Planemakers press suppliers to rein in costs

Paul Perales, a machinist at Cox Machine, removes tabs from a part he made for the 737. (Sept. 23, 2014)
Paul Perales, a machinist at Cox Machine, removes tabs from a part he made for the 737. (Sept. 23, 2014) The Wichita Eagle

The commercial aviation industry is booming, and aircraft orders are at record levels. For suppliers, that means opportunities and challenges in a changing environment.

Together, Boeing and Airbus have orders for about 11,500 planes on their order books.

So far this year, Boeing has taken net orders for more than 1,000 planes; Airbus has taken net orders for more than 700.

Overall, each has almost a decade of business on the books.

Boeing and Airbus have been raising production rates on their popular single-aisle airplanes. Boeing is considering raising rates once again – to a record 52 a month – on its 737 jet.

“It’s a good time to be making aircraft parts,” said Jason Cox, chief technical officer at Cox Machine, where 75 percent of the work is for Boeing.

With rates increasing, Cox Machine is busy.

“It’s pretty exciting,” Cox said.

It’s also challenging.

As Boeing and Airbus compete against each other and keep an eye out for new players, such as China, there’s more intense focus on keeping costs down.

Another dynamic in the marketplace is the expanding manufacturing capabilities of many countries. It’s no longer a given that parts will come from a longtime U.S. supplier.

Supplier challenges

The good news is there’s plenty of commercial aircraft work for suppliers.

But “it’s a matter of whether the suppliers can participate based on their current capacity,” said Lee Schwartz, a principal at Schwartz Profitability Group in Los Angeles, who is a consultant working with manufacturing companies. “If they can, they’ve got a positive future ahead of them. But it’s going to demand a different approach than in past years.”

Manufacturers, such as Boeing and Airbus, are working aggressively to reduce costs and are applying pressure to their supply base for price reductions.

Boeing, for example, rolled out its “Partnering for Success” program last year, with a goal to reduce supply-base costs by 15 percent.

As a result, Boeing’s suppliers, such as Spirit AeroSystems in Wichita, are also asking their suppliers to cut pricing.

“It’s going to put even more pressure on the suppliers to survive long term,” Schwartz said. “There are no more people to cut. Their costs to produce are rising, just like Boeing. It’s not a pretty picture.”

Suppliers must be nimble. They must innovate and become more efficient.

And they must know that in almost every case, there’s someone behind them waiting to step in to take up the slack, Schwartz said.

“The challenges get to be more critical in terms of delivery time, quality and so on,” Schwartz said. “I think they have to be much more on top of those areas because now Boeing (and) the primes are looking to find alternatives. So if you’re not meeting their schedules, if you’re not producing the quality, if you’re not producing it on time, you’re jeopardizing your relationship.”

The big manufacturers are looking at those kinds of metrics more intensely.

“You can’t allow yourself to have any slippage,” Schwartz said. “If you meet them, that’s great. If not, we need to find another supplier.”

At Metal Finishing Co., the biggest challenge is meeting quick turnaround schedules for suppliers, who are no longer keeping inventory on their shelves as a way to lower costs.

That means suppliers don’t order materials until they absolutely have to, said Ed Ball, vice president of sales and marketing at Metal Finishing.

At the same time, Boeing and Airbus have moved up the dates of when they need their parts.

So if the supplier has a hiccup of any sort, that means more pressure on Metal Finishing to heat treat, inspect and finish parts, the last stop before parts are shipped to the planemakers.

“The schedules have been pulled in so tightly,” Ball said.

To adjust, Metal Finishing now has 10 customer service representatives who follow a job to know where it is in the process every minute.

A few years ago, suppliers wanted to know whether a job was going to be ready in a given week, Ball said. Then they wanted to know whether it was going to be ready in a given day. Now they want to know whether it will be ready by 3 o’clock, Ball said.

At the same time, Metal Finishing has entered long-term agreements with large prime contractors and other large aerospace companies to hold fixed prices for a determined length of time, he said.

Those agreements included fixed turnaround times.

The terms also apply to the suppliers of those contractors to help keep their costs down, Ball said.

At Cox Machine in northwest Wichita, most of the product is shipped to Spirit AeroSystems in Wichita, which builds part of every Boeing aircraft.

Cox’s customers are more strategic in the way they interact with suppliers, Cox said.

“So relationships become very important,” he said. “There’s a lot more involvement rather than getting three bids and giving it to the cheapest person.”

They’re working to develop partnerships and find ways for the entire supply chain to work together to reduce the cost of an airplane, Cox said.

“Boeing is trying to help Spirit (AeroSystems) find opportunities for cost reduction,” Cox said. “Spirit will try to help us find opportunities.”

The challenge is to produce the same products at a lower price, he said.

“We all have to work together if we want the cost of the aircraft to be cheaper,” Cox said. “Pushing the burden around and up and down the supply chain doesn’t help in the end. It has to be everybody.”

Cox is working to increase its efficiency and is forging relationships with its own suppliers. It’s putting in place pricing agreements with material and processing suppliers, Cox said.

“That helps us lower our costs,” he said.

It’s also researching adding more automation.

Cox Machine plans to add a robot next year to load and unload material in the machines.

“You don’t need as many people to operate the machines,” Cox said. “But you need more people to program the robots.”

The opportunities for suppliers are there, Schwartz said.

“It’s great to be in it,” he said. “That does bode well. But ... you still have to stay on top of your game.”

Reach Molly McMillin at 316-269-6708 or mmcmillin@wichitaeagle.com. Follow her on Twitter: @mmcmillin.