A new intensityProgrammes under pressureA&D Insights                              Industrial Products                     ...
Contents01	Introduction02	 Executive summary06	 A convergence of pressure14	 Responding to the programme management challe...
Introduction                     A&D Insights 2012, the third in this     In a world of convergent pressures,             ...
Executive summary                              Aerospace and defence companies face       How can companies respond to thi...
64%            of the senior executives stressed            the importance of innovation as a            source of competi...
The downturn in western defence            teams under one roof because                              markets and the conti...
These overarching strategies in turn         Become world citizens inprovide the context for the programme        relation...
A convergence of   pressure                              The intensity and combination of         Market pressures        ...
Figure 1: Biggest challenges for A&D overall programme performance                                                        ...
But big rate increases also mean         Internationalisation of markets                                          pressure...
Typhoon and Dassault Aviation’s            engineering, quality and programmes,Rafale jet to become the preferred         ...
Globalisation of new investment                               The number of investments in                           count...
Greater complexity                         interviewed emphasised that it is                                           not...
Margin pressures                          to deliver. In some cases, there may                                            ...
Programme volume                          the US, observes that they have 4,000-    At the other end of the spectrum,     ...
Responding to the programme   management challenges                               The new environment of multiple and     ...
The main challenges                       challenge for companies is to                                          achieve t...
Using innovation as a key                  to develop as programmes develop. As                               competitive ...
Most companies emphasise technology                        performance-based or outcome-basedinnovation and underutilise b...
Relying more on joint ventures               The complexity of modern A&D                               and partnerships  ...
Being able to properly monitor and           Effective partnership relationshipstake a shared approach to risk also       ...
Finally, we heard from one senior          performance and withhold payment                               executive involv...
Deeper customer intimacyDeeper customer intimacy is delivering           throughout the programme chain,benefits in a numb...
Managing globalised supply                  changing fast as defence companies                                       chain...
Improving identification of rate ramp-up              risk in commercial aerospace              Managing risk in the suppl...
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
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Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)


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PwC a interrogé 28 dirigeants de 23 entreprises chefs de file du secteur de l’aérospatial et de la défense au Brésil, au Canada, en France, en Allemagne, en Inde, au Royaume-Uni et aux États-Unis, entre février et mai 2012.

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Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)

  1. 1. A new intensityProgrammes under pressureA&D Insights Industrial Products Aerospace & Defence The third edition in our A&D Insights series www.pwc.com/aerospaceanddefence
  2. 2. Contents01 Introduction02 Executive summary06 A convergence of pressure14 Responding to the programme management challenges27 Delivering for the future30 PwC aerospace and defence experience31 Contacts32 AcknowledgementsMethodologyAs part of this report, PwC interviewed 28 senior executives from 23 leadingAerospace and Defence (A&D) companies in Brazil, Canada, France, Germany,the United Kingdom and the United States. The combined sales revenues ofthe companies exceeded US$338 billion in 2011. The interviews took placein person between February 2012 and May 2012. Questions focused onprogramme management effectiveness and profitability as well as the impactof changing dynamics from market shifts and globalisation. The results of theinterviews are supported by additional proprietary research, as well as analysisof publicly available information. The results are reported in US dollars unlessspecified otherwise.II  A&D Insights 2011
  3. 3. Introduction A&D Insights 2012, the third in this In a world of convergent pressures, annual series, looks at the challenges we conclude that companies will facing programme management as the need a different kind of programme industry responds to an unprecedented management mindset in which convergence of pressures in the partnership, internationalism, environment in which today’s inclusivity and innovation are as much programmes are being delivered. to the fore as really good ‘get it out of the door’ programme management. Healthy order books in the commercial airline sector sit alongside sluggish In an era of fierce international recovery in corporate aviation and competition, the winners will need to retrenchment in defence. Commercial show that they can also use innovation sector buoyancy is coming largely from as a key competitive advantage to bringNeil Hampson growth markets such as the Middle value-addition to customers alongside East and Asia. In contrast, western price-sensitivity. Deploying a host ofGlobal Aerospace &Defence Leader markets are considerably more brittle. innovative strategies to anticipate, The defence sector is adjusting to the understand and match customers’ new reality of western government needs in changing international austerity measures and seeking to markets will be an important part of diversify its international footprint. programme success. We conclude our All this, while the global economic report by looking at the qualities that outlook continues to be clouded by companies will need to deliver future considerable uncertainty arising programme management success. from the eurozone crisis.
