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SUPPLY CHAIN ANALYSIS

PROJECT
PRESENTED TO: Dr. ADNAN MKATTASH FROM: 1. SAFA'A IBRAHIM 933293 2. MARAM MOHAMMAD 933318 3. MANWA MAHMOOD 933323

Introduction
A primary concern of management is how to achieve strategic goals in ways that are least costly. This is of particular interest during times when economic growth is less than robust, supplies of almost everything are plentiful, and intense competition restricts price increases as a means of improving profits. Because expenditures for materials and services are very significant in most organizations (more than 50% of revenues in most manufacturing companies), supply chains offer an obvious potential source of cost savings. This article will discuss several major sources of potential cost savings in supply chains, identify some techniques of saving supply chain cost, and present a general approach for achievement of supply chain cost savings.

SourcesofCostSavingsinSupply Chains
Two primary sources of cost savings in supply chains are: change what is purchased or sold or how and when it is purchased or sold, processed and delivered to the point of use; and increase the velocity of material in supply chains to reduce the time from point of entry to the chain to final consumption or sale (see Figure 1). The first source is often approached by a strategic sourcing initiative. Typically, all purchases are identified, the optimum number of suppliers determined, and appropriate strategies applied with the goal of maximizing the value of purchases for

all items. The second source of savings can be approached as part of a total cost analysis associated with a strategic sourcing initiative or as a separate effort to reduce the cash to cash cycle time. The most frequent means of obtaining savings from increased velocity is to reduce or eliminate material inventories wherever they exist in the supply chain. To seek savings from either of these sources requires as complete knowledge as possible of an organizations most important supply chains. Such knowledge should include purchases, inventories, members of the chain including suppliers, customers and providers of transportation and other services, and all costs and cycle times throughout the chain. The most effective way to organize this information to facilitate analysis is through some form of process mapping, either on paper or with computer software.

TechniquesofSavingCostsin SupplyChains
The specific supply chain management techniques identified as follows are not described in detail because there are many textbooks, handbooks and other sources of detailed information. A few of these are included in the References section of this article.

ChangeWhatisPurchasedorSold or HowandWhenitisPurchasedor Sold,ProcessedandDeliveredto

the PointofUse
To tap this source of supply chain cost savings, a number of techniques are available. Some of the primary examples include the following (in no particular order and not mutually exclusive). Total cost of ownership analysis analyze all costs involved in obtaining a material or service to select the least-cost alternative or to identify costs that can be reduced or eliminated. Procurement process improvements change the procurement process to reduce cost or improve value, for example blanket orders, procurement cards and e-procurement techniques. Spend analysis identify all spending by an organization to determine what was bought, who bought it and from whom it was bought. This provides information necessary to conduct a strategic sourcing initiative and to apply other cost-saving techniques.

Cost Savings in the Supply Chain


Reference Section Material or service substitution replace the item

or service bought with a different item or service that meets requirements but reduces total cost. Material or service re specification or redesign also known as value analysis. Focus on function versus cost to improve value received. Quality improvements improve the match of quality received to quality required or improve quality consistency over time. Outsourcing determine what can be done more

efficiently or effectively outside of the organization and arrange for others to perform such functions. This usually involves activities that are considered non-core or non-critical to the purchasing company. Volume leveraging capture as much as possible of the total spend on a particular item or group of related items and contract for it as an entity. Provides the buyer with the maximum negotiating leverage and economies of scale opportunities. Cross-organizational synergies identify and apply cost-reducing supply chain best practices across various parts or locations of an organization. Material or service standardization reduce variety of specification, size or material. Simplifies the entire supply chain process and may enable volume leveraging and procurement process improvements. Investment recovery manage items returned from customers, surplus material purchased, unneeded capital equipment and other materials to recover as much as possible of original cost and to minimize handling and other recovery costs. Operational cost reductions reduce costs of performing services within the responsibility of supply chain management, for example warehouse operations and purchased services such as transportation. Price and cost analysis analyze prices and costs of materials and services to determine cost reduction potential. This requires knowledge of markets and processes for the product categories where this technique is to be applied.

