A forging supplier strategy focusing on consolidation and diversification of offerings to address the turbulences in the aerospace industry
Rémy LORIOZ
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TABLE OF CONTENT
Introduction
The Forging Industry
A Strategy to Face the Downturn
Conclusion
1
2
3
4
5
Supplying the Aerospace Industry
Page 3
Study environment
Industry
The Forging Industry
Sales 2008
$70,840,007 Up 18% from 2007
95+% Aerospace
Markets
The XXX Group at a Glance
Employees
Approximately 180
Page 4
LOCATION
XXX, XXX, U.S.A.
Study environment
The XXX Group at a Glance
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TABLE OF CONTENT
Introduction
The Forging Industry
A Strategy to Face the Downturn
Conclusion
1
2
3
4
5
Supplying the Aerospace Industry
Page 6
Vertical Relationship in the Aerospace Industry
Structure of the Supply Chain
Row material
Assembly
Engine
Avionics & equipment
Airframe
Various parts and components
Supply-type Supplying
Specialization-type Supplying
Prime integrator
Tier 1 Supplier
Tier 2 Supplier
Tier 3 Supplier
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Vertical Relationship in the Aerospace Industry
XXX’s Position in the Supply Chain
Prime Integrator 1 : Boeing
Tier 1 Supplier : Rolls-Royce
Tier 2 Supplier : Machining
XXX
Prime Integrator 2 : Sikorsky
Prime Integrator 3 : Bombardier
: Orders: Parts
Definition
Effect on XXX
Value gain
Consolidation trend
The Machining Issue
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Vertical Relationship in the Aerospace Industry
Value Chain Integration
Speed to market
Collaboration
Rapid Innovation
Advantages
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Vertical Relationship in the Aerospace Industry
Globalization of the supply chain
Globalization Forces XXX’s Limited Risk Exposure
Overcapacities of production in highly industrialized countries
Significant advantages of labor costs on less industrialized countries
Availability of worldwide information networks that connect firms information systems
The emergence of extended markets areas
Very low to low volume
High flexibility
Ability to forge a high number of different alloys
High quality aerospace forgings
International Traffic in Arms Regulation (ITAR)
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Internationalization of Horizontal Relationships
1960s: From the old piston engine to the jet engine
1985s: New materials (Ultralight alloys, carbon fiber), new propulsion system with high by-pass ratio, massive use of electronics.
Two revolutions
Technological Barrier
Financial Barrier
Market Barrier
Three Barriers
Internationalization
F-22
U.S. Tanker Fleet
Supply Chain Structure
Value Chain Integration
Several Consequences
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Mergers and Acquisitions
Lack of leverage
Regulators
Low activity ahead
2008 Turnover :EADS $62,7 billionsThe Boeing company $60.9 billionsLockheed Martin $42.7 billionsBAE Systems $30.5 billionsNorthrop Grumman $33.9 billionsRaytheon $23.2 billions
Internationalization of Horizontal Relationships
0
50100
150200
250
300350
400
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
10
20
30
40
50
Total Number of deals
Total disclosed value of deals(US$bn)
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Airline Business Model
Business class
Load factor
Profit contradiction
Cyclical behavior of civil aerospace markets
Manufacturing delay
Time of recognition of over capacity
Double Delay Structure
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XXX’s sales variation and market demand
Both civil and military; opposite trend. XXX’s sales affected.
Cyclical Behavior
Cyclical behavior of civil aerospace markets
-40,0%
-20,0%
0,0%
20,0%
40,0%
60,0%
80,0%
2000 2001 2002 2003 2004 2005 2006 2007 2008
SIFCO SALES CIVIL - ORDERS DEFENSE - ORDERS
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TABLE OF CONTENT
Introduction
The Forging Industry
A Strategy to Face the Downturn
Conclusion
1
2
3
4
5
Supplying the Aerospace Industry
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Industry Processes
Impression Die Forging
Dies
Impact
Part
The forging advantage
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Market Overview
Markets served
1 491 1 636 2 014
1 779 1 863 1 442
2 601 2 651 2 629
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
2006 2007 2008
OTHER
AUTOMOTIVE
AEROSPACE
Automotive: high to very high volume.
