Digital: The next horizon for global aerospace and defense

Digital can help A&D become more resilient, efficient, and innovative. Here’s how.

Aerospace and defense (A&D) companies create some of the world’s foremost technological marvels and have pioneered applications of digital and analytics technologies in many of their products. However, now digital presents a new opportunity for A&D companies to embed it across their value streams, enabling them to design, build, and service products with greater speed, efficiency, and quality.

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A new McKinsey research effort, in partnership with the Aerospace Industries Association (AIA), found that advancing the digital maturity of the A&D value stream could unlock $20 billion in annual EBITDA (see sidebar “About the research”). This value would come from both cost and growth opportunities across the value stream—from engineering to supply chain, manufacturing, aftermarket services, and support functions.

Digital also has the potential to create substantially more value for customers in the form of more innovative, reliable, and affordable offerings that get to market more quickly. Several trailblazing companies in A&D are showing how this is possible.

Yet delivering this value will not be easy. The reality is that A&D has a long way to go to leave behind paper-based processes, fragmented data systems, and stubbornly manual operations. To become a digital leader and realize the digital value at scale, A&D will need to transform every aspect of how it approaches digital across strategy, talent, delivery, technology, data, and adoption. This article explores the opportunities digital creates for the A&D sector and what it will take to capture them.

The value at stake and where to find it

Across the global A&D sector, $20 billion in incremental annual EBITDA (an approximately 10 percent improvement based on 2018 global sector EBITDA of $200 billion 1 ) can be created through digital. This value will come from both OEMs and suppliers, and from expanding revenue and reducing costs across the value stream: engineering, supply chain and procurement, manufacturing, aftermarket services, and support functions (Exhibit 1).

Global A&D could unlock more than $20 billion in potential value from digitization.
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As a sector, A&D is in the early stages of capturing the value of digital across all elements of the value stream, with supply chain showing the most value-creation potential. Exhibit 2 shows how far along companies felt they were in deploying—and capturing value from—digital, ranging from “not started” (where companies felt they have little to no activity under way) to “early stage” (where initial pilots may be under way but value capture so far has been limited) to “at scale” (where digital and analytics have been deployed broadly and are leading to substantial, ongoing impact).

A&D companies are most advanced in using digital for R&D, but they can realize more impact across the value stream.
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As a whole, the companies reported making the most progress in improving the digital maturity of their back-office functions and R&D. The progress of R&D is perhaps understandable, given the sector’s strong technical acumen and emphasis on digital innovation and engineering, the latter of which is also being prompted by the US Department of Defense.

However, even A&D companies recognize the room for improvement in how digital is deployed across the entire value stream—particularly in manufacturing and supply chain, which together compose 44 percent of digital’s value-creation potential. Without a plan rooted in where digital can drive the most value, companies will not realize the full benefit of what digital can offer.

The challenges facing the A&D sector in advancing digital maturity can, to a degree, be explained by several of the unique challenges it faces compared with other sectors, including demanding customer requirements; costly product development; long product life cycles; legacy incentive, funding, and customer procurement structures; the imperative for safety and compliance; and legacy systems. However, several digital leaders in A&D (and other sectors) are showing how these challenges can be overcome.

Research, design, and development

A&D engineers have developed some of the world’s most advanced digital and analytical methods. At the same time, the design of record for some A&D products is still on paper, and design work often requires manual checks and is plagued by quality and cycle time issues.

To reach the next horizon of engineering productivity, speed, and quality, the sector will need to place a new emphasis on analytics-driven productivity and the digital twin—areas many companies are already starting to explore, but in which there is still significant opportunity to accelerate and scale efforts. For instance, only 35 percent of A&D firms in this study reported that they use digital and analytics to inform their product designs or improve throughput and quality in their engineering function. Because engineering forms the basis for everything else in the value stream, the impacts of these inefficiencies are wide-reaching, extending deep into the quality and productivity of the supply chain, manufacturing, and operations.

Digitizing engineering work can materially address many of these challenges. Nearly every company in this study noted that digital engineering and model-based design is a priority for them. One defense OEM cited its recent achievements in building a completely digital representation of several naval products that served as a basis for significantly more efficient testing and manufacturing.

Companies should look to those with mature digital engineering capabilities to see what is needed.

First, several of the companies in this study found that retroactively digitizing platforms’ designs, especially when those platforms were not originally designed digitally, was cost prohibitive. Instead, companies have found more success in digitizing new platforms from conception.

