Snapshot: global aerospace procurement strategies to 2012

According to research presented in ICD Research’s report, Global Aerospace Industry Outlook Survey 2011-2012, 66% of respondents within the aerospace industry are more optimistic about revenue growth for their company during the next 12 months.

A further 24% are neutral about revenue growth, while 7% of respondents are less optimistic about their company’s revenue prospects.

It is observed that in 2011, optimism levels have increased considerably compared to the 2009 survey. In 2009, 32% of respondents were pessimistic of revenue growth, a figure that has declined to just 7% in 2011. Revenue growth has also significantly increased in 2011 from that of 2010, when 48% of respondents voiced optimism in revenue growth.

Strong global growth in air travel for both civilian and military purposes is driving demand in the global aerospace industry, with the civil aerospace segment expected to grow at a faster rate than the military segment. Moreover, strong growth in emerging markets such as India, China, Mexico and Brazil has contributed to an increase in revenue optimism.

Growing demand for new, fuel-efficient aircraft in the wake of rising jet fuel prices has also contributed to the rise in optimism for aerospace industry revenues for 2011.

Demand for aircraft will grow strongly in 2011-2012, with the consistent recovery of the global economy enhancing the overall business growth outlook. The US is considered to be the largest market for the aerospace industry, followed by Europe, Canada and Japan.

However, 24% of respondents express neutral observations about revenue growth. This could be because companies exercise caution, and small businesses in particular are reluctant to undertake large investments following the emergence of the global economy from the crisis of 2008-2009.

Many aircraft manufacturers are still wary of a decline in demand for aircraft due to rising jet fuel prices, difficulty in obtaining aircraft financing and stringent environmental regulations; there is still some uncertainty about how executives expect their companies to perform over the next 12 months.

Critical success factors for supplier selection

Aerospace industry buyers and suppliers were separately asked what they consider to be the most important factors in supplier selection. Aerospace industry buyers were specifically asked: ‘How important are the following factors when choosing a supplier for a major contract?’

Suppliers were asked: ‘How important are the following factors to promote to major buyers in the industry?’ The results are presented below and have also been compared for the level of discrepancy between each party’s viewpoints.

‘Quality’, ‘price’ and ‘level of service’ are considered to be the most important factors for supplier selection by buyers in the aerospace industry, while a ‘supplier’s environmental record’, the ‘proximity of supplier operations’ and a ‘supplier’s corporate social responsibility (CSR) reputation’ are considered least important.

Compared to ICD Research’s 2009 survey, the top priorities remain unchanged apart from an increased importance attached to ‘supplier’s record for speed’ and a decreased importance attached to ‘existing relationship with supplier’.

The importance of buyers’ relationships with stakeholders such as the public, consumers and the media will increase. As a result of this, suppliers attributed importance to factors such as ‘supplier’s record for reliability’, ‘supplier’s knowledge of buyer’s market’, ‘supplier’s brand reputation’, the ‘existing relationship shared with the buyer’ and ‘innovation’.

For example, in March 2011, IndiGo commissioned Pratt & Whitney to supply PurePower PW1100G engines to power IndiGo’s fleet of 150 new Airbus aircraft and also provide maintenance for these engines. IndiGo chose Pratt & Whitney over other suppliers due to its reputation for high quality and reliable products, and the new engines will enable IndiGo to significantly reduce its operating costs along with emissions and noise reductions.

‘Price’ and ‘supplier’s record for speed’ are two important factors in supplier selection for many buyers, factors which many suppliers have underestimated. For example, Heroux-Devtek signed a US$175 million extended contract with Bombardier in February 2011 to supply more than 300 structural components such as fuselage frames and wing ribs for Bombardier planes, including the new composite C-Series and Learjet 85.

Heroux-Devtek plans to offer these products at competitive prices while improving its profitability by means of enhanced operational efficiency. Consequently, the company moved its manufacturing facility to Mexico, a low-cost, emerging country.

This indicates buyers prefer those suppliers which provide them with competitively priced products with minimal or no supply disruption. A ‘supplier’s environmental record’, the ‘proximity of supplier operations’ and a ‘supplier’s CSR reputation’ are considered by buyers to be the three least important factors for supplier selection.

