In a recent set of interviews, I had an opportunity to learn about some of the recent developments in the aerospace industry, that is happening in both commercial and defense sectors. As organizations seek to drive inventory out of the supply chain and improve working capital, while simultaneously reducing leadtimes and customer responsiveness, they are turning more and more to their suppliers for assistance.
Last week, a senior procurement executive at a large aerospace company shared with me the changes in inbound supply strategy that are underway. The individual I spoke with described this as follows:
“The model involved looking at where we are in the industry and the leverage we had. We looked at how we aggregated and leveraged our spend for C-class parts. (C-class parts include low cost, high volume commodity parts such as fasteners, sometimes called “Pan Stock”). We realized that every site and every platform needs them. We are using the same stuff! So we decided to aggregate and put contracts out, so that we could have every part on one contract – regardless of whether they are shipped to a site on the West Coast, East Cost, South, etc. Our initial objective was to drive to the lowest piece price.
So we went ahead and put the contracts out there – and the hardware sourcing was done. But that’s when we had an epiphany and made an important decision – “Let’s let someone else manage ALL of it! Why – because we are NOT good at managing the inbound process for this stuff! Why not let the people who make parts for us figure out how to get it to us when we need it?
This individual went on. ”Certainly, we want the contracts to ensure our people buy off them and get a good price. But in addition they [the distributor] can do the procurement, services, supply chain functions, material handling, storage, everything! And they keep the inventory and own it – and we will pay you AFTER you deliver to us. We keep the inventory in their forward stocking location close to each of the sites, and they provide us metrics, we utilize their IT, and so they are managing the whole thing.”
Although this approach (often called “Vendor Managed Inventory”) has been around for years, it is a dramatic change from the past for aerospace. It requires very strong supplier capabilities, which many have not developed in the past. As one individual noted, “You need to have a very good understanding of the product! Even though it is a 50 cent washer you can shut down a major assembly operation and don’t want to stop a commercial line! If you are NOT tied into that vertically integrated commodity, that won’t fly, as you not allowed to run out. You really need to understand the commodity and have a full depth of knowledge and understanding before you make that leap on going full-on VMI. I don’t think many aerospace suppliers are there yet personally – it is not a core competency of theirs, and they may not want to do it!”
There are indications that the VMI model may be just getting started in aerospace. The manager I spoke with emphasized that “It is a model that can be used in other commodities and that is what I am excited about. I see other opportunities within the general procurement sphere to plug this model with some tweaks. It involves reducing inventory cost and risk management, and all of that stuff. I hope we have hit the tip of the iceberg and deploy this through other areas, and we are doing an investigation on it, and putting together the business case to ensure it makes sense. In the old days, we would give them a forecast, and we went out and bought the stuff, put it on our shelf, and held onto it in cases when the forecast was way off! We’re realizing now that many of our C-class distributors are doing this with other non-aerospace companies, and the were doing a lot of this already and the relationship with the OEM’s of C-class products is bigger than our buy alone! They are involved with other companies and buying in larger volumes than we were! And when we looked at it that way, it became a no brainer: it eliminated us as someone who needed to be involved and started a paradigm shift on how we do will be doing business from here on in!”