An area of manufacturing that has seen dramatic ups and downs over the past few years is aerospace. Commercial aircraft orders fell during the pandemic as people stopped traveling. Then everything opened up again and people started traveling even more than before the pandemic. Airlines started ordering more planes with more fuel efficiency and lower operating cost. All that pent up demand after several years of depressed demand resulted in – surprise – inflation in everything from raw materials to labor. Especially labor, since all those workers now have to spend more for things like eggs, rent and cars. And then Russia had the poor judgment to invade Ukraine, resulting in western countries shipping weapons of all kinds to Ukraine, and then trying to rebuild their supplies. To top it off, China scared everyone that was relying on their low cost sources for almost everything, and we’re now trying to make more stuff here instead.
Supply chains have been stressed to the breaking point and a recent study of the industry by Deloitte predicts this isn’t going to end anytime soon. Their take on potential solutions and rising challenges include:
- A&D companies getting stronger control over their supply chains to better manage risk,
- Increased adopting of digital “smart factory” solutions to streamline design and development,
- Rebuilding a workforce despite still high turnover, and with greater digital skills besides,
- Dealing with decarbonization pressures in an industry already challenged to make progress,
- Responding to emerging market opportunities, such as space-related technology.
No wonder the cost of building airplanes in the USA is going up dramatically – expanded demand and restrained supply. How will top tier manufacturers respond? Our experience says one big way is to force the inevitable cost increases down to their suppliers by demanding long-term agreements (LTAs) at fixed prices for as many years as they can get. And their suppliers will get the message and will work equally hard to pass the pain on down the line to their suppliers, which is where some of our third tier clients get hit.
One client of ours is being asked to accept fixed prices until the end of the decade, after absorbing the unanticipated cost increases of the past few years from the last round of fixed price LTAs. Their big customers know costs have increased and will increase more yet; they just don’t want to pay the price on their bottom line. Better to have the smaller firms spread the pain around, or so their procurement strategy suggests.
We think it’s time to recognize that another dollar of sales may not be worthwhile unless it brings something to the bottom line. We think the big guys should play fair, price their products and services at reasonable levels, require their customers to accept the result, and not use their size and economic muscle to pick on the little guys. We think it may be time to say good-bye to fixed price LTAs. We mostly represent the little guys, of course, because…
We are Your CFO for Rent.