Second, many companies noted that they have no standard engineering design language or practice. For the gains of digital engineering to take hold, the entire sector should move forward with common standards, APIs, and data-sharing practices, as well as a single source for data, where possible. And third, companies pointed to the importance of cross-functional teams. For digital engineering to deliver on its potential in the value stream, the engineer has to understand what is most important to downstream consumers of the engineering. For instance, specific features may make the part easier for a mechanic to install, and well-placed sensors can improve an operator’s efficiency. Understanding these downstream needs requires engineers to gather greater cross-functional input upfront.

Procurement and supply chain

The supply chain is the single largest driver of the cost structure for most A&D companies—and yet it is still in its digital infancy. Of the companies in this study, only 15 percent use digital at scale to optimize demand planning; 12 percent use digital and analytics for procurement; and 16 percent use digital to track components throughout their life cycle. When asked why digital deployment in their supply chain was so low, respondents’ most common reason was data.

Within nearly every company, data on everything from spending to supplier performance to inventory levels were noted as being so disparately organized that it was challenging to use to make decisions. This is, in part, a byproduct of a sector that has grown through acquisitions. The problem compounds when trying to share data across companies—for instance, when OEMs and suppliers need to collaborate.

Despite these challenges, there are companies leading the way in digitizing their supply chain. One A&D OEM uses sensors connected to its products coupled with advanced analytical methods to build real-time forecasts on inventory requirements and to direct where inventory should be held to optimize cost and response times. This approach has led to significant cost and working capital improvements and greater asset uptime, which increased customers’ on-time performance. A Tier-1 supplier has begun to pilot blockchain with its supply base to drive greater part traceability. Several companies have begun to deploy digital procurement methods to, for example, analyze spending data for savings opportunities and to automate sourcing processes.

One of the most relevant examples of how to revolutionize supply chains with data comes from outside of A&D—Volkswagen. VW had the vision of building an “industrial cloud” across its network of 30,000 locations and 1,500 suppliers, linking them through a common platform that could optimize production processes and enable a step change in productivity improvements. 2 The platform was based on gathering and analyzing a range of real-time data—for example, IoT sensors on machines to improve utilization and maintenance and component tracking to improve logistics—all integrated to optimize the overall production flow. VW expects its industrial cloud to be a key driver of reducing its production costs by 30 percent by 2025.

Manufacturing

Manufacturing is similarly lagging in digital maturity. Of the A&D companies surveyed, only 15–20 percent use digital and analytics to improve maintenance, automation, performance management, quality, and throughput. As one A&D executive lamented, “We’ve never had a believable view of our manufacturing performance.”

Industry 4.0 (I4.0) provides a road map for how companies can transform their manufacturing—with sensors, IoT, virtual and augmented reality, robotics, and other advanced analytics and production methods. The World Economic Forum publishes a list of “lighthouse” factories from around the globe that are leading on I4.0; notably, there are no A&D companies on that list 3 .

Nevertheless, some A&D companies have made meaningful inroads in digitizing their manufacturing. One OEM blends part and talent data to define the optimal mix and sequence of jobs to be completed each day. A Tier-1 supplier implemented wide-scale predictive maintenance by applying sensors to machines and using artificial intelligence to drive models for increasing equipment uptime. Several companies have digitized manufacturing workflows and performance management. For instance, one OEM digitized its technicians’ time charging and quality reporting using portable tablets to maximize their productive time. Another automated its quality processes and, in so doing, improved outcomes, cost, and cycle time.

Services

The companies in this study reported services as being the least digitally mature element of the value stream, with only 12 percent of companies using digital and analytics to build new service offerings tailored to customers’ needs.

Still, digital can open tremendous opportunities in this domain, such as e-commerce, workflow integration, and new software and data-driven services. Several companies have realized this and are taking action. For instance, Boeing and Airbus (with its Skywise platform) are both pioneering ways to unlock the power of data and analytics for customers. Engine OEMs have also been trailblazers in applying digital tools and analytical methods to improve customer value.

The value opportunity from getting services right in A&D is immense. As one executive said, “Properly sustaining an aircraft results in seven times the value over the initial sale.”

While the precise nature of the services opportunity will vary across companies and between defense and commercial aerospace, A&D companies can use digital to enhance their services by, for instance:

  • assessing operational performance to improve uptime, future designs, and inventory planning
  • automating pricing and service delivery
  • understanding the factors that correlate with greater customer lifetime value
  • streamlining customer support via automated tools to accelerate issue resolution
  • implementing blockchain to create transparency across the value stream (from supply chain to in-service records)

Support function optimization

Making support functions more efficient and effective is an evergreen goal for all industries; however, most A&D companies are not maximizing this potential through digital. For instance, only 23 percent of companies in this study are using digital and analytics at scale to improve talent recruiting, productivity, and retention; and only 28 percent are using digital to inform finance decisions. As one executive noted, “We need to start using our gray matter for analysis, not things that machines could do.”

