Aerospace Logistics: Building for Growth
Supply chain improvements, and specialized service providers, keep the aerospace industry flying high.
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The world has an insatiable appetite for air travel, which is creating massive demand for new planes. Airbus' latest Global Market Forecast predicts the need for more than 29,220 new freighter and passenger aircraft, and estimates the world's overall passenger aircraft inventory will double from 17,739 in 2013 to more than 36,500 by 2032.
"It's a paradox: The airline industry is suffering, but there have never been so many orders for new aircraft," says Joël Glusman, president and CEO of The Aerospace Logistics Alliance (TALA), a Miami-based cooperative that provides supply chain management, freight forwarding, and customs clearance services to aerospace companies.
This backlog, particularly from Middle East buyers, is putting pressure on the aerospace industry to produce planes more quickly, efficiently, and profitably. Aircraft manufacturers are challenged to make lighter aircraft with lower fuel consumption, using materials sourced from a geographically diverse supplier base. Technical challenges are also delaying some production timetables, causing a ripple effect through a carefully planned schedule of costly incoming parts timed to keep inventories low.
A related demand is to keep the planes flying—servicing and managing replacement parts across an increasingly global footprint. Those pressures are elevating supply chain management to an unprecedented status within aerospace organizations, which have historically emphasized research and development, and manufacturing. They're also prompting aerospace companies to hire third-party logistics (3PL) providers to manage inbound materials movement, production, maintenance, repair, and overhaul operations.
"The aerospace supply chain is five years behind the automotive and high-tech industries," notes Erik Goedhart, senior vice president, aerospace for Kuehne+Nagel, a global supply chain solutions provider. "So 3PLs are trying to adapt automotive and high-tech supply chain concepts for the aerospace industry. Regulation is a key topic in aerospace; however, companies often use it as an excuse not to make improvements in the value chain."
Battling the Backlog
"During the next few years, 20 new aircraft will be in circulation that are not built yet," says John Brennan, managing director, government sector at UPS. The parts to build those new planes are sourced from more than one dozen different countries, increasing lead time, complicating customs clearance, and challenging supply chain managers to match the right parts and orders to the right modes and trade lanes in time to meet narrow delivery windows.
"This shift is stretching the elasticity of the aerospace supply chain," Brennan adds.
Signs of progress, however, are emerging. In April 2013, Airbus broke ground on a $600-million A320 Family jetliner final assembly line in Mobile, Ala., which will become the global company's first U.S. production facility. Aircraft assembly is scheduled to begin in 2015, with the first delivery targeted for 2016. The Gulf Coast location will enable parts to be delivered from global locations via deep-sea vessels, in addition to other modes. Airbus' move spurred its suppliers to also open facilities in the area, which is increasingly becoming a hub for the aerospace and defense industries.
Meanwhile, Boeing is deciding where to manufacture its 777X aircraft, which it launched at the 2013 Dubai Airshow with a record-breaking 259 orders from four customers across Europe and the Middle East. The 777X's design includes a new composite wing. Production is set to begin in 2017, with first delivery targeted for 2020.
Streamlining Parts Flow
Both new and current model production lines require improved processes for the inbound flow of parts. "Aerospace companies are striving to streamline movement, and continuously synchronize the manufacturing process," says Kim Wertheimer, executive vice president of the global industrial sector for supply chain management company CEVA Logistics. "Previously, those processes were batch- or project-oriented."
One improvement involves determining how to move the parts. While most aircraft components are parcel-size, some can scale up to an engine or wing, which requires specialized handling, racks, and conveyances. Given tight production timeframes, and the nature of the business, aerospace companies make heavy use of air freight to move components, taking advantage of its value, lead times, and contract terms. But they also use some ground, rail, and steamship transportation, which requires careful coordination, particularly as points of origin grow more diverse.
"Like automotive companies, aerospace companies have moved some sub-assembly activities to low-cost countries," says Wertheimer. "They've extended their supply chains to 3PLs to support the manufacturing process, and handle staging, kitting, and other tasks."
Those other tasks include providing visibility to the order and part level, determining total delivered cost, and synchronizing the flow of material from suppliers using tools such as warehouse, event, and transportation management systems.
As manufacturing supply chains become more disciplined, inbound materials movement is becoming less urgent and more synchronized, with supply chain managers monitoring flow and communicating with suppliers to address exceptions.
In addition to moving parts cost effectively, aerospace supply chain managers must meet increasingly tight delivery time windows. "In the past, meeting delivery schedules was easy because companies held one month's supply of buffer stock close to the plant," says Goedhart. "Today, however, the increased production tempo results in less stock held at the plant or with vendors. Aerospace companies are more frequently requesting that their 3PLs manage vendor relationships and inbound logistics.
Flight Path: A Growing Market for Freighters
About 870 new aircraft will be required over the next two decades, driving aerospace companies to reconfigure their supply chains to handle demand.
Source: Global Market Forecasts 2013-2032, Airbus
"It's helpful to develop close relationships with those suppliers, so they can anticipate issues and create contingencies based on past experience," he adds.