  4. 4. Executive summary Aerospace and defence companies face How can companies respond to this a new intensity in the delivery of their convergence of pressures? In the past, programmes. The need to be faster, companies would respond to pressure fitter and lower cost while managing by majoring on excellence in one of growing programme complexity solutions leadership, operational goes with the territory. These are excellence or customer intimacy. considerable challenges in their But today’s environment means that own right but they are being given a excellence in one alone is not enough. new intensity by the unprecedented Companies, and in turn their environment in which today’s programme managers, need to be top programmes are being delivered. of their game in all three. And they need to be able to deliver innovation A&D companies are experiencing and affordability in tandem. more pressure from more directions than ever before—on price, supply We invited the senior executives chain risk, the need to expand we interviewed to identify the globally, the risks associated therewith programme management attributes and broader macro-economic they feel are most important in the uncertainty. Alongside this, customers current and future environment. They expect that innovation will continue painted a picture of a different kind of while costs come down or are capped. programme management mindset in Innovation is a must-have but can no which partnership, internationalism, longer come at any price. This inclusivity and innovation are as much convergence of pressures is leading to to the fore as really good ‘get it out of a change in programme management the door’ programme management. that moves it well beyond its For example, 64% of the senior traditional heartland of scheduling, executives we interviewed stressed progress tracking, managing risk the importance of innovation as a and pressurising or sometimes source of competitive advantage when penalising suppliers. asked to identify the most important aspects of their programme delivery strategy. They also emphasised the importance of being able to deliver2  A&D Insights 2012  | PwC
  5. 5. 64% of the senior executives stressed the importance of innovation as a source of competitive advantageprogrammes in a way that is much Innovation, systems integration andmore strongly integrated into the affordability need to go hand in hand.customer, market and supply chain In the competitive environment facedforces that are shaping the sector. by A&D companies, it is not good enough just to wait to compete onThere is a strong trend towards more contracts anymore. Instead,inclusive partnering relationships with companies are bringing innovationthe supply base and with the customer. into their business model to get reallyThese partnerships are being used to close to their customers and the supplyco-define a product or service, share chain to try to be ahead of what therisk in the design and production market needs and wants. ‘Co-creation’,cycle, enter new markets and deliver where the customer has significantthrough-life services. This trend to input to the end product throughgreater inclusiveness is reflected in structured approaches, can result in athe greater emphasis being placed much closer match between budgetson joint ventures and partnerships in and requirements.programme delivery strategies. Jointventures and partnerships, alongsidemanagement of globalised supplychains and tight control of programmecosts, were second only to theimportance of innovation in theminds of the senior executives weinterviewed. A&D Insights 2012  | PwC  3
  6. 6. The downturn in western defence teams under one roof because markets and the continued certain capabilities are required internationalisation of both the from partners across the globe defence and the commercial sectors but the expertise for virtual have accelerated the trend to greater management of complex tasks globalisation of supply chains. But as in a breakthrough technology supply chains extend so too does risk. does not currently exist within More inclusive relationships across your organisation. You must know and down the supply chain can help what you do well, focus on that, manage these risks and ensure they and measure performance. are jointly identified and mitigated Put an emphasis on rather than debated and litigated. co-creation and Such an intense and complex customer intimacy environment brings dangers. How Develop relations with your can companies cut through this? Our customers and suppliers that are discussions with senior executives, really tight, so that requirements and our review of what they said, led are exactly understood, developed us to identify the following things that together and put at the heart of companies need to make sure they programme design and execution. get right: Paying close attention to detailed design upfront and aligning it to Stay focused on your core customer requirements can go a Identify and understand what you long way to reducing programme do best and make sure that focus profitability problems. Good guides your key decisions. Just customer intimacy can be used because the industry is heading in to pre-plan efficiencies across a certain direction, such as the programme lifecycle. globalising the supply chain, doesn’t mean it is always best for Get innovation and cost you. A clear understanding of control working in tandem what you do best and what others The previous ability of customers do best is fundamental to your to tolerate price drift no longer make-buy decisions. For example, exists. Companies will need to there might be situations where deliver more capability at lower you may need to co-locate design cost, becoming adept at combining cost reduction strategies with ‘innovation ready’ derivative platforms.4  A&D Insights 2012  | PwC
  7. 7. These overarching strategies in turn Become world citizens inprovide the context for the programme relationship managementmanagement approach needed to Build the skills and culturaldeliver future programme success. outlook as programme leadersProgramme managers will need to: and within your team to manage Look hard at systems global programme footprints and integration the partnerships that go with it. Programmes generally stand Develop the ‘softer or fall on how well companies skills’ needed to take a succeed in managing an collaborative approach inherently complex network to supply chain risk of interlocking platforms and Get good at sharing risk technologies from different information, taking coordinated suppliers. Unless you can get action to manage risks and being integration of this jigsaw right, more open about vulnerabilities. don’t make it even more complex Finally, programme managers need by extending it further. If you great judgment. The importance of can’t get it right, then maybe speed and agility means that it’s not a greater degree of vertical always going to be possible to have integration is what is needed. 100% of the data before making Put partnerships and JVs on decisions. In such situations, good firm foundations judgment based on sound experience Have the right approach to and a focus on what the company culture, governance, contractual knows and does best is everything. terms, transparency and create Companies that can move forward fast an environment where critical when maybe they only have a fraction information flows when and of the data are going to gain a where it is needed. competitive edge. But such talent is in short supply and companies need to be Develop real agility and good at recognising and developing it. speed in business processes Use this as a valuable differentiator, enabling adaptation to new products, services and markets in months not years. Companies are bringing innovation into their business model to get really close to the customer and try to be ahead of what they need and want. A&D Insights 2012  | PwC  5
