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IBM Global Business Services Aerospace and Deense

White Paper

New trajectories for theaerospace and defense industry

Attacking new opportunities while simultaneously driving greater efciency andagility will defne the immediate uture o aerospace and deense companies

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New trajectories or the aerospace and deense industry

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IBM Global Business Services

Today, aerospace and deense (A&D) companies nd

themselves at potentially perplexing crossroads. On one hand,

shrinking deense budgets, an increasingly aggressive

competitor set, and riskier market conditions are pushing

companies to ocus on protecting prot margins. On the other

hand, business and technological innovation is setting the stage

or new modes o providing services to customers, changing

how revenue is earned, and using sophisticated inormation

technology strategies to make products and operations smarter.

Given the simultaneous drive or protable operations and

innovation, where does the savvy A&D company invest? The

answer lies in being able to do both, and doing so might

require some new operating trajectories that enable the

organization to expand oerings and business models while

executing with more eciency and fexibility, all with improved

prot margins. This should drive a new wave o critical

conversations on business model innovation and smarter

products, achieving smarter operations, becoming a globally

integrated enterprise, and engaging in new ways with suppliers

and customers. The outcomes o these explorations shouldmaniest in a new view o the uture and an intelligent plan to

achieve it.

The imperatives for rethinking

todays operational strategiesFor A&D companies, the playing eld weve known or the

past decade is going to be changing signicantly. Several

megatrends, such as declining deense budgets, globalization

and shiting markets, and a changing competitive landscape,

will orce A&D companies to change many o the key ways

they operate today. Some o these changes will requiremarginal improvements in productivity and ocus; others will

represent more signicant, dicult transormation.

Depending on the nal decit reduction plan deployed ater

the 2012 elections, there is nearly $500 billion on the chopping

block over the next 10 years or more. Reduced deense budgets

will orce corporations to dramatically change their business

operating models and processes. With the DOD emphasis on

xed ee pricing models, A&D companies may be orced to

change their mindset to keenly ocus on program management

and execution, versus providing the most eatures on products.

Being able to execute whats good enough while maintainingmission assurance will be more important than delivering the

best weapon in the galaxy. Likewise, quality and meeting

objectives on time and on budget will be critical as programs

all under increased scrutiny rom DOD buyers, and signicant

penalties are imposed on A&D companies that do not achieve

targets.

With shrinking budgets and new constraints in pricing and

regulation, it is likely the competitive landscape will change.

Mid-tier suppliers that cannot survive the smaller margins and

increased cost o business will likely experience a wave o

mergers and acquisitions, with the possibility o exit strategiesin many cases. This will impact the prime suppliers

signicantly as the reduced number o sub-prime suppliers

concentrates supply chain risk, but it may also open new

opportunities or both new contracts and new acquisitions.

Globalization and emerging markets may be both a blessing

and a curse to A&D primes. Most primes are expanding their

global sales and operations to oset US deense budget

declines, some looking to move 25-30% o their business to

oreign sales. This increasingly requires a global presence with

local participation in relevant countries, each with dierent

requirements or regulation, saety, language, partnering and so

on. Direct and indirect osets become an area where new

knowledge is needed, particularly in emerging economies.

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4 New trajectories or the aerospace and deense industry

Primes may nd osets working to their advantage when

looking to expand supplier and subcontractor networks.

Smaller rms, though, may have increased struggles with

rapidly changing oset regulation, and may struggle with

emerging global subcontractors due to the advantages local

oset regulation creates. Whether small or large, all A&D

primes will require a deep understanding o ITAR and the US

Arms Export Control Act laws, in order to expand global

operations while ensuring measurement and compliance o

core operations, subsidiaries, and suppliers.

A shift to the commercial product lines?

With domestic deense budgets shrinking and demand or

commercial aircrat and deense products rising in developing

countries, A&D executives will need to develop new strategies

or their portolios o products against these two categories. In

both deense and commercial aircrat, the shit seems to be or

more aordable products that perhaps have ewer eatures.

