peer adversary.
Collectively, commercial aerospace and defense are both headed toward the same supply chain hurdles, from differing directions: material availability and supply constraints driven by capacity limitations, labor shortages, commodity price inflation and demand volatility. This is a perfect storm that can make or break A&D companies.
Because of commercial recovery and defense budget growth, investor expectations are increasing, and maximizing value requires addressing these supply chain challenges. Here are five strategic imperatives in supply chain and operations to capture that value.
1. Pursue integrated digital planning powered by machine learning
Amid so much volatility, human biases and incorrect assumptions plague many forecasting functions at A&D companies, hobbling their ability to plan and grow more agile. Most rely on legacy “rearview mirror” approaches, but greater usage of analytics and machine learning (coupled with a focus on data integrity) can eliminate inherent biases while also minimizing forecast errors and process inefficiencies.
This analytics-based approach can identify emerging trends, teasing out patterns using historical information, to better predict outcomes and project an accurate forecast. The forecast accuracy of these models can be further enhanced with unstructured data within the company and publicly available external data.
2. Gain “real time” supply risk monitoring and mitigation
A&D companies spend almost 80% of their time trying to identify risk and only 20% of their time for mitigation actions — ratios that should be flipped, and can be, thanks to digital tools and data. First, stratify and prioritize the supply base, based on which suppliers and parts pose the biggest risk to operations. Historical supplier performance is a consideration, but so are factors such as single source, long lead time, extent of safety stock, and where the part falls in the build sequence.
Second, automate the risk monitoring for the prioritized suppliers. Artificial intelligence can sift through publicly available data — for instance, supplier locations, labor issues, financial challenges and litigation — to trigger alerts when deliveries could be impacted. And automated data feeds (including raw material inventory, cycle time changes and quality trends) from critical suppliers’ systems can enable a high-confidence automated risk assessment.
Third, shift time and attention toward risk mitigation actions — from near-term supplier management actions to address delivery and quality issues, to long-term strategies to secure supply.
3. Use digital twins for rapid planning, rescheduling and better decision-making
A digital twin — a virtual replica of a supply chain or a factory, or an asset or process — can help in predicting and assessing the implications of disruptions. Besides analyzing and predicting, the digital twin capability helps you prescribe the right actions, and in its most advanced form, it involves autonomous decision-making.
For instance, what is a feasible production schedule amid changes in the mix of demand? How can downstream activities be re-sequenced to manage supplier delays? How deftly can capacity be planned on flexible time horizons considering shifting bottlenecks? Digital twins can offer answers to these types of questions to address supply chain challenges proactively.
4. Digitally enable operations to make them “smart”
It is ironic that the A&D industry uses cutting-edge design, advanced materials and precision manufacturing while retaining many manual processes and operations. This often results in low productivity and equipment utilization, poor visibility into operational performance, and a lack of granular data to identify drivers to make sustained improvements. Legacy equipment and low-rate production are often blamed; however, these are rarely limitations for a smart factory. In fact, it is the opposite: digitally enabling legacy operations is not only possible but also yields the most value.
With digital applications, supported by standard ways of working, a capable workforce is empowered to deliver incremental value and maximize productivity. Smart operations are founded on integration and connectivity of IT and OT data, supported by a scalable and secure architecture to enable value-creating use cases and shopfloor execution apps. We have seen up to 50% improvement in overall process and equipment effectiveness, in addition to quality improvement, from digitally enabled operations use cases like machine monitoring, condition-based maintenance of equipment, digital work instructions, automated visual quality inspections, and digital performance management.
5. Develop a differentiated employee value proposition
For almost a decade, the A&D industry has been challenged to attract talent, because of its culture, cyclicality, legacy ways of working and limited career progression. This challenge has now been exacerbated, as the sector has disproportionally lost critical talent during the pandemic. Meanwhile, the A&D industry faces a generational challenge — and opportunity — and supply chain has neither the capabilities nor the resources to address the magnitude of the hurdles.
Securing talent in this market requires companies to develop and market a differentiated employee value proposition. This is an opportunity to implement thoughtful workforce planning activities further into the future and monetize skill sets to make informed hiring development and retraining decisions. Analytical models can help proactively predict attrition and address retention while conjoint analyses can help in improving the rewards structure to maximize return on people investment. Lastly, automation in the talent acquisition process can improve the quality of talent sources and address root causes of candidates exiting the process.
If COVID-19 vanished tomorrow and the pandemic finally ended, A&D supply chains would still persist as a challenge, with a profound impact on how operations should operate effectively and what talent you need. Tomorrow’s challenges are just around the corner, but these strategic capabilities are timeless — and the time to pursue them is now.
With about 30 years of experience in the sector, focusing on strategies for sustainable value creation, operations and cost transformation, Raman Ram serves as the EY Americas Aerospace & Defense Sector Leader, based in Washington, DC. Views expressed in this article are those of the author and do not necessarily represent the views of Ernst & Young LLP (US) or other members of the global EY organization.