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2011

 

It is time to update our readers on Bombardier and its C-Series aircraft program. 

 

Our last Supply Chain Matters and Supply Chain Expert Community update was in October 2010. We noted that Bombardier was taking a huge strategic gamble on the supply chain deployment and market launch of the new C-Series aircraft scheduled for 2013.  The C-Series is a 100-150 single-aisle passenger aircraft that is the cornerstone of the company’s plan to compete head-on with the likes of Boeing’s 737 and the Airbus A380 for advanced, lightweight commercial aircraft that can deliver compelling fuel efficiencies for airlines. This market segment has dominated aerospace headlines throughout the year.

 

In 2011, airlines were compelled to begin to open their wallets and place large amounts of replacement orders for more fuel efficient, narrow aisle aircraft, and the Airbus Experiences a Spectacular Week of Landing Customer Orders- Lessons of Timing the Market and Value-Chain Collaboration, followed by the 737. At the recent Paris Air Show, Airbus garnered one of the highest order volume rates in its history through customer orders of the planned A380 Neo. Thus far, Bombardier, and its China based rival COMAC, continue to compete for remaining customer orders.

 

In an interview published in the Wall Street Journal on November 21 (paid subscription or free metered view), Bombardier CEO Pierre Beaudoin remained upbeat, indicating that he was not too worried about uptake in new orders for the C-Series.  Thus far, Bombardier has 133 firm orders, which is supposed to place the manufacturer on-track to its target to have 200 to 300 orders between first maiden flight and first delivery in 2013. Mr. Beaudoin’s statement in the interview indicates that he would rather have his company concentrate on delivering the plane on time while maintaining its stated profitability goals than moving to discounting list price at this point. Further he states that the aircraft manufacturer has turned down prices that it did not like, and that its main market is China where anywhere between 20 to 30 percent of the global fleet could eventually be located.

 

Our reaction to the interview was of course, slanted toward a supply chain lens.  As more and more airlines weigh in with the current high rate of firm orders, the aerospace supply chain as a whole becomes committed to long-term capacity, and especially to the two current key players, Airbus and Boeing. Some of Bombardier’s C Series suppliers also cater to these current dominants.

 

Recall that the C series also features an outsourced global supply chain for many of its major components, allowing Bombardier to concentrate solely on innovation, design and final assembly needs.  Major components such as fuselage wings and tail are sourced in China, Ireland, Italy, and other countries.  All of the major components are to be shipped to Bombardier’s final assembly facility outside Montreal’s Mirabel airport for final integration. While profitability is certainly a very important goal, some aspect of volume scale is required to justify overcoming fixed supply chain material and transportation costs. There has always been a debate as to where the break-even point resides with this new outsourced major component and final assembly integration model. A review of Boeing’s 787 Dreamliner’s primarily outsourced supply chain provides ample evidence to this debate.

 

The second aspect for consideration is the stated goal competing for China’s aircraft business.  Aerospace is one of the key strategic growth industries identified by China’s political leaders in the current five year economic plan. In our November Supply Chain Matters commentary, China Takes Aim at Aerospace, we observed that China based, state-owned aerospace manufacturer COMAC has embarked on its own program of innovation and cost competitiveness for narrow aisle aircraft, and also features a C Series program. (Coincidental, of-course)  In order to insure strategic options are covered, major component aerospace suppliers such as General Electric and United Technologies have jumped-in with strategic development and relationship programs with COMAC and its other China based supplier partners. COMAC has already garnered orders from several of China’s state-owned airlines because of its unique role for contributing to China’s strategic plan for competiveness in aerospace, and continues its declaration that it will provide a compelling alternative offering for the global market.

 

Bombardier currently faces difficult headwinds with its C Series program, not all of which from its doing.  Aerospace industry events have been dramatic and far-reaching in 2011, and the industry is in both an enviable, and yet challenging situation.  Order volumes have been robust, but supply chains remain even more stressed to deliver capability and commitments for the next 5-10 years. The Bombardier C Series aircraft needs to find its place in this challenging environment, especially while customer buying motivations currently remain biased toward staying competitive in future aircraft operating efficiencies.

 

A highly uncertain global financial climate and industry that has supplier capacity increasingly being committed and internal dynamics within China’s airline operators may alter the widow of opportunity for Bombardier. 

 

We wish Bombardier well and trust we can look forward to the inaugural flight of the C-Series.

 

Bob Ferrari

This is a brief update to our Supply Chain Matters and Expert Community commentary earlier in the week regarding aerospace supply chains remaining stressed, and specifically Airbus’s recently announced setback on its lighter weight and more fuel efficient multi-aisle aircraft, the A350.