  8. 8. A convergence of pressure The intensity and combination of Market pressures pressures facing A&D companies is reflected in the range of challenges The simultaneous convergence identified by the leading senior of pressure is markedly different industry executives we interviewed from previous periods. The market for this report (figure 1). Programmes environment in both the commercial are coming under more pressure from and defence segments is strongly more directions. Reductions in major price-sensitive. But there is still a need defence platform programmes are to deliver product that can enable coinciding with more but higher technological innovation, for example risk commercial programmes. For in terms of greater functionality, companies serving both markets, the reduced operating costs and effect of the upturn in commercial environmental improvements. orders offsetting the shrinking of At the same time, the banking traditional defence markets is crisis and tighter financial market welcome but this can introduce conditions have put pressure on programme development challenges financing and support for R&D and where platforms and technologies are access to capital, not just on primes interdependent. In the background, but most significantly on tier-one continuing world economic suppliers and beyond. This can uncertainties, particularly in the introduce significant programme eurozone and possible softening of risk through the supply chain. Chinese growth, pose concerns about economic growth and further possible pressure on military budgets.6  A&D Insights 2012  | PwC
  9. 9. Figure 1: Biggest challenges for A&D overall programme performance Globalisation of new petition, rs playe Co st o res m su f en Gr w m emergForeign co res ne ow a erg e np th rke th o in y ence of ts rgi Co int cha de Ma tec nsta lity ly m bi pp isi su an req hno nt n d log eed V d, to ies of int , lo ne eg ng w ners Rising rat er ng part al factors e tim e shari Declinin Risk g defen ce budg ets International trade complexity Programme pressure environment, intensified d price compliance se of fixe Extern Greater u in defence def enc Unce contracts and gov ern e prog rtainty &D ing Cu men ram on lop rR st t str me eve om ateg s, fo g, d t er ies ctin talen t or ra re Gr pp Att ining lat l demands ow ex io su a ret ns Com ket env d th po mar hip an tal s to rt g pres ironm in api co ma nc me rk to c Environmenta na sed Fi fro ets ess m time ent Acc toIn defence, there has been an where you have to be more mindful ofextension of the use of fixed price what the baseline is, and to managecontracts in the US in particular, closely to that baseline.”elevating contractor risk. The public At the same time as these potentiallysector is more than ever holding constraining factors have to becompanies and programme managers managed, the programmeaccountable for failing to meet environment is also one of greatschedules, budgets, and performance opportunity and expansion. Highspecifications. Nan Bouchard, vice production rate ramp-up will bepresident of program management, needed across much of the sector.Boeing Defense, Space & Security Airbus, Boeing, Bombardier and(BDS) points out: “We’re seeing an Embraer have all announced aattempt to reduce technical risk on series of record deals for their newprogrammes so that cost can be more generation of commercial aircraft.assured and contained. We’re also Military programmes such as theseeing a shift of risk to industry in Joint Strike Fighter and Tankermore of a fixed-price environment. It’s with extensive supply participantsdifferent than the way programmes are also ramping up in the next fivehave been run in this last cycle. Both on to ten years, albeit slower thanthe customer side and on the industry previously anticipated.side; people are not used to runningprogrammes in a fixed-price context A&D Insights 2012  | PwC  7
  10. 10. But big rate increases also mean Internationalisation of markets pressure on the supply chain, leaving and supply chains programmes vulnerable to supply chain disruption (delay or failure). The globalisation of the A&D industry It will be important that companies has accelerated over the past few years learn from previous programme and this trend is further intensifying issues where delays or failure have as both the defence and commercial arisen from factors such as immature segments look to capture business in technologies, engineering and supply growth regions of the world, notably chain complexity, supplier constraints the Middle East, Asia and South and over-optimistic scheduling or lack America. On the defence side, there of planning for contingencies. is the heightened international competition for these new markets, highlighted recently by the contest between the four-nation Eurofighter “The risk management associated with the supply base is huge and volatility in the economy is a change from the past. Cycles are getting shorter and more volatile, putting pressure on previous reliance on existing core long-term business which are needed to support programme development. International competition and the whole trade environment is also one of the biggest challenges we face today.” Mairead Lavery, vice president, strategy, business development and structured finance, Bombardier Aerospace8  A&D Insights 2012  | PwC