Target pricing establish a price you are willing or able to pay for a particular material or service, based on your knowledge of costs and markets, and seek suppliers that will supply your requirements at or below the target. Supplier integration arrange for one supplier to provide materials and/or services that were previously supplied by multiple suppliers. This method can be implemented either vertically or horizontally. Vertically, one or more tiers is removed from the supply chain; horizontally, the number of suppliers is reduced. Vertical implementation can increase material velocity through the chain and improve the chains ability to appear as a single entity to customers. Horizontal implementation can reduce procurement process costs and improve volume leveraging potential. Supplier relationship revision change the relationship with suppliers, for example longer term contracts, partner or alliance-type arrangements or other changes that will enable reduced costs of acquisition, ownership or other supply chain costs.

IncreasetheVelocityofMaterial in Supply Chains


Extraction of increased value by increasing material velocity is frequently a lucrative source of supply chain cost savings because many materials move slowly and have many stopping points (inventory locations) in most supply chains. This creates larger average inventories throughout the

supply chain and results in high inventory carrying costs. Some techniques that can reduce these costs include the following (in no particular order and not mutually exclusive). Reduce number of inventory locations use supplier inventory or supplier-managed inventory, drop-ship items, consolidate stocks into fewer locations. Maintain smaller average inventories evaluate levels of safety stock, arrange for more timely supplier back-up to enable smaller safety stock, perform analyses such as ABC periodically to ensure that all items are managed properly according to their movement and importance as demand conditions change.

An Approach to Achievement of SupplyChainCostSavings


A framework of three broad steps can be used to achieve supply chain cost savings. All steps in the process are best conducted by cross-functional teams that include representation of all stakeholders in a particular supply chain including internal functions, suppliers, customers and third parties such as transportation providers. Prior to any supply chain cost-saving effort, preliminary investigation should be carried out to determine a possible range of savings that could be achieved. From preliminary estimates of cost savings, obtain management support for a detailed analysis. The three steps can be characterized as an LSP approach to supply chain cost savings: learn, study and plan.

Techniques Supply Chain Management


This includes the techniques identified earlier in this article but also includes other methods, processes and systems that impact supply chain operations and costs but are not specific only to supply chains. These include, for example, suppliers operations, information technology and e-business, ordering and payment systems, forecasting techniques, use of cross-functional teams, product development processes, production planning and scheduling techniques, material requirements planning (MRP) techniques, distribution system operations, marketing and sales processes and facility location techniques. resource planning
Reference Section

Cost Savings in the Supply Chain


big money flows in or out of the organization;

major continuing purchases; major continuing product sales; largest volume production; highest-cost activities, functions or services performed; and activities or processes that have long cycle times. Classify identified areas of potential improvement by cost-savings potential and ease of implementation. Rank in order of highest potential and easiest implementation. Develop specific projects for application of cost-saving techniques in the highest ranked areas. Include implementation plans and performance metrics. Prepare business cases for these projects and obtain management and stakeholder support. Implement changes and follow

up to ensure cost savings are achieved and continuous improvement opportunities are captured and implemented. Review metrics periodically and adjust processes as necessary to continue or improve savings.

References
Jon Hughes, Mark Ralf and Bill Michels (1998), Transform Your Supply Chain, London, International Thomson Business Press. Thomas A Crimi and Ralph G Kauffman, Looking for Cost Savings in the Supply Chain, Inside Supply Management, Vol. 14, no. 3 (March 2003), Institute for Supply Management. The Purchasing Handbook, 6th edition (2000) (Eds Joseph L Cavinato and Ralph G Kauffman), McGraw-Hill, sponsored by the National Association of Purchasing Management.

THE PROGRAM
Providing a comprehensive and practical course of study, this program is designed to help professionals develop their capabilities in purchasing and related areas such as contract

management and logistics management. The program was introduced in 1987 and has been revised and updated to reflect the changing roles and responsibilities in purchasing. The program is offered in cooperation with the Inland Empire Chapter of the National Association of Purchasing Management also known as the Institute of Supply Chain Management.

INDUSTRY CONNECTIONS
Endorsed by National Association of Purchasing Managers (NAPM)/Institute of Supply Managers (ISM), Inland Empire, Inc., which provides scholarships for students who wish to pursue purchasing management careers. For membership and event information, visit www.napm-ie.org. For scholarship information, call (951) 827-1600 or e-mail bet@ucx.ucr.edu. Endorsed by the California Association for Public Purchasing Officers, Inc. For meeting and event information, visit www.cappo.org. Endorsed by Distribution Management Association of Southern California. For membership and event information, visit www.dmasocal.org.

