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Networked capabilities for A&D supply chain and operational excellence
Many aerospace & defense (A&D) companies are under intense pressure to deliver stronger financial performance. The margin for error is thin, with increasing competition often from non-traditional sources. Both defense and commercial A&D manufacturers, regardless of their position in the supply chain, are balancing greater production expectations with cost reduction mandates.
- Key to success
- Production increase and cost reduction challenges
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Keys to success
Our experience shows that the key to success in this challenging environment is the interface across internal operating functions. And with over 70 percent of the cost of the average program tied to the supply chain, this success often also involves robust alignment with supply partners.
Unfortunately, over time, many companies have developed capabilities and expertise that reinforce these functional silos. For example, some companies have a high-performing procurement function and high-performing engineering function but are less mature in aligning engineering and procurement objectives (e.g. Design for Cost). This lack of alignment can be compounded by a management culture and performance metrics that, as the functions excel, make managing the interface increasingly difficult. Functional excellence with weak interfaces can actually destroy value in the form of cost, margin, working capital, and production performance.
Companies are striving for better ways to manage cross-functional performance to achieve operational excellence. Looking at this challenge through a different lens, we have defined a set of seven capability areas that lay the foundation for operational excellence. Some of these could be within a functional organization and others are shared across functions. Each of these seven capability areas has multiple individual capabilities. And each of these individual capabilities can be managed and optimized to excellence. But effectively managing an individual capability can reinforce isolation of a function and sometimes, preclude company-wide operational excellence.
Production increase and cost reduction challenges
Companies facing both production increase challenges and cost reduction challenges will typically employ functionally-specific improvement efforts. For example, procurement optimization initiatives are common. The emphasis is typically within the supply chain or procurement function with the objective of reducing indirect and direct material cost or improving purchasing effectiveness. These initiatives can drive significant value but often lose effectiveness when other functions are engaged. For example, negotiations with a key supplier about direct material cost can only go so far before an engineering redesign is required to further reduce cost. However, the collaboration between procurement and engineering is sometimes flawed due to misaligned priorities, metrics, or leadership objectives.
We have observed companies with more advanced capabilities consider an end-to-end or value stream perspective on performance. These efforts are typically focused on a specific operational problem and target a sub-assembly or portion of the bill of material or specific element of supply. This management approach can be shown vertically in the diagram. Value stream management enables tighter alignment across functions and can provide dramatic improvements especially when managing complex and multi-tier supply chain risks. Specific improvement tools like war-gaming, simulation modeling of tradeoffs, and integrated planning and production synchronization can deliver significant value.
A new approach to operational excellence is evolving that builds upon a horizontal functional excellence foundation and expands beyond the vertical value stream management structure. This operational excellence approach is a network-oriented management philosophy that expands and contracts across individual capabilities depending on the challenge faced.