More aordable products wont just be about limiting what is

delivered; it will also put pressure on reducing costs

throughout the supply chain and manuacturing processes.Following customer demand trends is vital, but the

competency to act on demand trends is probably the more

important capability. This puts a ocus on the basics o both

businesses: being able to turn manuacturing operations

quickly; smartly managing suppliers; building eciencies

within the supply chain; and gaining more visibility to

customers uture demand.

600

500

400

300

200

U.S. defense budget

Figure 1: While uncertain at the moment, defense spending may decrease depending on what plan is adopted.

Source: Center for Strategic Budgetary Assesments

$Bill

ions

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Fiscal year

Actual

Presidents fiscal 2012 plan

Fiscal 2013 plan

Budget caps under sequestration

Note: Base discretinary Defense Department

budget in fiscal 2012 dollars.

100

0

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IBM Global Business Services

Threats and challenges from within

As external orces like the supply chain and government

customers are adding pressure, the mandates and challenges

within A&D companies are also whipping the demand or

change. Within A&D companies, business is becoming

increasingly complex as they look to secure new revenue,

preserve existing revenue streams, satisy customers, maintain

mission assurance, streamline operations, build eciencies, and

reocus business operations to align to demand. Years ocost-plus contracting by the government has perpetuated this

complexity without consideration o the cost impact or

long-term sustainability.

Many A&D companies are also dealing with rising amounts o

data rom their transactional, manuacturing and planning

systems, oten without a clear view o how to manage and

leverage it eectively. Most also deal with complicated business

portolios that have grown diverse, ragmented, and misaligned

as systems were added over the years or patched in through

merger and acquisition activity. With global operations, this

problem becomes magnied over dierent geographies. Many

A&D company executives are fying blind or managing by

intuition in running their business, which increases the level o

risk o non-compliant nancial, operational, and ITAR-related

events across the enterprise. Leaner and compliant operations

will require more visibility and measurement across programs

to succeed. The mantra that what gets measured, gets done

should initiate more ocus on metrics, dashboards, and

operational analysis across the A&D enterprise.

Figure 1: R&D investment trends point to both increased globalization of

A&D investments as well as a continued appetite for innovation.

Source: PricewaterhouseCoopers, Flight International

Number of investments by Top 50 Global A&D companies in

international markets (2000-2008)

Coutry/

Region

India

US

Russia

UKW.Europe

China

Mexico

CEE

S.Korea

Middle East

N.Africa

Other

R&D

7

6

5

33

2

2

2

2

1

1

1

35

Coutry/

Region

China

India

Mexico

USRussia

UK

W.Europe

Middle East

N.Africa

CEE

S.Korea

Other

Manufacturing

13

11

8

86

3

3

3

3

2

2

1

63

Opportunities in innovation and growth

As A&D companies seemingly need to enorce a strict diet o

cost control and process discipline, there are simply too many

exciting opportunities or innovation in todays inormation-

and technology-accelerated world. There are new

opportunities to pursue new business models, improve product

perormance and dierentiation, and ulll on operational

mandates in new ways. This is largely driven by smarter

technologies such as instrumentation (such as sensors and

RFIDs), improved interconnectivity and integration, and

powerul advanced analytics.

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6 New trajectories or the aerospace and deense industry

In terms o business model and product innovation, there is

growing demand or A&D companies to convert to new service

models, where streaming data available rom aircrat and

equipment provide advanced insights into operating condition,

perormance, and repair prediction. On the shop foor,

manuacturing execution systems are improving how inventory

is managed, ensuring quality goals are met, and increasing

visibility across the entire value chain. Opportunities or

collaboration with customers and suppliers are advancing insophistication and scope. Management is using advanced

analytics and their data assets to understand the pulse o the

organization in real time, to drive better decision-making.