OBJECTIVES
This program focuses on the major skills and responsibilities of purchasing managers and professionals in related areas of responsibility. The program provides an in depth examination of the roles, responsibilities and functions in purchasing and materiel management including legal requirements, contract negotiation and management, price/cost analysis and management of outside resources and suppliers. Students also have the opportunity to

examine and explore current issues and trends as well as best practices through an intensive case study course.

WHO CAN BENEFIT


Coursework emphasizes the latest practices in the field and is intended for purchasing managers, those considering purchasing management as a profession and professionals who wish to augment their problem-solving and decision making skills in related areas including contract management, logistics and supply chain management, finance and accounting. The program provides basic information to meet the needs of persons entering the profession, while also covering legal, financial and managerial aspects important for successful managers in the profession.

ADMISSION
The program and courses are open to anyone who can benefit from university-level study, including persons who are not certificate candidates but who are interested in specific topics.

TO ENROLL IN THE CERTIFICATE PROGRAM


An enrollment form must be filed along with a nonrefundable application fee. Participants intending to complete the program and receive a certificate should apply at least one quarter prior to expected completion of the certificate. The nonrefundable fee covers academic advisement, tracking of progress/completion and updates on program changes and additions. Certificate enrollment forms are available in Extensions quarterly catalog, at Student Services, in program department offices and on the Web site at www.extension.ucr.edu/certificates.

SCHEDULING OF CLASSES
Generally, certificate candidates may complete the program

within one year. Courses are offered at various times of day and in a variety of formats, including weeknight, weekend and two- and three-day formats.

CERTIFICATE IN PURCHASING, LOGISTICS AND SUPPLY CHAIN MANAGEMENT COMPLETION REQUIREMENTS


To earn this certificate, students must complete the six required courses with a grade of C or better for a total of 21 units. The typical time to complete this certificate is nine months to one year.

REQUIRED COURSES
Purchasing and Supply Chain Management
Management X410.82 (4 units)

Principles and practices of purchasing from determining the requirements for goods and services through their receipt. Includes an overview of quality assurance, quantity determination, price and cost analysis and supplier relations. The policies and procedures of purchasing management are introduced and issues of concern to today's purchasing professional are discussed. Inventory Management Management X410.91 (3 units) Provides a comprehensive study of inventory control and warehousing as key functions within the supply chain. Major topics include inventory fundamentals and vocabulary, economic order quantity, independent demand ordering systems, and the receiving, tracking, shipping and storing of material and finished goods inventories. Other topics include just-in-time inventory management practices; the use of technology to track,monitor and organize inventory; warehouse operations, staffing, safety and training; communication and reporting; and the overall function of inventory control within the organization.Also discussed are

the role and responsibilities of inventory control managers and the link between warehouse operations and internal and external customers, vendors and suppliers.
Current Issues and Case Studies in Purchasing and Materiel Management
Management X410.8 (4 units)

Surveys current trends and issues in purchasing and examines best practices through case studies.Topics include the challenges and changes affecting purchasing management, latest technology and automation in purchasing systems and materiel handling,working with suppliers, staff and materiel, outsourcing, procurement coordination, control and verification.

ELECTIVE COURSES
Legal Aspects of Purchasing Management X410.85 (3 units) Contract Negotiation Management X410.4 (3 units) Price and Cost Analysis in Purchasing Management X410.81 (4 units) Procurement and Subcontract Management Management X410.7 (3 units) Logistics and Supply ChainManagement Management X410.86 (3 units) Transportation and TrafficManagement Management X410.88 (3 units) Global Logistics

Comparative Analysis of Supply Chain Management Practices by Boeing and Airbus: Long-Term Strategic Implications by

