Aerospace Sector

Executive Summary

The Aerospace global supply chain (GSC) is driven by a customer-centric reality, smart border requirements, logistics mandates (such as Radio frequency identification (RFID)) from large corporations, and mass customisation in a Just-In-Time (JIT) manner. Logistics and supply chain management (SCM) are thus expected to play a key role in GSC and contribute dramatically to productivity growth of Canadian Aerospace firms within the next few years.

The particular supply chain characteristics of the Aerospace sector is its high level of GSC integration, the application of SixSigma processes and a shifts towards manufacturers that provide both goods and services.

Measurement of logistics and supply chain management (SCM) key performance indicators (KPI)  is an essential part of the agile supply chain concept. It is estimated that 37 percent of North American (NA) firms that have put in place logistics and SCM KPI corporate wide measurement applications have achieved a decrease of 15 percent or more in shipment delays compared to only 7 percent of firms that did not measure those KPI consistently¹ .

The Aerospace sector has traditionally incorporated SixSigma measurement processes, which are concentrated on product quality and not on JIT lean manufacturing. On-time delivery, a logistics and SCM JIT measure, is the most used KPI in the North American (NA) Aerospace and defence sector. This enables the Aerospace industry to increase its level of mass customization and decrease delivery times, while maintaining a high level of quality.

While inventory turns is the main KPI for evaluating supply chain agility, logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM operations. The combination of supply chain agility and efficient SCM practices is key to long term competitiveness and prosperity of Canadian firms in a global supply chain (GSC) context.

Inventory Turns

With respect to supply chain agility, Canada’s Aerospace manufacturing raw materials inventory turns in 2005 were below that of the average for the Manufacturing sector by 31 percent and in 1992 by 101 percent. This reflects a continuous trend of improvement in the Aerospace sector in terms of their raw materials inventory turns, with a growth of 77 percent between 1992 and 2005².

On the finished goods side, the Aerospace sector had inventory turns that were below the average for the Manufacturing sector by 48 percent in 2005, a definite improvement from 1992 when their inventory turns were 89 percent below those of the Manufacturing sector on average. This is explained by a stronger growth for the Aerospace sector than for the Manufacturing industry in finished goods inventory turns during this period (57 percent compared to 23 percent respectively)².

In terms of total inventory turns comparison with the U.S., there is a very small gap, the U.S. having total inventory turns that were somewhat higher than that of Canada in 2005. However, this gap is not significant because both countries have very small total inventory turns that are similar and have been overlapping constantly for the past decade, both of them keeping to variations of no more than +20 percent,-20 percent over this period (with a unique exception for Canada in 2002, when a growth rate of 40 percent occurred)³.

Logistics Costs

The Aerospace sector has a logistics cost distribution that is particular, in that it is quite different from, not only the average distribution, but also from the distribution of sectors that were selected for comparison in this study.

The initial difference is that there are lot less logistics outsourcing costs in the Aerospace sector, relatively speaking, than in the Manufacturing average and in various sub-sector of Manufacturing. For instance, the Motor vehicle manufacturing sector has outsourcing logistics costs that are 4 times higher than those of Aerospace⁴.

A second difference appears when looking at inventory carrying costs, in term of percentages of total logistics costs. The Aerospace manufacturing sector has inventory carrying costs that are larger than the average for the Manufacturing industry and larger than those of various sub-sectors taken for comparison purposes. As an example, the Aerospace manufacturing sector has inventory carrying costs that are 46 percent higher than those of the Chemical manufacturing sector.

Finally, internal costs, expressed in terms of percentage of sales, are relatively similar for the Aerospace sector and the Manufacturing average. However, compared to some of the sectors taken for comparison, the Aerospace manufacturing sector has larger internal logistics costs, as percentage of sales (the difference being of 26 percent with the Motor vehicle manufacturing sector)⁴.

Technology

The focus used to be on SixSigma processes rather than on improving their supply chain agility and flexibility, but this is starting to change. Improving operational performance and shorter cycle times were identified as the top two drivers whereas increase in product quality came only as third.

Generally speaking, twice as many SCM high technology adopting firms enjoy a reduction in inventory carrying cost compared to low technology adopting ones. Furthermore, in terms of success to implement JIT Lean manufacturing, 71 percent of NA Aerospace and Defence firms experienced a reduction in supply chain costs as expected, compared to only 51 percent in average for the whole Industry⁵.