Its an exciting time to innovate, but more importantly this

innovation can help overcome the external and internal

challenges A&D organizations ace. They neednt be seen as

risky expenditures in competition with cost control demands,

but as powerul tools in the pursuit o protability in

challenging times. And the drive to innovate may not be

voluntary as customers demand it and competitors attempt to

set the pace o change. Those who invest in a downturn arequite likely to be recognized and rewarded when the deense

cycle returns to prosperity. The DOD will likely have a long

memory o its partners that invested or the uture.

So: whats next?

New operating trajectories: four strategic

discussions to have nowAs A&D leadership review their strategic agendas or the

coming months and years, they should tune their conversations

to the upcoming challenges internal and external pressures will

present. But instead o leaning on traditional cost control

levers such as blunt workorce reductions, divesting business

lines, or limiting R&D and other investments, they should

open up their view to new approaches to becoming ecient,high-perorming and eective. They should also view

innovation especially that which is driven by new

technologies and inormation insights not as distracting or

ill-timed investments but instead as essential tools in shaping

their utures.

These create our strategic discussions to have now with your

leadership team:

Figure 3: Strategic discussions for leadership teams.

Extended enterprisevisability integrationand collaboration

Smarter operationsand manufacturing

Business modelinnovation and

smarter products

Realigning to be aGlobally Integrated

Enterprise

New Trajectories

for A&D Companies

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IBM Global Business Services 7

Each o these topics could be deep-dive discussions around

dozens o strategies, practices, technologies, and activity. We

touch a couple o the general points as a platorm to begin the

conversation or A&D leaders.

Business model innovation and smarter products

With an imperative to change, the boldest place to consider is

in core business model innovation and delivering smarter

products. Today, there are new applications in instrumentingassets and products to have them collect data rom sensors,

location awareness devices, and RFID-type tags. They can be

deployed in the aircrat or weapon system, in the customer

repair environment, on the manuacturing foor, and

throughout the global supply chain. Interconnecting this

inormation and combining it to create new insights is now

becoming more common, broader in scope, and vastly more

sophisticated.

Many companies are leveraging ast and ocused innovation

by using accelerated processes that let operators experiment,

trial, and validate with minimal investment risk. Some o the

hotter areas are in predictive analytics and advanced condition

monitoring (ACM), where the perormance o products their

health, reliability, and uptime are optimized by analyzing

repair history data and matching that with real-time condition

monitoring, to x break-downs beore they happen, optimize

repair supply inventories, and overall provide more value tomilitary and transportation clients.

Through the emergence o this new capability, new business

models can be ormed. For example, many are seeing that the

client relationship shouldnt end with the delivery o the

aircrat or weapon system, but instead turn into an ongoing

service business where the A&D companies manages the

predictive maintenance program through ongoing collection

and analysis o asset data and providing service maintenance

systems that integrate with the clients inrastructure. This fips

the traditional model on its head, to one where clients are no

longer looking to buy parts but instead asset perormance.Power by the Hour models where the uptime and usage o a

vehicle is measured and priced are becoming more common, as

are perormance-based logistics, again, where outcomes are

measured, not materials or repair resources. Some in the

industry are discovering both successes and ailures, with the

DOD itsel sending mixed signals about how it will embrace

these models. While these types o new business models grow

in sophistication and maturity, newer ones are sure to arise,

their creation only awaiting an emboldened and clever product

managers action.

New business models may also including penetrating new

markets such as entering adjacent industries with similar

manuacturing schemas or entering emerging economies that

are currently under-served. Many primes are making these

plays to oset orthcoming deense budget reduction.

The emergence of strategic performance improvement (SPI)

As A&D companies look to improve their business modelstowards more proftable and sustainable margins while likely

dealing with harsher operating conditions, many are look to

SPI initiatives to make a change.

Dierent rom traditional down-sizing or cost cutting

approaches, SPI examines each area o the business or

opportunities to improve P&L and balance sheet-driven

perormance issues; identiy cost reduction opportunities

that align to strategy; optimize current revenue streams; and

exploiting existing growth opportunities. It does this while

emphasizing the importance o people issues and change

management.

