ES4C9 Supply Chain Management Lecture 3: SCM and Procurement Strategies Case Study: Filton Aerostructures Lecturer: Alexa Kirkaldy Icons used in this set of presentation slides are made by Freepik from Flaticon and is licensed by Creative Commons BY 3.0. Graphics arrangement and layout by Vance Tan. Slide presented by Ginny Watsham (slides 2-5 and 11), Nicholas Karakoullis (slides 6-10), Avishka Karunaratne (slides 12-13), Vance Tan (14-16) and Eckardt Gladman (17-20). Case Study: Filton Aerostructures Lecturer: Alexa Kirkaldy

Filton Aerostructures: An overview British Aerospace sister companies Airbus Filton Aerostructures, a Bristol-based company created in 1993, was a second-tier supplier to British Aerospace sites (primarily the Airbus programme for the manufacture of aircraft wings). ES4C9 Supply Chain Management | Filton Aerostructures

The Procurement Function Bonding Machining Assembly Fabrication Manufacturing The Filton Aerostructures organisation can be seen on this slide. The procurement function (which is the focus of the case study) liased with all 5 manufacturing departments, although currently this might be as little as just one person from procurement overseeing one department of Manufacturing. Procurement ES4C9 Supply Chain Management | Filton Aerostructures

Filton Aerostructures: An overview 58 38 Company created to supply parts to British Aerospace Strategic changes in the aircraft industry 1992 1993 1994 1995 The case study describes the company’s supply chain during a period of rapid change (early 1995). All was going well and good, then there was a recession (early 1990s) and as a result less people were flying, as this is a luxury, so there was lower investment in aircrafts. The Gulf War also affected this as there were less transatlantic flights. As a result BA underwent reorganisation and faced disruption – e.g. redundancies, closure programmes Many smaller companies went out of business as a result of this, and BA became a leading partner within European Airbus. Lots of the aggressive targets and redundancies passed on to Filton, for example the procurement team downsized from 58 employees in 1993 to 38 by the end of 1995. ES4C9 Supply Chain Management | Filton Aerostructures

66% 75% 35% Improvement Targets Reduction in overheads within 4 years Production lead times to be reduced by 75% 35% Reduction in unit costs in 2 years Airbus had over 50% of market share in 1994, so seemed to be doing well. To mirror this success, Filton had to set targets for improvement and to streamline their processes to become a more efficient supplier in the Airbus supply chain, as otherwise they might become redundant. These were the targets they set. However, they had some problems meeting these targets, as there were a lot of problems in the company, which Nick will now talk more about. Stock-turn ratios: How many times stock/inventory is being sold/purchased. Stock-turn ratios to be improved from 4 to 12 ES4C9 Supply Chain Management | Filton Aerostructures

Issues faced by the company Poor communications (both internally and externally) Poor communications – internal and external This was the main problem concerning Filton Aerostructures. Because of the structure of Procurement, internal communication was often poor because other departments such as manufacturing didn’t know who to address their problems to and this usually resulted in disruptions in supplies. This lack of coordination coupled with poor forecasting meant that raw materials were often overstocked and up to half of the stock was redundant. ES4C9 Supply Chain Management | Filton Aerostructures

Issues faced by the company Bad relationship with suppliers Historically poor supplier relationship Filton didn’t use the expertise and advice offered by suppliers in the past. Also, last minute changes to schedules and specifications by Filton made it difficult for suppliers to perform-only 60-70% of deliveries were on time. ES4C9 Supply Chain Management | Filton Aerostructures

Issues faced by the company Large numbers of suppliers Several thousand suppliers so any positive change would involve a lot of parties. ES4C9 Supply Chain Management | Filton Aerostructures

Issues faced by the company Low morale of employees Low morale of Filton employees – future job uncertainty To cut costs, 1/3 of the staff was laid off between 1993 and 1995. Throughout this time there was also continuous reorganisation within Filton in a bid to improve which meant that job descriptions and day-to-day tasks of employees changed regularly. These factors resulted in low employee morale as employees didn’t know how much longer they would have their jobs and weren’t quite sure what exactly their job was at points. ES4C9 Supply Chain Management | Filton Aerostructures

Issues faced by the company High demand uncertainty High demand uncertainty Filton were receiving last minute changes to specifications and schedules which were then passed on to suppliers. ES4C9 Supply Chain Management | Filton Aerostructures

Recommendations Use less suppliers, build relationship with preferred suppliers Implement early decoupling points Integrate processes using ERP These were our suggested improvements that could be made to meet each of the problems Nick mentioned, which we will now talk about in more detail. Change shape of BOM from ‘X’ to ‘T’ Implement pull postponement ES4C9 Supply Chain Management | Filton Aerostructures

Recommendations Moving the manufacturing team and the procurement team physically closer to one another The use of electronic data interchange (EDI) Have a committee with selected members from all departments Integrate processes using ERP Physically moving the procurement team closer to the manufacturing team would help bring down the barrier of poor communication. The use of electronic data interchange would allow each department to understand the real time situation of each team, this would help each team understand the challenges each team face, helping build relationships. A committee with all the departments would help reduce the animosity within the departments as well as reducing the isolation faced by satellite members. 360º ES4C9 Supply Chain Management | Filton Aerostructures