Tzu-Ching Horng and Kirk Bozdogan, MIT April 18, 2007


web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 2 Research Goals and Approach Goals Develop an improved understanding of emerging supply chain management strategies and practices in the commercial aerospace industry Explore the longer-term implications of the findings for supply chain management practices in the aerospace industry in the future Approach Conduct a comparative analysis of supply chain management practices by Boeing and Airbus by Focus on two large development programs -- the Boeing 787 Dreamliner and the Airbus A380 Navigator Concentrate on the common set of suppliers supporting both programs to develop a sharp compare-and contrast perspective, looking at Boeing & Airbus from the vantage point of these common suppliers Capture bottom-up suppliers voice to complement top-down perspective, while controlling for any embellished top-down view from the two companies web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 3 Key Questions What are the defining characteristics of supply chain management practices adopted by Boeing and Airbus in connection with the Boeing 787 Dreamliner

and the Airbus A380 Navigator programs? Design of the supplier network architecture Supplier selection and certification Supplier engagement in design and development Management of supplier interfaces & relationships Technical engineer data exchange -- technologies, systems, and practices What are the significant similarities and differences between the two? Cost and risk sharing Workshare allocation, supplier role and responsibilities Contractual arrangements Global outsourcing, alliances and partnerships Use of information technology and infrastructure What are the longer-term future implications of the findings? Emerging business models and networked enterprise architectures? Technology development, product and process innovation, and knowledgesharing Global product development & production Structure of the supplier base & customer-supplier relationships web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 4 Guiding Insights from the Literature Extensive literature showing that lean supply chain management practices represent a critical source of sustained competitive advantage. Examples: Supplier network architecture linked to companys vision & strategy Early supplier integration into design and development Synchronized flow throughout the supplier network Visibility and transparency through open communications Long-term, trust-based, mutually-beneficial relationships Knowledge-sharing and fostering supplier-based innovation Continuous supplier development & process improvement New supplier network architectures represent a defining feature of

emerging new business models for managing complexity, uncertainty and competition in a globalized market environment Access to investment capital, new markets and new sources of innovation Greater outsourcing, strategic alliances & partnerships, delegation of greater responsibilities to suppliers to minimize risk and transaction costs Internet-enabled information technologies and systems radically redefining supplier integration via improved information visibility and information-sharing efficiency gains Machine-to-machine data communication & system integration globally Unprecedented visibility, transparency and accuracy Greater flexibility in interconnecting different systems, facilitating both bilateral and multilateral collaboration web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 5 Research Design Questionnaire survey of a sample of common suppliers supporting both programs To develop baseline data about the individual supplier companies To gauge whether and the extent to which they are employing lean practices To assess the extent to which the two large customer companies are practicing lean principles in their engagement with the suppliers To document the extent to which the two large customer companies have proactively required the suppliers to adopt lean practices Telephone interviews with key representatives of a selected set of suppliers To delve more deeply into specific topical areas (e.g., role in design & development, information/communication links, contract design)

To probe how exactly the two customer companies manage their relationships with these specific suppliers Open source information to ensure external validity & generalizability About the two companies & their supply chain management practices About the two specific programs About the common suppliers web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 6

Airbus A380 Program -- Quick Profile Basic information Double-decker super jumbo aircraft available in two models 555-seat A380-800 in a three-class configuration, with a range of 8000 nautical miles (15,000 kilometers) and cruise speed (typical) of Mach 0.85 (max Mach 0.89) 853-seat in a single-class economy configuration Economic and environmentally-friendly A380 can fly10-15% more range but burn 13% less fuel than the 747; consumes less than 3 liters of fuel per passenger-seat over 100km List price: $292 million (in 2006 dollars) Launched in mid-1990s to end Boeings dominance in long-distance commercial aviation market since 1970s Initial launch cost: $10.7 billion (now higher) Final assembly in Toulouse, with interior furnishings and customization to be performed in Hamburg Wiring problems discovered early in 2006 have led to a (more than) two-year delay in the program and over $2 billion in expected losses in net

revenue web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 7 Airbus A380 Program -- Further Details Aimed at ending Boeings worldwide dominance in long-distance hubdominated commercial passenger aviation market since 1970s With 35% more capacity than Boeing 747, A380 positioned to help airlines cope with rising worldwide passenger traffic -- hub-to-hub traffic growing at staggering rate, as evidenced by the fast-growing aviation routes connecting Asia with North America and Europe Provide better utilization and efficiency of fleets without increasing number of flights Targeted as a calculated bold response to projected market demand Next 20-year outlook: 22,663 new aircraft (2006-2025); growth over 5%/yr Main difference between Boeing & Airbus projections: for the A380/Boeing 747-class aircraft, Boeing sees a market for 990 aircraft (for both passengers & freighters), while Airbus sees a total of 1,665 (latest 20-yr outlook Global Market Forecast issued in Nov 2006) Boeing A380 launch decision based on expected rise in market fragmentation (new markets, higher-frequency thinner routes & hub-bypassing) along with consolidation of hub-to-hub traffic and hub-dominated traffic, typical of alliance networks web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 8 Airbus A380 -- Further Details on Some Design & Technical Features

