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The AlixPartners A&D Minute
Over the past several years, manufacturers have been primarily focused on ensuring supply continuity amid supply chain disruptions across industries. Now, as supply chains return to relative stability, it is crucial for aerospace and defense companies to shift attention to cost control and supplier performance/quality improvement.
Slowing inflation presents a good reason to re-engage with suppliers regarding costs, especially now that we have moved beyond the 2020-2022 peak. During this time, we saw particularly sharp increases in commodities and transportation costs, but 2023 saw costs trending toward a return to normalcy (Figure 1).
During the 2022 surge, many suppliers argued for price pass-throughs because of the considerable inflation they were encountering. But it’s fair to ask how many of them revisited and reduced prices when costs flattened or declined. The answer is, not many.
AlixPartners’ work with aerospace and defense clients reveals that there has been no discernable trending reduction in supplier pricing. In fact, prices continued to rise for more than 40% of parts with a multi-year price history.
A Four-Pillar Approach for Some; Rapid Repricing for Others
What is the optimal approach for customers seeking price reductions? Where is the best place to start when managing a supply base that consists of hundreds to thousands of suppliers?
Effective negotiation in times like these requires a balance between a fine-tuned sourcing process, and an urgency to maximize savings within a reasonable timeframe. To secure quick wins, we recommend adopting a structured negotiation approach for key strategic suppliers, and rapid sourcing for many of the remaining suppliers.
AlixPartners’ methodology is designed to pinpoint the most appropriate suppliers for structured negotiations. The selection process is collaborative, and tailored to address key constraints in the defense industry, including limited leverage due to short-lived programs, single sourcing, cost-plus contracts, IP ownership, supplier / part qualification, and more. The outcome is a multi-dimensional scorecard that assesses a supplier's suitability as a negotiation candidate, and its potential to generate meaningful results.
For the identified suppliers, we build a comprehensive negotiation dossier on the four pillars outlined in Figure 2.
Most of the remaining suppliers can be addressed through rapid sourcing. The general principle during these negotiations is, “Ask, and you shall receive." This method can result in significant benefits within weeks, but it is not a one-size-fits-all approach. Various techniques should be considered, factoring in the nature of the supplier relationship.
Some might ask, why engage in top supplier negotiation and rapid sourcing work, especially for large, complex, aerospace and defense corporations? The answer lies in what is typically left on the table due to the common characteristics found in this industry:
- A siloed culture in large corporations, leading to multi-channel negotiations and the absence of a big-picture view of the supplier relationship
- Insufficient coordination to establish a unified supply base that leverages common, strategic suppliers
- Overreliance on spot buys vs. long-term agreements
- Fragmented and inconsistent data; incorrect spend categorization
- Lack of historical price analysis, and lack of enterprise-wide forecasted spend
- Weak cost estimating capabilities to determine hardware and software target pricing
- A lack of systematic, cost reduction partnerships with suppliers to improve design for manufacturability and take out cost
When combined, these factors often lead to an underutilization of enterprise bargaining power, which can leave up to 10-15% savings untapped. In certain situations, the potential savings are even higher.
Pave the Way for Category Sourcing Leveraging Artificial Intelligence & Machine Learning Capabilities
Quick wins can generate momentum while simultaneously advancing a more comprehensive, longer-term category sourcing initiative. The challenge with this is usually the quality and readiness of data. Before creating sourcing strategies, businesses need a clear view of the products they purchase. This can be very difficult, as centralizing, cleansing, and filling in gaps in data from scattered systems across a myriad of business units and programs is often akin to assembling a million-piece puzzle.
Our solution consists of integrating the capabilities of AI language models to enhance industry knowledge and expertise.
A recent implementation confirms just how quickly companies can realize results. When working with a defense contractor that purchased more than 150,000 unique products annually, AlixPartners noticed these products were categorized broadly by supplier, but not precisely at the part level. This resulted in a murky view of what was being bought, and prevented development of part-level category strategies.
Within a few weeks, AlixPartners classified over 97% of the spend down to the granular level of parts, with a very high degree of accuracy, and with a comprehensive part taxonomy/classification. This created a quicker route to a comprehensive spend overview, and paved the way for top-tier strategies, and faster savings implementations.
Once clarity has been established regarding spend history, it is equally important to gain visibility into future purchases. The process of building a forecast typically begins with an initial, labor-intensive effort to collect demand data from various systems and sources, including demand driven by ongoing programs, and demand driven by business development. Once these sources have been identified, the process can be automated and made continuous by establishing a unified data layer to create a single view of demand across disparate data sources.
To facilitate this, AlixPartners brings the power of Palantir to bypass a multi-year ERP/IT convergence plan, and reduce project completion to a matter of months.
Address Spending from All Perspectives
Supply chain cost reduction can deliver tremendous financial benefits, potentially exceeding those achievable through capturing new business. However, supply chain teams have been reactive in recent years, responding to multiple shockwaves, including Boeing 737 Max failures, the COVID-19 pandemic, the global chip shortage, and Russia’s armed conflict with Ukraine. Now that shortages have been reduced, it’s time to be more proactive.
Supply chain gains are as critical as ever, and various strategies must be considered. Category sourcing, which can take 6-18 months or longer, typically delivers the most benefits. However, rapid sourcing and top supplier negotiations can be done more quickly and are most effective with suppliers who are either infrequently pressured through competitive bidding, or have a competitive advantage. Critically, these are not mutually exclusive initiatives, and should be considered together.
For a deeper discussion about the challenges and solutions associated with this topic, contact:
Eric Bernardini
Executive Partner & Managing Director, Aerospace, Defense, and Airlines
[email protected]
Stefan Ohl
Global Co-Lead, Aerospace, Defense, and Airlines
[email protected]
David Wireman
Global Co-Lead, Aerospace, Defense, and Airlines
Contact the authors:
Dan Hearsch
Partner & Managing Director
[email protected]
Luc Esmerit
Partner
[email protected]
Rob Cerff
Director
