A four-step approach to reducing materials costs in Aerospace & Defense By Sanjay Agarwal, Principal, Deloitte Consulting LLP
While companies in other industries have adopted innovative approaches to cut materials costs — with effective results — a variety of internal and external challenges have prevented Aerospace & Defense (A&D) companies from following suit. For example, the traditional approach of structuring A&D companies around individual programs has created impenetrable silos that discourage enterprise-wide standardization of systems, processes, and part numbers — making it difficult to implement large-scale efficiency improvements or to capitalize on economies of scale. At the same time, companies that have grown through acquisition often have not yet integrated their newly acquired operations in our experience. These types of challenges have forced many A&D companies to continue to make fragmented, ad hoc purchases that rob them of their buying power and undermine their efficiency.
Executives and managers in A&D generally recognize that materials cost management is a target-rich area and a potential source of competitive advantage. However, most companies thus far have been unable to capitalize on this opportunity. The truth is, when it comes to improving materials procurement in A&D, there is no silver bullet. An acceptable level of effectiveness can be achieved only through a series of small improvements. The good news is that we have seen these small improvements — when pursued as a coordinated four step approach — reduce an A&D company’s total procurement costs by as much as 15 percent.
1. Create a center-led procurement organization. Many companies have shied away from improving their procurement capabilities because they think they need fancy new IT solutions or spend management systems. But in most cases the real key to improvement is a procurement organization that cuts across business silos. Buying groups are generally structured around parts categories – for example, resistors and capacitors, harnesses, wire and cable. Within each category, the work is divided into two distinct roles: (1) category managers who analyze the market, develop and execute strategy, negotiate contracts, and develop suppliers, and (2) buyers who actually place the purchase orders. A center-led sourcing organization enables a company to coordinate its buying activities, share buying insights, and leverage its full buying power.
2. Generate quick wins by reducing parts complexity. Most A&D companies purchase a much larger variety of parts than they need to. Sometimes the parts are identical but are assigned different part numbers. Other times the engineers in various silos specify different parts that are functionally equivalent. Companies can tackle the problem by cleaning up their parts data, promoting the use of standardized parts, eliminating duplicate part numbers for identical parts, and making sure they aren’t being charged different prices for the same part. These simple improvements can reduce parts proliferation by 30 to 40 percent, while reducing overall procurement costs by 2 to 4 percent.
3. Establish robust sourcing processes. Process innovations and leading practices can have a positive and lasting impact on all aspects of the procurement process. Specific long-term improvements include: Leveraging spend across procurement categories, not just within categories. Avoiding reliance on a single supplier by using standardized parts or re-using existing designs. Using parametric price models to determine the appropriate price for new parts based on the prices and capabilities of similar parts that already exist. Establishing up-to-date pricing agreements so buyers don’t pay out-of-date or non-discounted prices. Negotiating tiered pricing that provides volume discounts automatically. Purchasing through distributors – rather than buying direct – for low-spend parts, or in situations where the distributor offers value-added services such as kitting and vendor managed inventory.
4. Develop a fully integrated procurement system. To fully leverage a company’s buying power, the procurement group needs timely and accurate information to support fact-based negotiations. This requires a fully integrated procurement system that links manufacturing information to financial forecasts. Such a system can help a company shave a few more percentage points from its overall procurement costs; however, the lack of a fully integrated procurement system shouldn’t be viewed as an obstacle to improvement. As we have seen, there are many ways for companies to improve their procurement performance without making a major investment in technology.
Putting the pieces together
We believe improved procurement performance in A&D is generally achieved through a series of small steps, rather than one big breakthrough. However, when taken together, the savings from a comprehensive sourcing effort can be significant. In fact, we have seen many A&D companies reduce their overall procurement by spending as much as 10 percent to 15 percent. And in today’s increasingly competitive A&D market, that could easily be the difference between winning and losing.
To read more, please visit our site on www.deloitte.com/us/aerospace&defense/strategicsourcing
Sanjay is a Principal in the Strategy & Operations Practice of Deloitte Consulting LLP. Sanjay can be reached at S1agarwal@deloitte.com
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