A Focus on Aerospace

& Defense Companies

A Seven-Year View of Progress on Supply Chain Excellence

10/17/2017

By Lora Cecere

Founder and CEO Supply Chain Insights LLC and Samuel Borthwick

Research Associate Supply Chain Insights LLC

Supply Chain Metrics That Matter

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Contents

Research

Disclosure

Executive Overview

A Closer Look at the Industry

Progress Versus Other Industries

A Closer Look at Aerospace & Defense Manufacturers’ Growth

Value

Performance

Cash-to-Cash Cycles

Industry Focus

Recommendations

Conclusion

Appendix

Other Reports in This Series

About Supply Chain Insights LLC

About Lora Cecere

About Sam Borthwick

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Research Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply

Chain Insights LLC. Each report in the series is a deep analysis of supply chain performance within

an industry. This report focuses on the Aerospace & Defense industry for the period of 2010-2016.

Here we analyze the trade-offs to balance growth, profitability, cycles and complexity.

Within the world of supply chain management, each industry is unique. It is dangerous to list all

industries in a spreadsheet and declare a supply chain leader. Instead, we believe supply chain

excellence needs to be evaluated based on a balanced portfolio of metrics, over time, by peer group.

In this series of reports, we analyze the potential of a supply chain peer group, share insights from

leaders within each industry, and give recommendations based on general market trends.

Disclosure Your trust is important to us. As such, we are open and transparent about our financial relationships

and our research process. This independent research is 100% funded by Supply Chain Insights.

These reports are intended for you to read, share, and use to improve your supply chain decisions.

Please share this data freely within your company and across your industry. All we ask for in return is

attribution when you use the materials in this report. We publish under the Creative Commons

License Attribution-Noncommercial-Share Alike 3.0 United States and you will find our citation policy

here.

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Executive Overview A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in

the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology

innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The

A&D supply chain is largely a story of supply chain excellence in procurement and sourcing

strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to

survive.

Government spending drives the defense supply chain. Companies in this industry compete for

government contracts that range from hundreds of millions to billions of dollars. The magnitude of

these contracts defines winners and losers for the industry. Demand is lumpy and volatile.

Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the

government re defense spending, but they live contract by contract. In contrast, the commercial

aircraft side is much different. It is driven by long-term economic trends

Government ups the ante for the latest and best technology for global defense. As the technology in

jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more

complex with increasing pressures on driving innovation. To better understand the industry in relation

to supply chain management, let’s start by looking at it within the larger context of the A&D value

network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are

increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain

Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the

table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry

was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is

down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green

arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While

the industry is more dependent on software and computer hardware, there has been little

collaboration to drive value between trading partners. Also note that this industry has the longest

Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in

government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-

Cash of 152.

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Table 1. Industry Overview of Trends for the Period of 2010-2016

In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with

excerpts from annual reports to enable the reader to understand the “voice” of the industry.

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A Closer Look at the Industry When we first started the research on the Supply Chain Metrics That Matter report series, we

believed that through the combination of an investment in technology, people, and process,

companies could drive improvement in inventory turns and operating margin as shown in Figure 1. As

will be seen in this report, this is not the case in the Aerospace & Defense Industry. Metrics

improvement within this industry is largely at a standstill.

Figure 1. Driving Performance Improvement

In the Aerospace & Defense Industry, Heico Corporation (Heico) is the supply chain leader, but most

of the industry is at a stasis in metrics performance. (Heico manufacturers electronic equipment for

aviation.) Heico performed above the industry averages in all metrics except inventory turns.

To understand supply chain excellence, let’s look at year-over-year patterns in metric performance

through visualization via orbit charts. To understand an orbit chart, let’s examine Figure 2. The

performance of Heico and United Technologies is charted year-over-year at the intersection of

inventory turns and operating margin (United Technologies makes products for aircraft engines). The

patterns are used to define supply chain excellence. As can be seen in Figure 2, the average

operating margin for Heico for the period of 2010-2016 is 18%, while United Technologies is lower at

13%. Inventory turns for Heico are 2.89 versus 4.99 for United Technologies.

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Figure 2. Orbit Chart of Heico and United Technologies

The patterns tell the story. It is a story of year-over-year metrics changes. The tight pattern of

continuous improvement makes Heico the winner in resiliency while the upward trend defines

improvement. Even though United Technologies’ patterns have better inventory turns, the margins

are lower, and United Technologies’ wide performance swings show the lack of metrics control.

Patterns of supply chain metrics come in many different forms. Note that in Figure 3, General

Dynamics is performing at a higher level of value, with an operating margin of 11% and inventory

turns of 7.46, but there is a lack of resiliency. The metrics pattern is more variable.

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Figure 3. Orbit Chart of Boeing and General Dynamics

In a similar manner, note the patterns of Lockheed Martin and Northrop Grumman in Figure 4. While

Northrop Grumman shows improvement, both companies show wide swings on the orbit chart,

representing a lack of consistency and the inability to be resilient. It is common of for companies in

this industry to have such wide swings due the amount of volatility associated with the defense

industry making consistency hard to come by.

