Lowering Supply Chain Costs in the Aerospace and Defense Industry

supplychain | eTurboNews | eTN
Avatar of Linda Hohnholz
Written by Linda Hohnholz

Aerospace and Defense (A&D) supply chains are facing a particularly tough season.

  1. The COVID-19 pandemic has brought the entire aviation industry to its knees, leaving manufacturers and suppliers alike scrambling to return to normal production levels.
  2. Governments, in response to crippling economies, have lowered their spending on A&D on military equipment.
  3. Private businesses, in a similar move, have reduced spending on aerospace equipment.

This trend has left many firms that donā€™t have a reliable aerospace supply chain partner reeling. But itā€™s not just the A&D supply chain thatā€™s suffering. The Biden administration recently conducted a 100-day assessment of critical supply chains. The findings showed various weaknesses in the supply chain industry.Ā 

The United States has fallen from 37 percent of global semiconductor production to 12 percent over the past 20 years. The United States now produces only 6 to 9 percent of the more mature logic chips, an advanced semiconductor technology. According to the president, this low percentage ā€œthreatens all segments of the semiconductor supply chain as well as our long-term economic competitiveness.ā€

The fall in prices has led to the Biden administration announcing a trade ā€œstrike force,ā€ headed by the U.S. Trade Representative Katherine Tai, that will ā€œpropose unilateral and multilateral enforcement actions against unfair trade practices that have eroded critical supply chains.ā€

As both government and commercial stakeholders focus on a cost-effective way to satisfy their aerospace needs, A&D manufacturers need to reduce costs to acquire deals and maintain profit margins. 

Here are some steps to help small and middle-sized aviation manufacturers can influence supply chain optimization to lower costs:

1. Digitize the supply chainĀ 

A classical supply chain model works linearly, and policymakers typically have a narrow perspective of the overall supply chain, leading to possible lags and increased expenditure. 

A digitized supply chain, however, provides a thorough view of the supply chain for better clarity, partnerships, flexibility, and prompt responses. Simply put, digitization uses data to streamline supply chains. 

The integration of data throughout the entire supply chain helps in the optimization of the supply chain by organizing and determining the final destination of supplies with limited human involvement.

 For example, stock-taking apps, surveillance systems, agile manufacturing, artificial intelligence, and other self-regulating machines can be incorporated into the supply chain structure for a more swift and flexible system. 

To achieve the digitization of your supply chain, you may need to partner with a global supply chain management company. There are several options in the US. This guide lists the best global supply chain management companies that are active in the aerospace and defense sectors.

2. Utilize Costing Tools

Understanding supplier expenses and supply chain rates help Aerospace and Defence manufacturers acquire rational prices for their orders. Most manufacturers assume that supplier costs are fixed. However, some costs can be changed if the manufacturer has the right information. A strategic costing analysis is the way to go.

According to the U.S. Federal Acquisition Regulation (FAR) 15.407-4, a strategic costing analysis should assess “the economy and efficiency of the contractorā€™s existing workforce, methods, materials, equipment, real property, operating systems, and management.”Ā 

We recommend two models for determining a fair pricing system:

Should-cost Model: In this model, the contractor uses commercial market pricing and economics to determine a productā€™s fair market value. This model does not consider the suppliers asking price but rather finds out what a product should cost based on factors like raw materials, overhead costs, labor, and inflation.

Tear-down Analysis: A tear-down analysis breaks down a product into smaller constituents to define a pragmatic price or value of each constituent in accordance with its operation. Apart from industrial design, this tool assesses proficiency, toughness, productivity, credibility, security, and other applicable features. 

Learn more about using costing tools in this article.

3. Checklists and Tools

Organizations should also produce model checklists and tools for directors to use before making acquisitions. Such checklists would outline suggestions such as whether a manufacturer has a component that is budget-friendly but can perform the same function. 

The tools could be graphs and worksheets that help the director to swiftly create a yardstick of performance, juxtapose the cost for constituents and other dealers, and examine market trends. 

Directors should have a clear view of needs regardless of whether the supplier demands a minimum order quantity. The goal should be not merely to avoid finishing up a component but also to lessen inventory.

4. Negotiate More Effectively with Suppliers

Many Aerospace and Defence companies believe that they do not have enough leverage to convince their dealers to reduce prices, especially deep-rooted dealers connected to major programs.Ā 

These companies primarily relinquish the play before it even commences. Even though negotiations are not a walk in the park, there are a few methods that Aerospace and Defense companies can use to optimize cost.  

Determine a defendable target price

Most producers usually have little intuition about the elemental economics for a component from a given supplier. Consequently, the first step is to come up with an accurate target value for what the constituent should cost. Companies can apply several approaches to achieve this.

Companies look at how a supplierā€™s costs for a specific constituent move down the cost curve in the top-down approach. For highly sophisticated equipment, the first finished product off the assembly line costs far more than the hundredth, which in turn costs far more than the thousandth. 

The rate of decline for the total system cost is a standardized relationship between the cumulative production quantity of a company and the cost of production. Given the number of units, the type of assembly required, and the initial starting cost, the cost curve shows what a top-rated dealer should be demanding after a definite quantity. 

There are various bottom-up approaches to determining a target cost. The product structure approach entails looking at the sub-features of a given piece of machinery. Those are usually available on the free market, and companies can determine an appropriate value for each of them, together with labor costs to put them together. 

Companies can also look at the price of similar constituents with related features. None of these approaches is fool-proof, but by using all of them, companies can develop a range for the correct target cost of a definite component. That gives them reliable and measurable grounds for negotiating with the supplier to reduce costs.

Develop leverage points with the supplier

An alternative way to bargain more effectively with suppliers is to grasp the possible areas of leverage. In most cases, companies can gain far more leverage than they think by using available data in some areas. First, however, Original Equipment Manufacturers(OEMs) need to grasp how the suppliers make their profits and how those earnings are inclined to increase over a period of time.

For example, some suppliers make most of their money selling to OEMs as part of the original contract for a system. Others make more by selling directly to the governments either globally or to their government. 

Still, others emphasize the aftermath of sales of spare parts for machinery that wears away over time. By grasping the supplier company’s plan, the company can determine how best to communicate with the supplier to build leverage during negotiations. 

About the author

Avatar of Linda Hohnholz

Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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