The outsourcing dilemma

Global original equipment manufacturers (OEMS) and their CEM contractors are facing interesting times. While competition is rife among main contractors – the likes of GE, BAE, Selex and Thales – to meet the increasingly more demanding timescales of urgent operational requirements (UORs) from the military, the civil market continues to work through the dichotomy presented by a fall off in new orders, while still dealing with a backlog of aircraft. In a nutshell, while CEMs working in the defence sector are being driven hard to deliver projects in days, rather than weeks, those with civil contracts are facing the ever present threat of offshoring. Clearly, manufacturers in the civil aerospace market have already embraced cost reduction, working with tier 1 and 2 suppliers in a bid to push down the total cost of manufacture. This often involves moving away from the traditional cluster model – as seen in Toulouse and Bristol – where suppliers are located within a few miles of the assembly plant. The development of extended supply chains, coupled with cost down strategies, has seen this model come under scrutiny, leading in some cases to their extinction. Weighing the offshore option While switching to lower cost economies, such as Eastern Europe or South East Asia, can cut costs considerably, OEMs need to be mindful of the pitfalls of this strategy as commercial pressure undoubtedly pushes companies down this route. Dual sourcing is a key trend in the outsourced electronics sector and well established, but games consoles are not the same as sophisticated passenger aeroplanes. One of the biggest questions for the aerospace sector centres on the capability – in terms of design, manufacture and in field support (including project revisions) – of the potential offshore supplier. This is not a rendition of the old 'Buy British' argument, rather it's a word of caution based on more than 15 years experience helping OEMs to offshore. The aerospace sector ideally wants the best of both worlds – a CEM partner with local design capability and an understanding of the product that enables continual redesigns to meet cost down strategies. It also wants the ability, where appropriate, to offshore certain high volume products to achieve offshore economies of scale. In reality, while some global OEMs have the benefit of in house expertise to facilitate successful offshoring, most tier 1 suppliers do not have the close to customer 'in geography facility/expertise' anymore to pull it off. In Exception's experience, most suppliers in lower cost economies are simply not set up to engage successfully with the aerospace sector. More specifically, while low cost economies will typically seek to manufacture single lamination, multilayer PCBs in large batch runs, they are now being asked to produce small batches of complex high density interconnect boards, incorporating blind, buried and microvias (laser drilled holes) that require upwards of three lamination cycles. Given their established model to handle huge volumes, this request may well push the capabilities of many suppliers too far, especially as maintaining high yields at low cost is critical to suppliers in Asia and other low cost economies. Quick reactions In the defence sector, a different set of pressures is appearing. These are creating a number of challenges for OEMs who are already feeling pressure from the Ministry of Defence to respond more quickly to UORs. This pressure to react more quickly is making its presence felt right along the supply chain. Tier 2 and tier 3 suppliers once had weeks to respond to quotation requests; now, electronics contractors are expected to respond within two to three days with a budgeted rough order of magnitude (ROM). This at least enables advance supplier selection and upstream procurement decisions, helping achieve reduced end delivery expectations. In turn, this has led to a huge change in the way many CEMs are approaching the tendering process. Invariably, this means investment in the supply chain, taking more of a strategic, long term view of materials availability and costing. Instead of simply quoting a bill of materials (BOM), many contractors are moving to an open book approach, so that all elements of cost and potential risk can be seen by both the OEM and supplier. This approach facilitates better collaboration and buyer power, as sub-suppliers can work with OEMs to leverage their bulk buying muscle to secure scarce materials at better rates. Beware counterfeits Counterfeited product is another big issue that OEMS and their suppliers in the aerospace and defence sector need to be aware of. In the current market, with quickturn being the norm, more bogus product is creeping into the supply chain as materials and approved components become scarce. Certainly, more OEMs are now seeing an increase in incidents of counterfeits on UORs. While one way to combat this trend is for CEMs to use exclusive suppliers that provide authentication services, this again will tend to exert more pressure on prices. Exception is actively stepping up its strategy in this area of risk and paying a lot more attention to quality audits at the outset of a contract. The current climate has increased demand for leaded parts. These are favoured by the defence sector as they avoid the threat of 'tin whiskering', which can create reliability issues for equipment that may not need to be used for years. However, many distributors are unwilling to take on the risk in the current market to hold this type of stock. This creates a market that is desperate for leaded stock, but cannot secure supply as quickly as required to meet the demands of UORs. This again leads to an inevitable increase in the price of lead and a rise in counterfeited goods into the market. Clearly, the aerospace and defence market is facing a complex set of challenges. While the civil market is struggling with the outsourcing challenge, their cousins in the defence sector are facing issues created by lack of materials and constant pressure to deliver electronic systems quickly. At times like these, there is only one answer for both sets of challenges; collaboration, innovation and quality control.