Spend Matters welcomes this guest post from Adam Cleveland, director of digital marketing at Ivalua.
There’s no doubt the aeronautics industry is booming. Resilient growth within the air traffic and defense sectors — alongside the recent enactment of the Rafale Contract in Egypt — has helped the industry soar to new heights. Nevertheless, the modern aeronautics industry still faces many stringent challenges, from sales limits to aging business models.
In recent years, speed of delivery and expanding cost concerns have characterized the industry. At the same time, many major aircraft manufacturers have sought to reduce the number of Tier-1 suppliers upon which they rely. While this situation is in part a reflection of the dynamism and general good health of the market, it has also nurtured negative consequences. In a 2014 report, the consulting firm Simon-Kucher & Partners stated the aeronautics sector has been weakened in recent years by adverse sales practices and the gradual hardening of market conditions. The report cites three main consequences:
First, the combined increase in the requested rate of production and the pressure on costs has pushed a lot of suppliers to the very edge of their capabilities, and could put some of them in danger if the demands continue to increase at the same pace. Secondly, the fact that big manufacturers are reducing the number of tier-1 suppliers means that these suppliers need to manage more tier-2 suppliers, passing along the same pressure on prices and production rate. Lastly, this situation has the indirect effect of discouraging and smothering innovation efforts, as well as possibly impacting quality.
For all of these reasons, the current approach to business in the aeronautics industry is probably reaching its limits. The sector is currently doing well, but the multiple participants in the supply chain cannot sustainably follow this model, and eventually the big manufacturers will no longer be able to demand lower and lower prices.
Switching Strategies: Cost Focus to Collaborative Innovation
As the pool of aeronautic Tier-1 suppliers has diminished over recent years, those remaining have become more and more strategic, reshaping the paradigm of relational dynamics within the industry. Cost concern, coupled with increased production rates, has created an ecosystem of instability, and an innovative approach must be defined.
But what should this new approach be? How do we get there? And what will the results be? These questions are crucial in today’s expansionist environment. For example, orders for the Airbus A350 are full until 2020. Air traffic and orders for aircraft will continue to grow, it seems, which of course is very good news, but it also accentuates the need for a healthy and workable model between the industry’s big manufacturers and the suppliers they depend on to fulfill this growing demand.
Through innovation, the aeronautics industry will renew its business model, from productivity gains and economies of scale to direct and indirect cost reduction. But beyond price, it is innovation that provides companies and manufacturers the ability to enhance competitiveness.
For example, the Airbus A350 provides a wonderful illustration of innovative strategy. Its commercial success is undoubtedly due, in large part, to the many innovations characterizing its conception and features: composite materials, which enable significant support gains (200 kilos per passenger); lower fuel consumption; pioneering engines (contributing to 30 percent noise reduction); new generation piloting technologies (advanced heads-up displays, high-performance on-board computers and more); and optimization of passenger quarters, among many other things. The takeaway? Airbus suppliers worked hard to ensure these innovations would spur success, not only for their companies, but also for the industry as a whole.
Airbus encouraged these innovations by including its sub-contractors in the early stages of the A350’s design and conception, giving them more responsibilities and thus more important contracts. Rather than focusing on cost, Airbus bet on innovation and reliability within a collaborative approach. And the success is evident.
This strategy of collaborative innovation is paying off, turning into a strong and sustainable strategy model for developing relationships between manufacturers and suppliers. For the alliance to succeed, however, suppliers must be irreproachable in quality, reliability and tolerance of error. Why? Because this helps manufacturers generate ideas and innovations, especially in the areas of process and technique. As with the A350, strategies can be about material change and new generation technologies or logistics and conditioning. But regardless of approach, strong relationships are key.
Therefore, manufacturers must be able to manage their highest performing and most innovative suppliers. They must select sub-contractors that best embody this approach — those who bring new ideas and high capacities for innovation to the table. They must be organized for this style of relationship. And on the suppliers’ side, it is not always easy or intuitive to shift toward such a model. But those who manage to do so are quickly becoming highly strategic suppliers, able to deliver strong gains to the manufacturer.
If purchasing strategy and management of suppliers are now the pillars of the financial equation for manufacturers, these aspects should contribute beyond financial performance: Above all, they must contribute to sales and business performance. Measured in this way, collaborative innovation is the best path for manufacturers, suppliers and end users.
The collaborative platforms and innovative idea sharing conceived by the Airbus model make these approaches much easier to enact, more efficiently integrating collaborative innovation into engineering and design departments. Suppliers that adopt this new business model will benefit from an important differentiator and a highly efficient lever.
Simon-Kucher & Partners say certain negative practices weakening the aeronautics industry today are strikingly similar to those that had such a disastrous impact on the automotive sector only a few years ago. But as the automotive world began to adopt collaborative innovation the results were clear, it is in the R&D labs of the industry’s suppliers where innovations are imagined and designed. This extraordinarily successful model should serve as inspiration for the aeronautics industry.