Aerospace industry buyers switch focus from delivery to cost
By Brian Milligan -- Purchasing, 7/15/1999
Buyers in today's aerospace companies want to improve internal operational performance and attack pricing and cost issues, and are significantly less concerned about delivery problems than they were last year.Those are some of the results of a recent survey of buyers at aerospace companies conducted by Ladish Inc. Co. The metal forger, located in Cudahy, Wis., has conducted the survey for the past three years. Ladish does 85% of its business in the aerospace industry. It surveys the companies that purchase aerospace forgings in an effort to better understand customer needs and to adjust its own business strategies as needed.
Gary Vroman, vice president of sales and marketing at Ladish, says the survey is particularly timely, since the aerospace industry is in flux. This is due, in part, to companies like The Boeing Co., which is projecting a drop in build rates for the next few years.
Vroman believes the Ladish survey is becoming more valuable because it now allows industry representatives to observe trends over at least a three-year period. This is particularly valuable to the notoriously cyclical aerospace industry.
"These answers are showing how they are changing in how they view the supply chain," he says. "You can see a steady climb in people's commitment to the right things."
The survey also concludes that:
- The market is slowing to the point where people are more concerned about pricing and cost issues than with delivery issues. Last year, delivery outpaced pricing and cost issues by a wide margin--53% to 22%. This year, 43% of survey respondents say that pricing and cost issues will dominate the time they spend with suppliers, and only 36% chose delivery issues.
- Most buyers in aerospace supplier companies still believe that long-term agreements are their most important strategy for acquiring cost-effective supplies.
- Most buyers say they will reluctantly maintain more than a single source for supply of some critical components.
Ladish's survey includes responses from 64 companies, 27 of which are located outside the U.S. Sixteen of the companies manufacture engines, 12 manufacture airframes, and 36 are suppliers to engine or airframe manufacturers.
Companies look inward
This year, 48% of those surveyed say improving operational performance is their company's first, most important strategy for sustaining a profitable, competitive operation in today's market. Thirty-six percent of those surveyed say their second most important strategy is demanding cost improvements from vendors.
By comparison, 18% of those surveyed say demanding cost improvements from vendors was the first, most important step toward staying competitive.
Vroman gives credit to those who chose improving operational performance as the most important strategy, saying they obviously care about how they are running their manufacturing facility. The answer suggests that these people are focussing in the right area, looking for problems or shortcomings in their own operation so they can improve and become more competitive.
"They deserve a lot of credit for that answer, because it is the right answer," Vroman believes. "By doing that, other issues will more or less take care of themselves."
Vroman says this answer probably differs greatly from the answer one would have gotten to this query some 20 years ago. He says those in the industry once would have focussed on buying components for less and selling parts for more in order to sustain profits and remain competitive. That sort of thinking has changed, he says, as the survey answer suggests. He says the answer suggests that people are learning, more and more, that their best opportunities to make themselves more competitive lie within their ability to improve their own operations. They can do this, he says, by looking up and down the supply chain and striving for better efficiency.
When asked what subject is consuming the majority of their time dealing with suppliers in 1999, 43% say pricing and cost issues. This is up dramatically from the 22% who reported this to be a major time consumer in 1998. It also shows a dramatic change from the 53% who chose delivery as the major area consuming their time in 1998.
Delivery now less of an issue
Vroman says this answer indicates that the market has slowed to the point where people are no longer focussing as much on delivery. In fact, a mere 36% of those who took the survey say worries about delivery consume the majority of their time. By comparison, 8% say quality issues consume the majority of their time, and 7% of those surveyed say they are concerned about process improvement issues.
"In 1998, it was customer satisfaction, getting their parts," he says. "Now what's happening is they are saying it is not so much a capacity issue."
Vroman says this is probably true because the market is not as competitive as before. Companies are now focussing on what they can do to bring business back up to where it was.
"If the market is more competitive, we spend more time focussed on price and cost," he says. "It's just another indicator of how customers are saying the market has changed. It will affect how people will approach business."
The most important companywide objective of surveyed firms is still to increase customer satisfaction, but the percent of those concerned about this has gone down dramatically this year. Only 17% of surveyed purchasers say keeping their customers happy is their most important objective. Last year, customer satisfaction ranked higher, with 27% of those surveyed saying this was their single most important company objective.
