Vertical Integration – How Can Suppliers Compete in the Tug of War?
With global fleet projected to double over the next 20 years, aerospace and defense companies are thinking about many new operational methods to continue meeting rapid demand. One large aircraft manufacturer has actually used this insight to take action and introduced vertical integration into its supply chain. Traditionally, aircraft manufacturers have suppliers that deliver the individual components of the aircraft. But with vertical integration, aircraft manufacturers, like Boeing, are forming joint ventures to manufacture and deliver aircraft parts in-house. One example is Boeing’s joint venture with Adient to deliver aircraft seats. But what are the implications of this shift and how will it affect the livelihood of suppliers?
During the Pacific Northwest Aerospace Alliance (@PNAA) Conference in February of this year, the topic of vertical integration was widely discussed by Dr. Kevin Michaels of AeroDynamic Advisory. He outlined several areas that are trending toward vertical integration but also discussed the drivers being that OEMs can bring the manufacturing and supply chain control back to the themselves, allowing ownership of the aftermarket. On the other hand, the challenges include the requirement of more overhead and higher inventory and asset carrying costs.
Similarly, the impact on the current supply base is also uncertain. Many suppliers question their position in the future model of higher vertical integration. Furthermore, the stability of this model is still up in the air. Will an OEM be able to truly move all the knowledge, capabilities and equipment in-house? Can an OEM assess the necessary buffer on capabilities and capacities? Will the OEM adjust the verticalization based on the product maturity or change in the market?
With so much still in question, suppliers still have a chance to plant their stake in this tug of war. For vertical integration to be successful, OEMs will have to effectively manage complexities. These critical complexities include adoption of new manufacturing orientations, the information exchange between the different machines and work cells. When OEMs encounter difficulties, agile suppliers with skilled resources can provide support during capacity challenges or when unexpected situations occur.
For example, in a scenario in which a supplier is already approved for certain activities, the OEM could communicate an unexpected down time and reroute the effort to a supplier’s machine that is already allowed within the network to perform the task. The digital transfer of information, including the instructions and machine settings, will be routed directly to the supplier. Status communication for the end product will be received from the supplier’s machine.
In order to achieve this agility, suppliers will need to quickly adopt the digital enterprise strategy. The ability to change and respond in short notice will allow suppliers to work surgically with lower volume activities but margins will be much higher. This will create a dependency on suppliers and their agile capabilities.
To adjust to vertical integration, suppliers will have to manage the integrated value chain with a digital infrastructure which collects data automatically through IoT. Suppliers will need to obtain the manufacturing instructions in a different format and timing. Any of the necessary manufacturing information needs to formatted to be exchanged between the individual players. SAP is uniquely positioned to offer these capabilities, integrations, and APIs to not only establish an agile operation, but in a secure and consistent environment.
Please join us in Boston, MA at SAP A&D Innovation Days (April 10-11, 2018) to hear from different SAP A&D customers who have turned their insights into action and started their journey to the digital enterprise. Click here to register and obtain further details.