Cockpit design follows same cockpit layout, characteristics and operating procedures as in the A320 and A330/A340 platforms, providing a number of advantages (e.g., in terms of crew training, crew transition, cross-crew qualification) Also incorporates new features that benefit from innovation in technologies for displays, flight management & navigation systems First commercial airplane to adopt EHAs (electrohydrostatic actuators) flight control technologies -- a step forward to the all-electric airplane EHAs are electrically powered but use hydraulic pumps and reservoirs that transform electrical power into hydraulic power Advantages: large savings in terms of weight and space (e.g., reduction in the size of pipelines, actuators and other components, power generation equipment, tubing, amount of fluid required), as well as ease of installation First commercial aircraft capable of flying with total hydraulic failure, using electricity to operate the flight control surfaces Extensive use of composite materials -- 25% (by weight), compared with 10% in A320 and 30% in A340-500/600 Use of carbon composites and advanced metallic hybrid materials, along with laser beam welding to eliminate fasteners, reduce weight and provide enhanced fatigue tolerance Glare: highly resistant to fatigue, used in construction of panels for upper fuselage Aluminum and fiberglass layers of Glare do not allow propagation of cracks Glare lighter than conventional materials & represents a weight saving of about 500kg web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan

04/18/07 - 9 Boeing 787 Program -- Quick Profile Launch Year: 2002, when Boeing abandoned its Sonic Cruise project and redirected the 7E7 project, later named the 787 Dreamliner Represents Boeings response to expected demand for an aircraft that would cost less to own, operate and maintain Targeted at the middle of the market segment -- the rapid, direct, pointto-point connections aviation market segment, with capacity of 250 passengers This market segment covers an intercontinental range of about 2000-6500 nautical miles, with capacity around 180-250 passengers Currently being served by such aircraft as the Boeing 767, A300/A310, and A330 Aircraft in this market segment allow airlines to offer greater flight frequency and more direct connections between city-pairs Boeing 787 is designed to operate in this market segment but at a higher speed and with better fuel efficiency List price: 152.8 million (in 2006 dollars) Expected rollout of the first aircraft in July 2007 With the 787 Dreamliner, Boeing is expecting to win back the dominance of the $60 billion/yr jetliner market from Airbus web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 10 Boeing 787 Program -- Further Details The 787 Dreamliner twin-aisle platform comes in four variants 787-8 : carry 210-250 (223) passengers in a three-class configuration, with a range of 8,000-8,500 nautical miles (14,800-15,700 kilometers) and cruise speed of Mach 0.85

787-9 : carry 250-290 (259) passengers in a three-class configuration, with a range of 8,600-8,800 nautical miles and cruise speed of Mach 0.85 787-3: carry 290-330 (296) passengers in a two-class configuration, with a range of 3,000-3,500 nautical miles 787-10: carry 300 passengers, stretch version, similar capacity as -9 & better range than -8 Designed as a lighter airplane with greater fuel-efficiency, lower emissions, lower cost per seat-mile, and lower maintenance costs 30,000-40,000 Ibs. lighter than A330-200; uses 20% less fuel & lower emissions compared with similarly-sized airplane Travels at speeds similar to todays fastest wide-body aircraft, allowing more cargo revenue Capacity 10% lower seat-mile cost than current generation aircraft 30% lower maintenance costs Selected two engine types: General Electric (GE) Genx & Rolls-Royce Trent 1000 to power the 787 Aircraft will be built in Everett, WA; goal for final assembly 3 days Program milestones First flight August 2007 Certification/entry into service May 2008 787-3 mid 2010 787-9 late-1010 787-10 late 2012 web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 11 Boeing 787 -- Some Design & Technical Features Represents large step towards all-electric-airplane, one in which all systems are run by electricity Driven by the belief that power electronics, key to the all-electric airplane, are on a steep curve of performance & cost improvement, while pneumatic systems growth has tapped out around 1995