  11. 11. Typhoon and Dassault Aviation’s engineering, quality and programmes,Rafale jet to become the preferred observes: “Historically, our client basebidder to supply medium multi-role was located only in North America,combat aircraft to India’s air force. On western Europe and Latin America.the commercial side, the Commercial Progressively, we are extending ourAircraft Corporation of China (Comac) client base to Asia and Russia.”is seeking to challenge the duopoly of Internationalisation was an importantAirbus and Boeing. theme highlighted by all theAlongside market globalisation, supply companies that we interviewed forchains have internationalised, giving this report. French defence companycompanies opportunities to source DCNS has moved from a position aproduction at optimal cost and in decade ago where its main revenueoptimal locations for offsets and came from French defence and exportsubsequent exports. But this adds accounted only for around 15% ofto supply chain complexity and revenue. Now, Andreas Loewenstein,significantly increases the profile DCNS’s senior vice president forof risks such as geopolitical, strategy and development, says:international trade and business “Export accounts for 35% and shouldconduct compliance. The emergence jump up to 70% ten years from now.”of new competition around the world Similarly, EADS’ defence divisionis bringing opportunities for western Cassidian, now has a global presence,suppliers who now have customer having seen its export share rise fromopportunities with a much greater 10% to 30-35% today with a target ofgeographic spread of manufacturers. around 55% in ten years.For example, Laurent Rasmont, Ratier Asked to compare important salesFigeac’s vice president in charge of revenue markets now and in ten years’ time, the companies we spoke to identified China, India and Latin America as high growth markets together with the rest of Asia and the Middle East as also being important. The markets of North America and western Europe are currently the two largest markets for these companies but they are relatively mature and seen as having less future growth importance compared to newer markets elsewhere. While western Europe was expected to deliver fairly flat growth, central and eastern Europe, Russia and North America were identified as offering slightly better growth prospects. A&D Insights 2012  | PwC  9
  12. 12. Globalisation of new investment The number of investments in countries outside of North America, international markets (i.e. invest- the UK and western Europe. Thirteen ments in markets outside of the ‘home’ of the 21 new manufacturing invest- country of the investing company) by ments added in 2011 came from the top 50 aerospace and defence outside these regions. Interestingly, companies reached a new high in there was also a pick-up of manufac- 2011 (figure 2a). Twenty one new turing investments in Europe and manufacturing investments and nine North America. Indeed, in 2011 research and development (R&D) unlike in the previous two years, investments were added in 2011. Two such investments outnumbered thirds of R&D investments were in those in India and China. Figure 2a: Number of investments by top 50 global A&D companies in Investments by Top 50 (2000-2011) companies in international markets international markets Global A&D 32 28 9 24 6 20 9 16 4 12 1 6 7 21 18 8 2 3 3 2 13 12 4 9 2 7 6 6 7 7 5 3 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Manufacturing R&D Source: Company Reports, PwC analysis Figure 2b: Number of investments by top 50 global A&D companies by country (cumulative 2000-2011) R&D and manufacturing investments by country, 2000-2011 (cumulative) Country/Region R&D Country/Region Manufacturing India 12 China 23 US 7 India 20 Russia 6 US 15 UK 5 Mexico 10 China 4 Russia 9 W Europe 4 Middle East 8 CEE 3 UK 7 Middle East 3 W Europe 7 Mexico 2 CEE 4 S Korea 2 N Africa 4 N. Africa 1 S Korea 2 Other 5 Other 5 Total 54 Total 114 Other in 2009: Singapore, Australia Other in 2009: Brazil Other in 2010: Uzbekistan Other in 2010: Brazil(2) Other in 2011: Canada Other in 2011: Kazakhstan Notes: Top 50 companies as per Flight International Top 100 Rankings. Includes organic investments and discrete aerospace JVs where rationale for investment is known. Excludes acquisitions. Source: Company Reports, PwC analysis10  A&D Insights 2012  | PwC
  13. 13. Greater complexity interviewed emphasised that it is not just technological complexity.A&D programmes have always been As Peter Fielder, managing directorcomplex. However, the complexity of performance excellence at BAEof programme requirements has Systems puts it: “It is the mix of factors,intensified significantly over the not just purely technical complexity.past few years. Most of today’s major It’s different markets, different supplyprogrammes have a systems-of- chain partners, different technologies,systems approach, an inherently different relationships. We’re having tocomplex network of interlocking address factors that we have not had toplatforms and technologies that address in the past. For example, yourequires the precise integration and may have multiple partner buyers asunerring performance of disparate well as multiple partner suppliers.”pieces. This also requires thesuccessful programme management of Complexity is also arising from theeach of the systems—an undertaking sheer pace of technological changethat can be significantly challenged which is accelerating in most areas ofwhen suppliers thrust into an the sector. Bill Fitzgerald, president forunfamiliar subsystem integration commercial engines at GE Aviation,role fail to meet schedules, cost observes: “Our market position todaycaps or capability promises. comes from a technological legacy that has been developed over 40 years. ButOn top of this, the internationalisation the pace of change now means that intrends that we have outlined above the next five to seven years we will coverhave further compounded the another 40 years. That’s a challengecomplexity, introducing greater for the industry. One big question isgeographical reach and bringing whether there will be enoughnew relationship matrices into play. engineering resources industry-wide.”Many of the senior executives we “Complexity is coming from the changing environment. Customers are facing into difficult budget situations and, as we internationalise more, there’s more complexity in those relationships. The challenge for all of us, both from the industry and the government side, is to deal effectively with that new environment.” Nan Bouchard, vice president of program management, Boeing Defense, Space & Security (BDS) A&D Insights 2012  | PwC  11
  14. 14. Margin pressures to deliver. In some cases, there may also be scope for shifts in emphasis The countervailing forces prevalent within programmes to higher margin in the A&D sector are reflected in opportunities. divergent views on the outlook for programme profit margins in the European space company, Astrium, coming decade. Just under half for example is looking towards more (43%) of the senior executives in emphasis on services in its mix of the companies we interviewed felt infrastructure and service business as margins would improve in the next a route to better profit margins. But, ten years with the rest split between like other companies, it is also putting them staying the same or reducing a strong emphasis on exploring lower (figure 3). cost sourcing opportunities and keeping tight control of programme With considerable pressure for price costs. Other companies are facing reduction or containment from both threats to the higher margin areas commercial and military customers, of their programme life cycles. scope for margin improvement will One senior executive heading the need to come from reduced input costs electronic systems division of a or programme efficiencies. With much world-leading aerospace company of the former being dependent on observes: “MROs are up-and-coming— wider commodity prices, companies taking our aftermarket profitability will need to look to their own internal away.” programmes, such as lean initiatives, In the defence sector, government austerity programmes continue toFigure 3: What do you think will happen to programme profit margins exert downward pressure on pricing.over the next 10 years? It is strongly felt on both sides of the Atlantic and is coming alongside other changes by government buyers. Decrease >10% 5% For example, Klaus-Peter Leinauer, vice president sales & business Decrease <10% 24% development at RUAG Aerospace Services points out: “One of the main Stay same 29% challenges for our defence division represents the reorganisation and the Increase <10% 29% budget cuts of the German Federal Armed Forces, which will likely also Increase >10% 14% enforce the monopolisation process of our market.”12  A&D Insights 2012  | PwC
