Strategic Evolutions in the Aerospace Supply Chain Key Success Factors for Aerospace Tier-1 Suppliers

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Arleen Johns
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1 Strategic Evolutions in the Aerospace Supply Chain Key Success Factors for Aerospace Tier-1 Suppliers Georg Hemmer, CEO Diehl Service Modules Århus, 27 November

Diehl Service Modules One of four operational Units SALES: over 700 m EMPLOYEES: 3,500 HEADQUARTERS: Laupheim, Germany Sales: 230 m Sales: 330 m Sales: 140 m Sales: 30 m

2 Diehl Service Modules One of four operational Units SALES: over 700 m EMPLOYEES: 3,500 HEADQUARTERS: Laupheim, Germany Sales: 230 m Sales: 330 m Sales: 140 m Sales: 30 m Employees: 1,200 Employees: 1,400 Employees: 490 Employees: 200 Shareholders: 51% Diehl, 49% Thales Shareholders: 51% Diehl, 49% Thales joint venture with joint venture with Trend

3 Diehl Aerosystems Building Blocks AIRCRAFT SYSTEMS CABIN INTERIORS Cockpit Systems Flight & Engine Control Systems Avionic Platforms Air Distribution Systems Crew Rest Compartments Comfort Modules Utility Systems Safety & Supply Interior Lighting Systems Systems Floor-to-Floor/ Lining Service Modules VIP Furniture From cockpit to cabin. Fully integrated or individual packages. 2

4 KEY TRENDS Lower labour costs and proximity to dynamic end-markets are driving up production capacity in emerging economies Washington Southern California Mexico Central US Quebec Connecticut Southeast US United Kingdom France Spain Russia Germany Eastern Europe North Africa UAE India China Malaysia Japan Brazil Singapore Established A&D Clusters Emerging A&D Clusters Major A&D manufacturing investments [EUR bn] 23 China 20 India 15 USA 10 Mexico 9 Russia 3

KEY TRENDS In addition, A&D suppliers are facing increasing cost pressure at all stages of the programs "At the end of 2011, Airbus announced that it was recording a 200 million charge on the A350

5 KEY TRENDS In addition, A&D suppliers are facing increasing cost pressure at all stages of the programs "At the end of 2011, Airbus announced that it was recording a 200 million charge on the A350 program" "The 787 production process will show a steep efficiency improvement within the next six months. Boeing will more quickly than on any previous program reduce the cost" "On the NH90 and Tiger Programs, Eurocopter has launched a comprehensive cost reduction program including redesign ideas by key suppliers" High pressure on OEM to improve their operating margin Increased competition of new entrants from new economies Increased competition from classical A&D suppliers facing decreasing Defense budget and refocusing on the Civil market Need to optimize design in the course of the program to recover from program delays Strong pressure on costs, at all stages of programs and levels of the supply chain 4

6 KEY TRENDS Especially Tier-1s run the risk of being "Stuck in the middle" Illustration for Tier-1 Pressure to reduce costs from OEM % ~70% A A330 long range 100% ~90% Pressure to increase prices from Tier-2 suppliers Part #1 Part #2 +16% +2% 2011 Increase Increase

number of suppliers Less and larger work packages 100% 100% 200-80% 100% Labour, tax and

7 KEY TRENDS OEMs are increasingly outsourcing large share of the work on major programs to an increasingly smaller number of suppliers Increasing Outsourcing by OEMs Reduction of the number of suppliers Less and larger work packages 100% 100% % 100% Labour, tax and depreciation 50% 20% 50% 80% Procurement 50% 40 Legacy programs New programs B777 B787 A330 A350 6

KEY TRENDS As a result, the A&D supply chain is forced to transform into a Multi-Tier structure Way of Working (Workshare) Legacy Programs Way of Working (Workshare) A350XWB With the A350XWB Sourcing

This generates a significant level of workload and additional disciplines and skills are to be build-up on the supplier side.

8 KEY TRENDS As a result, the A&D supply chain is forced to transform into a Multi-Tier structure Way of Working (Workshare) Legacy Programs Way of Working (Workshare) A350XWB With the A350XWB Sourcing Policy Airbus shifted most former Airbus tasks to the RSP s. Except the definition of an HoV, the RSP s are in charge of more or less the entire customization process. This generates a significant level of workload and additional disciplines and skills are to be build-up on the supplier side. The RSP has to work directly into the Airbus IT-environment being very time consuming. Beside the development of the equipment to be delivered, complete Data Sets have to be delivered by the supplier. All integration tasks of system components (e.g. IFE, CVMS = so-called Airbus Defined Equipment) shall be coordinated and performed by the Module Supplier (DSM). 7

9 SUCCESS FACTORS Three success factors for suppliers in a changing world Drive consolidation Build up new capabilities Collaborative action 8

10 SUCCESS FACTORS #1 RSPs/Tier-1s need to extend their size and scope by taking advantage of M&A opportunities 9 Market consolidation level # of Aerospace M&A deals Aerostructures Flight Controls Avionics & Defense Electronics Environmental Control Systems Wheels & Brakes Electrical Power & Distribution Nacelles & Thrust Reversers 150 Engines Interiors Landing Gear APU 0% 20% 40% 60% 80% 100% st supplier 2nd supplier Other Suppliers Source: ICF, Catalyst Corporate FInance 9

SUCCESS FACTORS #1 Example Cabin Interiors: Emergence of Super-Tier-1 Cabin Interior market consolidation [2006-2011] Zodiac (France) Diehl Aerosystems (Germany) Zodiac 2008 2010 2011 Diehl

