Note: This blog post originally appeared on the web site of the Corporate Responsibility Association (CRA) in March 2014 as part of a series that Art Stewart authored in his role as a CRA Blogger.
A variety of factors are changing how organizations view – and calculate – risk, especially regarding competitiveness and business continuity. The concerns range from high capital requirements and lagging utilization rates, volatile energy costs, and expanding global distribution networks to capacity shortfalls, inadequate responses to product demand, infrastructure limitations, security concerns, and complex supply chain integration requirements.
For most industries, the rules of engagement have been shifting; in some instances, dramatically. Pressures to reduce wasted asset utilization, enhance sales and operations planning, and minimize avoidable risks must now be factored into a holistic view that incorporates end-to-end visibility of the global supply chain. Executives must balance driving revenue with lowering costs while also transitioning from a cost compression and containment orientation to one that re-engineers business process for new value creation in operations and the supply chain.
Loss of Control Precipitates Transformation
Aerospace is one industry that illustrates the extent to which externalities and other factors are injecting new risks and vulnerabilities into the competitiveness equation. A massive, integrated market with manufacturing revenues alone exceeding $700 billion, Aerospace companies can view their future with confidence as current estimates expect the global fleet to double in size by 2030.
Nevertheless, the global supply chain for Aerospace parts and raw materials has become increasingly splintered. Primary parts once procured from single sources are now produced by a wide, dynamic universe of standalone sources – each responsible for one or a few micro-components that are then integrated into a more intricate network involving disparate locales around the world.
As a result component access, production, distribution and integration can be greatly impacted by the most subtle of factors – creating a ripple effect across the supply chain in which sourcing companies have little or no direct control. Major occurrences, such as geopolitical unrest, terrorism or natural disasters, can inject fear into networks and create significant uncertainty in supply availability. For example, the tsunami in Japan subjected two major aircraft manufacturers to a disruption so severe that eventually they couldn’t access parts for the fuselage and wing structures of their new aircraft models for months.
There’s more to the aerospace picture: The industry has traditionally relied on labor concessions, capital investment in automation and software, and supplier renegotiation to achieve cost reductions and efficiency gains. Along with the uncertainty of fuel prices as the biggest risk airlines face, there is also an unprecedented level of global retirements expected among senior pilots over the next five to ten years. Factory schools have been established but they are not producing enough qualified personnel at a level that will offset what is now projected to become a worldwide personnel crisis.
On the brighter side, many aerospace analysts agree that the industry has entered a new manufacturing and supply paradigm that is bringing about a near revolution in efficiencies that were unheard of a few years ago. The technology revolution in component manufacturing has enabled certain countries to focus on particular aspects of the aircraft market – prioritizing their R&D dollars and developing advanced manufacturing or technological practices that the airlines want to source. Other players are acquiring pure production cost advantages merely from their location characteristics.
In Japan, enhanced heavy engineering capabilities and investments in battery R&D have enabled manufacturers to reduce costs and produce a better product in wing box and fuselage sections. Out of one region of Italy, advanced composite technologies are helping to bring about a major leap in aircraft design, on par with the introduction of the 747 or the Concorde.
Despite a very different R&D model today, one manufacturer cannot assume the risk for the entire design and development investment that’s required for major initiatives. With the prospect of no government backing or subsidies, manufacturers must create new models of collaboration to share the component and design risk with the micro-manufacturers and/or their suppliers.
These and many other supply chain partnerships are proving to promote better operations integration and synchronization of manufacturing, sales, finance, IT, marketing and distribution – which in turn reinforces supply throughput and velocity as well as network optimization and resiliency.
Supply chain partnerships can also relieve infrastructure constraints, reduce bottlenecks, and strengthen efficiencies – generating far greater margins and solidifying longer-term commitments that can protect revenue certainty on all sides of the value equation.
The Responsible Choice: Proactive Value Creation
For many years, one traditional approach to supply chain optimization has been to constrain and compartmentalize procurement personnel to a focus primarily on squeezing excesses out of the supply base – at any cost. Back then there was little view – or will – toward transforming how one thinks about EBITDA and profitability enhancements, especially if they focused on delivering differentiated value creation for the end customer.
Now, if you’re willing to change the nature of your supplier relationships and account for all stakeholders in the chain, you can achieve new efficiencies from a more organic enterprise development process. That, in turn, will more dependably enrich the capital base.
Transforming your supply chain into a mechanized driver of bottom-line value creation requires strengthening of the procurement organization through the integration of best practices, contract negotiation, and organizational structure. New formulas can re-orientate suppliers to a lower cost basis in direct materials; procurement professionals can become the leaders in a new collaborative communication s model between all supply chain interests.
Ultimately the goals should be more efficient processes and operations, strengthened productivity, enhanced resiliency with less downtime, and improved revenue. That in turn will deliver the capacity needed for greater empowerment of the end customer. It’s a more holistic approach to optimization of your top and bottom line.
Here are some questions to help guide your organization toward a more responsible supply chain strategy:
- What are the priority factors for risk (new regulations, energy cost exposure, resource utilization, financial and human capital)?
- What governance frameworks need to be established to uncover conflict and appropriately resolve it?
- What incremental and game-changing sustainable business strategies can help maximize economic, human and ecological capitals (i.e., creating a sustainable supply chain)?
- What can you do to help evolve your company’s culture to a truly collaborative way of working?
- What metrics and incentives would help promote big-picture thinking?
- How do you cultivate a supply base whose values align with yours – especially in corporate, environmental, and social responsibility?
- How can you engage suppliers in an ongoing dialog that supports your innovation?
- How do you ensure that your suppliers proactively manage total quality standards for their raw materials as well as those of their own suppliers throughout the chain?
- What steps can you take now to personally transition your sourcing organization to a driver of value, versus a manager of costs?
- What internal tools and specialized knowledge are needed to integrate sources of new value?