Analysing An Appropriate Supply Chain Case Business Essay

Airbus is a subsidiary company of European Aeronautic Defence and Space Company (EADS).It is the world’s leading commercial (over 100 seats) aircraft manufacturer. The company’s operation is geographically disturbed, it operations are present in Asia, North America, Europe and Middle East. Manufacturing of the aircrafts components is carried out 16 manufacturing sites, designing at 7 locations and 5 spare parts centres across the globe.

Airbus operations in different countries include Airbus North America is responsible for designing, engineering and customer service in North America. Airbus Japan handles the marketing and sales in the Asia Pacific region (Datamonitor 2009). Similarly Airbus China takes care of sales and marketing operation in the China. Airbus Germany overlooks the production with its 7 production centres. Designing and manufacturing of aero structures in handled by Airbus India. Airbus UK is responsible for the Wing design and development, Airbus Spain – handles equipping and assembly of the tail section of the aircrafts. The final assembly takes place at Airbus France in Toulouse, France.

Its products include A380, A350, A330/A340, A320 and A300/A310 family aircrafts (Data monitor 2009). Airbus has around 800 suppliers in United States alone and in total it has over 1500 supplier spread across 30 different countries. Airbus has a customer base of 225 customers; some of the customers include FedEx, Virgin America, US Airways, Japan Airlines, Singapore Airlines and China Southern Airlines. As of May 2010, Airbus has manufacturing orders for 9559 aircrafts , total delivery of 6204 aircrafts and work in progress (production)for 5905 aircrafts (Airbus 2010).

In the aircraft manufacturing industry there is a strong competition between Airbus and Boeing. Boeing is the largest commercial aircraft manufacturer in the US and its products and services are extended to more than 140 countries.

The competition in the market is no longer between individual firms, but as a supply chain. So it can be argued that firm which has the ability to integrate with suppliers and customers through business relationship will have the competitive advantage. The management of these business relationships is referred as Supply Chain Management (SCM) (Lambert and Cooper 2000). (Christopher 1992) defines “Supply Chain Management as a network of organisation that is involved, through upstream and downstream linkages, in the processes and activities that produce value in the form of products and services in the hands of the ultimate consumer”.

(Lambert and Cooper 2000) argue that the dimension of this competition will be “suppliers – brand – store against suppliers – brand- store”, which suggest that competition will supply chain against supply chain. Therefore it can be argued that the supply chain management of Airbus plays an important role in gaining competitive advantage over Boeing

Supply Chain Management Frame Work

SCM has three vital elements namely supply chain network structure (member firms and linkages), business process (which produces a particular value) and management components (variables to be managed).

Supply Chain Network Structure:

The network structure will depend on the numbers of suppliers involved, product’s complexity and accessibility of the raw materials. The three different facet of the network (Figure 1) includes the members in the network, structural dimension and type of process linkages between the members.

If every member of the network is taken into consideration then the structure will become more complex. So it is necessary to identify those members in the network on which the firm’s success rely upon. Thus the members can be classified as Primary and Supporting. Primary members are those which produce a value added service or product to a particular customer. The firms which provide skill or resources to the primary member is called Supporting member in the supply chain network.

Figure 1 : Supply Chain Management Framework

Source : Lambert , D.M. and Cooper, M.C .  (2000). Issues in supply chain management. Industrial Marketing Management . Vol. 29, pp. 65-83

The classification of primary and supporting members in the SC network will help the firm to manage and allocate resources , to define the point of origin (where there is no further primary member is present) and point of consumption (no further value addition) in the SC. The network’s structural dimension include three components horizontal structure (number of tiers), vertical structure (number of supplier or customers) and horizontal position (position of the firm with respect to source of supply and end customer) .So the firm should understand the structure, interconnected functions and perspectives of the member companies to successfully integrate and manage the business process (Cooper et al 1997).

Figure 2: Supply Chain Network

Source : Lambert , D.M. and Cooper, M.C .  (2000). Issues in supply chain management. Industrial Marketing Management . Vol. 29, pp. 65-83

Supply Chain Business Processes

The interaction between downstream and upstream segments of the SC was disconnected with irregular flow of information between them. But to operate a successful SC, integration of the downstream and upstream activities is essential with continuous flow of information. The integration of key individual processes to that of supply chain process is essential for a successful SCM. The key processes that has to be linked with that of SC are Customer relationship management , Customer service management , Demand management , Order fulfilment , Manufacturing flow management , Procurement ,Product development and commercialization and Returns (Cooper et al 1997).The level integration between the businesses processes depend on the type of linkage. The four different process linkages are managed business, monitored business, not-managed business and not-member business process (Cooper et al 1997).

