Integrated Value Chains
In Aerospace and Defense
Managing relationships and complexity up and down the value chain
T
he aerospace and defense industry is enjoying its strongest
market ever, according to the 2007 Aviation Week A&D Programs
Conference. Demand by the world’s airlines continues to increase,
government defense spending is at its highest in decades, production
is at record levels, the roll-out of new commercial and defense aircraft
continues unabated and more innovative technology is required at a
faster-than-ever pace. Given these dynamics, the industry is compelled
to move toward more integrated value chains—building collaborative
partnerships between manufacturers and suppliers to capture significant opportunities in competitive advantage. The challenge, however,
continues to be managing relationships and complexity in execution.
The phrase “strongest market ever” could suggest
that today’s aerospace and defense industry (the
A&D ecosystem) is demonstrating the bottomline value of collaboration, rapid innovation and
speed to market—all essential earmarks of value
chain integration.1 Collaboration and tighter
integration among manufacturers and suppliers,
with a systems integrator at the lead, is said to
create a more networked, cooperative and productive structure — and drive success in the
market. As these organizations become increasingly networked, both virtually and globally,
mutual success will hinge upon their ability to
gain a competitive advantage from their respective value chains.
Yet being networked into even a simple
supply chain does not mean being integrated into
a value chain. There is a fundamental difference
1
between a networked supply chain and an integrated value chain. In an integrated value chain,
the coordination of external interfaces is just as
important as the coordination of internal interfaces, and technology innovation is a shared
responsibility among all partner companies.
A.T. Kearney’s recent survey of the A&D
industry suggests that value chain integration
is neither universally accepted nor widely practiced. Partnerships in the A&D value chain
are often viewed on a continuum from “transactional supplier or customer” to “fully integrated
strategic partner” (see figure1 on page 2). Prime
integrators, those farthest along in value chain
integration, have partners in most steps of the
value chain. Tier-one contractors have partners
in several steps of the value chain. Tier-two and
-three contractors, those that do not have plans
Value chains are defined as all the interactions that create and add value in the process from innovation, new product development and raw material supply to
finished product and lifecycle support.
A.T. Kearney
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Integrated Value Chains in Aerospace and Defense
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to partner in most steps of the value chain, tend to
serve their immediate downstream tier only. The
same research shows an anomaly. Some firms see
their business as predominantly an independent
participant in a networked process. Increasingly, as
companies move upstream into higher tiers, their
perception steadily narrows to focus on fulfilling
orders from the next lower tier rather than understanding their role up and down the value chain.
Such an anomaly is a potent threat to an
industry value chain’s ability to meet its cost, performance and schedule objectives. The success of
any one organization within the industry depends
critically on the performance and capabilities of
others — many others, in most cases. As always,
the weakest link can destroy the chain.
Market-Centric Innovation
Companies are asking their customers what they
want and need. The task is to develop and deliver
the product to market and wow the customer —
and definitely before the product has become
obsolete. But the customer-driven quest for innovation extends far beyond what was once a deciding differentiator, an individual business’s core
competency or technology. The profound com-
Figure 1
Assessing value chain partnerships in aerospace and defense*
Transactional supplier
or customer
0
Fully integrated
strategic partner
20
40
40
60
80
60
Tier three
80
Tier one
Prime
integrator
Tier two
Transactional supplier or customer
Fully integrated strategic partner
• Pursues mainly buy-sell relationships,
with little or no collaboration
• Focuses on costs and quality
• Does not have formal contracts with
partners
• Maintains hierarchical relationships
along the value chain
• Collaborates with partners and seeks
strategic alignment
• Aligns organization to a value chain
approach
• Values flexibility and offers incentives
to promote it
• Develops relationships along the
value chain
*Companies were evaluated on a scale of 0 to 100 to calculate the degree of integration in the value chain.
Source: A.T. Kearney
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Integrated Value Chains in Aerospace and Defense
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A.T. Kearney
100
plexity of today’s products and systems means
that no single firm has the technological, financial
and risk-bearing capability to develop a new airliner or jet fighter, for example, on its own. To try
to do so without teaming across the value chain
would severely constrain the depth, breadth and
speed of innovation.