The traditional bleed air and hydraulic power are replaced with electrically powered compressors and pumps Cabin pressurized by electric motors, not by bleed air used by almost every pressurized aircraft An open architecture centralized computer hosts the avionics and utility functions, rather than dozens of individual buses Anti-icing of the wing to be done with electric heat instead of bleed air Unprecedented use of composite materials Composites (50%, by weight); by comparison, 777 has 12% composites Aluminum (20%); by comparison, 777 has 50% aluminum Titanium (15%); steel (10%); other (5%) 61% of 787s airframe structure is made from fatigue-and-corrosionresistant materials Composites -- resist long-term wear and tear, because cracks do not propagate from holes as in aluminum; inspections are made easier; maintenance intervals stretched to 1000 hrs (compared with 500 hrs for 767 or 700 hrs for A330 -- the two most prominent aircraft 787 aims to replace) Much more savvy focus on flexible financing arrangements, plus closer attention to passenger comfort, fuel burn and life cycle costs Before: customer = airlines, not much attention paid to financing flexibility issues Now: customer = airlines + banks -- that is, eliminate huge differences in systems packages common on other aircraft to enhance the aircrafts appeal to lenders (i.e., makes it easier to transfer aircraft from one operator to another when it comes off a lease) web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 12 Largely Similar Supply Chain Management Practices by Airbus and Boeing

Supplier selection on both programs following a typical competitive bid process during initial plateau phase; selection on best-value basis Boeing retains unified list of pre-qualified suppliers/vendors (qualified parts list -QPL; qualified vendor list -- QVL) Airbus does not yet maintain such a unified list, but moving in same direction Both have major suppliers participate early in design and development process Both committed to long-term, mutually-beneficial, reliable and stable relationships with key suppliers Supplier partnerships typically limited to suppliers that continuously show excellence in performance, demonstrate credible long-term business interest, and back it up with their own development and investment Life-of-program fixed-cost contracts, but with some differences Electronic links with suppliers via supplier portals -- (e.g., request for quote/proposal; order placement; technical data interchange, such as technical specifications, key characteristics, engineering drawings; exchanging documents; facilitating virtual collaboration with global partnering suppliers in a 3D design software environment) RFID initiatives: Both Boeing and Airbus have expanded the application of RFID tags for both the 787 and A380 programs; they have worked together to reach for consensus regarding standards for using global RFID technology on commercial airplanes)

web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 13 Major Suppliers Given Much Greater Responsibility than in the Past Important strategic shifts in supply chain management, driven by pressing need to reduce cost and spread development costs Both have asked major suppliers in 787 and A380 to absorb non-recurring costs, thus greatly shifting costs and risks to suppliers, but using somewhat different approaches Suppliers delegated much more responsibility for design, development and manufacturing through closer collaboration, partnerships and integration across supplier networks Airbus A380 Airbus, as a multinational consortium prior to July 2001, had already adopted a strategic partnership model with well-defined workshare arrangements (groupement dintrt conomique) Airbus has increased its outsourcing in the A380 program, but has still kept in-house core technologies, such as composite technology and wing design Boeing 787 Boeing has gone the extra distance with the 787 program -- retains only about 33%35% of the total 787 work share Deliberate effort to reduce parts count to enable snap three-day assembly of the 787 Suppliers moving up the value chain & assuming more of a system integrator role, providing more integrated components and managing their own subtier suppliers This is the first time Boeing has outsourced the entire wing design and manufacturing to external suppliers (e.g., to risk-sharing partners Fuji Heavy Industries, Ltd.

-- center wing box; Kawasaki Heavy Industries, Ltd. -- main wing fixed trailing edge; Mitsubishi Heavy Industries, Ltd. -- wing box) web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 14 Increased Global Outsourcing-1 Both Airbus and Boeing have increased their global outsourcing Japan China India Middle East Eastern Europe Strong economic growth as well as fast-growing air travel particularly in Asia/Pacific region Large Asian and Middle Eastern carriers now major customers (Singapore Airlines, Emirates) Variety of offset arrangements have opened up new market opportunities, tied to increased sourcing (e.g., from China) web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 15 Increased Global Outsourcing-2 Boeing -- long unparalleled dominance in Japanese market & strong presence in China In Japan -- 80% of orders from Japanese airlines from Boeing during last decade; Japanese suppliers (heavies) account for 35% of 787 workshare (with subsidy from Japanese govt -- $3 billion) In China -- activities range from subcontracting, joint ventures, technical training and assistance for cooperative programs; visible support from Chinese suppliers (valued at $1.6 billion), supplying essential composite parts and structures for 787 program Airbus -- relative newcomer to Japan & China In Japan -- facing difficulties in winning orders from Japanese airlines, but

