Cargo insurers can expect to face a large exposure value after the recent tanker attacks in the Gulf of Oman.
Aviation Supply Chain Risks: Overcoming The Crisis Of Complexity
30 January 2017 | Blog Post
The Aerospace & Defence industry is under pressure from price, risk and expansion according to PwC’s report A&D Insights: Programmes Under Pressure. The report explains that A&D companies are experiencing more pressure from more directions than ever before — on price, supply chain risk, the need to expand globally, and broader macroeconomic uncertainty.
The downturn in western defence markets and the continued internationalisation of the defence and commercial sectors have accelerated the trend to greater globalisation of supply chains. But as supply chains extend, so too does risk. The report’s authors recommend more inclusive relationships across and down the supply chain to help manage these risks and ensure they are jointly identified and mitigated rather than debated and litigated. The authors also acknowledge, however, that such an intense and complex environment brings dangers.
Put an emphasis on co-creation and customer intimacy: Develop relations with your customers and suppliers that are really tight, so that requirements are exactly understood, developed together and put at the heart of programme design and execution.
The report advises risk managers that: “Programmes generally stand or fall on how well companies succeed in managing an inherently complex network of interlocking platforms and technologies from different suppliers. Unless you can get integration of this jigsaw right, don’t make it even more complex by extending it further. If you can’t get it right, then maybe a greater degree of vertical integration is what is needed.”
One point in particular, stands out: “Develop the ‘softer skills’ needed to take a collaborative approach to supply chain risk. Get good at sharing risk information, taking coordinated action to manage risks and being more open about vulnerabilities.”
According to the report, big rate increases also mean pressure on the supply chain, leaving programmes vulnerable to supply chain disruption (delay or failure). In such an environment it is vital that companies understand where delays or failure have arisen from factors such as immature technologies, engineering and supply chain complexity, supplier constraints and over-optimistic scheduling or lack of planning for contingencies.
Mairead Lavery, vice president, strategy, business development and structured finance, Bombardier Aerospace, says in the report:
“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 is needed to support programme development. International competition and the whole trade environment is also one of the biggest challenges we face today.”
The connected risk occurs because, alongside market globalisation, supply chains have internationalised, giving companies opportunities to source production at optimal cost and in optimal locations for offsets and subsequent exports. The problem for risk managers and their underwriters is that this adds to supply chain complexity and significantly increases the profile of risks such as geopolitical, international trade and business conduct compliance.
Greater complexity is another connected risk problem. The complexity of programme requirements has intensified significantly over the past few years and as Peter Fielder, managing director of performance excellence at BAE Systems puts it: “It is the mix of factors, not just purely technical complexity. It’s different markets, different supply chain partners, different technologies, different relationships. We’re having to address factors that we have not had to address in the past. For example, you may have multiple partner buyers as well as multiple partner suppliers.”
In a survey conducted by PwC, it is reported that two of the main challenges facing A&D programmers are managing globalised supply chains (45%) and risk sharing with the supply base (25%).
One proposed solution to the crisis of complexity, as it has been described elsewhere, is to foster a culture of collaboration and sharing information. One conclusion is that the complexity of modern A&D programmes will drive a need for genuine collaboration. However, this means that partnership participants should adopt a different approach to joint initiatives leaving behind hierarchical or contractual attitudes.
As Rolls-Royce’s Adrian Ellis explains: “We see a much more partnered type of management emerging as the future of complex programmes rather than one party being in the sole lead and directing the others. No one party has all the capabilities to deliver these complex programmes.”
Taking a shared approach to risk identification is increasingly important in the aerospace and defence supply chain. Bombardier’s Mairead Lavery says: “We have been very public about the fact that we enter into risk-sharing partner relationships. We focus very much on what we call supplier development, which includes supplier assessment and development and monitoring to make sure we have the right risk partner.”
Russell Group was particularly interested to read the words of one senior executive quoted in the reports who was involved in a large defence contract. He explains that the contract partners were willing to cooperate and the cultural environment was supportive. But, and this is key to Russell Group thinking: “because the different partners’ design and production systems did not talk to each other, exchanging critical programme information relied on an intensive manual check of thousands of data items to identify any changes made since the last data exchange.”
This is not only a problem for aerospace Boardrooms, it is central to understanding the challenge facing risk managers and their insurance partners in 2017. It is not just about having access to data, effective risk management is increasingly about getting the data into a consistent format that can be shared accurately and in real time with partners and other stakeholders in the supply chain as well as the (re)insurance value chain.
Supply chain risk is a number one concern for aerospace corporates and their (re)insurers. What is needed is an integrated risk management framework which quantifies bottom-up exposure, manages aviation risks and in so doing delivers superior return on equity.