Strategic sourcing

As with others in the aerospace and defense industry, this leading manufacturer and supplier of aero-engine systems had been under increasing pressure to reduce costs. In their highly competitive commercial airline sector, maintaining market share remained a primary challenge. While strategic sourcing offered the principal means for reducing costs this needed to be undertaken alongside changes to organization, program management, and long-embedded working practices.

Challenge
Reducing the cost structure of jet engines is a complex proposition. The material technology is state of the art, safety requirements are paramount, the number of qualified suppliers is limited, and increasingly the suppliers have design responsibility for the components supplied. Once an engine is in production, the cost of major redesign or supplier change can be prohibitive. Further, when A.T. Kearney began working with the company, procurement practices were still very traditional – cost inflation was prevalent, suppliers exceeded annual price increases, and new components were sourced individually rather than within framework agreements. The challenge was to develop practical sourcing strategies that addressed these constraints and delivered essential savings.

Approach
Following a fundamental review of suppliers, contracts, engine programs and program opportunities, A.T. Kearney and the client team developed a procurement strategy that became the framework for restructuring the supply chain and transforming the way the company worked with its suppliers. This transformation was implemented over a series of waves and led to new ways of working in which selected suppliers came to be treated as partners, with shared responsibility for cost reduction and risks/reward share over the life of the engines. An important mechanism for this transformation was the Customer Value Process Centre. It provided a sophisticated forum for working proactively with suppliers on improvement projects. Other solutions included moving some selected, less-critical components offshore to Eastern Europe and Asia. Additionally, sophisticated spend management tools were developed and implemented to monitor global spend.

Results
The Strategic Sourcing initiative has been a major success. Benefits include:

• The procurement organization has consistently met or exceeded demanding cost reduction targets
• Supplier consolidation has provided significant scale benefits
• The procurement function operates on a global commodity basis to leverage the company’s buying power and streamline supplier interaction
• External surveys now rank the company’s procurement organization as a top-quartile performer