Wednesday, September 25, 2013

Supply Chain structure of the Aerospace Industry and Challenges

General Structure

The Aerospace industry is dominated by a few large companies like Boeing and Airbus. These large players are supported by a vast supplier base globally, including large and sophisticated engine and avionics manufacturers like General Electric Aircraft Engines (GEAE), Rolls-Royce, Honeywell and Pratt & Whitney. They are referred to as tier-one suppliers, and play a significant role in the aerospace industry.

Tier I suppliers are further supplied by a large base of tier 2 and tier 3 suppliers, which
serve multiple industries (such as industrial manufacturing or automotive). These tier 2 and 3
suppliers supply all tier 1 suppliers, which share this common supply base. The tier 2 suppliers include companies such as L-3Communications, Harris or Parker-
Hannifin. These are followed by tier 3 suppliers which include suppliers of machined
components such as castings and raw materials suppliers for metals and rubber. Except for the
first level of the supply chain who do not trade among themselves (aircraft manufacturers such as
Boeing and Airbus), companies actively buy from and sell to each other.
Hence, for example, Honeywell and Rolls-Royce are competitors and might collaborate and trade between themselves too. Therefore, the industry is symbolized by collaborative programs and equity cross holdings between aircraft manufacturers (Boeing and Airbus) and its tier 1 suppliers. At tier 2, 3 and 4 levels, there is a large and diversified manufacturing base which is shared by the consuming
supply chain tier above it.

Challenges Ahead

The biggest challenge facing the industry is a maturing market, slowing growth and industry consolidation. Since growth is slowing and each level of the supply chain is consolidating, it puts pressure on each layer to become efficient and cost effective to survive and gain market share from its rivals. This defines the opportunity for operational improvements at each layer of the supply chain because the survival of each company depends on whether it can deliver a better quality product at a lower cost, and on time to its customer base.

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