1. Federal Aviation Administration Presented to: By: Date: Oversight Throughout the Supply Chain: Is It Adequate? DOT OIG Audit: Assessment of FAA's Risk-Based System for Overseeing Aircraft Manufacturers' Suppliers 2008 US/Europe International Aviation Safety Conference Frank Paskiewicz, Manager, Production and Airworthiness Certification Division June 4, 2008

2. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 2 Federal Aviation Administration 2 Outline –Audit Overview –OIG Findings –OIG Recommendations –FAA Response –Industry Reaction

3. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 3 Federal Aviation Administration 3 Audit Overview OIG Initiated Audit February 2004 OIG Concluded Audit November 2007 Issued final report February 26, 2008 OIG Audit Objective: – “to evaluate FAA’s oversight of aircraft manufacturers quality assurance systems for domestic and foreign suppliers”

4. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 4 Federal Aviation Administration 4 Audit Overview OIG visited 9 FAA HQ and field offices OIG Contacted 5 manufacturers and 21 suppliers – domestic and foreign OIG reviewed supplier oversight at 17 domestic and 4 foreign suppliers OIG Contractor compared 5 manufacturers’ quality system manuals to industry standards (e.g. ISO 9001) to determine compliance with FAA guidance OIG Audit Objective, Scope, & Methodology is further defined in the OIG Audit Report. –http://www.oig.dot.gov/

5. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 5 Federal Aviation Administration 5 OIG Audit Findings FAA needs to improve its risk-based oversight system FAA does not ensure manufacturers regularly audit their suppliers FAA has not ensured that manufacturers are providing oversight of their suppliers FAA does not perform enough supplier audits

6. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 6 Federal Aviation Administration 6 OIG Audit Findings FAA risk assessments exclude pertinent information (previous supplier audit results) FAA inspectors do not consider the number of suppliers manufacturers use and their level of responsibility in assessing risk FAA does not consider the increased use of suppliers in FAA’s risk assessment process FAA’s risk indicators overlook the increased role of suppliers

7. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 7 Federal Aviation Administration 7 OIG Audit Findings Concerns about supplier oversight are even more serious given the number of countries that produce parts for U.S. aircraft manufacturers without a bilateral agreement with the United States Systemic weaknesses identified at supplier facilities indicate that FAA must strengthen supplier surveillance

8. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 8 Federal Aviation Administration 8 OIG Audit Findings Suppliers did not provide adequate oversight of their sub-tier suppliers Suppliers did not have effective tool calibration programs Suppliers’ employee training programs were inadequate Suppliers did not have adequate procedures in place to inspect parts they produced

9. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 9 Federal Aviation Administration 9 OIG Audit Findings Systemic deficiencies were identified at the 21 supplier facilities OIG visited Systemic weaknesses identified at supplier facilities indicate that manufacturers must strengthen supplier surveillance Neither manufacturers nor FAA have provided effective oversight of suppliers; this has allowed substandard parts to enter the aviation supply chain

10. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 10 Federal Aviation Administration 10 OIG Recommendations - FAA Response (1) Require manufacturers to establish criteria for conducting on-site audits for initial supplier approval and conduct periodic audits of suppliers to ensure that quality assurance systems are followed throughout the supply chain. Partially concur. There is no regulation to implement this recommendation as a requirement. However, the FAA agrees that additional supplier selection criteria are appropriate. The FAA will develop and publish additional criteria in the next revision of the applicable advisory circular. (2) Develop a risk assessment process that emphasizes suppliers of flight-critical parts (e.g., those that manufacture critical and high- volume parts or use large numbers of suppliers, etc.) for passenger aircraft. Concur. The FAA has developed a new risk assessment tool that is scheduled for certificate management implementation in FY09. Special emphasis will be placed on suppliers of flight-critical parts.

11. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 11 Federal Aviation Administration 11 OIG Recommendations - FAA Response (3) Develop a risk assessment process that reduces the level of subjectivity in evaluating manufacturers so that inspectors’ risk assessments will be more consistent. Concur. The new risk assessment tool discussed in FAA’s response to recommendation 2 uses a methodology that is standardized across all FAA directorates, while also reducing the level of subjectivity. (4) Require inspectors to review prior manufacturers’ audits of suppliers as part of their analysis of risk and determination of resource targeting. Concur. The FAA will develop directive material that will require inspectors to review a sample of a PAH’s prior supplier audits. In addition, the new risk assessment tool will emphasize the results of these FAA reviews during annual assessments of the PAH.

12. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 12 Federal Aviation Administration 12 OIG Recommendations - FAA Response (5) Modify its supplier audit requirements so that the number of audits that inspectors are required to conduct more directly correlates with the number of suppliers used by the prime manufacturer. Concur. The FAA will develop an approach that will require the number of supplier control audits conducted to more directly correlate with the number of a manufacturers suppliers. (6) Provide inspectors with training on auditing systems or processes, individual or task-specific elements of a supplier’s operations, and processes for documenting the results of their reviews. Concur. The FAA will update its training courses to address the issues in this recommendation.

13. Oversight Throughout the Supply Chain: Is It Adequate? June 4, 2008 13 Federal Aviation Administration 13 Industry Reaction