 

In an interview which was published in the November 18 printed edition of the Financial Times, (paid subscription or free metered view) Louis Gallois, the chief executive of Airbus’s holding company EADS, expressed his personal apology for the announced delay of the A350. He noted that Airbus made the decision to delay the introduction from late 2013, to the first half of 2014, because “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” The Times reports that Airbus concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

 

The FT interview coincided with Mr. Gallois’s attendance at the Dubai Air Show event, along with all other major manufacturers..  The big headline of that event has been the announcement from Dubai based airline Emirates of the single largest commercial aircraft order, ever.  The airline ordered 50 of rival Boeing’s 777-300 long range aircraft at an estimated list price book value of $18 billion, with an option for an additional 10 aircraft. Deliveries are planned to begin in 2015. A separate FT published article quotes an aerospace industry analyst as noting that Emirates selected the 777-300 because of the announced delay of the rival Airbus A350-1000, where planned first delivery has slipped from 2015 to 2017.

 

The European focused headline from the show was the perceived public humiliation incurred by Akbar Al Baker, the CEO of Qatar Airways, directed at Airbus, also reflecting on the delay. Qatar is the designated launch customer of the A350.  According to a separate FT article, Qatar accused Airbus of “still learning how to make airplanes.”

 

Tough words indeed, coming from your launch customer.

 

But reports indicate that Qatar, after some last minute negotiation with Airbus senior management, later unveiled an order for 55 aircraft at list value of $6.4 billion, with a provision that Qatar would be the designated launch customer of the highly popular and new to arrive A380 neo aircraft. That obviously equates to maximum leverage of customer power and bargaining chips.  It’s like the analogy of the enterprise software account manager who makes the largest sale of the year on the last calendar day of quarter or fiscal year-end, with a healthy discount and all sorts of added perks for the customer.

 

To our earlier commentaries, airline customers, especially the newly emerging and more powerful global high growth carriers, are aggressively augmenting long-term lift capacity and are highly sensitive to aircraft delivery windows. They also practice high energy, savvy negotiation skills that reflect their current presence as aerospace industry disruptors.

 

Supply Chain Matters offers two follow-up observations, post Dubai Air Show.

 

First, we believe that Airbus should be praised and not chided for its latest actions.  Citing lessons learned from previous public delays of the A380 super jumbo jet and perhaps unstated, Boeing’s current three year delay status with the 787 Dreamliner, Airbus felt it was far more prudent to fix potential supplier quality problems now, rather than later, when the stakes are higher. A public apology coming from the CEO of any company is a bold statement of acknowledgement and commitment to accountability.

 

Second, airline customers have been patient regarding numerous setback announcements, perhaps leaving their gripes behind closed doors. We get the strong sense, however, that this will change during 2012 and beyond.

 

It seems that every very passing week brings fresh reminders of added stress in aerospace supply chains. The transfer of supply chain learning and a renewed emphasis on agility, risk avoidance and operational excellence are now new table takes for all aerospace value-chain participants.

 

Bob Ferrari

 

Supply Chain Matters has noted in previous commentaries that Aerospace supply chains are now under stress. Many factors have led up to this condition. A significant recent uptick in airline customer orders for new and more fuel efficient aircraft is locking-up industry delivery capacity for many years to come. Increased outsourcing of major components to suppliers has precipitated significant program setbacks with major OEM’s Airbus and Boeing both struggling with aircraft programs that have experienced multiple year delays for customers. Boeing’s latest Q3 earnings report provided a specific backdrop to the highly visible 787 Dreamliner program, which just entered operational service, but remains three years overdue in production and customer delivery fulfillment of over 800 aircraft.  Customers and suppliers now seek financial consideration for these delays while Boeing makes plans for a serious supply chain ramp-up in production and final assembly of 787’s.

 

But alas, Boeing is not the only OEM dealing with setbacks.  Last week, EADS, the parent for Airbus, announced its second delay associated with the new A350 passenger aircraft. Initial delivery will delayed by up to six months because of supplier issues, pushing the time window into 2014. EADS also incurred a 200 million ($271 million)direct charge as an immediate result of this delay. The A350 is made with more lightweight composite materials and is the Airbus competitive alternative to Boeing’s 787.

 

An article published last week in the Financial Times (paid subscription or free metered view) indicates that this latest Airbus delay was attributed to suppliers being late with planned delivery of key components. Of more concern, Airbus warned that some suppliers were struggling to renew bank loans in the midst of the current Eurozone debt crisis, and there are signs of a new credit availability crunch for European small and mid-range manufacturers. The article reports that EADS has started giving financial support to some subcontractors, and has had to acquire a German supplier, PFW Aerospace. At the height of Boeing’s issues with the 787, it was also forced to acquire some key suppliers.

 

In a mid-October commentary, Supply Chain Matters noted that that senior supply chain executives should be contemplating scenario plans and contingencies concerning the ongoing Eurozone crisis and its potential impact on global supply chain processes.  One of the outlined areas was the availability of credit to finance ongoing inventory and working capital needs.  A worsening of bank fragility or outright bank or country specific financial failures could cause an additional credit crisis to cascade across industry supply chains.  The latest Airbus announcement is evidence of this growing risk.  We suspect Boeing and other OEM’s are not immune since each has key suppliers located in Europe.

