Paul Adams is a Director and Aerospace & Defence sector specialist at Vendigital. He recently shared his insights with ADS Advance.
Just when the civil aviation industry is starting to make good progress in ramping up production in response to demand for new aircraft, yet more mega orders were placed at the Dubai Air Show and demand levels across the defence sector have rarely been higher.
Yet what does this mean for buffer stocks – will they need to continue for a while longer?
The truth is that with so much growth in the sector, OEMs and their supply chains cannot afford to turn the lean dial back as far as Just in Time (JIT), even if they wanted to, meaning buffer stocks are here to stay.
While significant progress has been made in the civil sector to meet ramp-up demands and rates have begun to soften in some areas, the performance of individual suppliers remains variable. As we know, just one distress call from a downstream supplier can cause significant disruption further up the chain, which means keeping some buffer stock seems sensible. Even if OEMs and their suppliers find that they are operating with too much buffer, they can address this simply by waiting for the ramp up to erode some of the excess.
In the defence sector, the picture is somewhat different and rates are rising sharply. The Ukraine crisis has caused demand for ammunition and equipment to soar globally and many suppliers are struggling to hit the rates expected of them. Further demand linked to the current conflict in Gaza is adding to the ramp-up challenge. For procurement teams operating in these challenging times, increasing buffer stock to mitigate the risk of supply chain disruption has become a necessity.
There are other reasons why JIT practices in the aerospace sector are unlikely to make a comeback anytime soon. Advances in digital technology have enabled OEMs and their suppliers to create agile, data-led management tools that offer improved supply chain visibility and connectivity. These systems can link supply performance to stock management seamlessly in real-time, allowing managers to smooth over any potential issues as and when they arise. As well as informing procurement strategies, these tools are opening the door to other value-driving opportunities in areas such as cost control and working capital management.
The increased input of data scientists is adding value to businesses in so many different ways. A growing number of businesses are choosing to design and develop bespoke AI-powered systems capable of predicting operational risk events before they happen. These reliable, data-led systems are increasingly viewed as invaluable assistive tools, supporting managerial decision-making, particularly in areas such as capacity planning.
Another problem with the current rate ramp up situation is that there is always the risk that businesses might forget how to manage in leaner times. At the moment, they are focused on sweating existing assets to keep pace with rate increases but as soon as rates start to flatten, concerns about cost and productivity will come to the fore. This is when lean management principles, such as value stream mapping, demonstrate their worth by helping businesses to right-size for the long term.
Rather than resuming JIT practices because they are familiar, the civil aerospace and defence industries need to focus on making the right decisions for the long term by investing in the right way at the right time. Lean thinking is still important of course but only as much as developing digital tools that can mitigate risk and improve operational efficiency. Investing to enable capability in critical areas, such as tooling, is also important and will help businesses to grow sustainably in the future.
Looking ahead to 2024, businesses in the sector need to focus on investment. With the UK inflation rate projected to fall and interest rates to follow, businesses confidence should begin to improve. The opportunity to take advantage of fiscal incentives, such as R&D tax relief and enhanced capital allowances, should also help to drive these changes.
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