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Management Components of SCM

(Cooper et al 1997) suggest nine different components that must receive attention from the firm in managing relationships across the supply chain are management methods, flow of information , power structure; structure of product flow , planning and control , work composition, organization structure; arrangement for risk and reward ; and culture .

The aircraft manufacturing industry consists of complex set of connections of supplier, customers and the end user. Aircraft manufacturing involves highly engineered components, therefore the manufacturer has to decide on what to produce and what to outsource. This decision will be based on the firm’s evaluation of success factors (Venkatesan 1992).Therefore when outsourcing strategy is followed, it help the company to concentrate on its core competence to serve its customers. In the aircraft manufacturing industry 70 % of the component manufacturing is outsourced, due to the high complexity of the components. In case of Airbus it outsources 75 % of its component manufacturing. The main advantage of outsourcing is to improve the performance, which is achieved by cost reduction, reduced inventories involved and supplier empowerment (Gilley, 2000).

Due to high percentage of outsourcing, classifying the suppliers beyond two tiers makes the SC network more complex. The first tier suppliers are mostly involved in design and serve the focal company directly , in some cases the second tier supplier are involved in designing serving the focal company or the first tier supplier(Laframboise and Reyes 2007).

Airbus is heavily dependent of its suppliers for the manufacturing and assembling the aircrafts, it acts a primary integrator. Being a prime integrator it provides more control over the design, development and production of its products. All of the Airbus products have commonality in design, which means the components can be shared/used across different product families for example the cockpit design is same for A340 and A320.

Figure 3 : Aircraft Manufacturer’s Supply Network

Source : Laframboise,K. and Reyes,F. (2007). The digitization of an Aerospace

supply network. International Journal of Enterprise Information Systems. Vol 3, No 2 ,pp 68-89.

Airbus Supply Chain Structure

Customer Base: The number of customers is limited or small when compared other industries like automobile. Customers for Airbus fall into 3 categories Passenger Airliners, Freight and Leasing companies. Passenger Airliners are the largest customers, who demand low prices due to their high bargaining power. As of 2009, the total customer base was 316.

Supplier Base:

The supplier base of Airbus is around 1500 suppliers from 30 different countries. The supplier base is limited in number because of high technological complexity of the components and high risk involved in case of product failure. The suppliers are classified into different tiers, the most vital design and components (like aero structure, engine) suppliers of Airbus as positioned in Tier 1 (Figure 3) supplier base is small, rival manufactures can source their components from the same supplier. The sourcing policy of Airbus takes into consideration the risk involved, so it sources the components at system level rather that at component level. The supplier are chosen based on their performance, adherence to quality norms and through competitive bidding across the world, mostly the relationship with suppliers are ling term and on risk sharing basis. Full responsibility is given to the chosen supplier to minimize risk and improve integration along the supply chain.

Figure 4 Selection Criteria for suppliers

Source : Aviation Now (2003) . A380 Selection System . Available at http://www.aviationnow.com/conferences/html/ts03/baubil_airbus.pdf . [Accessed on 15 June 2010]

Product Manufacturing:

The aircraft is build to the needs of the customers, that is, it is highly customised. Airbus A380 comes in 3 varieties, 555 seats – 3 classes, 853 seats – Single economy class and the third for freight (A380F). Since the whole manufacturing involves complicated design, process and assembly along with high customisation required from the customer makes the manufacturing process highly complex. Therefore lead time for A380 is from customer order to delivery is 9 -12 months (Airbus 2009).

Figure 5 Component Flow for Assembly

Source : Airbus.(2009).

For the assembly of the components, Airbus receives the parts from the supplier at it three distribution centres and are then transported to the assembly plant in France (Figure 5). Airbus follows lean manufacturing methods in the final assembly of the aircraft (Figure 6). Airbus follows modular assembly of the components for Airbus A380.

Figure 6 : Final Assembly line A380

Source : (Aviation Now 2004)

It can be argued that by making the supply chain lean, the whole process of design, development and delivery of the components to the assembly line will be streamlined. By making the Supply chain lean (figure 7 ,below section ) , it will be possible for Airbus to match the demand in assembly line with that of the inbound materials / components.