SPI doesnt seek to change strategy or pursue new product

lines, but instead ocuses on doing what the company does

already but just much better.

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New trajectories or the aerospace and deense industry

Smarter operations and manufacturing

As A&D companies look to get leaner and more eective, the

heavy operations o the value chain such as manuacturing,

order management, inventory management, and logistics will

be key areas o ocus. Organizations are now instrumenting

their manuacturing inrastructure with sensors to gain greater

visibility o foor operations. This creates opportunities or

advanced manuacturing and supply chain control rooms that

monitor productivity, clear stoppages beore they happen,speed equipment turnarounds, and even proactively monitor

employees actions or saety and regulation compliance.

One trend is the integration o systems rom top foor to shop

foor, meaning that core enterprise resource planning (ERP)

systems that help in planning nance and HR are connected to

inventory planning systems, manuacture execution systems

(MES), distribution tracking, enterprise warehouse

management, and even customer relationship management

(CRM) and sales systems. These systems are used in concert to

improve manuacturing perormance across the entire value

chain, as well as provide synoptic cross-enterprise views ordierent types o decision-making.

Manuacturing optimizations are being deployed today that

ocus on using analytics, inormation technology, and process

redesign to rethink and improve the eectiveness o

manuacturing operations, ocusing on aster manuacturing

with higher quality. Metrics-based approaches are being used,

where process key perormance indicators (KPIs) are

monitored continually through operational analytics

dashboards, to watch everything rom inventory control to

customer service. As A&D companies look to their strategic

discussions on sustainable protability, the manuacturing

operation in all its aspects should be analyzed or places to use

technology to make it smarter.

Realigning to be a globally integrated enterprise

In manuacturing and beyond, there oten exist countless other

business unctions that are not as connected, aligned, or

otherwise optimized. This may include procurement,

distribution, nance, human resources, sales, marketing, and

IT. Oten these groups grow in organizations in silos,

ineectively speaking to each other, oten using dierent data

ormats and standards, and duplicating eorts across

geographies and business units. These issues are oten rampantin organizations with multi-national ootprints and especially

those that grew rom years o merger and acquisition (M&A)

activity. The disparity o the groups is oten refected in a

jumble o an IT portolio, where duplicative, disconnected, or

otherwise maligned systems drive cost without providing

optimum value.

In many organizations, nding acts about the business to make

decisions is a chore in itsel. The inormation is oten

unavailable, inaccurate, or dicult to put together. Dierent

departments may use dierent data denitions and may even

claim to have their own versions o the truth. The decisionmaker, especially at the leadership tier, must oten fy blind,

making best guesses on inormation that is unreliable,

potentially wrong or even simply out o date.

The best organizations are pursing the vision o a globally

integrated enterprise or GIE. They nd areas or synergy,

collaboration, and integration across all o their unctional

departments, including standardizing processes; standardizing

and improving enterprise data; integrating reporting,

measurement, and analytics; and simpliying the corporate IT

application portolio. The globally integrated enterprise that

integrates systems o systems and sotware will be pointed

towards success.

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IBM Global Business Services

From the upside, this makes organizations more nimble and

fexible, with the ability to get a consistent set o acts to make

decisions, improve the speed and accuracy o decisions, gain

visibility to the entire enterprise to take actions that may have

multi-department dependencies, and quickly pounce on new

opportunities when they arrive.

From the cost reduction or avoidance side, becoming a globally

integrated enterprise enables companies to reduce redundancyand rework, create global delivery capabilities or common

routine and repeatable work, leverage the unique skills o

dierent geographies, and oten reduce corporate and

administrative overhead across divisions and departments.

Technology osets are likely to be required, with global sales

urther expanding the need to operate globally, in other words,

companies will need to operate more consistently while being

in more diverse places. GIEs do more with less cost. They are

leaner, smarter, and more agile. For A&D companies seeking

to simultaneously invest in innovation while working under

tighter governance and cost controls, GIE-type strategies areprime targets or helping to achieve these goals.