  15. 15. Programme volume the US, observes that they have 4,000- At the other end of the spectrum, 6,000 programmes under management, defence combat specialist GeneralMost of the interviewees we spoke to of which 10-20% are over US$2 million Dynamics Land Systems focuses onlyexpected the number of programmes but that the number accounting for 80% on one or two programmes, currentlythat they rely on for the vast majority of revenue is shrinking and that will the Abrams tank and the Strykerof their revenue to increase rather continue to be the case. “I think the family of light armoured vehicles, forthan decrease in the coming decade. 1990s are coming back to bite us now. its main revenue volume. SimilarlyEmbraer, for example, has moved As we went through the downturn in the Rolls-Royce’s submarine nuclearfrom a single programme for 80% nineties we gathered up a generation of propulsion division has moved fromof its revenue a decade ago to four engineers. And now it’s coming back to 20 or so small contracts a decadeprogrammes today (Phenom, haunt us 20 years later because we’ve ago to five large contracts today, andLegacy 600, Legacy 650 and KC 390). lost a generation. We as an industry the division anticipates one single,It expects the number to double in ten encouraged a generation to get integrated contract for the entire fleetyears’ time. Bombardier has seen out of defence.” management in ten years’ time.similar programme expansion,moving from four or five to 11 todayand expects to be delivering about15 programmes in a decade’s timefor the vast majority of its revenue.Programme volumes vary considerably “We’ll be going from a fewer number ofaccording to the nature of the productbeing manufactured and some huge programmes to many smaller andcompanies report that they expect more developmental type programmes.future revenues to be concentrated ona smaller number of programmes. For Yesterday there were hundreds of massive,example, Dan Gobel, vice president multi-year programmes with more beingand deputy general manager of BAE cost-plus type contracts. Today and in theSystems Electronic Systems sector in future there will be thousands of smaller, shorter, development type programmes. It’s a different environment and requires identifying and managing risks way up front much more effectively.” Major US defence contractor A&D Insights 2012  | PwC  13
  16. 16. Responding to the programme management challenges The new environment of multiple and Indeed, three in every ten gave converging pressures intensifies the themselves a top ranking of ‘excellent’. challenges faced by programme This comes despite the number of managers. They are working in an examples of cost overruns and delays environment where customers are in the sector. But a quarter were much asking for increased capabilities but more modest, rating their company’s at lower cost. This puts pressure on programme management ability only programme management to innovate as ‘fair’. The remainder, nearly half, while also containing cost. How well while believing their company to be positioned are companies? In general ‘good’, also recognised that there was terms, the senior executives we room for improvement before they interviewed are satisfied that their could feel it was ‘excellent’ (figure 4). companies have the ability to manage complex programmes well. Figure 4: How would you rate your company’s ability to manage complex programmes? Poor 0% Fair 25% Good 45% Excellent 30%14  A&D Insights 2012  | PwC
  17. 17. The main challenges challenge for companies is to achieve these goals in the currentWhen invited to identify their top changing and, in many ways, uniquethree programme concerns, the environment. We drilled down furtherfamiliar imperatives of delivering on and invited the senior executives totime, staying on budget, and meeting rank the issues they are focusing mostand managing customer requirements closely on in the delivery of theirwere the most frequently mentioned programme goals (figure 5).challenges. But, of course, theFigure 5: Most important aspects of company programmedelivery strategy Using innovation as a key competitive advantage 64% Managing globalised supply chains 45% Keeping tight control of programme costs 45% Relying more on JVs/partnerships 41% Risk sharing with the supply base 27%Delivering programmes more quickly (better time to market) 27% Opening up innovation (e.g. collaborative R&D with customer or supply base) 14% Protecting intellectual property 9% “By definition, large and highly complex engineering programmes carry risk and hit problems from time to time. It’s a competitive environment out there and with the current affordability challenges, it means that the industry has to be agile, innovative and bold in supporting our customers. So growth without risk seems a bit unlikely to me. Those who get it more right than wrong are the ones most likely to earn the right to be trusted with the next challenges.” Peter Fielder, managing director of performance excellence at BAE Systems A&D Insights 2012  | PwC  15
  18. 18. Using innovation as a key to develop as programmes develop. As competitive advantage Ratier Figeac’s Laurent Rasmont points out: “New technologies need to be The responses from senior executives mature right away. Airbus or Boeing highlight the extent to which a can’t give suppliers time to develop their technological and innovative edge is technology over the course of a aircraft seen as the key way to survive and programme anymore. The technological thrive in a highly competitive step is too big to take any kind of risk environment. Putting innovation and the ramp-up is too important as into the heart of programme delivery Airbus and Boeing have a record number strategy was emphasised time and of new orders. They can’t have any time again by the senior executives delays because of immature we spoke with. But innovation technologies.” brings technology risk. Recent big Strong and well financed research and programme examples show how development plans are essential for difficult it is to introduce innovative companies to produce robust and technologies on time. reliable technology. In the past, A vital part of success is aligning manufacturers such as Airbus or innovation with clear customer Boeing helped