Aerospace Booming, Supply Chain at Risk

My colleague Taras wrote late last month about the booming order books for new aircraft at Boeing and Airbus. In an FT article out this week, Forecast International are quoted as saying they expect production of commercial and military aircraft to jump more than 50 percent to 4,870 units within just five years. Anyone reading the good news that at least some parts of the manufacturing sector are doing well may imagine the supply chain is rubbing its hands in glee, but the reality is both the aircraft makers and their suppliers are worried that some parts of the vast sub-supplier network may not be up to the task.

United Technologies UTC, makers of helicopters, aircraft engines (Pratt & Whitney) and aircraft control systems, is not taking anything on trust. In a Financial Times article, Eileen Drake, vice president of operations at UTC, explains how the firm has developed sophisticated monitoring tools in what should be an example of best practice for the industry. The program has a ten-year forecast for some 2,000 of the most critical suppliers the firm uses, and monitors both the historical performance and future investment plans of each supplier.

The article makes no mention of how far down the suppliers’ tiers of sub-suppliers the analysis drills, but it is likely at least two to three layers to be robust enough to ensure security. According to the article, UTC has already identified four key areas where supply is looking tight and might benefit from closer supervision including bearings, titanium, sand forgings and composite materials.

UTC – Not the Norm

But industry experts are not confident all firms in the supply chain are as well prepared as UTC. Already the supply chain is showing signs of stress with lead times for some components made from titanium and nickel alloys more than doubling in the past year. Rob Stallard of RBC Capital Markets is quoted as saying that despite the efforts to work together, suppliers and their customers are often at odds over when to hire or build up stocks.

“No one wants to be the one left holding the inventory hot potato. You are always trying to keep it with someone else, he said.

Not surprising, when you look at the repeated delays major projects such as Airbus’ A380 and Boeing’s 787 have suffered; any supplier gearing up for takeoff of those projects’ original start dates would have been sitting on investments for the last few years without a return. Finally, though, the 787 seems to be rolling, RBC Capital markets expects Boeing to deliver six 787s this year, with 33 next year and 108 by 2015 that will be a steep ramp-up for many sub-suppliers, especially those in an already tight titanium market (upon which the 787 is highly dependent).

Fortunately the big boys are already ahead of the game. Allegheny Technologies has made heavy investments in metal manufacturing over the past few years, and by the end of 2011 the company will be able to churn out about 47 percent more titanium products compared to the prior peak in 2007 and 13 percent more nickel alloys, while Eaton, makers of hoses and couplings, is confident they can readily ramp up 15 percent with existing facilities.

Not all will be as well prepared though, as Boeing acknowledged it only takes one supplier failure to bring the whole production line to a halt, and with the aircraft makers bringing both an increase in plane build rates and new models online at the same time, the risks are obvious. So too for associated industries that draw on the same supply base; think medical devices that use titanium and cobalt alloy forgings and castings, automotive, nuclear…the list goes on.

A buoyant aerospace order book is certainly a good state of affairs for US and European manufacturers, but it will come at a price and buyers in related industries may be the ones to ultimately pay.

–Stuart Burns