When the pandemic disrupted supply chains and exacerbated existing supply-chain problems at aerospace and defense manufacturers, major players took steps to ensure resilience. A&D manufacturers already carried more inventory than other industry segments, notably automotive. They also continued production and orders early in the pandemic as opposed to slowing or shuttering operations. And they accelerated payments to suppliers throughout.
As a result, the aerospace and defense sectors are emerging from the pandemic more resilient while other sectors, including automotive, are struggling to meet demand.
“Most of our suppliers have proven to be very resilient,” TTI Americas President Don Akery said. “They probably surprised themselves. They had to work through countrywide plant shutdowns and COVID outbreaks in their facilities. Now, they’re manufacturing and shipping out quite a bit more than they were pre-pandemic.”
In at least one case, an OEM (original equipment manufacturer) extended a helping hand to suppliers. To help keep smaller, vulnerable suppliers in business, Lockheed Martin has accelerated payments to suppliers, the company said in May.
In April the company averaged more than $430 million weekly in accelerated payments to supply-chain partners, focusing on small and vulnerable businesses.
As of April 30, Lockheed Martin had accelerated about $1.3 billion in payments for invoices for the second quarter of 2021 and beyond, the company said in prepared remarks.
In the first quarter of 2020, TTI, a 50-year-old Texas-based distributor of passive, connector, electromechanical and discrete components for industrial, military, aerospace and consumer-electronic manufacturers worldwide, saw record bookings and shipments, Akery said.
Then orders fell off for the second quarter with the impact of the pandemic.
Past the second quarter of 2020, orders have picked up every month, he said.
“We believe all these segments will continue strong through the end of this year and into next year,” Akery said this summer. “We are seeing our shipments leveling out at record levels. Bookings will be at new high levels for the quarter ending now. Shipping will be in line with record levels from last quarter.”
Meanwhile, demand in the military aerospace and commercial aviation piece of aerospace and defense is weaker and still recovering, he said.
“Boeing and Airbus made up a big part of commercial aerospace and then the pandemic exacerbated the Boeing situation,” he added.
Boeing has experienced significant challenges of late, including two fatal crashes in 2018 involving the 737 Max, the grounding of 69 777s following an engine failure earlier this year and lagging demand for its wide-body jets.
But, at the same time, the commercialization of space—companies like Blue Origin, Virgin Galactic, and Space X have been sending private citizens into space and more companies are making satellites—has created new demand, Akery said.
TTI has seen the commercial space portion of its business surge about tenfold in the last three years, he said. When Boeing put orders on hold, that freed up supply chain capacity to meet the needs of the fast-growing commercial space sector.
“From a commercial aspect, we’ve seen unbelievable growth,” he said. “We’re talking tens of millions of dollars in purchases where there was nothing.”
‘A victim of our own success’
Challenges remain, including the well-documented shortages of semiconductors, as well as shortages of transistors and capacitors, Tom Derry, CEO of the Institute for Supply Management, said.
Although the pandemic shined a spotlight on supply-chain problems, some of the supply chain’s issues were both pre-pandemic and self-inflicted, he said.
“These shortages predate the pandemic,” Derry said. “We’ve been very successful at negotiating more and more competitive prices with these manufacturers over a decade. The margins on these products has been whittled down to low single digits. They’re not making enough profit to invest in new manufacturing capacities or adopt new technologies.
“We’re a victim of our own success.”
Supply-chain expertise undervalued
In some cases, manufacturers don’t value supply-chain expertise highly enough, Aerofied Vice President David Rampton said.
“The vast majority of American aerospace manufacturers do not invest in the supply-chain workforce,” he said. “No one wins a contract from the U.S. government by saying, ‘I have the smartest, most effective buyers, and our supply chain management practices are top of the line.’ They win by highlighting their technology, their design engineering savvy, their hardware manufacturing dominance and scientific prowess.
“Pick a company on the Mount Rushmore of aerospace and defense and speak with anyone who has worked supply chain for them. They will tell you that supply chain, i.e. other support functions (legal, finance, human resources), is seen as a necessary evil, a nuisance.”
