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Aerospace and defence sector faces supply chain 'big squeeze'

The worldwide aerospace and defence industry should be gearing up for "severe supply-chain pressures" in the years ahead, newly published research warns.

"The aerospace and defence industry globally will be facing tough and contradictory burdens in the next few years, as the need to meet an anticipated 25% jump in commercial-aircraft deliveries by 2014 contrasts with further belt-tightening of nations' defense budgets in the wake of widespread budget deficits - both of which could lead to severe supply-chain pressures," according to a study by business-advisory firm AlixPartners.

The report notes that, while impacted, the global aerospace and defense industry emerged from the economic downturn relatively well, due largely to increased demand in the defence sector, and cost-cutting.

David Fitzpatrick, managing director at AlixPartners and co-leader of the firm's Global Aerospace and Defense Practice, said: "However, the industry now faces the 'big squeeze' - the contradictory challenge of quickly ramping up production for expected growth in the commercial sector coupled with the need to address expected cuts and therefore a sharpened focus on affordability in the defence sector. And those squeezed the most will be the supply chain."

According to the study, the near-term outlook for commercial aircraft is positive due largely to increasing air-traffic demand globally, which is expected to grow 5.5% by 2012 alone. Asia and the Middle East, says the study, will enjoy 35% of all demand increases over the long term. Rising fuel prices and the need for more-efficient aircraft are already causing heightened demand for new aircraft, per the study. It notes that this year, for the first year ever, commercial-aircraft deliveries globally are set to exceed 1,000 and that global aircraft production is expected to increase 30% to 50% over the next three years.

Increasing demand for commercial aircraft, however, does not come without its challenges, and the guide-path to meeting global demand will be bumpy. Original-equipment manufacturers (OEMs) will be forced to ramp up production while simultaneously trying to innovate and develop products to meet demand for more fuel-efficient aircraft. Suppliers - who largely decreased capacity after suffering through the recession - will also face capacity and talent-acquisition constraints as they try to meet demand, which could lead to severe quality issues, according to the AlixPartners study.

There is significant risk, says the study, that commercial-sector suppliers will not be able to keep up with aggressive new manufacturing demands and will be challenged by: capacity constraints of their own (Tier-2 and Tier-3) suppliers that have under-invested in capability development; specialty raw-materials shortages (e.g., carbon fiber and titanium fasteners); and ongoing supply-chain delays and shortages resulting from the disaster in Japan.

"The aerospace supply chain was basically decimated by the economic downturn, as even sold orders were put on hold or otherwise put in a lumpy, stop-and-go mode," said David Wireman, director in AlixPartners' Aerospace and Defense Practice.

"From all indications, that supply chain is not at all prepared for steep commercial ramp-up curve that lies ahead, and production constraints are a very real possibility."