Original equipment manufacturers (OEMs) in the aerospace industry are facing unprecedented challenges and uncertainty. Inflation is at a four-decade high, labor markets are tight, skilled labor is increasingly hard to find, and consumer confidence is shaky. Compounding that, supply chains remain stressed, increasing the likelihood of part shortages and uncertainty in supplier service levels.
Nevertheless, demand for production is rebounding— fast. For legacy industrial providers and disruptors alike, the transition from low- to high-rate production represents a monumental change. Many aerospace and defense companies, large industrial suppliers, and early-stage startups have been operating at low-rate production for years—and, as a result, have underinvested in the infrastructure required to achieve scale effectively and efficiently. Without an effective approach to increase capacity, rapidly scaling production may well result in missed targets, significantly overrun budgets, or—more often than not—both (Exhibit 1).
Barriers to scale
A combination of new and old barriers has made scaling production more difficult even as it becomes more important strategically.
A challenging macroeconomic environment. Rising capital costs and inflationary pressures have left OEMs less able to invest in the additional assets that higher production would require.
Access to talent. Across the globe, OEMs are facing challenges in finding and onboarding the skilled talent required to meet production demand. Among the main reasons for these shortages are the economic impact of COVID-19, resignations, aging workforces, and a widening skill gap.
Inadequate supply chain. Pandemic-induced disruptions to the global supply chain have continued to hinder the flow of materials to OEMs, creating part shortages and production delays—which may reflect suppliers’ inability to match ramped-up production. When suppliers at lower tiers cannot scale, OEMs must either onboard new suppliers or pay considerable penalties to expedite shipping.
Demand shift. High-complexity industries are making a dramatic shift away from low-rate, bespoke production to larger-scale operations. For years, lower production rates were sufficient for OEMs to meet demand. However, the resurgence of postpandemic demand has encouraged a transition to high-rate production—representing a monumental change to not only the daily production operations, but also the operating model to sustain and deliver a higher output operation. Across an OEM’s value chain, the increased tempo means an evolution of current operations to maintain production assurance, quality, and profitability.
Would you like to learn more about our Aerospace & Defense Practice?
A multifaceted approach to increasing scale
Achieving scale has never been easy. It is a complicated, often lengthy process that is all the more difficult for OEMs seeing postpandemic demand increases. No longer do companies have three to four years to incrementally scale production—now, the expectation is to accelerate changes in production at two to three times the previous speed, while remaining profitable and maintaining diverse offerings.
That means fulfilling an existing book of business while adding assets, onboarding new hires, and redefining the operating model. To manage the strain, a foundation of core infrastructure is critical to mitigate cost overruns while transitioning to full-rate production. The most important elements include:
- A deliberate, methodical, and codified approach to scaling production
- Tailored strategies by capital asset to forecast and mitigate disruptions
- An agile operating model to inculcate new ways of working for high-rate production
- Effective capital-project management to run simultaneous projects, including teardowns and installations of new assets
- Enhanced supply-chain resilience to proactively mitigate risks for lower-tier suppliers
- Refined talent strategies to hire and train the right people, while strengthening capability building programs to close skill gaps
Core ingredients and accelerants for achieving scale
Companies that are succeeding in their production transformations show a common recipe for ramping up, comprising two components: a set of core ingredients, together with a few critical accelerants (Exhibit 2). The core ingredients—maximizing throughput of current assets, augmenting necessary labor hours, and efficiently deploying capital—focus on how best to use existing resources to meet demand. The accelerants—leveraging analytics, scaling the supply chain, and optimizing working capital—provide the ability to both step change output while also creating the infrastructure to sustain higher rate production.
Maximize the throughput of current assets. In addition to traditional lean manufacturing–based improvement initiatives—such as KPI setting and monitoring, visual performance boards, and daily target setting meetings—OEMs seeking to step change production must adopt a utilization-based approach to production. Running machines at near full potential capacity—“sweating” machines—is a concept innately familiar to high-volume manufacturers, but is often much less common in highly engineered, low-volume manufacturing. Maximizing throughput per asset requires the development of tailored maintenance strategies and the codified processes required to sustain higher output levels. These processes include productivity strategies such as improved batching, detailed work planning, and schedule optimization to maintain asset utilization.
