Global Economy Causing Big Changes in Aerospace and Defense Industries

The challenging economy that continues to grip the world has accelerated changes that were already underway in the aerospace and defense (A&D) industry. Deregulation, the high cost and complexity of designing and building airplanes, and the rise of the multi-polar world necessitated that A&D companies reconsider their operating models and seek new opportun­ities.

 

Accenture (News - Alert) research of past recessions demonstrates that the companies that emerged as winners were those that invested in a common set of capabilities. For today’s A&D companies, these include managing the shift from manu­facturing to services, pursuing operational excellence, taking a balanced approach to cost reduction, targeting “bargain” acquisitions, and outsourcing strategically.

 

 

The past five years have seen many A&D companies push services to the top of their priority lists. Opportunities abounded. Militaries introduced the world to contracts through which third-parties were entrusted with maintaining a prescribed level of readiness. For example, commercial airlines bought aircraft looking to manufacturers to provide services that are, in many cases, nascent and non-existent. The weak economy has also increased the focus on service as companies focus on extending the useful life of legacy platforms as funding shortfalls slow the roll-out of new ones.

 

Accenture calls the companies that successfully navigate this shift “original equipment integrators.” These companies engage collaborators to assist in non-core activities, permitting these integrators to focus on core engineering, systems integration, final assembly, and high-margin services. Those that successfully make this shift will:

 

 

 

 

 

 

 

Becoming an original equipment integrator poses additional challenges. Commercial and military equipment manufacturers are increasingly relying on working with other companies to share the growing costs and risks of new program development, engineering, and manufacturing. While effective in this regard, such collaboration has increased the complexity of already intricate supply chains. Those companies that successfully manage this complexity have the opportunity to emerge from the recession as winners.

 

For many years these aerospace and defense companies have applied operational excellence initiatives such as Lean and Six Sigma to their in-house manufacturing assembly operations. The time has come to apply the same operational rigor to the extended enterprise. As collaborative models move to the center of the A&D operating model, successful program execution will require upstream and downstream supply chain visibility, common metrics, and shared standards. Internally, by increasing rigor in areas such as shared services, A&D companies can reduce selling, general and administrative costs, while improving how they serve both internal and external customers.

 

 

How and where companies cut cost is of paramount importance. Yet recessions often trigger reflexive cost cutting that actually chokes off strategic initiatives. By strategically managing rather than cutting costs, companies can reduce non-core spending while preserving core initiatives that position them for future growth. In years past market rigidity allowed aerospace and defense companies to broadly cut costs, retrench, and wait for the market to return to normal. The emergence of new competitors, new technologies, a new financial landscape, and new demands for efficiency and quality has eliminated the luxury of waiting. Recessions, once a trigger for retrenchment, are now a call to invest and reinvent.

 

 

Acquisitions become more enticing as overall equity market declines reduce the enterprise value of target companies. Yet a price reduction should not signal an “open hunting season” for any and all companies who meet this fate. A&D companies still need to rigorously screen potential acquisitions and find a target that generates a structural advantage in portfolios, capabilities and geographies. Most importantly, acquisition targets should share the cultural similarities that often distinguish successful acquisitions.

 

 

Many A&D companies already use information technology (IT) application and infrastructure outsourcing to limit fixed costs and leverage companies that specialize in IT. Some companies also use business process outsourcing arrangements in non-core areas such as human resources and finance. But outsourcing is more than arbitrage. When extended beyond these “traditional” areas, outsourcing offers an opportuni­ty to expand the depth and breadth of business capabilities. Furthermore, the shift from commodity outsourcing to higher value managed services can help A&D companies accelerate their international expansion, and meet the offset obligations they can incur.

 

 

Resources are stretched thin across the A&D industry. The reflexive response may be to cut, dig in and wait. There is a better answer. By balancing today’s imperative to control costs with tomorrow’s needs for efficiency, innovation and agility, aerospace and defense companies can emerge from the downturn as winners and high-performance businesses.