Today’s A&D customer, the end user,
demands:
• More innovation
• Greater flexibility to incorporate emerging technologies over the system’s life
• Faster time to market
• Managed risk and cost-effective outcomes
• Longer-term product support and service
With this in mind, organizations are moving
across the integrated value chain in an effort to
meet their customers’ needs for more innovative
products. Physical location is becoming increasingly less important as businesses seek strategic
partnerships with global firms offering best-ofbreed technology.
The primes are definitely among the integration leaders. They have mostly moved away
from transactional relationships to assume more
of a value chain integrator role. They are among
the most sophisticated relationship managers
in the group, taking into account a “balance of
trade” among partners.
However, many upstream suppliers still look
at the value chain as a series of discrete suppliercustomer relationships, viewing each transaction
as a separate instance of “buy” and “sell.” The
transactional business, as our survey identifies it,
defines a supply chain simply in terms of buy and
sell transactions at the commodity level. Realize
that although upstream participants may tend
toward the commodity end of the value chain,
they can be costly bottlenecks. Alcoa’s inability to
supply 3/16-inch titanium fasteners, one of the
smallest and least-costly parts on Boeing’s new
787 Dreamliner, was part of a cascading series of
A.T. Kearney
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production pushbacks. One lesson: In a sophisticated, global, virtual supply chain, the lack of visibility, integration and sophistication far upstream
can prove as troublesome as problems with a hightech, advanced downstream participant.
As customer requirements percolate through
the different tiers of the supply chain, we believe
sustained business growth will be earned by
moving from a transaction-based supplier or customer to a strategic partnership, especially at the
lower tiers of the value chain.
Complexity Is the Issue
Strategically driven partnerships are not without
complexity. Usually, a large number of participants are involved in an integrated value chain,
ranging from strategic partners to transactional
“commodity” suppliers. Relationships among the
participants are multifaceted: One organization
might be buying from another company, selling
to it, selling with it, competing against it, and
engaged in a joint product or service relationship — all at the same time. The word “coopetition,” or cooperative competition, sums up these
complex relationships. As one survey respondent
noted, “Even at our tier of the supply chain, we
are committed to being an integrator, but we
must also keep our manufacturing know-how.”
Just understanding the wide spectrum of
sometimes contradictory relationships at an
enterprise level can become an issue. Managing
the many attendant interdependencies and risks
becomes more difficult, too. Risks are exacerbated
as companies try to implement “lean” supply
chain concepts such as reducing inventories and
tightly synchronizing order-to-delivery times.
Visibility among the participants and across
the value chain becomes increasingly challenging
as system interfaces grow more complex. While
prime integrators can impose their systems to
some degree, they can’t realistically do so for all
supply chain participants.
Integrated Value Chains in Aerospace and Defense
3
On the military side, complexity is compounded due to the International Traffic in Arms
Regulations (ITAR) and other regulations that
impose constraints on supplier eligibility and
information that can be exchanged across supply
chain participants. These restrictions also tend
to limit the open and collaborative product
development style that has become vogue in
other industries.
Is the Integrated Value Chain Universal?
The days of the vertically integrated behemoths
are over. But have companies within the A&D
ecosystem successfully achieved an optimal, integrated value chain characterized by fully functioning partnerships? The answer is yes — and no.
We say “yes” because some companies are
focused on the ultimate customer and use the
value chain as the lens through which they see
the complete process and their unique role in it.
Operating on this inclusive perspective, they can
anticipate change—by seeing it before it gets to
them — and adopt new, fresh and flexible strategies. Such organizations embrace their role and
position in the value chain and use it to their
advantage as a competitive differentiator.
We say “no” because some companies —
too many, we suggest — continue to work the
old transactional system while maintaining an
almost myopic focus. Unable to see any farther than their loading docks, they just don’t
appreciate the potentially disastrous “bullwhip”
effect up and down the value chain of, for
example, a late arrival from their suppliers
or a late delivery to their customers (see figure
2). Such organizations are not committed to
the value chain concept, by decision or default.
Over the long term, their performance or lack
thereof will drive them from the chain.
An important common dimension exists
within both answers. A shortage of commodity
parts at one end of the value chain or a complex
technical problem at the other extreme can have
the same potentially stultifying effect on produc-
Figure 2
The supplier “bullwhip” effect
Supply fluctuations are magnified as they progress down the supply chain. A little snap of the curve
at the supplier end ripples down toward the customer in successively higher peaks and wider troughs.