Figure 7: Integration of Process

Source : www.aerlines.com

Supply Chain Vs Product

The foundation for effective supply chain process lies in selecting the nature of supply chain based on the product categories. Many attributes are vital such as product life cycle, demand predictability, product variety and market standards for lead and service times (Fisher nd). First step is to categorize the firms’ products as Functional and Innovative. Functional products are those that meet minimum needs and have stable, expected demand and life cycle is quite long. However innovative products are those newly designed/developed products that have the potential to achieve high margins. They have short life cycle and the demand is highly unpredictable.

A supply chain possesses two functionalities: a physical function and a market mediation function. Physical function involves transforming raw substances to completed product and transferring them to desired location. Market mediation purpose is to make certain that the final products are those that end-users sought to purchase. Predictable demand ensures that supply matches the demand. Uncertainty and unawareness about innovative products increases market mediation costs. The crucial decision is to choose the suppliers for speed and flexibility rather than low cost incase of innovative products. Managers should posess knowledge of how and where to position the stocks and how efficiently capacity should be managed to hedge against uncertain demand.

Physically Efficient Process

Market Responsive Process

Primary Purpose

Supply predictable, demand efficiently at the lowest possible cost.

Respond quickly to unpredictable demand inorder to minimize stockouts, markdowns and obsolete inventory

Manufacturing focus

Maintain high average utilization rate

Deploy excess buffer capacity

Inventory strategy

Generate high turns and minimize inventory throughout the supply chain

Deploy significant buffer stocks of parts or finished goods.

Lead Time focus

Shorten lead time as long as it doesn’t increase cost

Invest aggressively to reduce lead time

Approach to choosing suppliers

Select primarily for cost and quality

Select primarily for speed, flexibility and quality

Product design strategy

Maximize performance and minimize cost

Use modular design inorder to postpone product differentiation as long as possible.

Table 1 : Physically Efficient Vs Market Responsive Supply Chain Process.

Source : Fisher,M.L., “What is the Right Supply Chain for your Product? A simple framework can help you figure out the answer

After categorizing the products as functional and innovative, and their related supply chain priorities, a 2*2 matrix can be used to frame a supply chain strategy. This 2*2 matrix will clearly depict whether the firm has employed correct supply chain for its products. If there is any mismatch, the firm can take necessary corrective action. A firm that has innovative products with efficient supply chain and functional products with responsive supply chain are those that need analyses and corrective action. “Functional products need efficient process and Innovative products need Responsive process” (Fisher nd).

Functional Products

Innovative Products

Efficient Supply Chain

Match

A320 (34 – 36 units per month)

Mismatch

A380 (lead time :9-12 months; 2 units per month)

Responsive Supply Chain

Mismatch

Match

Table 2 : Product Vs Supply Chain Process.

Source : Fisher,M.L., “What is the Right Supply Chain for your Product? A simple framework can help you figure out the answer

Like other companies, even Airbus faces a mismatch issue in innovative products and its supply chain. The lead time for A380 is quite high. Innovative products need to be more agile and should possess high responsiveness. If 36 units of A320 can be produced in a month, the firm requires deep insight in the production and supply chain process of A380. There are few ways in which uncertainty can be reduced: lead time can be reduced and flexibility can be increased such that goods are produced only at the cost of demand and correct forecast; hedging against uncertainty by proper usage of inventories and capacity management.

Supply Chain Integration

Airbus’s business drivers for integration are to lower the cost of owner ship , improve quality of its products and deliverables , involving the suppliers in the early stage of product development and to improve the operational performance(EADS 2008). Power8 program was introduced in 2007 , which is to address new organisational structure , deployment of processes which are lean and tighter cash management. Airbus achieved a total cost saving of € 1.3 billion in the year 2008 (EADS 2008)

Airbus plans to double its production for A380 in 2010, and it is also planning to rollout 2 aircrafts per month (Arabian Supply Chain 2010). Airbus claims that their production capacity per month is four aircrafts, which suggests that the company should stream line its production process. For streamlining the production Airbus has to integrate process with its different production sites and its suppliers.

(Christopher 1998), points out that for a firm to integrate with external companies, it should first integrate its process internally .he argues that a firm which is not internally integrate cannot successfully integrate externally.

