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Supply Chain Evolution

The introduction of the Boeing 787 aircraft sparked an evolution in the aerospace supply chain.

Historically airframes, components, and engines were designed, engineered, manufactured, and assembled by the original equipment manufacturers (OEMs). The OEMs would then use a long list of local or regional suppliers to provide millions of small parts. With the introduction of the Boeing 787 and the magnitude increase of costs and risks associated with any new aircraft, the historic model has changed.

Today and into the future, OEMs will continue to design and engineer the products, but a large portion of the manufacturing and assembly is being disseminated to a network of suppliers around the globe. This global network of suppliers is not the same small suppliers that have been used for previous generations of aircraft, but a much smaller group of larger, better capitalized, professional companies. The older generation of suppliers will survive for some time as they live off the current install base of aircraft and the very long lifecycle of these aircraft, but suppliers will find it harder and harder to grow unless they can consolidate, invest, and professionalize to get on the newest platforms.

OEMs are forcing a consolidation of the supply chain for two primary reasons: costs and risks.

On costs, OEMs need to share the increasingly high upfront investment with others in order to maintain an acceptable profitability level. These investments in non-recurring engineering, infrastructure, machining, tooling and much more are now going to become the increasing responsibility of the supply chain. Only larger, better-capitalized and professionally managed companies will be able to make these investments.

On risks, due to the ever-increasing complexity of the products and the production processes, small failures in delivery and quality dramatically increase the probability of failure. The OEMs cannot take on the combined risks of an undercapitalized and unprofessional supply chain, as the aerospace industry is becoming an industry of zero failure. Too much is at risk to rely on a weak supply chain.

This evolution of the supply chain was started in the last decade and will continue through the end of this decade as many new aircraft enter service. During this next six years it will be critical for every supplier to the aerospace industry to develop a comprehensive strategy on how to grow with the industry and not get left behind.

Peter J. Friedman
Five by Five Capital, LLC

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