Tier-three
supplier
(raw materials
or piece part
manufacturer)
Tier-two
supplier
(component
manufacturer)
Tier-one
supplier
(sub-system
integrator)
Source: A.T. Kearney
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Integrated Value Chains in Aerospace and Defense
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Prime
integrator
Customer
tion and delivery to the customer. Best-practice
companies develop solutions commensurate with
the nature and level of the value chain participant
relationship. For example, they may adopt intermediary strategies to deal with possible commodity-level issues at one end while adopting strong
partnership management approaches for the most
complex, expensive and time-consuming issues
at the other end (see sidebar: Best Practices in
Integrated Value Chains on page 7).
For example, Boeing is managing such a
spectrum-spanning situation now, with its fastener shortage at the commodity level and its
wing-box design at the most sophisticated level
of the Dreamliner integrated value chain.
Participants committed to today’s truly
integrated value chain are alert to a number of
interrelated factors. It’s one thing to espouse value
chain integration; it’s another to be an effective
systems integrator attuned to needs such as:
• Bringing new technologies rapidly to bear in
complex systems
• Managing and controlling costs, schedule and
performance
• Focusing on core competencies
• Moving beyond the traditional position in a
system lifecycle
• Incorporating (or at least considering) foreign
sub-assemblies and components to assure access
to foreign markets
Putting More Value in Your Value Chain
An organization that perceives its role as
purely transactional is in an awkward position when “business as usual” can no longer be
the path forward. In the complex A&D ecosystem, business growth requires aligning the
organization to a value chain concept and building relationships up and down the value chain.
With this in mind, the following are proven
approaches that A&D companies can take to
add value to the value chain.
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Integrate product design and development
with supply chain functions. Realize the fundamental difference between immature and mature
technologies. The more mature the technology,
the less complexity and the fewer changes in
specifications — with a concomitant risk of obsolescence. A program committed to fruition on
the basis of immature technology (“it worked
in the lab, it will work on the production line”)
will be subject to continual change. Usually, the
customer will continue to augment, add, modify
and otherwise keep the design target moving,
which requires the virtual supply chain to be continually flexible. And more often than not, the
longer the development cycle, the more likely the
technology will be obsolete by the time it’s ready
to go to market.
We worked with a North American hightech equipment manufacturer having problems
with on-time deliveries to its customers, whose
needs changed quickly. With our assistance, the
firm developed an integrated value chain based on
two-tier product design criteria — high commonality, lower cost and low commonality, higher
cost. We advised the firm to leverage its local,
more responsive suppliers of critical components
to increase its flexibility and to maintain longer
lead-time relationships for suppliers of predictable, more costly components. As a result, ontime delivery increased to 90-plus percent within
six months, and order lead times dropped from
six to eight weeks to two to three weeks. The
overarching message: Improve your value chain
design. If either your strategy or the competitive
environment has changed and your value chain
design hasn’t, then it’s time for a redesign. This
process enhances the firm’s ability to identify and
establish its distinctive supply chain role — as
prime integrator, sub-system integrator, original
design manufacturer (ODM) or tier-one, -two or
-three contractor — at the product or service value
chain stages.
Integrated Value Chains in Aerospace and Defense
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Improve supply chain competency. Engage
engineering-savvy people who understand supplier technology road maps and how the pieces
must integrate into a highly functioning supply
chain. Simplified transaction processing is essential to an integrated value chain. In the purchasing
function, for example, paper-based, individualapproval systems can consume valuable management time and can result in costly bottlenecks.
One client reduced its purchase order (PO)
processing time from 30 days to less than one day
by converting to electronic catalogs. The catalogs
contain frequently ordered supplies from approved
suppliers at verified prices, and, in many cases, the
automated approval process is linked to budgeting
tools. Using the catalogs frees the firm’s buyers to
focus on strategic issues instead of managing each
transaction. Significantly, some firms are reducing
their manual efforts by linking their sales catalogs
with their buy-side catalogs. When a sales order is
placed, an order to the corresponding supplier is
triggered automatically if the on-hand supply has
reached predetermined levels. Electronic catalogs,
linked IT capabilities and transaction support
provide sustainable benefits: Our client reported
that 95 percent of its purchases were being done
electronically and PO processing times dropped
to less than a day from almost a month. Customer
satisfaction scores almost doubled.