11 SUCCESS FACTORS #1 Example Cabin Interiors: Emergence of Super-Tier-1 Cabin Interior market consolidation [ ] Zodiac (France) Diehl Aerosystems (Germany) Zodiac Diehl Aerosystems Driessen Airbus Laupheim 1) Sell Heath Tecna Contour Dasell Mühlenberg Thales (France) B/E Aerospace (US) Thales B/E Aerospace 2008 Diehl Aerospace (49%) 2) Dräger Airbus Laupheim 1) [New JV] 3) 1) JV between Diehl (51%) and Thales (49%) 2) Thales took a 49% stake in Diehl Aerospace 3) JV created in IFE segment with the Chinese companies COMAC and CETCA Source: Roland Berger 10

12 SUCCESS FACTORS #2 RSPs need to secure their ability to be involved from the early phase of the programs CONCEPT DEFINITION DEVELOPMENT POST DEVELOPMENT A380 System Requirement document Purchaser Technical Specification RFI launch RFP launch Supplier selection A350 Pre-definition (Functional Specification) Joint definition (System architecture) Supplier System Specification Supplier Equipment Spec. Equipment Development Supplier selection Source: Airbus, Roland Berger 11

SUCCESS FACTORS #2 Engineering efficiency is key as major portion of the product costs is determined in very early design stages ENGINEERING EFFICIENCY Ensure strict design to cost and design to

13 SUCCESS FACTORS #2 Engineering efficiency is key as major portion of the product costs is determined in very early design stages ENGINEERING EFFICIENCY Ensure strict design to cost and design to manufacture approach in early design phases Keep objective view on actual vs. planned costs during development and industrialization Establish performance and risk based contracts with Engineering suppliers Developing a product portfolio is key to address a multi-client environment PRODUCT COSTS Product costs Concept dev. System design Detail design Earlier supplier involvement Refinement Manufac turing In service Cost defined Cost incurred Knowledge Source: Roland Berger Study "Purchasing excellence" 12

14 SUCCESS FACTORS #2 The ability to optimize product costs during the course of programs needs to be develop STEP 1 STEP 2 STEP 3 Product teardown Quick scan ABC analysis Identification of cost drivers Target cost modelling Competitor benchmark Identification of alternative design approaches Cost benchmarking Commercial evaluation Product analysis Components Drawings Cost structure STEP 4 STEP 5 STEP 6 Opportunity portfolio COST OUT APPROACH To reach minimum product cost, a list of tools and methods can be applied After detailed product costs, cost drivers and competitor benchmarks are conducted, with the aim is to establish a suitable target costing model Commercial evaluation represents the realization of the new product cost approach Detailed calculation Benchmarking Supplier review Tier 1 and tier 2 Development of joint improvement portfolio Source: Roland Berger 13

SUCCESS FACTORS #2 Tier-1s and Tier-2s require Supply chain excellence Key components of supply chain excellence Supply

qualification Negotiation of supplier contract Evaluate supplier performance Evaluate alternative suppliers Tracking and

ramp-up Quality Delivery performance FAI Cost saving Product improvement ideas from supplier Weight Cost Lead time LCC

15 SUCCESS FACTORS #2 Tier-1s and Tier-2s require Supply chain excellence Key components of supply chain excellence Supply chain challenges during ramp-up Supplier selection/ assessment Supplier management Supplier selection Supplier qualification Negotiation of supplier contract Evaluate supplier performance Evaluate alternative suppliers Tracking and controlling of KPIs (delivery, quality) Negotiation of local contract Local ordering, call-off Process invoice Capacity ramp-up Quality Delivery performance FAI Cost saving Product improvement ideas from supplier Weight Cost Lead time LCC footprint/offset requirements Supplier development Audit of ramp-up capacity Optimization of manufacturing processes Source: Roland Berger 14

16 SUCCESS FACTORS #3 Right Program Management organizations is a key enabler for collaborative way of working LIGHT MEDIUM HEAVY Marketing & sales Legal Finance Engineering Marketing Engineering PM PM Legal Planning Operations preparation Finance Operations CONSOLIDATE AND VERIFY Purely functional organization: no clear leader to manage critical path or define priorities & trade-offs Little control of lead times STRUCTURE, COORDINATE AND DRUMBEAT Dedicated PM to coordinate dedicated interfaces within functions, resources remain under the Functions authority Balance adapted to most Programs STEER AND PERFORM Dedicated organization: resources belong to Program, not to Functions Little external control, but fit with highly complex / timeconstrained situation Source: Roland Berger 15

SUCCESS FACTORS #3 RSPs need to be flexible enough to implement collaborative ways of working with OEMs Examples of good practices PROGRAM MANAGEMENT ENGINEERING SUPPLY CHAIN MANUFACTURING RSP Shared

17 SUCCESS FACTORS #3 RSPs need to be flexible enough to implement collaborative ways of working with OEMs Examples of good practices PROGRAM MANAGEMENT ENGINEERING SUPPLY CHAIN MANUFACTURING RSP Shared KPIs Integrated schedule Joint decision making process Shared resource planning Joined change management process Shared KPIs on sub-tier progress Joint sub-tier capability assessments Joint process for nonconformity management Joint steering of readiness improvement plans OEM Source: Roland Berger 16

18 Contact Diehl Service Modules Vierenkamp Hamburg Phone Fax

Global Investor Forum 2008

Global Investor Forum 2008 Power 8 & A350 Fabrice Brégier Airbus COO Seville, 17 th January 2008 1 1 Safe Harbor Statement Certain of the statements contained in this document are not historical facts