Rethink shift design. A non-capital-intensive lever to unlock incremental capacity is decoupling shift structures and developing tailored shift strategies by production asset. Shift augmentation aimed at enabling assets to run at full potential utilization enables OEMs to maximize throughput while balancing labor needs. In a constrained environment, better use of operator cross training or more standardized work, or both, can create redundancy to allocate resources in line with production demand and alleviate any need for overstaffing.
Deploy incremental capital using a total cost of capital approach. Macroeconomic factors are increasing budgetary pressures for OEMs and restricting available capital to invest in incremental production assets. A total cost of ownership approach that considers predictability in future demand, product design specifications, and lifecycle management should be assessed when investing to close capacity gaps. Capital investments can be minimized by evaluating levers such as design-to-build and make-buy decisions, which can smooth production flow and minimize spikiness in temporary demand profiles.
Leverage analytics. In low-volume, long-lead production cycles, it is crucial to maximize throughput and learnings from every production iteration. But by its nature, the most complex types of manufacturing lack the ability to trial multiple production techniques, or isolate batch production for testing. Advanced analytics is therefore vital to accelerating production learnings while also creating an environment capable of simulating different scenario-based pilots. Techniques such as digital simulations (including advanced digital twins) and digital performance management can enable scenario-based modeling, dynamic bottleneck reduction, and real-time feedback loops on performance optimization opportunities.
Scale the supply chain. The availability of necessary parts is critical to ensuring a continuous and efficient production operation. Scaling the supply chain begins with an in-depth look at part criticality to determine if any parts could be simplified, redesigned, or multisourced, as well as a detailed risk assessment of a supplier’s ability to match production rate. Assessing supplier risk requires qualifying historical performance, evaluating current production capacity and scalability, and assessing overall reliability—through assessments of revenue criticality and geographic risk that estimate a supplier’s ability to consistently deliver parts. Mitigating potential risk may mean tolerating additional redundancy in the supply chain, with tailored fulfillment strategies based on part and supplier risk profiles.
Optimize working capital. If higher output targets lead buyers to scale their inventory orders accordingly, ramping up production could significantly constrain working capital—while also raising the risk that excess parts will eventually become obsolete inventory. That risk can be compounded by incomplete or unstable engineering designs, which may result in obsolescing whole categories of components. A “plan for every part” fulfillment strategy can help balance part availability and mitigate waste by accounting for variability in demand, consistency of design, and ability of suppliers to deliver parts at the required lead times.
Achieving scale in action
An aerospace OEM followed this recipe to create a road map towards tripling its production capacity in less than two years, while simultaneously saving about 20 percent of planned capital investment. Starting with a utilization-based approach, the OEM tailored its production strategies by asset—including redesigned standard work, decoupled and batched workflows, targeted maintenance strategies, and a rigorous focus on overall equipment effectiveness (OEE). This combination mitigated the need to invest in six planned assets, at a total cost of more than 10 million. The approach also enabled the production line to reduce excess staffing requirements by 20 percent, through the use of dynamic shifts, improved performance management, and standardized work.
In addition to increasing overall capacity, instituting targeted fulfillment strategies for each part on the bill of materials is on target to improve working capital improvement by $400 million. These savings are expected to be realized over two years by refining on-hand inventory levels and creating mechanisms to optimize the purchase of parts in line with future demand. Reducing obsolete parts and inventory backlogs led to an incremental, one-time cash avoidance of more than $25 million.
This new production recipe enables OEMs to scale capacity holistically by increasing capabilities across all supply tiers, not just within four factory walls. It can be done quickly by unlocking capacity in parallel to address throughput, supply chain, and working capital simultaneously. Leveraging Industry 4.0 technologies and analytics enables maximum throughput in every production cycle, while mitigating the need for large upfront investments. It’s an approach that can step-change production both for seasoned industrials and startup disruptors.