Date: 7/31/2008
Aerospace

Dollars & Sense

Overshooting the Runway




Deloitte’s Tom Captain explains why aerospace programs are over budget and behind schedule.

Lately we have seen commercial aircraft programs run late due to global supply chain or design problems. In addition, government aerospace procurements such as the UK MoD A400M Transport and the US Joint Strike Fighter have overrun their budgets. A recent GAO report on program performance found that, of 95 programs studied, the US Government was over budget by $295 billion and programs were an average of two years behind schedule. This phenomenon knows no country boundaries and affects commercial as well as military procurements. What is behind this disappointing record and what can be done about it?

Technology complexity: The aerospace industry has made great technological advances in functionality and performance over the last 50 years. Digital product definition, computational fluid dynamics, and sophisticated engineering analysis have enabled vast improvements in materials, propulsion, communications and avionics. These advances, in turn, have resulted in important contributions to society and history, including the moon landing, the end of the cold war, and ubiquitous and affordable global jet transportation. However, this increased functionality – combined with ever-increasing precision, tighter tolerances, and increasing complexity – make it extraordinarily difficult to manage the product development process. Unpredictable interface errors, integration challenges, difficult cost/functionality tradeoffs, and variability have dogged even the best managed programs, resulting in schedule misses.

Functionality and the supply chain: The requirements definition, systems engineering and configuration management processes are increasingly dynamic. Suppliers have increasingly taken on important engineering duties, requiring integrated design tools and processes, and constant coordination. Complex next-generation commercial and military jet aircraft, space and naval platforms have long lead times, sometimes exceeding 10 years, during which time technology keeps marching on. Parts are continually improved upon and their designs continue to change even after they are sourced to suppliers – so that they are often obsolete even before they are manufactured. We can’t fault customers that want to include the latest technology advances in products they may have ordered years earlier. Unfortunately, designs that continue to evolve once the product definition is “frozen” are a root-cause problem. With inter-connectivity of designs, and the requirement for systems integration, a change in one part of the design typically affects another part, sometimes in unpredictable ways.

Talent: There is a talent shortage in the US Defense organizations in the program management and systems engineering areas. Having a “smart” buyer and a supplier compliance process is paramount for cost and schedule performance to be achieved. Often a prime culprit is deficient engineering management in the buying organizations. According to a recent estimate, the number of civilian and uniformed engineers on the Air Force’s core acquisition staff has been reduced by 35 to 40 percent over the last 14 years. Similarly there is a shortage of experienced systems engineers in aerospace & defense organizations. Firms are increasingly short on assigning senior level employees with broad understanding of systems integration. And the problem is expected to get worse: A 2007 MIT survey showed 28.7 percent of undergraduates were headed for jobs in finance, and 13.7 percent were headed to management consulting – but just 7.5 percent were going into aerospace and defense. Shortages in talent and experience in both the customer and the supplier firms is another root-cause problem.

Politics: The aerospace industry is synonymous with prestige, power and politics. Nations want to manufacture domestically because they want to increase their industrial base and create high tech employment. Even within nations, local politicians lobby for factories in their districts. For example, the Eurofighter consortium has multiple final assembly locations, and parts and subassemblies are manufactured in locations that have more to do with where jobs are located – not how to best optimize supply chain performance. A key reason for the Airbus A380 schedule miss can be traced to two different software tools used for wiring design and lack of integration between the Hamburg and Toulouse factories. Also, due to large non-recurring R&D costs required to design complex products, politicians dictating decreases in expected number of deliveries have a negative effect on fly-away price.

Program management: The A&D industry has turned in spectacular program management performance in the past. For example, President Kennedy announced that, within a decade, the US would land a man on the moon – a program that was able to meet its goal by July 1969. However, with increased job specialization – along with the aforementioned challenges with technology complexity, design variation, unpredictability, talent shortages, supply chain diseconomies and political agendas – the ability to manage to budgets and schedules becomes extraordinarily difficult. Programs run into trouble when optimistic scenarios are used as baselines in order to gain approval. In addition, technical, functional and financial risks may not be identified and managed effectively. It is not clear if program approvals would be forthcoming if realistic risks, budgets and schedules were presented. Thus we are experiencing an epidemic of sub-par program performance, costing shareholders and tax-payers dearly.

So What Are The Solutions?
Customers need to ensure that requirements are complete, while allowing for flexibility in form, fit and function. Change will always occur; however, the configuration management process needs to have iron clad discipline and processes re-enforced. Solutions for the talent shortage are complex, requiring incentives to increase engineering graduate rates in the US, increase systems engineering curricula, and retain experienced engineers in the short run to bridge the pending talent gap. Budgets need to be based on realistic and full visibility cost benefit and business case analysis. Scenario analysis needs to be performed to contemplate risks and the probabilities of un-forecasted design complexities, supplier shortages, quality problems and raw materials price increases and incorporate these contingencies in the budgets. In other words, programs need to have budgets and schedules based on “rainy day” – not “sunny day” – scenarios. Lastly, politicians need to understand that programs will have sub-optimized economics due to social and political policy decisions regarding employment. These measures need to be implemented soon; or else the industry may not be able to afford its own future.

Tom Captain is Vice Chairman, Global & U.S. Aerospace & Defense Industry, Deloitte LLP. Reach him at: tcaptain@deloitte.com

As used in this document, "Deloitte" means Deloitte Consulting LLP. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte & Touche USA LLP and its subsidiaries.



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