Extended enterprise visibility, integration and collaboration

With a potential shrinkage o the supply chain and the risk that

a smaller supplier base brings, integration, visibility, and

collaboration with vendors will improve supply chain and

operational perormance and reduce risk. A&D companies

should examine their extended enterprise strategies and adopt

new ways to have vendors integrate into A&D value chains.

This could include increasing inventory and supply visibility,

promoting data standards with suppliers, pursuing vendor-

managed inventory, and deploying other inormation tools to

reduce supply shocks and the risks they entail. Organizations

should leverage Ease o Doing Business supplier dashboards

to improve risk and quality overall. In some situations, A&D

companies should consider vertically integrating key lower-tier

suppliers i signicant program risk seems palpable.

On the customer side, opportunities exist or greater

collaboration and visibility, both in customer demand and

repair o pipelines and inventories, as well as customer visibility

into the A&D organization. As mentioned earlier about new

business models, the ability or an A&D supplier to provide

proactive, predictive maintenance services over the lietime o a

product will require much closer data integration. This will

require technology integration and new tools, but will also

require new processes, new data standards and coordination,and rigorous data governance programs to ensure quality,

security, and perormance.

When increasing collaboration and visibility with suppliers or

customers, its oten the case that the undamental nature o

the relationship between the parties may need to change.

Instead o a guarded vendor-buyer relationship, companies

need to orge strategic partnerships, where trust and mutual

benet are valued above negotiating power or commodity

pricing. Two organizations must be able to justiy long-term

investments in creating collaboration platorms and integrating

data with condence in the prospect o a long-termrelationship. This type o alignment must stretch well beyond

the codications o technology and include strategy, culture

development, new attitudes and behaviors, and in general a

new organizational mind-set. While oten dicult to achieve,

the value generated rom strategic partnerships can be

enormous.

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New trajectories or the aerospace and deense industry

Next steps: Envisioning the future and

building the roadmapThese our trajectories provide the basis or new strategic

conversations or A&D leadership. While energetic

exploration, learning, and debate are a must, leaders should

also take some ormal, purposeul actions to advance their

operational strategies. Some o these actions include:

Engage with external parties to learn what the industry isdoing at large, discover the best practices that work (and those

that dont), and leap into a new knowledge o the state-o-the-

art in A&D business trends

Assess in detail current opportunities and challenges within

your own operation, in the context o examining the

applicability o the our strategic trajectories discussed earlier

Dene a strategic vision or how the company will operate in

the near and distant uture

Build a prioritized roadmap o work activities such as

resources, investments, milestones and timing to achieve the

vision, at both the project level and the enterprise level

Justiy changes through a robust nancial business case

ConclusionMay you live in interesting times is the ot-quoted Chinese

curse, which says that adversity and challenges can create

situations that are much more interesting than when things are

just cruising along without issue. This couldnt be truer or

todays and tomorrows A&D industry. While the expected

challenges will cause some short-term pain, they open us all to

a period o change, one where exciting things like new business

models, new ways to improve margins, and innovation emergeto those who act. Adversity is also benecial or industry

leaders and those that are proactive in dealing with challenge;

while the laggards all when aced with poorer market

conditions, good companies strengthen their positions.

Understanding this, A&D leaders should nd the new strategic

conversations about their business the new trajectories a

very interesting and exciting endeavor.

For more informationTo get started and learn more about IBM Global Business

Services, please contact your IBM representative, or visit the

ollowing website:

ibm.com/services/us/gbs/industries/aerospacedeense

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IBM Global Business Services

AuthorMike Matthew

A&D Business Solutions Proessional,

Global Business Services

mikematthew@us.ibm.com

ContributorsJohn Burt

Partner, GBS NA Aerospace & Deense Industry Leader,Global Business Services

jburt@us.ibm.com

Glenn Reis

Associate Partner-Industrial Sector-Aerospace & Deense,

Global Business Services

gvreis@us.ibm.com

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