has contracted work with Japanese suppliers In China -- sales in China jumped to 219 aircraft in 2005 from 56, overtaking Boeing by delivering 6 more aircraft; committed to doubling procurement from Chinese suppliers to $120 million/yr by 2010; announced Tianjin will be site for Airbus first final assembly plant outside Europe web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 16 The Emerging Unique Boeing Model The Boeing 787 experience represents a unique model for the future in supply chain management In essence, the Boeing model is about optimizing the total business, not just the supply chain in the traditional sense Supply chain architecture as an integral part of the entire program extended enterprise architecture Main emphasis is on optimizing portfolio of core competencies in entire value stream for mutual benefit Lifecycle value creation perspective, not short-term waste elimination or cost minimization for Boeing itself Boeing has adopted a bold new innovative system integrator role This represents a revolutionary departure from the past web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 17 Key Features of the Emerging Unique Boeing Model Boeing has asked all suppliers to carry all of the non-recurring costs; in return, gives back to risk-sharing partnering suppliers the intellectual property rights on the components or systems they provide Contracts are so designed that if the aircraft does well in the marketplace, the risk-sharing partners derive direct benefits (revenues above amortized costs of non-recurring investments based on initially-agreed-up expected unit sales volume) Major partnering suppliers (e.g., Hamilton-Sundstrand), with big chunks

of the aircraft, can make design trades within each work package and across company units to find optimal system solutions Lower-tier suppliers are not provided IP ownership but are given long-term relationships, where they can benefit from scale economies Boeing only provides high-level interface definition; the first-tier (major partnering suppliers) are responsible for the detailed interface definitions & designs Suppliers work together and Boeing acts as referee in case of conflicts Web-enabled in formation technologies & systems a critical enabler web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan 04/18/07 - 18 Airbus -- Some Concluding Observations Airbus is reported to have established risk-sharing partnerships with more than 30 of its major suppliers covering $3.1 billion or 25% of total program non-recurring costs These suppliers include Alenia, Eurocopter, Fokker, Gamesa, Labinal, Saab) However, this needs closer scrutiny, to see what it actually means Airbus also continues to exercise control over all system and detail engineering (component level) interface definitions Airbus suppliers work in parallel (bilaterally with Airbus), with limited lateral communications among them Unlike Boeing, Airbus has no strong partners for major risk-sharing activities or as contributors to development spending However, Airbus is currently pursuing new partnering arrangements under its Airbus Power8 competitiveness Industrial Plan Plan proposes radical cost-cutting rationalization measures (cutting 10,000 jobs, closing down or selling specific sites, rearranging workshare allocation) Investment partners being sought for the Extended Enterprise sites (Nordenham, Germany; Meaulte, France; Filton, UK) As part of the plan, supplier relationships would also change -- Airbus wants partners to commit to long-term cost reductions Airbus also reducing its supplier base from 3,000 down to 5,000 web.mit.edu/lean 2007 Massachusetts Institute of Technology Bozdogan

04/18/07 - 19 Long-Term Strategic Implications Aerospace supply chain management will continue to evolve from a transactional or relational business model to one involving risk-sharing and cost-sharing prime-supplier partnerships, alliances & closely-knit collaborative relationships Where primes (system-integrators) will likely to move closer to a total systemintegrator & lifecycle value provider role Major suppliers to assume greater system-integrator role, with greater responsibility for design, development, manufacturing, and after-market lifecycle support Suppliers, in general, moving from short-term service providers to longterm partners Global outsourcing -- aerospace supply chains are likely to be a lot more quite internationalized in the future Adoption of information technologies enabling network-wide connectivity right down to lower tiers an imperative in the future for coordinating complex set of interdependencies Continued consolidation likely in aerospace supplier base to build greater specialization & broader system integration skills, and stronger financial backbone to make the necessary investments to enhance core capabilities

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