Manufacturers are now well down the path of digital transformation. As has been the case in other industries, there are many changes associated with such a journey. Greater efficiency in production, maintenance, and distribution processes are some of the potential benefits. Increased competition from companies with vast resources and intellectual capital represents new possible threats. McKinsey recently published an article that highlighted how existing digital platforms provided by the tech giants could be a potential threat to the spare parts business that many Aerospace & Defense manufacturers have come to rely upon as part of their business model. This post will explore the merit of this prediction and what steps can be taken to minimize this threat as part of a digital transformation strategy.
Learning from History
Aerospace and Defense manufacturers can learn from the automotive industry when it comes to competing against a high number of online suppliers. This market is now driven by pricing, availability and response times. How quickly a part can arrive has now become a competitive differentiator, with an impact on aftermarket revenue streams. The extent of how every process has been digitized and the level of resiliency of your supply chain are not just “nice to have” attributes but could soon have a profound impact on future profitability.
Innovation continues to change the automotive industry, as just mentioned in a recent Gartner report (Gartner subscription required), “Open-source platforms are commonplace in the IT world and are now spreading across the automotive sector, reaching product areas beyond software. Automotive CIOs must define strategies to mitigate the risks and leverage the benefits brought by these collaborative platforms,” Gartner “What the Automotive CIO Needs to Know About Open-Source Platforms,” Pedro Pacheco, October 2019.
One might question how this could happen in the aerospace and defense industry. Change might initially start slowly. New concepts are tested as specials or limited options. Minor commodity items such as bolts might be easier and cheaper to order on an online marketplace focused on volume. Over time, more and more ground could be ceded to such companies. Then one day, the bulk of the supply chain has changed. Manufacturers find their profits curtailed and opportunities limited.
What is the Right Solution?
According to McKinsey partners Jurgen Meffert, Mark Patel, and Rupert Stuetzle, manufacturers need to act now (source) to avoid following a similar history to what has happened in the automotive industry. They suggest that manufacturers establish their own digital B2B ecosystems as a strategy to be at par with what other providers can already deliver, as part of a digital transformation strategy.
This suggestion is no small task. Given the legacy infrastructure and the speed of digitalization now underway, it is unlikely any large A&D manufacturer could reasonably embark on this journey with the capabilities and experience necessary to have a world-class solution. There are simply too many variables and challenges.
McKinsey suggests A&D manufacturers band together to build an industry-specific platform for digital commerce. Owned and operated by OEMs, this online marketplace could be branded as a place where buyers connect directly with sellers for the most complete collection of available parts and spares – perhaps even with the capability to make on-demand anything else with 3D printing.
Of course, this would call for a big change in philosophy. Traditional competitors would then need to work together to set up a digital network as a series of alliances serving all interests. Mutually beneficial networks could be established providing economies of scale across the entire supply chain that delivers an exceptional customer experience second to none.
It is hard to imagine such a framework could be established between companies that have embedded in their culture such a strong history of competition. Such is the case in the world today of digital transformation.
Consider the Customer Experience
Alternatively, if we are to look back to the giant tech providers, an advantage of using their existing online marketplaces is instant access to slick IT-based platforms capable of large scale and efficient operations. And, with a collection of exiting buyers that are already used to buying products here in their personal lives, the transition to buying “work” purchases here wouldn’t be difficult to achieve.
If these types of digital ecosystems offer enough reporting, visibility, and insights into buyer behavior, then that is a win-win situation. This intelligence could lead to a better understanding of what customers need and help drive a superior customer experience.
Alternatively, should all the A&D manufacturers band together to invest in and build a robust digital ecosystem similar in scope to what has been achieved in other industries, then it would be necessary to collaborate on systems integration to enable the delivery of real-time product updates, inventory availability and delivery times. This would need to be done while offering a high level of customer service.
Now is the Time to Act
Regardless of what future direction the A&D spare parts market evolves into, one commonality exists. Complex discrete manufacturers and their suppliers must invest in forming a digital infrastructure within each of their own organizations first. This is a critical part of any digital transformation strategy. Systems and processes must be digitized in order to integrate with any marketplace or ecosystem, either as a proprietary platform, through partners, or alliances.
A great place to start is your own production, quality, and maintenance, repair and overall operations. Every design, production execution, and process improvement system must digitally connect to all enterprise systems, such as ERP or Point of Sale IT systems. Digital continuity is the building block to establishing an industry ecosystem or marketplace. Vendors such as iBASEt and others have the solutions to make this happen. Without these industry platforms for collaboration on digital initiatives, the ability to effectively compete in tomorrow’s markets will disappear.
Regardless, investing in a digital transformation program is a good first step.
Continue reading my next article to read what pragmatic steps can be taken today to launch your strategy – or further accelerate your existing program.