Supply chain managers must also contend with the increased risk for disruption that accompanies global sourcing. When a volcanic eruption in Iceland disrupted air travel in 2010, for example, parts suppliers had to reroute orders through southern Europe via ground, then get them in the air. That risk is being compounded by a move to reduce the number of suppliers from hundreds to dozens. Take into account additional tiers, and the total supply base can number in the thousands. The same is true of logistics providers: aerospace providers want to work with only one or two that understand the industry's specialized needs and can handle the scope.
Borrowing from Automotive
One inbound materials management idea aerospace is adapting from automotive is creating a vendor village: building a warehouse at the front of the production line where goods are combined into multi-function units designed for each aircraft in the queue. This strategy reduces stock in the value chain by 15 to 20 days.
"Besides cost savings, the big benefit is that once an aircraft is produced, changes to parts can be implemented more rapidly because of the small amount of stock in the supply chain," says Kuehne+Nagel's Goedhart. "This strategy is intense to manage, but far more flexible."
Northrop Grumman Aerospace Systems is employing another strategy new to the aerospace industry. The military contractor tackled its materials flow system by reorienting its Joint Strike Fighters and F18s supply chain to pull, rather than push, inventory. In the past, the company would send a purchase order to a supplier and specify delivery dates for parts. A subcontractor could then deliver, say, 48 center fuselage assemblies at regular intervals over the course of one year.
But production didn't necessarily move at that pace: schedules may accelerate, or fall behind. Nevertheless, those parts would keep coming, building up inventory if they were not needed or slowing production if the line had to wait for the next shipment.
Using the Material Acquisition Pull System, Northrop Grumman Aerospace now provides suppliers with a minimum and maximum level for inventory, and they are free to deliver as they want in order to stay within those parameters.
"The pull system has been a huge success," says Wink Williams, director of goods movement for Northrop Grumman Aerospace Systems. "We don't have to worry about big inventory fluctuations, and buyers no longer need to issue change orders with new dates."
Keeping Planes Flying
Once aircraft are inducted into service, it's up to carriers and their partners to maintain their aircraft, including regular and emergency parts replacement. That's a costly undertaking, adding to the many other pressures currently impacting airline carriers: consolidation of major players, rising debt, pressure from low-cost airlines, depressed cargo demand, the rising incidence of natural disasters and other disruptions, and escalating costs. Carriers also are looking to trim costs and streamline spending as much as possible.
With the advent of deregulation, airlines began outsourcing some parts of their operation not considered a core competency, and that trend is now escalating. Many airlines began by entrusting maintenance, repair, and overhaul (MRO) to OEMs or MRO specialists, followed by catering, aircraft loading/unloading, and fueling. Some are even spinning off their own MRO units into independent companies.
When outsourcing MRO, as well as the logistics around MRO parts and other components, airlines are seeking global reach, speed, visibility, 24/7 service, a single point of contact, and management of spare parts inventory including reverse logistics. Airlines only make money when they're flying, so service providers must be highly responsive and offer exceptional service levels.
"When outsourcing, the main concern of air carriers is not how much it costs, but how the service provider will do what needs to be done," says TALA France's Glusman. "Price comes second to customer service."
One approach to outsourcing is "Power by the Hour"—the concept of paying a flat hourly rate to ensure complete service, support, and replacement parts. Engine manufacturers have long offered this model, and it is now being applied to other types of equipment.
When a plane is grounded and in need of a part, time is of the essence. Getting the part there is the bailiwick of providers such as TALA France. When a customer needs a part, TALA France formulates a solution within one hour, and uses whatever means necessary to deliver the part—via ground, the customer's own airline, another airline's scheduled service, charter, even hand-carried.
The unpredictability means "flexibility is essential," says Glusman. Being able to support both scheduled maintenance and emergency needs requires TALA France to strategically stock parts in the right places, as well as work closely with parts suppliers.
"We're seeing an increase in the number of urgent shipments for aircraft on ground (AOG)," says Morten Jensen, corporate market director, aerospace and defense, for Geodis, a global logistics provider headquartered in Clichy, France. "Because manufacturers are trying to reduce inventories and enable just-in-time delivery, the number of urgent shipments is up." That means service providers are required to offer round-the-clock staffing to address emergencies.
Increasingly, those parts are supplied from manufacturers spread across a broad geography, making quick fulfillment even more complex, and requiring service providers to operate in diverse locations.
The United States and other governments impose strict rules about tracing the location and history of airline parts, down to the serial number. Airline parts are often high-value and have a limited lifecycle, so each one must be monitored and replaced on a specific schedule.
That means reverse logistics is as much a part of the job as distribution—not only moving the parts, but monitoring them through repair, returning them to service, and providing visibility to the carriers.
Tracking expectations also are growing increasingly sophisticated and granular, with more data collection points and greater detail. Air carriers want to be able to search databases by reference, project, or purchase order number. Parts are also growing more specialized, with less ability to share them across airlines, complicating inventory management.