Increase supply chain visibility. An agreement with a strategic partner can facilitate information sharing, enable technology and increase
communications. In contrast, an agreement with
a transactional supplier can require little more
than efficient transaction execution and helps
assure supply reliability. Strategic partnerships,
therefore, require intense monitoring and managing of all participants. One original equipment
manufacturer (OEM) that outsourced significant elements of the value chain to third-party
suppliers had initially structured all its agreements in a series of “typical” sourcing relation6
ships, basing its service level agreements (SLAs)
on plans to measure the suppliers’ performance.
This “one size fits all” approach led to sub-optimization of the overall supply chain. By restructuring agreements to make them appropriate to the
supplier’s role, it improved alignment among the
suppliers and enhanced the supply chain’s performance. On-time delivery increased from 70 percent to more than 95 percent. Within the SLA,
each business must now also identify the partnership’s value chain governance and operational
principles, including intellectual property sharing
and project management.
Establish solid governance structures. The
best governance structures provide clear responsibilities, accountability and integrated performance
metrics, while recognizing they cannot be entirely
dictated by the prime. Collectively, these structures
must drive system cost, schedule adherence and
performance, and create individual and collective
accountability for end-product results. They must
also recognize that the degree of commitment and
ownership may vary widely among participants.
For example, the $250 billion, nine-nation
development of the Joint Strike Fighter (JSF)
F-35, involving Lockheed Martin, Northrop
Grumman, BAE (SYSTEMS) and scores of other
global suppliers, relies on performance metrics
that change from qualitative to quantitative over
the life of the project. Designed to cover several
major drivers of overall system availability —
mission capable rate, aircraft availability and
mission reliability — the metrics are tied to a
decade-long series of specific milestones along
the JSF development and production lifecycle.
The goal is a system that initially provides a
series of qualitative evaluations of each supplier’s
plan to participate in the program. As the plan
matures, the system switches to a quantitative
evaluation of each supplier’s performance.
Developing metrics that help each partner measure its successes—and identify the lack
Integrated Value Chains in Aerospace and Defense
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A.T. Kearney
Best Practices in Integrated Value Chains
In a complex environment, survival
often depends on embracing the roles,
responsibilities and opportunities of
an integrated value chain. A handful
of companies in the A&D industry
understand how real integration (and
all it means and requires) can put
more value in the value chain, and
therefore are in a position to achieve
a sustainable competitive advantage.
We recognize best-practice companies as those that do the following:
Monitor and manage both
immediate and upstream suppliers.
Best-practice firms rarely cede management of upstream supply chain
participants to their immediate suppliers because they understand the
risk. Henry Ford’s attempt at vertical integration was intended to
minimize risk and maintain control over the production process,
from raw materials procurement to
product delivery. Boeing’s highly
publicized setbacks with the production of its 787 Dreamliner exemplify the difficulties when upstream
participants do not meet cost, performance or schedule objectives.
A tendency simply to assume that
component manufacturers will
find raw materials —by taking an
“it’s their problem, not mine” attitude — can intensify value chain
risk. Boeing’s setbacks also emphasize how product complexity can
create its own set of problems when
bringing new technology to market.
Find the optimal balance and
supporting governance processes.
Proper governance can reduce supply
chain management complexity while
providing risk management and mit-
igation capabilities. Relationships
and governance processes that
swiftly identify issues and work
cooperatively at resolving them are
essential. Fostering a spirit of give
and take is key, because all suppliers,
whether upstream or downstream,
will need support at some time.
Manage internal and external
interfaces. There is no substitute
for rigorous management of internal interfaces such as customer service, engineering, supply chain and
manufacturing, as well as external
interfaces. This is in contrast to the
firm that must deal with isolated
functional silos and internal departments working at cross purposes.
“Much of the problem we have
with business complexity today is
around internal cooperation and lack
of communication,” said a survey
respondent. “For example, an engineer today has to work more closely
with commodity sourcing, contracting and program management.”
