Electronic Supply Chain Solutions provides this Article by Vince Pavlak as a
quality lesson learned.
There have been numerous comparisons between the automotive and aerospace industries, and an October 2009 article from Aviation Week even asked, “Could Wichita become the next Detroit?” Many aircraft suppliers are learning from the automotive industry and some have recruited executives from the sector. Given the recent turmoil and challenges faced by the cyclicality of the automotive industry and its participants, the actions taken may provide valuable insights for the aerospace industry, which has historically also endured its share of volatility.
During the past 18 months, the automotive industry experienced one of the worst periods in its history. All industry participants, from original equipment manufacturers (OEMs) and suppliers, to automotive dealers, were affected. Suppliers experienced significant volume declines, immense liquidity constraints and a severe tightening of the credit markets. Few companies were adequately prepared, and all were required to adapt quickly to the new economic conditions and take significant actions to remain viable. This time period can truly be characterized as a fight for survival in which there were many casualties.
While the extraordinary government aid at the OEM level clearly helped to stabilize the industry, we have found that supplier survival came down to the following key factors…
Understanding customers, programs and parts
We are constantly surprised by how many suppliers believe they understand the profit generated on specific parts, programs and customers. However, after more thorough analysis, these gut feelings are often proven inaccurate. During a downturn, having a good understanding of where the profit is (and is not) can be critical to survival. In one example, we evaluated the standard cost and quote model for a $100 million supplier, noting the pricing model was omitting 20% of true cost, and that management was basing pricing and other critical strategic decisions on this flawed model.
As a supplier, it is also critical to understand which programs your parts ultimately end up on and which programs may be susceptible to market conditions or cancellation by the OEMs. Automotive suppliers that sold parts to the SUV and truck markets were more severely affected during the economic downturn than those that supplied more fuel efficient vehicles.
Managing and optimizing the cost structure
The best suppliers found creative ways to cut costs while mitigating negative impacts on the company’s longer-term prospects. Many suppliers were careful not to make cuts that affect the customer (e.g., sacrificing quality and delivery). Suppliers implemented numerous actions, including temporary wage/benefit reductions, in-sourcing of certain processing or services, improving asset utilization, and facility consolidation. While there was an obvious focus on reducing costs to conserve cash and enhance liquidity, we found the prosperous suppliers took this concept a step further by preparing an integrated cash flow/liquidity forecast model. This forecast model contained several key concepts, including (a) understanding product linkages to OEM programs, (b) sensitizing industry/OEM volumes and© flexing various cost structures. Suppliers with a deep understanding of their cost structure that were able to perform detailed financial planning were better equipped to manage through the downturn but more importantly, were proactive in developing plans and providing confidence to other stakeholders (lenders, customers, etc.) during the process.
Supply risk management
We believe that suppliers at all levels of the aerospace industry will receive increasing pressure from upstream customers (including the DoD) to proactively manage their supply base. Further, from a supplier standpoint, there will likely be more scrutiny on both the financial and operational metrics of the supplier’s business. An October 2008 Government Accounting Office report indicated that ”[the] DoD expects prime contractors to maintain internal corporate metrics to evaluate the health and performance of their subcontractors.” Further, Brett Lambert, the DoD’s director of industrial policy, noted:
“I’m worried about the second-, third- and fourth-tier vendors, the people who make the nozzles … that’s where we’re going to focus a lot of energy in the next few years.”
Ford Motor Company utilizes a Web-based system called Vontik as its global solution to gather more intelligence on its supply base, even going so far as to require suppliers to enter data prior to being awarded any new sourcing. It will be critical to ensure that suppliers at all levels are taking a proactive role in managing their own supply base, which includes understanding the extent of sole-source relationships, suppliers’ geographic footprints, contingency planning, etc. Providing comfort that there is a sound supplier management system in place might well become a criterion of future sourcing decisions.
Adapting (not abandoning) a longer-term business strategy
To prepare for a potential, or cope with an actual, down cycle, it is more critical than ever to understand the strategic direction of your company and how it aligns with the future marketplace. Making short-term decisions that are inconsistent with long-term strategy can be disastrous. Honest assessments of core competencies, manufacturing footprints, industry trends and technology shifts can provide valuable insight into the future direction of the company and its ability to be competitive. Also, it is crucial to maintain a convincing, viable, long-term plan; otherwise, customers may not be willing to source the company new work.
Being in the midst of a downturn represents an opportunity to re-evaluate the whole business model to refine the focus on delivering value. This evaluation could lead to the realization that a merger/acquisition is the preferred method for long-term growth and survival. Also, certain elements of the business that are without strategic or core value might present an opportunity for carve-out or liquidation.
Managing Debt and Liquidity
High debt levels prior to the automotive crisis caused many suppliers to end up insolvent. The suppliers that survived were able to maximize cash flows from working capital, as banks were not increasing exposure to the sector and in fact were more prone to exiting credits. Further, surviving suppliers were more sophisticated in terms of preparing flexible financial forecast models and reducing cash outflows. This allowed these suppliers to understand and plan for potential upcoming issues with their debt, whether it was the specific amount and timing of repayment, covenants or liquidity constraints.
While there now appears to be some loosening of credit and more willingness on part of lenders to work with troubled credits, the markets generally are still tight, and borrowing costs remain high, especially for lower tier suppliers. Ironically, many automotive suppliers are now experiencing liquidity constraints trying to fund the working capital needs and requisite capital/tooling expenditures as the industry slowly begins to recover and volumes increase.
In summary, those suppliers that were able to demonstrate the above factors were more likely and better positioned to survive the recent automotive downturn. Automotive suppliers actually are emerging from the downturn better positioned with lower cost structures, improved balance sheets, more reliable supply chains, fewer competitors and an enhanced mix of product offerings. While these principles have proven valuable during the crisis in the automotive industry, they can be applied to aerospace suppliers, as well, and are useful even during times of prosperity. Suppliers that demonstrate viability through the aforementioned key factors can make it clear to customers and other key constituents that they are well positioned for long-term success and, as such, are more likely to be chosen as winners in the long-term battle for survival.
Electronic Supply Chain Solutions is an AS9120 certified company that owns it's facilities in Clearwater FL ESCS owes and stocks both military and aerospace components with an estimated value in excess of a million dollars and has both factory and franchise relationships with many of the top tier original component manufacturers. Visit
http://www.escs9120.com/ to learn more!
