Montreal aerospace companies lead in supply chain transformation

The aerospace industry ecosystem in Greater Montreal is made up of 236 companies with a combined $ 12.3 billion in revenues and a workforce of more than 42,000 people in 2008. Together with a concentration of prestigious and unique educational institutions, this environment endows the region with an exceptional innovation capability.

Senior executives of 12 Tier 2 and Tier 3 aerospace companies participated in the November 2008 West Monroe Partners Aerospace Event, co-sponsored by Quebec Aerospace Association QAA. Participants discussed the results of a five-subject questionnaire sent by West Monroe Partners prior to the event. The survey covered human capital and workforce development, business and finances, operations and supply chain effectiveness, knowledge management, and information systems. Later, the group engaged in a roundtable discussion focusing on improving competiveness and operational performance.

Confronting challenges from finance to human resources.
From a business and financial perspective, this group of industry executives is concerned with challenges to diversification and sustainability. The discussion revealed that:

• The current economic slowdown started impacting most companies; specifically, those whose order books are filled until 2010, have started to experience a downturn. All expressed concerns about working capital.
• Small and medium-sized companies have been affected by delays in major programs, such as the Airbus 350, the Boeing 787, and the Airbus 380. Many companies have invested considerable capital in these new programs.
• OEM expectations for enhanced industry synergies and integration capacity have put significant pressure on tier 2 and 3 companies. Not all believe this is a viable growth scenario. Some prefer a horizontal rather than vertical growth strategy, with a focus on increased production capacity in their core specialty as well as diversification of their client bases and markets. For many, this approach seems more natural and less risky.
• The large local presence of aerospace companies, including a critical mass of tier 2 and 3 companies, has made the Montreal area a magnet for foreign investors, especially European investors who view Quebec as an entry point to North American markets.

Participants also debated the impact on margins, of factors such as operations performance metrics, program management, planning, competition from countries with low production costs, exchange rate volatility, and raw material prices—raising the following issues:

• Client expectations regarding value-added products and services have forced small and medium-sized companies to improve supply chain management planning and execution.
• Countries with low production costs don’t currently pose a significant threat; however, many companies can read the signals they receive from OEMs and clients. Accordingly, participants discussed possible responses to scenarios in which subsystems or major components are contracted to companies in countries with low production costs. What do we have to do to remain the supplier of choice? Do we rely on state-of-the-art expertise? Ensure a local presence in those countries? Call on subcontractors based in those countries? Participants acknowledge that none of these answers is a cure-all. They did believe it was important, though, to define the knowledge and skill sets that are core to the company’s continued development and sustainability, as well as the non-core areas where financial optimization strategies may be deployed.
• Small and medium-sized companies in this sector make little use of the currency hedging instruments.
• Client expectations place enormous pressure on companies to shorten production cycles.

Discussion then turned to information systems and operations:

• While small and medium-sized companies appreciate the importance of technology solutions and information systems, these tools are often dictated by major OEMs and, as a result, are viewed as a necessary evil that negatively affects company resources and investment capacity. Only a few companies regard these systems as important from a strategic development standpoint.
• Participants need to establish an exchange forum or network focusing on information technology issues.
• Participants also desire greater harmonization among business consultants and solutions providers with respect to technology requirements.
  

Finally, participants discussed several human resources issues:

• While small and medium-sized companies different in their views on some points, they agreed that resource shortages and recruitment difficulties are directly proportional to the level of skill and expertise that companies seek. This issue is compounded by a lack of in-house training and professional development resources.
• New programs and recruitment efforts by OEMs are in direct competition with similar initiatives by the small and medium-sized companies. This situation not only restricts development, but also limits OEMs ability to deploy new programs since their network of subcontractors is unable to meet increased production requirements.
• Companies have begun to design programs to enhance employee participations and align their roles and responsibilities with company objectives. These initiatives help build a stronger sense of belonging and loyalty and help companies retain their skilled personnel.
• Companies and OEM must work together to expand the pool of available personnel by promoting technical and scientific training, workforce re-training, international recruitment.
• Participants also determined that the greater a company’s distance from the Island of Montreal (hence limited mass transit), the more acute its workforce shortage problems.
• To date, small and medium-sized companies have attempted to deal with succession planning and intergenerational management issues without outside help. Few have a formal succession plan.
• Finally, while each company is seeking to grow and develop, most do not currently have a strategic development plan that looks forward three to five years.
  

Systems as an enabler of growth and performance.
The session then shifted gears, looking at systems as an enabler of achieving goals.


Planning systems. Participants agreed with the importance of strategic planning and forecasting, as well as with the need to communicate the results of such initiatives to the organization as a whole. Strategic planning, demand forecasting, and production scheduling solutions are still in their infancy, however, and fluctuating demand from major contractors makes planning even more challenging, thus the need for improved processes and systems.

Execution systems. Some small and medium-sized companies have implemented an ERP system, and they agree that this has required a considerable—and often underestimated—outlay of effort and resources. Many companies said they welcome support in planning, selecting, and implementing an execution system.

Collaboration systems. Small and medium-sized companies’ time horizon for forecasting major contractors’ needs has shrunk from 12 months to two. This compression has made planning much more challenging, especially in the case of raw materials whose delivery cycles significantly exceed the forecasting horizon. Risk management, therefore, is a critical issue for small and medium-sized companies.

Enhancing communications between contractors and companies is essential, but this often conflicts with contractors’ obligations to control information, protect their shareholders’ investments, and comply with regulatory requirements. Nevertheless, the onus for enhancing communications and collaboration rests primarily with tier 2 and 3 companies. Implementing collaboration processes and systems can facilitate optimal planning and decision-making at all levels.

Knowledge management and business process management systems. While these systems are not yet in widespread use, participants did recognize the benefits for:

• Compiling lessons learned
• Maintaining a methods log for each client
• Facilitating weekly meetings of all company departments in order to plan production launches for new orders

A beneficial dialogue for all involved.
While the participants would have liked more in-depth discussion of the issues raised, they agreed that this was a very productive opportunity to discuss their respective company’s concerns and challenges. Each company serves a particular niche and has specific expertise, but it was clear that these organizations share many of the same issues.

West Monroe Partners thanks the participants who made this event a success—in particular, Ms. Hélène Séguinotte, Executive Director, Turbomeca Canada and National Executive, SAFRAN Canada, in her capacity as honorary chair of the meeting; and the honourable Jacques Saada the CEO of QAA.

For more information about the Quebec aerospace industry, please contact Nabil Saad.