their suppliers finance benefit, most importantly cost their research programmes but, as reduction for customers. Company Rasmont observes: “Those days are innovations need to be rooted first clearly over. Tier-one suppliers must and foremost in understanding of show that they’re able to finance their customers and how their problems can R&D on their own. In that regard, be solved better. Energy affordability, government actions such as R&D tax for example, is a big concern for credits have been a great help.” customers and the introduction of Aerospace and defence companies lighter aircraft and more fuel efficient are deploying a range of strategies to technology is now a ‘must have’ in the ensure innovation is an integral part commercial sector. But to survive, of programme delivery. Among them, aircraft and engine manufacturers will Dassault uses ‘technology roadmaps’ need to be able to introduce further to identify 15 technologies that give fuel efficiency ‘game changers’. it differentiation and then converge Unlike in earlier periods in the these onto a single product. One major evolution of the sector, the industry US defence contractor uses innovation cannot afford to wait for technologies websites that employees and suppliers have access to and puts an emphasis on incentivisation of innovation by its engineers with awards and CEO involvement.16  A&D Insights 2012  | PwC
  19. 19. Most companies emphasise technology performance-based or outcome-basedinnovation and underutilise business contracts is also an illustration ofmodel innovation. Some companies business model innovation.are looking at more innovative models This is having a significant impactfor their business processes and on programmes, as programmedoing this in conjunction with their management teams need tocustomers. General Dynamic Land understand how their programme isSystems (GDLS), for example, is expected to deliver value (figure 6)developing an innovative government and to feel comfortable managing it.contracting approach to secure the Michael Joyce, senior vice president,best mix of vehicles and lock in future operations and programmeprices. GDLS’s Mike Cannon, senior management with Lockheed Martin,vice president ground combat systems, observes: “For the past eight to tenalso adds: “With all the pressure on the years, government and industry havedomestic market and a lot of saturation developed an impressive portfolio of newas well, taking our product global is a innovation. Now the programmaticbig priority. But innovation is probably challenge is to produce and field thesenumber two. And it’s not innovation in a new innovations in an affordabletraditional sense. It’s innovation in how manner.”we approach our clients.” The trend inthe defence sector towardsFigure 6 Business Model Innovation Technology Innovation • Performance and• Customer experience Value Products/ feature improvements• Brand value proposition services • Packaging integral to customer value Customer• Value network/ Insight • Manufacturing and supply chain Value Process assembly• Ecosystem of network technologies • Service delivery value offerings• Buyers and non-buyers Target Supporting • Information systems• Marketing methods customer technologies • Logistics/inventorySource: Making Innovation Work, Davila, Epstein, Shelton: Wharton School Publishing, 2006 A&D Insights 2012  | PwC  17
  20. 20. Relying more on joint ventures The complexity of modern A&D and partnerships programmes and the need for genuine collaboration also means Many senior executives emphasised that partnership participants need the growing importance of joint to be ready to change their style and ventures (JVs) and partnerships. approach to joint initiatives and leave JVs are an important way into new hierarchical or contractual attitudes markets and continue to be an at home. Again, Rolls-Royce’s Adrian important popular business model Ellis observes: “We see a much more to share risks and leverage the partnered type of management complementary resources and emerging as the future of complex capabilities of the participants. programmes rather than one party But they also present challenges in being in the sole lead and directing financial risk sharing rules and in the others. No one party has all the structuring clear and well-documented capabilities to deliver these complex technical and managerial interfaces. programmes.” These challenges are even more onerous when the JV relationship Risk sharing with partners spans multiple countries and cultures. It is essential for companies to be clear In past years, ineffective management about when it is appropriate to choose of supply chain risks has resulted in a JV approach and when other cost overruns, production delays, partnership approaches may be better. quality failures and, in some cases, penalties and order/programme Whatever the chosen model, it is cancellations. And the increasing important for the participants to invest search for international partners time in making it work. Important and customers is creating ever more building blocks for any such initiatives complicated risks. Individual suppliers include a shared ‘whole partnership’ cannot always identify and respond to approach to risk, as well as visibility these risks alone and, often, processes and transparency right across the and controls at prime contractors don’t programme, a coherent master capture them. Working in isolation, schedule linked to all partners, shared both primes and suppliers can be blind programme management space and to many emerging supply chain risks. capacity. Adrian Ellis, Rolls-Royce’s director of next generation Taking a shared approach to risk submarines, recalls the commitment identification is increasingly important needed to establish the operating in the aerospace and defence supply model for the UK’s Successor new chain. Bombardier’s Mairead Lavery nuclear submarine programme: “It says: “We have been very public about took considerable senior level time and the fact that we enter into risk sharing effort. You can’t expect a complex project partner relationships. We focus very team to just work. It needs investment.” much on what we call supplier development, which includes supplier assessment and development and monitoring to make sure we have the right risk partner.”18  A&D Insights 2012  | PwC