But some A&D companies are applying digital to their support functions. One company noted its use of advanced analytics to identify employees with the greatest retention risk. Workflow automation was key for several OEMs; one even automated large portions of its bid and proposal process, building on gains it had made in digitizing engineering and manufacturing that enabled it to better estimate design and manufacturing costs.

Capturing the value at stake

A&D companies show a wide range in their digital maturity (Exhibit 3). Several are already leaders truly using digital at scale, while others are digital emergents just starting on their journey. And most are digital performers—roughly in line with the median across sectors.

A&D’s digital maturity is on par with other sectors but lags behind digital leaders.
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Some companies may wonder whether being a digital leader is worth it. The answer is yes. Across all industries, digital leaders delivered 2.6 times greater total returns to shareholders from 2015 to 2019. So the question then becomes: how can a company become a digital leader?

Enablers for getting it right

We can turn to McKinsey’s Digital Quotient, which defines an organization’s digital maturity along 32 management practices across six groups: strategy, organization and talent, agile delivery and culture, technology, data, and adoption and scaling. The dataset behind the Digital Quotient has debunked two common myths about digital maturity: who can be a digital leader and what it takes to get there.

The first myth is that an organization needs to excel at every aspect of digital maturity to be a digital leader. In fact, the research shows that not all management practices related to digital maturity are equally important. Instead, 13 “power practices” most strongly correlate with greater company returns. Interestingly, not a single technology-related practice is a power practice; IT architecture, data platforms, and cybersecurity are important, but they are table stakes and not enough to propel a company to being a digital leader, even if done well. Instead, digital leaders set themselves apart through distinctive capabilities on the business and organizational sides of digital—for example, in setting strategy; building business cases; tracking financial impact; recruiting and developing talent; organizing and running teams; integrating IT into the business; and managing organizational change.

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The second myth is that only the world’s leading tech companies can be true digital leaders. In reality, the data show that digital leaders can come from any sector (currently 16 separate sectors claim at least one digital leader), any size, and any company age. This is good news for A&D companies; however, it will require them to shift their approach to emphasize the power practices that are most correlated with digital leadership (see sidebar “Case study: Aerospace supplier increased its value by 2.5 times in four years”).

Strategy. Fifty-six percent of the A&D companies in this study have a clear and bold vision for how digital will transform their business—a critical first step. However, A&D companies struggle to connect their vision to concrete business cases, resource allocation, and performance management: only 22 percent felt they were effective at measuring and communicating the value of digital initiatives. One executive expressed a common sentiment, admitting that “digital impact statements are fluffy. It’s tough to quantify a business case for something that doesn’t yet exist or for which you don’t know the full extent of what is capable in terms of delivery.”

Organization and talent. While most of the A&D companies in this study have a leadership role working full time to realize value from digital, only 17 percent have a clear understanding of their broader digital talent needs. Once they can articulate their needs, they find that the competition for talent is fierce, not only from technology companies but also from virtually every sector. Overcoming this challenge will require A&D companies to significantly rethink how they recruit, develop, and compensate top digital talent.

Agile delivery and culture. Building an agile delivery methodology and culture is critical to a company’s digital maturity—but adapting an agile model that releases updates in days and weeks may seem foreign to an industry in which product development takes years and life cycles last decades. The focus for A&D will be improving cross-functional collaboration and moving with speed; of the companies surveyed, only 33 percent have integrated, cross-functional teams driving digital initiatives, and only 22 percent have digital initiatives that follow defined agile methodologies.

Data. A&D companies are certainly no strangers to data; however, only 28 percent reported having a vision or strategy for data use that aligned with business objectives. Further, the data, though securely kept, is not easy to use: only 22 percent of A&D companies reported having clean,structured data stored in a central repository that is ready for analysis.

Adoption and scaling. Companies trying to scale digital adoption typically encounter three common missteps: tackling too many areas to be achievable and cohesive, focusing too narrowly to demonstrate material impact, and not involving the front line in developing solutions. One executive noted, “When we could communicate, and then ultimately show, the improvements our people were getting, it became a no-brainer.”


Digital presents an enormous opportunity for A&D: $20 billion in annual incremental EBITDA. Capturing that value will not be easy, but any company can start with a strategy that defines the value at stake, prioritizes where and how value will be created, creates stakeholder alignment, and builds an execution road map. For most companies, that road map should start by focusing on one or two key areas where they can deliver real value and build a springboard for scaling. The companies that do this effectively will create a long-term competitive advantage. As one executive in this study noted, “We expect our industry to realize that the world is digitizing. Not everyone will adapt successfully, but I have little doubt that the winners will be ones capable of reading this trend.”

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