Recommendations Existing X configuration: uncertainty in terms of volume, time and level Implement JIT by changing to ‘T’ configuration Late customisation Change BOM shape Finished product (Aircraft wings) Filton Aerostructures are producing a large variety of products, and they have a large number of suppliers, causing the shape of the configuration to be X-shape. This causes a lot of uncertainties when considering, volume, time and level of service. Therefore implementing a JIT system if possible to make the configuration more of a T shape structure would be more suitable. This may be possible by having an assembly line which caters to the variety of the products towards the end of the supply chain. Raw materials Reference: Slack et al., Operations Management, 4th Edition, Prentice Hall, 2004, pp. 494-495 as cited in Kirkaldy, A., 2015 ES4C9 Supply Chain Management | Filton Aerostructures

Fabrication Team Leader Recommendations John Ramsay (Procurement Manager) Core Team Leader Fabrication Team Leader Machining Team Leader Bonding Team Leader Assembly Team Leader Manufacturing Team Leader Forge relations with customers and suppliers Improved forecasting and accuracy of order schedules Build relationships with preferred supplier Another strategy that Filton Aerostructures can adopt to improve its Supply Chain is to evolve from a traditional organisational structure to a more customer-focused structure, as shown on this slide. In our new proposed structure, we can see that each division works as a team of 4 to 5 people, plus one team leader instead of manager, ensuring a free-flow of communication. These customer focused teams can then be relocated closer to the internal customers, so staff can become more agile to changes and more responsive to customers’ demands, as they would have a clearer view of who they are working for (and to whom they are selling to). By sharing knowledge internally/externally and up/down the supply chain, it allows the Procurement function to forge relationships with both the customers and suppliers. It also means that the Procurement function is able to gain the capability to improve forecasting and accuracy of their order schedules. ES4C9 Supply Chain Management | Filton Aerostructures

Customer order-driven Recommendations INFORMATION FLOW Filton suppliers Filton Aerostructures Airbus End customer The Bullwhip Effect on Filton’s Supply Chain 80 40 20 160 units 80 units 40 units = stock level CASH FLOW , Pull postponement & customer order decoupling points Engineer Fabricate Assemble Deliver Make-to-stock Assemble-to-order Make-to-order DP Forecast driven In order to meeting 100% of their customer demands, instead of just 60% to 70% as mentioned earlier by Nick, the Procurement function need to adopt the pull postponement strategy which means that orders are moving towards make-to-order, based on customer specifications instead of less accurate forecast. A model which links pull postponement strategies to customer decoupling points was proposed in 1984 by Sharman, whereby the Decoupling Points are as upstream as possible within the supply chain, allowing orders to be customer driven. Decoupling point: “the point that indicates how deeply the customer order penetrates into the goods flow” (Donk, 2001). DP Customer order-driven DP Reference: Sharman, G. (1984). The rediscovery of logistics. Harvard Business Review, 62(5), 71–80 ES4C9 Supply Chain Management | Filton Aerostructures

Customer order-driven Recommendations INFORMATION FLOW Filton suppliers Filton Aerostructures Airbus End customer The Bullwhip Effect on Filton’s Supply Chain 80 40 20 160 units 80 units 40 units = stock level CASH FLOW , Pull postponement & customer order decoupling points Engineer Fabricate Assemble Deliver Make-to-stock Assemble-to-order Make-to-order DP Forecast driven In order to meeting 100% of their customer demands, instead of just 60% to 70% as mentioned earlier by Nick, the Procurement function need to adopt the pull postponement strategy which means that orders are moving towards make-to-order, based on customer specifications instead of less accurate forecast. A model which links pull postponement strategies to customer decoupling points was proposed in 1984 by Sharman, whereby the Decoupling Points are as upstream as possible within the supply chain, allowing orders to be customer driven. Decoupling point: “the point that indicates how deeply the customer order penetrates into the goods flow” (Donk, 2001). DP Customer order-driven DP Reference: Sharman, G. (1984). The rediscovery of logistics. Harvard Business Review, 62(5), 71–80 ES4C9 Supply Chain Management | Filton Aerostructures

Conclusion: Achieving strategic fit Understand customer demand uncertainty 01 Understand the supply uncertainty 02 03 Understand supply chain capabilities Because of the booming air transport market in the early 1990’s followed by a recession and lack of governmental funding, Filton Aerostructures had a lot of pressure to achieve strategic fit in its new environment. 04 Achieve strategic fit ES4C9 Supply Chain Management | Filton Aerostructures

