MetalMiner welcomes guest commentator Trevor Stansbury, President of Supply Dynamics. Supply Dynamics is the leading provider of material consolidation solutions known as “Material Demand Aggregation. We invited Trevor to comment on a piece recently written by Stuart Burns, Aerospace Booming, Supply Chain at Risk.
As always, Stuart has done a great job characterizing the current state of play in the aerospace industry. I would concur with his comments. While much lip service has been paid to how this up-cycle will be handled differently by the Primes, I too have my doubts that much has changed. From my vantage point, this up-cycle may make the supply chain snafus that dogged the A380 and 777/787 programs look like child’s play.
We believe it will take a lot more than mills (like ATI) simply increasing capacity to “fix” the problem. Ironically, 30 to 60 percent of the cost of metal parts that go into OEM products (e.g. an engine, automobile, washing machine, or airframe) has nothing to do with the finished part supplier’s labor rate, overhead, or machine speeds and feeds. Instead, the majority of part cost (and a good portion of delivery risk of those parts) typically relates to the raw materials that go into them – things like bar, sheet, plate, casting, forgings, etc.
Yet, over the last 20 years (partially as a consequence of outsourcing), most OEMs have lost visibility into those costs and exercise little or no control over where raw materials are purchased or what outside part suppliers pay for those parts. The result: OEM raw material supply chains characterized by high fragmentation and dubious (often slow) demand information flows. Those stakeholders with the greatest need for the information — in this case, the mills and distributors — have little or no access to it. This translates into lengthy lead-times, billions of dollars’ worth of speculative inventory, sub-optimized purchasing leverage, expensive raw material and, ultimately, cost overruns and late deliveries.
Ironically, most OEMs have invested vast resources to lean out the “value-added component of finished part cost, while largely ignoring the waste and inefficiency on the raw material side of the equation. Why we don’t see this story reported remains a mystery.
Perhaps the issue creates too much embarrassment because raw material supply chains appear so chaotic and disorganized. Or maybe because no one wants to admit how often a handful of $28 fasteners (with a 48-week lead time) hamstring the shipment of a major sub-assembly. Raw materials, especially some of the high-temperature alloys Stuart mentions, represent some of the most costly items purchased. They also act as the aerospace bottleneck, as they often have the longest-lead times.
If history will not repeat itself, the major Primes will have to take the proverbial bull by the horns and stop abdicating decisions about sources and prices of raw materials to their outside suppliers. They will need to take ownership of the problem by assuming their rightful roles as “supply chain quarterbacks.” By this I mean they need to do a better job of translating Original Equipment-related part demand into aggregate raw material requirements. Once they have done that, they need to rapidly communicate changes to those mills and distributors they have selected to supply those requirements taking responsibility not just for their own direct material requirements, but for raw material demand across their extended supply chains.
While we see plenty of chaotic raw material supply chains out there, we have also seen some notable exceptions. Some of the aerospace Primes we work with (two air framers and a major turbine engine manufacturer) use our Material Demand Aggregation processes and web-based, multi-enterprise, raw material forecasting and fulfillment solution to get ahead of the curve. This “extended enterprise solution OASIS addresses the kinds of concerns Stuart raises in his post.
It essentially connects independent companies in an extended supply chain (OEMs, outside part suppliers, distributors and mills) and enables them to choreograph and synchronize the supply and demand of forgings, castings, fasteners, bar, sheet, plate, bearings and all kinds of other stuff.Ã‚Â The impact of such programs can be transformational not just in terms of cost, but in terms of cycle time, the ability to immediately adjust to schedule pull-ins and push-outs, standardization of common materials across multiple users, and reduction of speculative inventory.
In our view, companies need to place a greater emphasis on fixing the raw material part of the supply chain. Supported by the right information management systems and processes, companies can insulate themselves from blame should something go wrong.
Companies interested in learning more about demand aggregation can register for a free report here.
Disclaimer: Supply Dynamics is a sponsor of MetalMiner