Some acted wisely regarding chips
But compared with the automotive sector, aerospace and defense acted wisely regarding semiconductors.
Automotive leaders miscalculated in the early days and stopped ordering semiconductors, Akery said. That created slack in the supply chain.
When demand for cars began surging at the same time the semiconductor supply shrunk, automakers faced serious supply-chain issues. Meantime, aerospace in general and TTI in particular “stayed in the game,” he said.
“Automotive got caught flat-footed when they stepped out of [the semiconductor supply chain] line and then thought they could get back in line,” he said. “The military-aero segment of the business is competing with automotive for that capacity. The automotive sector part of the business got out of line for a few months last year and that wreaked havoc on the supply chain and on some of these suppliers. Suppliers have been trying to recover and produce quite a bit more to meet record demand.”
Pandemic not the only culprit
The pandemic can no longer be blamed for many of the current disruptions, Akery said. Of note is a shortage of resins, which are used to make electronic components and packaging. Factories in Texas and Mexico that make those resins were impacted by the massive power outage there earlier this year.
Not surprisingly, shortages are driving up costs. Costs also have gone up for precious metals, he said.
Manufacturing costs also are increasing based on logistical and transportation issues and lack of labor, Akery said. Costs of some components are up 7-10 percent. Absorbing increased costs above 5 percent is difficult.
In TTI’s case, the strategy of carrying more inventory has helped to smooth out costs increase.
“Obviously, the pandemic put us in times that are difficult. But if you look at the supply chain shortages in electronic components, we’re past the pandemic,” Akery said.
Likewise, shortages of castings for hot engine components and of electronic components predate the pandemic, Rampton said.
“From what I’ve seen, companies are being forced to accommodate 180- to 360-day delivery slips from their casting suppliers,” he added. That’s because of supply shortages of investment-cast components, such as nickel alloys and stainless steels.
A&D somewhat of a safe haven
Because of longstanding government contracts, the aerospace and defense sectors were more insulated from the pandemic-based supply and demand swings, Derry said in an interview.
“If your primary customer is the government, your demand is more predictable and steadier—you’re not subject to the changes that are consumer-driven,” he said. “From February-March 2020 on, any business that was consumer facing was whipsawed by a drop off in demand and then a surprising surge in demand.”
Additionally, since planes and other aerospace and defense products are in service for decades, the need for parts has continued throughout the pandemic, Derry said.
Logistics causing headaches
One of the biggest changes and challenges has been logistics and transportation, Akery said.
“Pre-pandemic, we had the option to fly product around the world or put it on ships,” he said. “Through the pandemic, fewer airplanes have been flying so there is less cargo space. That’s put more demand on sea containers. The daily shipping rate from China to the U.S. West Coast is up 400 percent from the beginning of 2020. UPS and FedEx deliveries are less predictable—you couldn’t depend on next day shipment even if you paid for it. I’ve seen satellite photos with ships waiting to clear ports. Some shipments are 30 to 45 days later than promised.”
Although many are quick to point at China as a huge problem, Rampton said the real issue is that the United States doesn’t have cost-effective materials and manufacturing solutions domestically or with trusted partners.
“China isn’t a supply chain problem at all,” he said. “It’s just a sub-optimal solution we are forced to consider at times.”
China is a less-than-ideal solution because of a lack of export compliance, loss of transparency, the risk of counterfeit materials and tampering, and the forced dependence on a less-friendly to the United States super power, Rampton said.
Companies may back away somewhat from dependence on China, but Derry doesn’t expect major disruptions.
“China is not the overwhelmingly attractive and obvious first choice it was 20 years ago,” he said. “I don’t believe we’re going to see wholesale departure from China or wholesale reshoring to the United States. It’s too hard to undo 30 years of integrated U.S.-Chinese economic relations. I don’t see wholesale change, but I do see integrated changes on the margins. A lot of companies are talking about a ‘China Plus One’ strategy: They need to be in China but, for safety’s sake, they need another country in the mix, such as Malaysia or Mexico.”