( Frohlich and Westbrook 2001) point out that in the manufacturing industry , the integration of upstream and downstream with suppliers and customers has gained importance. The extent of the integration between the suppliers for the manufacturing of the product is the key for manufacturing firms to achieve operational excellence (Ragatz et al 1997) . Therefore for Airbus to achieve production capacity of four aircrafts per month, will depend on the effective integration with its suppliers. There are two types of integration namely, forward and backward integration. The forward integration is the delivery of the physical products between the supplier, manufacturer and the customer (Saunders, 1997; Trent and Monczka, 1998). Just-in-time and product postponement techniques fall in the forward integration category. Backward integration is the flow of information and technologies from the customers to the suppliers( Frohlich and Westbrook 2001).

Figure 8: Integration in Supply Chain

Source : Frohlich and Westbrook 2001

Other vital factors in arcs of integration are direction (towards supplier or customer) and degree (extent of integration). The performance can be improved when firms in the supply chain integrate and operate as a single unit (Tan et al 1998). Incase of Airbus (Figure 9) the direction of integration is towards the suppliers and it has to increase the extent of integration towards its customers. It is evident from the fact that Airbus delayed the delivery of A380 due to incompatibility of customer’s components in the entertainment system. Therefore, the degree of integration should increase towards customers and also with the supplier (to increase the operations performance) .It will be recommended that Airbus achieves the Outward facing arc of integration, as the Outward facing manufactures can reduce uncertainties in the supply chain.

Figure 9 : Customer Facing Arc of Integration

Source : Frohlich and Westbrook 2001

(Frohlich and Westbrook 2001) suggest that a weak linkage in the supply chain would affect the complete network; it is evident from the fact that, in 2008 Airbus’s disruption in supply of seats and lavatories affected 8 % of airbus’s wide body aircraft(PricewaterhouseCoopers 2010)

Supply Positioning: Kraljic-matrix

To analyse Airbus purchasing portfolio , Kraljic matrix is used. The matrix is dependent of two dimensions first the profit impact and the supply risk. The profit impact is the terms of value addition through the purchase and the percentage of total cost of raw material to the profitability. Supply risk is the evaluation of the supplier market on the basis of pace of technology adaptation, scarcity of suppliers and complexity (Kraljic 1983) .

. The matrix will aid in finding out what components / products to outsource and what type of relation is needed with the suppliers. Leverage items , strategic items , normal items and bottleneck items are the four different types of products in the matrix.

Figure 10 : Kraljic-matrix

Source: Kraljic, P (1983) “Purchasing Must Become Supply Management”, HBR, Sep-Oct, pp. 109-117

Since the aircraft manufacturing are highly engineered, requires technologically advanced components and the risk involved, these products fall mostly in the Strategic and Bottle Neck items. Since the leverage items carry high cost, Airbus can look to channelize to them for Just in time delivery. Similarly for the strategic items and the bottleneck items Airbus can go for JIT delivery. The bottleneck item supplier risk can be reduced for Airbus, through integration and by buying wide range of products from a single customer.

Due to the shorting of products life cycle, fluctuations in demand, uncertainty in the market and competitive environment change from firm vs. firm to supply chain vs. supply chain has forced manufacturers/firms to integrate their supply chain. The integration of supply chain can improve the operational performance, reduce cost and it reduces the amount rework / reengineering for a firm. The main advantages of supply chain integration (Patterson et al., 2003) are reduction of bullwhip effect , supply chain process efficiency increases , product development can be better and faster , the amount inventories held can cut down . Emergence of e-business has aided firms in making decision faster (like coordinate logistics , inventory ) and it also helps suppliers and customers to stay connected (Golicic et al., 2003). Airbus has e-technology at place; it connects to its suppliers through Sup@irworld for easy collaborations, visibility and communicate (Airbus 2009). The database called Foundation is a collection of all the supplier information their name, product and contract details. From the Buy side the orders can be placed on line – which reduces time of delivery and while in operations is helped by continuous replenishments, whenever a component is being used up in the assembly line; the system sends an automatic order for next .The tool also helps Airbus in terms of selecting the suppliers. eSupply Chain Airbus displays its requirement of component and day/time when they need on the website. This will allow the suppliers to plan and respond to the demand (Airbus 2009).

Figure 12 : Airbus Online Portal For Colloboration

Source : Airbus 2008

Therefore sharing of information by Airbus to supplier through its website allows easy collaboration, easy communication and to synchronise the demand and supply (Airbus 2009). Airbus supply objective is providing a single point of access for information for Suppliers(services , sub contractors and tier n suppliers) and customers furthermore the supply portal will enhance the collaboration. The portal will help Airbus get greater visibility, accurate and fast information , improve the lead time and delivery performance.