Conclusion: Achieving strategic fit Understanding Filton Aerostructures’ customer demand uncertainty Service level Lead time Variety of products (remains unchanged) Volume Price Rate of innovation Volume - Initially during the boom in the market, the focus was on capacity, rather than cost or quality. There were little competition during this time. Rate of Innovation, Lead time & Price- After the recession, many smaller manufacturers had to merge or go out of business. At this point the remaining competitors in the industry were at making plans for huge improvements in the design, time to market and cost of aircraft. Boeing was the leading company at the time in this move. In order for British Aerospace and their Airbus partners to continue to gain market share, they had to at least match the improvement targets that Boeing had set out for themselves. Service Level- The pressures involved with improving the previous variables, coupled with an inadequate communication system between Filton Aerostructures and its suppliers is what caused a problem with its service level. The redundancies, the overtime, and resulting frustrations, due to bad communication with suppliers, reduced the morale of the employees. ES4C9 Supply Chain Management | Filton Aerostructures

Conclusion: Achieving strategic fit Supply uncertainties within Filton Aerostructures Stable SC Evolving SC Less breakdowns Vulnerable to breakdowns Stable and lower yield Variable and higher yield Less quality problems Potential quality problems More supply sources Limited supply sources Reliable suppliers Unreliable suppliers Less product changes More product changes Less capacity constraint Potential capacity constraint Dependable lead time Variable lead time Flexible Inflexible Reliable Suppliers- The suppliers of Filton Aerostructures had an on-time delivery performance of 60-70%. But this was mainly due to the lack of transparency in the SC. FA’s decision making resulted in last minute changes to order and schedules. This meant that they kept their suppliers at an arms length and were basically making things harder for themselves. Less product changes- In the industry, as airoplanes become more advanced, FA would have to change the parts they produce but at this point in time, there was no big change to their product. Less capacity constraint & Dependable Lead Times- The metal stores were considered the bottleneck, which created a problem for manufacturing. This delay to the internal customer as well as the inadequate communication between these two department meant that manufacturing often over-ordered which caused a huge backlog, sometimes of up to seven weeks or 900 items waiting for processing. This is an example of the bullwhip effect. Flexibilty- The lack of communication between the organisations in the SC, reduced its flexibility to change. ES4C9 Supply Chain Management | Filton Aerostructures

Conclusion: Achieving strategic fit Demand uncertainty Low High Responsive supply chains Low Efficient supply chains Supply uncertainty Risk-hedging supply chains High Agile supply chains Despite the poor communication, FA’s supply uncertainty was quite low. Initially during this period of change in the industry as well as BA’s resulting improvements, the demand uncertainty was relatively high. In order for BA and its partners to remain in the market and achieve a strategic fit, they now had to become an Efficient SC. But to do this they first had to be a Responsive SC. So to conclude, the poor communication and lack of integration of information in the SC meant that they weren’t as Responsive as they could have been. Reference: Lu, D., MSc SCM module, Warwick Manufacturing Group as cited in Kirkaldy, A., 2015 ES4C9 Supply Chain Management | Filton Aerostructures

Questions? ES4C9 Supply Chain Management | Filton Aerostructures

Supporting Slides Electronic Data Interchange EDI Challenges What is Electronic Data Interchange? Details the process of EDI. EDI Challenges Challenges that Filton might face in its implementation ES4C9 Supply Chain Management | Filton Aerostructures

Buyer creates Purchase Order Purchase Order is faxed or posted Electronic Data Interchange What is Electronic Data Interchange? Details the process of EDI. “Computer-to-computer exchange of business documents in a standard electronic format between business partners.” - GXS Inc. Buyer creates Purchase Order Purchase Order is faxed or posted Supplier enters order into internal system and generates invoice http://www.edibasics.com/what-is-edi/ Buyer enters invoice into internal system Invoice is faxed or posted via mail Invoice is generated ES4C9 Supply Chain Management | Filton Aerostructures

Buyer’s Internal System Supplier’s Internal System Electronic Data Interchange What is Electronic Data Interchange? Details the process of EDI. “Computer-to-computer exchange of business documents in a standard electronic format between business partners.” - GXS Inc. Purchase Order Invoice In EDI, business documents can be safely and securely exchanged between Filton Aerostructures, their suppliers and customers up/down the supply chain. Unlike traditional approaches to Purchase Order and Invoices, no paper is involved in EDI systems. Buyer’s Internal System Supplier’s Internal System NO PAPER INVOLVED! ES4C9 Supply Chain Management | Filton Aerostructures

01 03 02 Confidentiality and trust Aligning incentives Electronic Data Interchange Challenges that Filton Aerostructures may face in its implementation Confidentiality and trust The confidentiality of shared information creates some risk to Filton Aerostructures and its suppliers. It is therefore important that all organisations sharing the information have mutual trust and exercise their judgement on commercial information. 01 Varying standards and requirements Different industries will have varying requirements in terms of the EDI system adopted. Filton Aerostructures could adopt an EDI via VAN to mitigate the need to support varying protocols required by suppliers. 02 Aligning incentives Filton Aerostructures should be wary of sharing too much information that may cause conflict between suppliers such as the alignment of incentives and privileges. 03 ES4C9 Supply Chain Management | Filton Aerostructures