Distribution looking better for A&D than automotive
Aerospace and defense manufacturers have incorporated distribution more thoroughly into their supply chain strategies than has the automotive industry, Akery said.
Aerospace and defense in general, and TTI in particular, have longer-range inventory pipelines and carry more inventory than the automotive sector with its emphasis on just-in-time manufacturing.
TTI has a broad forecasting model based on information from its tens of thousands of customers, including their past purchasing history, customer forecasts and other factors in the market like the adoption of 5G, Akery said. TTI also owns Mouser Electronics, which designs and distributes semiconductors and other electronic components and can anticipate what the industry will need based on what components will be needed.
TTI has hundreds of its customers linked in its API (application programming interface) system, and those customers can see in seconds TTI’s available inventory and lead times, he said.
In some cases, especially where customers have multi-year projects, customers are set up to automatically convert forecasts into orders, Akery said. In other cases, a human looks at the forecasting numbers and then makes an order.
“We’ve got inventory in the pipeline for weeks, months, a couple of years in advance,” he said. “We’ve already got factories loaded with orders to level out the supply chain. We also carry inventory, as a safety buffer for a lot of those companies. When the pandemic happened, we were sitting on record levels of inventory. It was a conscious decision. We knew there was going to be a rebound. We kept taking product on, building inventory through 2020. We kept the inventory coming in, like an insurance policy. Some of our publicly traded competitors didn’t do the same thing.”
“It’s speculation based on sound data,” Akery said. “We have systems that are custom built for this product set and for this industry that allow us to transact huge volumes for our customers. Data fed into our ERP system helps us anticipate the needs of the industry before the industry tells us they need the product. We can say, ‘That part of the market is going to require more components in the future.’ We have that product on the shelf before the customer asks for it.”
That accurate forecasting paid off in 2017 and 2018 when the supply of ceramic capacitors and chip resistors became tight, he said. “Our product team had seen that coming. We felt there wasn’t enough capacity to meet the demand for those components. We grew our business in the Americas more than a quarter of a billion in 2017 because we had the inventory customers needed.”
Similarly, TTI also is linked to its suppliers via EDI (electronic data interchange) and API systems.
Carrying inventory makes even more sense when the parts in question are vital, but also small and inexpensive, Akery said.
“The vast majority of components used in manufacturing designs are not necessarily the latest technology,” he said. “Some of the components we provide are sub 10 cents, even sub five cents. You don’t want to run out of a component like that because someone didn’t get an order placed in time. You want to keep those flowing. Obviously, if a customer is paying hundreds of dollars for a component, we will manage their inventory pretty closely. Storing a million capacitors is not much money. Storing a hundred micro controllers ties up a lot of capital.”
TTI already has some visibility into where its orders are in the supply chain.
“We do a lot of tracking from the perspectives of cost and demand,” Akery said. “A lot of our customers are asking for visibility into the raw materials required. We don’t have it down to the component level yet.”
But that is a goal for the future, he said.
Additive gets a nod
One solution to supply chain disruptions is additive manufacturing (AM), Rampton said.
For example, “technology is readily available to replace castings for engine components at a fraction of the cost to set up a new investment casting production line,” he said. “That totally eliminates the issue of vendor-managed inventory and opens up opportunities for geometric features that weren’t possible previously. The hesitation is the cost to qualify parts from a new process.”
With AM, designers wouldn’t necessarily have to engineer products to last a long time, Derry said. “With additive manufacturing, you might be able to produce a replacement very inexpensively and not have to count on that product being in service for 10 or more years.”
AM also could help with supply-chain transportation issues by offering closer proximity to the assembly site, he said. “You’re moving inventory across town compared with across the world.”
In addition to new shapes, AM also offers the potential to use more sophisticated materials, Derry said.
AM also could help solve the risk of counterfeit or recycled components, he said, noting that because of the long lifecycle of prod ucts, aerospace and defense faces a greater exposure to counterfeit or recycled parts in the supply chain.
“Additive is not a panacea, but it’s certainly part of the solution,” Derry said.