Devise ways to simplify.
Rather than manufacturing products at low volumes that aren’t
attractive to many commercial offthe-shelf suppliers, best-practice
companies build modules (rather
than individual parts) that can
be used in various designs. While
commonality is a way to manage
complexity, it is a significant challenge in the often high-complexity,
low-volume A&D market. However,
opportunities for commonality frequently exist by creating visibility
into cross-program parts, components and sub-systems, and
incentives for reuse.
Do not submit to the pressure to “win” on technology. Bestpractice companies do not apply
technology that is still under development or unproven. Thus, they
do not have to guess at a supposed
(or hoped for) supply base capability to support the technology.
Engage the supply chain function early. Leaders engage the entire
supply chain before the product
development and design function
is well down the path toward producing the product. And they make
certain the supply chain function
has the technical or supply market
knowledge to offer a thorough and
current understanding of supply
options, supplier R&D roadmaps,
and production and supply chain
risks. Leaders also understand that
they must manage the timing and
quality of development and engineering interfaces as closely as the
flow of physical goods and materials.
Develop strategic partnerships.
Such partnerships enable technology innovation, provide for greater
information sharing and assure more
frequent communications. Working
within these strategic partnerships,
best-practice companies efficiently
migrate cutting-edge, technologydriven products and systems from
design to production by supporting
collaboration across the value chain.
A.T.
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Integrated Value
Value Chains
Chains in
in Aerospace
Aerospace and
and Defense
Defense
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thereof—requires addressing the implicit need
for a way to evaluate and adapt to integrate new
partners and separate existing ones. At the same
time, each participant’s metrics must ensure that
system-level performance goals are met. If any
supplier fails to perform, then all suppliers will
suffer. A sophisticated exception reporting system
is mandatory.
Employ risk management tools and capabilities. External suppliers are critical elements
in your integrated value chain, which means
managing and mitigating risks must be a central focus. Our studies reveal that as much as half
of the value chain’s cycle time is consumed by
suppliers. The best tools provide for early alerts
far upstream in the supply chain while avoiding
bullwhip effects. For that reason, one electronics manufacturing services (EMS) supplier moved
manufacturing to China to be closer to its electronic components sources. At the same time, some
EMS firms implemented just-in-time manufacturing, switched to batch processing and synchronized
their production with component manufacturers
to respond quickly to changes in the market and
customer demand. In this case, the firm also benefited from lower labor costs for assembly work. By
shipping directly to customer warehouses, EMS
suppliers reduce the length of the integrated value
chain and cycle time, while in many cases eliminating wait times. Moreover, some EMS suppliers
are establishing product development labs closer to
their customers’ R&D centers to develop and roll
out product innovations faster than ever.
How Does Your Role Align with Your Future
Business Strategy?
Look up and down the chain. You will see an array
of partners who coalesce around and are driven by
the following values:
Knowledge of what the customer wants.
Know your role on the continuum in relation to
your specific customer and the ultimate customer.
If you can continually bring a unique product or
service to a partnership, it can probably sustain
your business into the future. But you must be
very good at it, and you cannot be satisfied with
the status quo.
Past dealings or history of the relationship.
If your company has been a reliable member of
the value chain, your prospects for continued
business are excellent. But a word of caution:
If a customer asks for products or services beyond
your capabilities or quality standards, don’t overextend or jeopardize your future. Say no.
Prospects of winning future opportunities
by partnering. Let customers know where you are
in the market and on the continuum. They must
know your capabilities and intentions. If you want
to stay small, you will need to demonstrate how
you can uniquely contribute to innovation,
competitive differentiation and superior cost or
performance to make your other value chain partners successful and your company indispensable.
If you want to grow, you’ll have to commit to
change. You need to begin the process of transforming your value chain — gaining a sustained
competitive advantage in the process.
Authors
Randy Garber is a vice president in the San Francisco office, and can be reached at randy.garber@atkearney.com.
Charles Withrow is a manager in the San Francisco office, and can be reached at charles.withrow@atkearney.com.
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Integrated Value Chains in Aerospace and Defense
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A.T. Kearney
A.T. Kearney is a global strategic management consulting firm known for
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we serve the largest global clients in all major industries. A.T. Kearney’s
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