Edging close to the percentage who are concerned about customer satisfaction is concern about increasing market share. Sixteen percent of those surveyed say this is their single most important companywide objective, compared to only 10% who considered this their most important companywide objective in 1998.
Bringing in new work
Vroman notes that in 1997, a large percentage of those surveyed were still focussing on increasing customer satisfaction. In that year, 23% said this category was their main focus. Also that year, 24% were still concerned about increasing their market share. The percentages tell Vroman that firms are becoming more concerned about finding new customers and bringing in new work, as compared to keeping existing customers satisfied.
Vroman cautions that these answers don't indicate that companies are seeing a dramatic downturn in the market. In fact, the market still remains very strong.
But Vroman says the answers strongly suggest that the aerospace market has plateaued. This is not overly surprising given today's global economy, he says. The aerospace industry, fueled by orders from commercial airlines, felt its most recent bump in the road with the onset of the Asian flu. As countries like China, Korea, and other Asian tigers watched their economies fall into a tailspin, companies like Boeing received fewer orders for planes.
"In 1997, suppliers to big companies like Ladish had not yet filled their shops with work," Vroman says. "Work was increasing, but they weren't really full. Twenty-four percent said the important thing was to grab more business.
"In 1999, the increase is going up," he continues. "They want more customers."
Long-term agreements
This year's survey indicates that most buyers in aerospace supplier companies still believe that long-term agreements are their most important strategy for acquiring cost-effective supplies. It should be noted, however, that this percentage has dipped a little from the past year.
In 1998, 78% of those surveyed said long-term agreements with one or two strategic suppliers was the best strategy for acquiring cost-effective supplies. That percentage dipped to 73% this year. Meanwhile, there was a noticeable increase in the percentage of those who saw competitive bidding amongst many suppliers as the best way to acquire cost-effective supplies. Twenty-one percent of those surveyed chose the competitive bidding strategy, where one supplier is chosen at a time to provide raw material or parts, as the most important strategy for acquiring cost-efficiencies. In 1998, only 14% chose this as the most important means.
In a distant third place in this category, only 4% of those surveyed chose placing multiple orders with multiple suppliers for the same parts as the most cost-effective method. This is down slightly from the 6% who chose this method in 1998.
Even though the percent of those who believe in long-term agreements has dipped, the percentage of those who use them still remains high. Eighty-four percent of those who answered the survey say they prefer to establish long-term agreements with key suppliers whenever possible. By contrast, only 14% say they prefer short-term agreements with multiple suppliers to allow for price flexibility.
Vroman notes that the percent who are now striving for the long-term agreements really hasn't changed since 1998, when 85% of those surveyed said they are using long-term agreements.
Vroman says this makes sense, since long-term agreements are the best way to utilize key suppliers. He noted, for example, that Ladish has long-term agreements with 13 of its best customers. One is with Rolls-Royce Motor Cars Ltd., its largest customer. The two companies have an ongoing, cost-reduction effort that works for both sides. "Our engineering people sit with theirs, and it's a cost-reduction process that's good for both of us," he says.
"It's difficult for people to quickly switch sources in this business, and difficult for suppliers to quickly find new customers because the relationship between the two will take on highly engineered components and systems," he continues. "They have to work together, so there's a significant amount of testing and time to qualify new sources."
More than one source
In other areas, most survey participants say they reluctantly will maintain more than a single source for supply of some critical components. They do this, mostly, in areas where it is absolutely critical to assure supplies of key parts. Thirty-seven percent of those surveyed say they will do this. This percentage changed little from 1998, when 37% of those who took the survey said they would maintain additional suppliers for a key part or parts. The percent who say it is necessary to do this to assure procurement cost competitiveness and control also changed little, with 29% in 1999 saying they will do this, and 30% in 1998 saying they will do it.
Measuring performance
The survey also asked participants to indicate what they primarily use to evaluate the performance of their purchasing department. Most, as in 1998, say they use unit cost vs. target to measure this. Twenty-seven percent picked this in 1999, compared to 25% in 1998. The 1999 percentage equaled the percentage who picked this in 1997.
Twenty-three percent of those surveyed say they use annual contribution to lower total operating costs as the measurement, compared to the 18% who picked this evaluation tool in 1998.
Interestingly, 22% of the survey takers chose supplier on-time delivery measurement reports as the best evaluation tool. This dipped slightly from the 27% who picked this tool in 1998.
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