Aerospace: very low to medium volume
Other: various industries, oil, nuclear, boiler etc…
Markets Info
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Market Overview
Market share
2,8%
3,5% 3,5%
0,7%0,9%
1,2%
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
4,0%
2006 2007 2008
Aero Market Share
Total Market Share
Customers140 customers; 100-110 are repeat customers that places orders on a consistent basis. 5 customers represent 65% of the sales, when combining direct and sub-tier level:
#1 – Rolls-Royce#2 – Sikorsky Helicopter#3 – Bell Helicopter#4 – Goodrich Landing Gear#5 – Alloy Specialties (Honeywell)
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TABLE OF CONTENT
Introduction
The Forging Industry
A Strategy to Face the Downturn
Conclusion
1
2
3
4
5
Supplying the Aerospace Industry
Page 19
The Economic Downturn
Background Information
Undervaluation of the risk
A blurred financial system
Financial Innovation and Globalization
Main factors
Effects on the Industry
Less Credit
Less Orders
Production adjustments
XXX’ sales drop
Fewer financing possibilities for aircraft acquisition.
Fewer orders, orders cancellation, orders delay
Prime integrators adjust their production schedule
Effects of the crisis on XXX
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Issues Summary
Industry Cycles
Globalization risk
Value Chain integration
Fewer prospects
Globalization of customers supply base
Economic crisis
High Cost of dies
Consolidation of the supply base
Less forgings in new aircrafts
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XXX’s SWOT Analysis
STRENGHT
High recognition in most aircraft primes and subs
High customer retention
High regard for historic technical capability (titanium)
Wide range of materials, forge methods, and manufacturing capability
In-house capability of supporting operations
Low utilization of equipment (available capacity)
5-yr. bargaining agreement
Customer LTA’s on several growth programs
2D/3D simulation capability
WEAKNESSES
Limited awareness of XXX outside of small group of customers
Image as a “typical” hammer operation
Perceived lack of capability to forge nickel alloys
Less forge product in XXX’s size is included in new product
Poor IT Systems
Older equipment in ageing facility
Significant reliance on aerospace industry – 95%+
Limited aluminum forge heating capability
Overall forge size capability
OPPORTUNITIES
Use access to high level decision makers in industry
Develop press capability for superalloy rotating parts
Add related services –i.e. machining
Convert 1500T press into isothermal forging press
Promote improved turn around time
Promote better cycle time
Asian markets – particularly China
Aluminum forge products
THREATS
Potential customers will choose other providers
Incomplete quotations will result in prospects selecting competition (not able to quote all nickel work)
Utility costs (natural gas continues to rise)
Regressive pricing
Customer are looking for suppliers who can deliver product quicker than today.
Low-cost competitors
New global forgers entering US civil and military markets
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Strategy’s Proposal - Consolidation
Keep and Seek
Benefits
Strong competitive advantage
Huge dies inventory
Low Costs
Program targeting
Customer targeting
Risks Involved
Being barred from new programs
Miss new opportunities
Can not be the only strategic item
Use the die inventory to target active programs and customers and gain competitive advantage while lowering tooling costs.
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Strategy’s Proposal - Consolidation
Enter the Aftermarket
DIE
CUSTOMER 1
SUB-ASSEMBLY
PROGRAM 1
CUSTOMER 2
CUSTOMER 3
CUSTOMER 4
CUSTOMER 5
PROGRAM 2
PROGRAM 5
PROGRAM 4
PROGRAM 3
ASSEMBLY
ASSEMBLY
End-User 1
End-User 2
End-User 3
End-User 4
End-User 5
End-User 6
XXX Tier 3 Supplier
TIER 2 SUPPLIER
TIER 1 SUPPLIER
AEROSPACE SUPPLY CHAIN – XXX’S OPPORTUNITY
PRIME INTEGRATOR AFTERMARKET
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Strategy’s Proposal - Diversification
Service provider ?
Raw material supplier XXX Tiers 2 Tiers 1 Prime End-User
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: Sale
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Any Questions?