  21. 21. Being able to properly monitor and Effective partnership relationshipstake a shared approach to risk also are delivering significant benefits inmeans capacity-building down the a number of ways:supply chain. Lavery’s colleague, • arge risks that transcend, what LRobert Dewar, vice president were in the past, individual companyand general manager CSeries at boundaries are jointly managed andBombardier Aerospace, says: mitigated rather than debated and“When we started the Global Express jet litigated.programme we managed the tier-onesbut had a lot of learning as well. Of • aste is removed from programmes Wcourse, a lot of the tier-one suppliers by joint governance which smootheshave to manage the tier-twos and, in the partner interfaces and optimisesturn, the tier-threes so they are also in resource costs, usually the largesta learning curve on how to do that. We proportion of developmentmake sure we have good governance in programmes.place and that they’re able to manage • Co-creation’, where the customer ‘that well with our help.” This overall and the supply chain have significantgovernance is especially important as input to the end product throughSafran’s Jean-Pierre Cojan, deputy structured approaches results in aCEO for strategy and development, much closer match between budgetpoints out: “Tier-one contractors and requirements.cannot really flow-down the risk-sharing partnership concept as But the experience of the AD industrytier-two and tier-three companies also shows that effective partnershipsare financially too small.” are not always easy to deliver. For example, while the cost of risk canOne senior US defence company be shared throughout a commercialexecutive stressed the importance aircraft supply base, there’s littleof “vetting suppliers early, sharing point in the Original Equipmentinformation across the business Manufacturer (OEM) extractingand getting them involved with the ever greater financial penalties fromcustomer early.” Risk sharing needs a failing supplier when the entireto be reflected in contract design: aircraft is delayed. Also, in meeting“If we have a fixed price with a customer, the requirements of export contracts,then suppliers need to share in that ‘offsets’ of design and productionaccountability. There should be the contracts are almost always requiredsame rules for suppliers as the prime to help the receiving country establishhas. There should be a flow-down of its own capabilities. If the chosenrequirements, quality standards and partners cannot deliver, this canfixed cost pressures. Without it, no jeopardise an otherwise successfulamount of engineers can solve a contract. And, if decisions in supplierfundamentally bad contract.” selection are based on offset obligations to create capability in an unproven supplier, it does introduce additional risk even though it may be required by the agreed offset obligation. AD Insights 2012  | PwC  19
  22. 22. Finally, we heard from one senior performance and withhold payment executive involved in a large defence if goals are not met. In today’s contract who said that the contract programmes, leaders must pay much partners were willing to cooperate more attention to the set-up and and the cultural environment was running of partnered relationships if supportive. But because the different they are to succeed. PwC’s experience partners’ design and production in establishing successful partnerships systems did not talk to each other, identifies some critical elements: exchanging critical programme • Culture – matching styles to ensure information relied on an intensive no unnecessary friction, includes manual check of thousands of data assigning personnel who are suited items to identify any changes made to the joint environment. since the last data exchange. Another senior executive, Hervé Multon, senior • Governance – low overhead but vice president of strategy for Thales, effective management at all levels highlighted the importance of not just through traditional review creating a wider common culture as meetings. programme management becomes • Environment – programme data, increasingly global: “It is necessary to design data, production information, harmonise programme management communication links, all are processes. Our programme managers essential to get right before critical come from different cultural information starts flowing. backgrounds. This is an internal training challenge to provide an • Contractual terms – must promote enterprise culture to our people who the desired operating model not lead have different backgrounds and to protectionism and claims against training, as well as living in societies other partners. with very different cultures in place.” • Transparency – to build trust which What all these cameos show is that is the foundation of successful programme management has moved relationships. beyond the mechanistic: create schedules, track progress, manage risk, pressure suppliers for improved20  AD Insights 2012  | PwC
  23. 23. Deeper customer intimacyDeeper customer intimacy is delivering throughout the programme chain,benefits in a number of areas. In the resulting in a more tightly managedUK, for example, the Ministry of programme. Another UK defenceDefence (MoD) is a full partner in the example is in Complex WeaponSubmarine Enterprise Performance Systems where the MoD works inProgramme (SEPP) along with Rolls- partnership with industry membersRoyce, BAE Systems and Babcock making trade-offs between newMarine. From this position, the MoD, equipment design and existingas the customer, can engage with its equipment support to give maximumpartners in dynamic trade-off capability from a fixed budget.decisions and risk mitigation actionsGlobalising or just exporting?In a recent PwC study, 30 companies were industry can be forced to respond. But,interviewed on how they are addressing as a general rule, progression throughthe globalisation challenge. The research the phases depends on the maturity of therevealed that the globalisation journey company’s globalisation strategy and on theoccurs in three distinct phases, which we complexity of the challenges in question.have named Export, Regionalise, and The research also confirmed that seniorOriginate. Companies and industries do managers consider the same ninenot move smoothly through these phases. dimensions in their globalization efforts,Progression is disruptive, and, when one regardless of the company’s industry or sizecompany changes the game, an entire (figure 7).Figure 7: Many companies are struggling to move beyond the ‘exportmindset’ Market Reach National Champions, still dominated by the ‘Export’ mindset Market Offering Focusing on home region offerings at emerging market prices Operations Driving cost-down and managing offsets Procurement Improving Low Cost Country supply of lower-end technologies IP Development Mainly tightly-controlled from the home region Capital Accessed through home markets Talent Hiring locally but home region dominates the leadership team Operating Model No consistent view on the best model for partnerships Governance Struggling to Integrate Regional requirements prioritiesSource: PwC survey of 30 global businesses AD Insights 2012  | PwC  21