RFID and GPS are emerging as options to increase visibility and tracking of aircraft components. TALA France, for example, is considering RFID for parts tagging. CHEP Aerospace Solutions, which offers management of unit load devices (ULD) and galley carts as well as MRO for non-flight-critical equipment, is in the midst of a two-year project to test GPS devices in ULDs. The devices will supplement the container tracking currently attained through flight load sheets sent via EDI to a central tracking location in Bangkok.
Cargo airline Cargolux is currently testing GPS for high-value containers of shipments such as pharmaceuticals. "Visibility is not limited, but it is based on human activity," says Henrik Ambak, vice president, ground services and commercial IT at Cargolux. "But GPS can be used without a human touching the shipment.
The confluence of all these changes is challenging aerospace logistics. "In the past, standardized solutions were the norm," says Geodis' Jensen. "Today, aerospace companies require tailored solutions. No two companies are alike."
On the production side, some aerospace companies still struggle to attain the same visibility into order status with Tier 2 and Tier 3 suppliers as they have with Tier 1 suppliers.
"As they transform into end-product integrators, large OEMs largely contract out the supply risk to their Tier 1 suppliers. As a result, they have lost visibility into the more distant part of their supplier network," says analyst firm KPMG in its 2013 Global Aerospace & Defense Outlook. Some signs of change are emerging, however. "We are seeing much more integrated information flow, even to the lower tiers of supplier," notes CEVA's Wertheimer.
Outsourcing ULD Management
One component most aerospace companies have seen fit to outsource is ownership and management of ULDs, such as containers and pallets for both freighters and passenger aircraft. CHEP Aerospace Solutions created a global network to repair this equipment at sites across the globe. Baggage containers are damaged an average of 1.5 to two times annually.
When airlines managed these repairs themselves, they would have to fly an empty, damaged container to a central location for repair. CHEP offers on-location repair, as well as asset pooling: Purchasing an airline's ULD or cart assets, then maintaining and managing them for a fixed monthly fee.
"Cargo can experience volatile demand," says Dr. Ludwig Bertsch, president of CHEP Aerospace Solutions. CHEP's solution helps balance that volatility, and reduce overall inventory while ensuring ready availability.
One airline reaping such benefits is Cargolux. "Carriers need to decide what core competencies to keep in house, and what they can safely outsource to reap the financial benefits of pooling equipment," says Cargolux's Ambak.
In 2009, the airline ran parallel studies comparing outsourcing to CHEP against substantially enhancing its in-house program for managing ULDs. The outsourcing route was deemed more beneficial. Since then, the move has delivered on Cargolux's financial goals and solved many equipment management problems without introducing new ones, Ambak says.
Cargolux avoids using revenue-generating space to move specialized container equipment, and experiences lower safety stock levels resulting from pooling. "Instead of three airlines, each with 10 pallets at one location, you only need 15 pallets as safety stock, reducing the total asset investment required," Ambak says.
Lighter Planes, Lower Fuel Costs
A priority for most airlines is reducing their number-one cost: fuel. Because weight increases fuel consumption, carriers are focused on shifting to lighter planes, often through the use of composite materials.
The shift toward lighter weights is driving CHEP Aerospace Solutions to pursue new materials for its ULDs. The company's Innovation Center in Orlando, Fla., is testing materials that adequately balance weight, strength, cost, and serviceability. Composite tends to weigh less, but also offers less damage protection, and can cost twice as much. In addition, aluminum's malleable properties make it easy to repair.
The same can't always be said of composite materials. In January 2014, CHEP began testing a pallet that weighs 143 to 150 pounds, compared to the 245- to 254-pound weight of a standard pallet. "The new pallet would offer a tremendous benefit," says Dr. Bertsch. "Carriers could save weight and load more cargo."
But composite parts have not yet cleared the necessary financial hurdles. "To date, fuel savings are outweighed by higher purchase and maintenance costs," says Ambak.
The other challenge is in transitioning from one set of ULDs to another when airlines are adopting at different rates, requiring two separate pools of inventory. As fleets change over, "we need to be able to follow that with spare parts," says Jensen, supporting both older and newer planes as they accumulate flight miles.
In 2013, for example, Air France signed on as a CHEP customer in a deal that includes ULD management, as well as transitioning the airline to new, lightweight composite containers for its fleet of widebody aircraft.
All these trends and demands are challenging the aerospace supply chain at every turn—from pre-production all the way through to after-sale service. That's elevating the role of logistics as an enabler.
Aerospace manufacturers, for example, "are looking to supply chain management as a lever to improve efficiency and cost," says CEVA's Wertheimer. "They want to drive velocity to enhance order-to-delivery time reliability, and improve total cost of delivery.
"That includes cutting inventory costs by synchronizing the flow to reduce inventory in the pipeline, decrease buffer stock and excess inventory, and improve the quality of supply chain visibility and on-time performance," he says. "Aerospace companies also want to decrease variability and therefore risk. It's a much more strategic application of supply chain management and logistics."