 

Within the aerospace industry there exists a paradox. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy.  Airbus alone now has an order book rate above 500 billion. Any company or industry would celebrate at having such a situation. On the other hand, supply chain process and program deficiencies, incidents of supply chain risk, and now the potential of financial crisis, are all compounding the ability to deliver the end product to customers in a timely fashion. This should be an industry humming on all engines, but success comes with a burden.

 

For aerospace supply chains, continuous scenario and contingency planning coupled with proactive response management may well be the S&OP agenda for many, many months to come.

 

Bob Ferrari

 

The ongoing devastating monsoon floods that continue to impact Thailand will once again demonstrate the response management capabilities among high tech electronics and automotive supply chain teams.  The word “agility” is often an overused term in the context of supply chain processes, but in the case of the unfolding supply chain disruption, it will have significant meaning.

 

First and foremost, our hearts go out to people of Thailand.  The floods have now claimed over 500 lives, most from drowning, and countless thousands continue to endure the ongoing effects.  Weather forecasts indicate that the heavy rains, which began in July, will continue through the end of the year and we hope that the rains end sooner than that.

 

As with the March massive earthquake and tsunami that struck northern Japan, the cascading global-wide effects are still unfolding across multiple tiers of supply chains.  Flooding in the country has forced the closure of more than 1000 factories.  Thailand itself represents a significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing.  Estimates are that the region represents 70 percent of global HDD production. Western Digital, the global leader in HDD obtains 60 percent of its inventory from its factories in Thailand and the company has already indicated that it will ship less than half of planned supply for the remainder of 2011. Japan’s Nidec Corp., a major supplier of precision disk drive motors had the majority of its production capacity impacted, and news reports point to production workers ferrying available undamaged inventory on boats in an attempt to move the motors out of flood prone areas. Industry observers warn of an outright severe shortage by Q1 of 2012, if alternative production is not found. Unlike what occurred in Japan, HDD and component producers had minimal safety stocks to buffer a major disruption of supply.

 

A posting in Eweek cites industry participants noting that once the rain stops and access to flooded factories can be garnered, it would take 2-4 weeks to pump out flooded buildings and upwards of 60 days thereafter before production levels could resume. Some observers point to a 20 million unit shortfall in supply per month before normal supply levels recover, while more conservative estimates point to a 50 million HDD shortfall over the next two quarters.  Some have stated that the ongoing Thailand floods will have a greater impact on high tech and consumer electronics supply chains than that which occurred in Japan earlier in the year. That impact will surely cascade to global storage and PC manufacturers. The PC industry has already been in turmoil and this incident adds more business challenges. A New York Times blog posting (paid subscription or free metered view) further points to a pending impact for cloud computing and infrastructure providers further up the stream, who rely on continued acquisition of HDD hardware to support the explosion of cloud and data storage needs. 

 

For automotive supply chains, particularly those of certain Japan based manufacturers, Thailand based factories represented considerable sourcing of electronic components, plastic and rubber parts.  Honda and Toyota are the most impacted thus far, and pending parts shortages have already led to production cutbacks at multiple final assembly production plants including Japan, North America, and other geographic regions.  According to a Bloomberg Businessweek article, Honda has been especially hard hit with its two Thailand final assembly plants being totally submerged since October 6. Toyota estimates that since October 10, the floods have already reduced its Thailand based auto output by 69,000 vehicles. Jim Fulcher has provided a Supply Chain Expert Community posting that elaborates further on the cascading impacts for automotive supply chains.

 

Business and industry media this week has rightfully raised questions as to how these recent “black swan” or unprecedented natural disaster events have exposed vulnerabilities among industry supply chains. Has the quest for lowest cost production and hyper lean supply chains overridden and exposed vulnerability to significant business risk?

 

While many in the community can weigh in on that discussion, the immediate crisis at hand is once again, the testing of supply chain response management capabilities among those high tech and automotive companies currently impacted, and those that will be impacted.  After all, would an executive S&OP process ever consider the reality of mid double digit interruptions in critical supply or extraordinary supply price hikes caused from that shortage?  The answer is no!

 

However, during the Japan crisis, some companies such as Nissan, Cisco and Jabil demonstrated that once the disruption occurred, they had the ability to quickly assess overall supply and revenue impacts from multiple layers of their value-chains, and had the response scenario capabilities defined to either re-route supply from alternative sources, allocate limited production to key customers and distributors, specify and qualify alternative parts, or call on existing suppliers to help buffer impacts.  Even the supply chain teams of Honda and Toyota, that were the most impacted, eventually found ways to analyze impact areas and overcome disruption beyond original expectations.

 

Supply chain teams need to address two looming and significant cross-functional challenges in the days to come.  The first is re-visiting business and supply chain planning capabilities in light of the reality that major disruption, either internal or external related, is a given.  The ability to have scenario plans in-place along with the abilities to quickly assess and proactively respond to disruption are new table stakes. The second and longer-term challenge is a complete re-visit of component and finished-goods sourcing strategies in the light of what both the Japan, and now Thailand disasters have uncovered.  There can be no significant vulnerability to required supply streams, and every major geographic region requires an identified and well-understood business and supply continuity plan.

 

Bob Ferrari