An IDC Manufacturing Insights (IDC) Industry Brief sponsored by UPS sheds light on the evolution of maintenance, repair, and overhaul (MRO) activities in the Aerospace and Defense (A&D) sector, a development that reflects a more general trend across manufacturing enterprises: the movement of service from the periphery of operation (i.e., a necessary cost of doing business) to an increasingly central role as a profit center and competitive differentiator in terms of customer satisfaction.
IDC cites three trends as substantially reshaping the value chain and permanently transforming business models in A&D:
- The growing importance of emerging markets
- The growing importance of MRO services
- The challenges presented by compliance
The analyst notes that while the sale of new aircraft is showing exceptional growth, operators as a rule are not modernizing their fleets. The growth in overall deployed fleets is being driven in part by emerging markets, and the number of aircraft coming out of service is relatively modest. This has raised the profile of the MRO market, which the analyst says is not only an important element of industry revenue growth, but perhaps even more so of healthy profitability.
The Changing MRO Structure
A driver for transformation has been the emergence of performance-based contracts where the OEM realizes revenue by the hours of operation rather than the aircraft at acquisition, pushing responsibility for operations uptime to the manufacturer.
The traditional structure of MRO within the industry looks like this:
- OEMs supply parts and expertise
- Remanufacturers perform major overhauls
- Operators are responsible for asset management
- Operators shag maintenance execution with a third party
The new structure of MRO looks like this:
- OEMs sells the asset in terms of its usage per time period
- OEM is responsible for maintaining the asset and keeping the asset in service including handling of spare parts
- Operators use the asset and keep the OEM informed of usage and incidents
- OEM would decide to bring in third party as needed to maintain service levels
This process is being reconfigured as OEMs look to take a greater share of both the depot-based overhaul work and flight line-level repair and preventive maintenance. The authors note this trend extends beyond the commercial A&D sector: “Even in the defense industry, where there are explicit rules about how much maintenance must be performed by the military, public/private partnerships are being formed to allow civilian contractors to more actively participate in the process.”
To be sure, these developments are reshaping the A&D value chain. Increasingly, A&D companies are not only replenishing spares but also taking on the responsibility for getting parts (or full work order kits including several parts and tools) to the aircraft in need. The complexity of this endeavor is magnified by globalization. Supply hubs are emerging to provide parts (e.g., in Mexico) to meet more globally distributed demand.
Compliance issues are also a factor in this transformation. While the defense industry has long been accustomed to regulatory oversight, when compliance is combined with globalization and service consolidation, the issue becomes more complex. Further, other elements of compliance exist beyond regulatory: industry standards and corporate policy.
The Need for Resilient Supply Chains
IDC notes that the pace of the above transformation is faster than the improvement of supply chain management practices by the industry. The gap is particularly noticeable in MRO activities, where OEMs’ desire to take on a greater role requires greater competency. Closing this gap presents a huge opportunity to drive value chain benefits, as maintenance over the asset lifecycle is the second largest expense for operators (after fuel). The strategic approach recommended: more resilient supply chains:
IDC proposes a strategic approach to articulate the required MRO supply chain capabilities that emphasizes the notion of resiliency. The academic definition of resiliency (and there is an academic discipline called resiliency that focuses on large-scale systems such as ecological or economic systems) is the ability to adapt to changing circumstances while maintaining a central purpose. Resiliency is crucial to the mission statement of an A&D company’s MRO supply chain operations—keeping up with globalization and changing compliance requirements (the ability to adapt) while keeping aircraft flying, passengers safe, and the company profitable (maintaining the central purpose).
How does a company go about achieving such resiliency? The analyst recommends that companies create a corporate position on what resiliency means for their specific circumstance. Moreover, to integrate those capabilities quickly, they should consider a third-party supply chain services partner. “Selecting a partner to support MRO supply chain activities, in the context of a strong corporate vision, will be critical to closing the capability gap, improving profitability through improved asset uptime and fixed maintenance cost, and increasing revenue by demonstrating a solid execution competency,” the report concludes.
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