  24. 24. Managing globalised supply changing fast as defence companies chains look for lower cost sourcing opportunities to protect margins Don Burch, chief program manager and seek to establish a better for Spirit Aerosystems, highlights the global footing to secure orders in critical importance of global supply non-traditional markets. However, chain management: “Managing our strategic trade controls such as the global supply chains really well is going US International Traffic in Arms to be critical for getting to where we Regulations (ITAR) place many want to be in five or ten years.” The restrictions on the transfer of development of global supply chains technical data from US primes to has been an important strategy for overseas suppliers, thus limiting the companies to reduce costs as well as potential pool of suppliers (see panel). to serve a worldwide customer base. The scale and complexity of modern The historic focus on national home programmes introduces a host of markets has meant that the defence potential risks. As one of our sector has been slower to develop interviewees from a major aircraft globalised supply chains. But this is producer observes: “The production of Adding to programme risk – strategic trade controls Strategic trade controls represent an area The US has recently created an Export of growing complexity for AD companies, Enforcement Coordination Centre to facilitate particularly in the defence sector. These interagency cooperation in investigating measures are imposed by governments to allegations of export violations. Risks to restrict access to sensitive equipment, materials companies increase exponentially as the and technical data. In many cases, these government increasingly moves towards restrictions are based on commitments made to enforcement actions that involve multiple multilateral export control regimes. In the US, agencies, and thus the risk of exposure export control policy and regulations are also to prosecution under different laws used to promote national security and foreign and regulations. policy objectives. Strategic trade controls The globalisation of sourcing, manufacturing, include economic sanctions and embargoes assembly and RD carries additional risks as as well as restrictions resulting from United companies strive to comply with the import Nations Security Council resolutions aimed and export regulations of various countries. at curbing proliferation activity. While many companies have processes for The US is in the midst of a comprehensive implementing multilateral export control export control reform initiative that is likely regime requirements, it can be challenging to introduce the most dramatic and sweeping to maintain current knowledge of new and changes in decades. In particular, the proposed changing laws in different countries. Malaysia movement of items from the US Munitions List and the United Arab Emirates (UAE), for (USML), subject to the ITAR, to the Commerce example, have both enacted export control Control List (CCL) will introduce new licensing legislation. In 2011, Mexico joined the regimes and unanticipated complexities. The Wassenaar Arrangement, which is the proposed change requires Congressional multilateral export control regime that approval but companies would be well advised implements controls on dual-use items to carefully consider potential impacts before and technologies. Keeping abreast of these they become a reality. While many AD and other ongoing regulatory developments companies are familiar with ITAR, moving around the world will be both challenging items to the CCL may be completely new and essential to maintaining effective trade territory for programme leadership and compliance programs. back office support.22  AD Insights 2012  | PwC
  25. 25. Improving identification of rate ramp-up risk in commercial aerospace Managing risk in the supply chain is all the more that is required2. This highlights the importance of important in commercial aerospace where the companies using practical and rigorous approaches industry operating model has pushed much of the to assess supply chain risk and develop effective design and manufacturing work to suppliers, often mitigation strategies. PwC has developed a model that in the form of risk-sharing partnerships. The current allows companies to continually monitor and assess rapid programme rate ramp-up will place risk in the AD supply chain and use that as the basis considerable strain on suppliers’ capacity. for pinpointing suppliers that need more detailed scrutiny and possible action. PwC analysed the potential capacity risks in the aerospace supply chain by identifying which suppliers’ In our experience, many tier-ones still need to operations will be most strained by projected rate upgrade their core capabilities to improve the ramp-ups on key 2011–2016 growth programmes. reliability of their end-to-end performance in the We then mapped that against which suppliers may be value chain. This includes the maturity to manage worst positioned financially to invest in additional their interface with their customers and the joint capacity. Our study covered 12 key growth interface with other tier-ones, particularly the programmes from five commercial and defence integrated performance of their core capabilities. OEMs. We calculated required capacity growth There remains a tendency to ‘firefight’ or ‘muscle and financial readiness scores for 93 suppliers across through’ to meet the ramp-up challenge. This can nine different component and system segments. come at the expense of ways to really structure, monitor, and dynamically collaborate as part of The results showed that a fifth (21%) of suppliers an extended supply chain. aren’t financially ready to support the high ramp-upan aircraft involves a very complex because managers perhaps feel chain risk or apply an undifferentiatedlogistic process. We need 65,000 parts comfortable with its product or and resource-intensive approach offrom several suppliers. If one supplier personnel, or because production performing a detailed due diligence ondelays the delivery, the whole process is volumes are considered too low for a each of their suppliers. At the other endaffected.” In a recent example, dual source. This might come at the of the spectrum, companies sometimessoftware problems in a remote cost of overlooking vulnerabilities in rely on internal or supplier surveys toelectronics unit tied to the fly-by-wire the supply chain. obtain a qualitative view of supplycontrol system for the new Embraer chain risks. Both the in-depth and the Our experience with many industryLegacy 500 and Legacy 450 business ‘lighter touch’ approaches have players suggests that currentjets have led to a reported one-year limitations. Instead, companies should approaches to AD supply chain riskdelay in first flight and certification1. develop approaches to map risk management are either too complex orAlso, at a time when banking and too simple. We have seen companies continuously and quickly so that effortmarket uncertainties remain high, trying to assign an absolute can be prioritised on the suppliersthe importance of checks on probability percentage to each supply where risk is greatest.financial as well as operational andcapacity vulnerabilities can’t beunderestimated. There is also theneed to identify ‘self-inflicted risks’, “The difference between good and badsuch as a preferred reliance on a single risk management has a huge influencesupplier for certain components on margins.” Bernhard Gerwert, chief operating officer, Cassidian1  Flight International, November 20112  PwC, Soaring or stalling: can aircraft manufacturers prevent rate ramp-up problems, February 2011. AD Insights 2012  | PwC  23