Outsourcing of products / services to 3rd party has helped the focal firm to concentrate on their core business or competency. Airbus has kept the composite technology and wing design in-house but has outsourced the wing manufacturing to Korean suppliers. Firms outsource their non-core business like distribution, Information technology infrastructure mainly to become lean and flexible in its operations. Firms also collaborate /build partnership with its suppliers and customers in product development with low capital investment. It can argue that the outsourcing, collaboration and partnership will create distributions like delay, inefficiency and waste. These disruptions or inefficiencies can be over come by information sharing, building stronger relationship or coordination between supplier and customers, long term assurance and trust.

Inefficiency and poor coordination between members of a supply chain, contribute to majority of the cost incurred in supply chain management (Sharman 2002). Supply chain integration reduces the bullwhip effect; bullwhip effect is caused mainly to irregular sharing of information along the supply chain and uncoordinated decision making. The supply chain integration increases the visibility (information sharing) and coordination between the supplier and customer. It can be argued that by sharing information along the SC, the loss/ inefficiency can be reduced. Therefore, integration is important for improving the efficiency in the supply chain network, which in turn helps to achieve greater customer satisfaction.

Information technologies place an important role in improving the supply chain efficiency and to facilitate the integration of supply chain members. It offers enhanced understanding of errors in the supply chain. The internet communication provides a effective platform for the suppliers and customers to communicate and share information in real time(Porter 2001).The information shared by the customers can help the supplier to plan their production and match the supply with that of the actual demand. Thus it reduces the effect of Bullwhip in the supply chain. Enterprise Resource Planning ( ERP ) system which facilities the integration of processes and departments of a firm onto a single computer system(Laframboise and Reyes 2007). ERP systems and other similar systems are transforming the aerospace supply chain (William 2002).Wireless technologies also aid in providing a greater visibility (inventory tracking, replenishment time) on the supply chain processes. Without the global information network the design and production of aircrafts by Airbus and Boeing is not possible (Christopher 1998).

Use of Radio Frequency Identification tags will improve the visibility and information flow in the supply chain. Furthermore RFID can be used in supply chain integration, especially in the backward integration (information flow). Airbus can adopt RFID usage for enterprise wide application because of increased visibility, cost savings and auto data generation. The greater visibility of the business process gives Airbus measurability of its processes. Furthermore measurability will be instrumental in the business process improvement initiatives at Airbus. The information gathered through RFID can be used in Lean improvements. It provides the real-time visibility and real-time automate data flow. When this data is shared with the suppliers they can plan in accordance to the demand.

Continuous Replenishment Program (CRP) also increases the visibility and efficiency of the supply chain. CRP utilises the customer’s point-of-sale data to generate the correct amount of supply for the customer’s next schedule. Vendor managed Inventories (VMI) is an extension of the CRP, here the vendor manages the inventories for the customer. The vendor matches the demand and required order quantities based on the movement of raw materials. These methods, CRP and VMI, can improve the operational efficiency and help cut cost.

Airbus has formed partnership with suppliers and customers as the part of its supply chain network. The risk-sharing partnerships are formed to achieve cost reduction in the Supply chain. This allows Airbus to spread across its risk and cost along the Supply chain. Airbus has suppliers with whom risk sharing is formed ( example Saab , Eurocopter).

Conclusion:

Aircraft manufacturing is a complex business since it involves high technology components, high risk involved, high cost involved in product development. For these reasons there is a high amount of Outsourcing of products and services by the aircraft manufacturing companies to 3rd party. Further more for an aircraft manufacturing company to coordinate the flow of materials and information with suppliers and customers to be successful, supply chain management is critical. Airbus has to prioritize integrating its internal activities like coordination of its many manufacturing units; it can be argued that integration of individual processes inside a firm is key for successful supply chain process (Lambert and Cooper 2000). As pointed out the delayed caused in delivery of A380, due to incompatibility of components are caused due lack of information follow between customer and supplier. So it necessary for Airbus to integrate the business towards customers .ie , Customer facing arc of integration. Airbus has established long term relationship with Suppliers to reduce total cost of ownership, reduce product development time, share risk and to improve operational efficiency. By integrating the complete supply chain, Airbus can have high visibility of its business process and reduce the supply chain risks like Bullwhip effect, errors, delays and poor quality. Use of information technologies, RFID tags, GPS will provide performance improvement and value to the final customers.

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