Buyers and suppliers both consider factors such as ‘quality’ and ‘financial strength and stability of supplier’ important, suggesting that suppliers may have begun to invest in R&D to offer the quality products required by buyers. Buyers seek suppliers with strong financial positions that can take advantage of their financial strength to support the flow of goods and reduce supply chain costs.

Therefore, those suppliers that can demonstrate their creditworthiness to buyers will have more chances to win contracts. The importance of ‘price’ has been underestimated by many suppliers, indicating that in the majority of circumstances, buyers and suppliers will always conflict in terms of price.

Procurement behaviours and strategies

Global aerospace industry outlook survey 2011-2012: Industry dynamics, market trends

Buyers to 2011 will actively seek suppliers that offer better pricing terms, and it is necessary for suppliers to provide and demonstrate their competitive rates in order to generate new business and secure their existing long-term relationships.

Suppliers have also underestimated the importance of ‘supplier’s record for speed’, as buyers expect fast and efficient deliveries from suppliers in order to avoid any potential supply disruption. Suppliers are therefore required to accelerate their delivery processes in order to meet buyer expectations.

The importance of ‘supplier’s knowledge of buyer’s market’ has been overestimated by suppliers. Buyers typically expect suppliers to understand the process requirements in the aerospace industry, rather than have considerable knowledge of the market.

On a similar note, the importance of a ‘supplier’s brand reputation’ has also been overestimated by suppliers, because suppliers feel that business could be gained by concentrating their efforts on brand reputation, while buyers attach higher importance to factors such as value for money, quality materials, fast delivery and better prices.

The importance of ‘innovation’ is overestimated by suppliers; buyers expect suppliers to offer value for money products and services with attractive pricing schemes, rather than focusing on product upgrades and new product development, as this may take considerable time, effort and money, contributing to a rise in the price of new products and services.

Similarly, the importance of ‘existing relationship with a supplier’ is overestimated by suppliers. Competitive market buyers show little loyalty to suppliers in terms of awarding contracts. Instead, buyers responded that they prefer those suppliers who provide them with better payment terms.

These discrepancies offer opportunities for suppliers to better align their capabilities with buyer needs. Although almost all these factors are important to buyers, the relative prominence of each should be treated accordingly in the current market conditions, during which many companies are re-evaluating suppliers or renegotiating contracts.

Significant discrepancies in the relative importance attributed to critical factors by suppliers and buyers identify areas that may require the strategic refocus of business practices for suppliers.

Future procurement objectives

Industry executives expect their procurement priorities and resources to be affected in a number of ways in the future. Chief among their stated procurement objectives is ‘internal operating cost reductions’, as identified by 45% of buyer respondents. Companies are looking at various ways to reduce internal costs and increase profits, including the development of innovative technologies, switching to cost-effective raw materials including various composites, developing lightweight seats and smaller planes and reducing aircraft weight for fuel efficiency.

For example, in June 2011, Alcoa developed new aluminum-based solutions for the manufacture of ultra-lightweight, short-range aircraft at lower cost and minimum production risk, compared to composite-intensive planes. The new lightweight components are used for the production of fuselage components and wings.

Survey results indicate that 35% of buyer companies plan an ‘increased use of technology’ to attain operational efficiencies. For example, in June 2011, GKN Aerospace signed an agreement with Recycled Carbon Fibre Ltd (RCF) Birmingham, UK, for recycling uncured carbon waste from its aerostructure manufacturing operation in Cowes, Isle of Wight, UK.

The technology will allow the recycling of 100 metric tons of carbon waste from the Cowes site over the next 12 months. In total, 35% of buyer companies are keen to ‘locate lower-cost sources of supply’ and are actively focused on bringing the supplier closer to the plant for a significant reduction in transit time.

Buyers generally select suppliers not only on the basis of low rates, but by the supplier’s ability to increase the frequency of required shipments. This enables buyer companies to maintain minimum safety stocks and inventory levels and achieve operating cost reductions. Buyers also seek ‘joint cost reduction efforts with selected suppliers’ by means of joint ventures and strategic alliances.

This approach helps to reduce transport, packaging and information costs, while increasing managerial efficiency. In order to actively manage commodity, raw material and energy price volatility, companies reduce costs by means of economies of scale and the consolidation of source materials in order to gain bargaining power for raw material prices.

To purchase the full version of, Global Aerospace Industry Outlook Survey 2011-2012: Industry Dynamics, Market Trends and Opportunities, Buyer Spend and Procurement Strategies, please click here.

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