Supply Chain Frontiers issue #9. Read all articles in this issue.
Large commercial aircraft manufacturers are cutting lead times and outsourcing more assembly work to tier-one suppliers. The aim is to smooth out the market turbulence that locks the industry into perpetual boom-and-bust cycles. Along the way the supply chain is being reshaped. As these companies pull away from traditional manufacturing, they will look more like marketing vehicles for product that is built mainly by contractors.
Daglar Cizmeci analyzed the aerospace industry's supply chain and business cycles as part of the MIT Supply Chain 2020 project. The multi-year research program is mapping the evolution of supply chains over the next decade or so. Cizmeci's work also forms the basis of his Master of Engineering in Logistics (MLOG) thesis on the supply chain management practices of aircraft manufacturer, Boeing.
Despite the current downturn, a bright future is forecast for the industry. The existing fleet of around 16,000 large commercial aircraft - planes with 100 or more seats - will have to be expanded to meet growing demand for air travel. Boeing recently forecast demand for 25,700 planes worth $2.1 trillion over the next 20 years.
That is big business for aircraft builders, particularly the two dominant players, Boeing and Airbus. Still, to achieve maximum profitability they must "get much better at controlling life cycle costs and rapid delivery in synch with the industry's business cycles," said Cizmeci.
It is a tough challenge. The business cycles are tied to fluctuations in GDP and are usually five to 10 years long. As Cizmeci explained, "air carriers tend to order on the upside" with down payments for a small number of aircraft and options for more. Building time is 12 to 18 months from raw material to flight testing. By the time the new aircraft are being delivered the industry's fortunes could have turned south again, and only a fraction of the original orders completed. Moreover, airlines tend to buy new planes at roughly the same time as they are lifted by the same business upturn, causing order backlogs. "Aircraft orders are very highly correlated to airline profits," said Cizmeci. Competition for raw materials also complicates the picture, Cizmeci noted. For example, aerospace manufacturing accounts only for about 10% of the product supplied by aluminum company Alcoa. Bottlenecks occur during economic booms when there is high demand for raw materials.
Shorter lead times would make the aero companies more responsive to these market gyrations. Boeing plans to assemble its Dreamliner 787 aircraft, which is due to be introduced in 2010, in just three days. After the termination of the 717 line by 2006, the smallest aircraft in the company's commercial portfolio will be the 737, which currently takes nine days to put together. Assembly "is a function of the complexity of the products Boeing receives from its suppliers," said Cizmeci, so the manufacturer is moving towards more pre-fabrication. Tier-one suppliers are providing larger units such as entire wings and landing gear assemblies.
The shift requires fundamental changes to the plane makers' sourcing practices. "Boeing needs to select more capable suppliers who can design and make these larger units, and take on risk/reward relationships," he said. That entails strategic partnerships with fewer contractors; over the last decade the industry's supplier base has shrunk by about 50% estimated Cizmeci.
These changes are redefining the manufacturers' role in the supply chain. Cizmeci described the aircraft builders as: "basically marketing companies backed by government," as they come to rely less on manufacturing and more on the market muscle of their brands. And since these organizations are strategically important for their intellectual capital, defense expertise and status as major employers, government support is unlikely to wane. Ultimately, companies such as Boeing could become marketing vehicles for aircraft that are built largely by major suppliers, he believes.
For more information on Daglar Cizmeci's MLOG thesis "An Examination of Boeing's Supply Chain Management Practices Within the Context of the Global Aerospace Industry" please contact Becky Allen Schneck at: bschneck@mit.edu. For further information on Supply Chain 2020 contact project director Larry Lapide at: llapide@mit.edu