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Figure 4. Orbit Chart of Lockheed Martin and Northrop Grumman

Progress Versus Other Industries The Supply Chains to Admire, and the Metrics That Matter, research rewards companies that show

improvement while outperforming their peer groups. Companies with tight upward patterns at the

intersection of the metrics are highlighted as winners, while companies with wide swings and

backward progression are penalized.

To help companies understand supply chain excellence through the insights of orbit chart

performance, we developed the Supply Chains to Admire analysis. An overview of the methodology is

shared in Figure 5, with a more complete discussion in the full Supply Chains to Admire 2017 report.

While no company in the Aerospace & Defense Industry met the criteria required to be a winner in the

2017 Supply Chains to Admire research, Astronics Corporation and Heico Corporation were the top

performers on the Metrics That Matter for the 2010-2016 time period.

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Figure 5. Overview of the Supply Chains to Admire Analysis

Figure 6. Winners of the 2017 Supply Chains to Admire Analysis

Note the short list of 24 companies for the 2017 Supply Chains to Admire Award winners.

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A Closer Look at Aerospace & Defense Manufacturers’ Growth Though the Great Recession did not necessarily affect government contracts with Defense

companies, it did affect the commercial side of the Aerospace industry. Growth during 2004-2006 was

15%, falling to 10% during the timeframe of 2007-2009. The industry deteriorated even further with a

4% growth rate in 2010-2016. Notice that nearly every company experienced a decrease in growth in

2007-2009 outside of Woodward and Raytheon.

Table 2. Growth and the Supply Chain Index in the Aerospace & Defense Industry

The Supply Chain Index is a measure of supply chain improvement. The lower the score the faster

the rate of metrics improvement at the intersection of inventory turns and operating margin, and

Return on Invested Capital and Growth. In many industries growth and supply chain improvement are

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tightly coupled. However, this is not the case in the A&D sector. (For more on the Supply Chain

Index, reference the Appendix.)

Note that while Astronics, Astrotech, and KLX drove the highest levels of revenue growth, only KLX

drove improvement. In contrast Astronics’ and Astrotech;s improvement levels rank at the bottom of

the list.

Value Traditional supply chain leaders focus on costs, not on value. There is no industry-standard definition

for value. To try to drive change, here we share the results on two value metrics: market capitalization

and Price to Tangible Book Value. Overall, for the industry, the Price to Tangible Book Values are

low.

Table 3. Company Overview of Market Capitalization and Price to Tangible Book Value

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Performance While growth fell from 15% to 4%, the story in the A&D industry for the rest of the Metrics That Matter

is stagnation. As you scan Table 4 and look at the averages, note that while Revenue per Employee

increased slightly in the period from 2004 through 2016, there was very little change in the other

metrics with the exception of Cash-to Cash. Also note that during the recession, with the pressure on

working capital, inventory turns improved slightly, but post-recession the industry reverted to the prior

state.

Table 4. Company Overview and Performance for Aerospace & Defense Companies

The most dramatic change is in the shift of the Cash-to-Cash metric. When the Cash-to-Cash value is

low, the need for working capital is reduced. In this period, while most industries improved cash-to-

cash, this was not the case for the A&D industry. This shift for A&D was driven by the elongation of

Days of Receivables.

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Cash-to-Cash Cycles Cash-to-cash is a compound metric that combines Days of Receivables, Days of Inventory, and Days

of Payables. The formula is:

𝐶𝑎𝑠ℎ − 𝑡𝑜 − 𝐶𝑎𝑠ℎ = 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠

In Table 5 we share the impact of supply chain decisions on the components of cash-to-cash. As

seen, all three components associated with Cash-to-Cash increased from 2004-2006 to 2010-2016.

Days of Receivables and Cash-to-Cash both nearly doubled in this timeframe. This is driven largely

by government receivables.

Table 5. Impact on Cash-to-Cash Elements

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Industry Focus To get a flavor for the industry, we comb through annual reports to consolidate supply chain related

trends. This allows the reader to “hear the voice of the industry.” Supply chain and procurement in

A&D are often used interchangeably. Innovation is the lifeblood of the industry. In the annual reports,

note the focus on supply, risk management, corporate social responsibility, and improving

procurement processes.

2014

Raytheon

Raytheon Company, together with its subsidiaries, is a technology and innovation leader specializing in

defense and other government markets throughout the world. We are dependent upon the delivery of

materials by suppliers, and the assembly of major components and subsystems by subcontractors used in our

products. Some products require relatively scarce raw materials. In addition, we must comply with specific

procurement requirements which may, in effect, limit the suppliers and subcontractors we may utilize. In some

instances, for a variety of reasons, we are dependent on sole-source suppliers. We enter into long-term or

volume purchase agreements with certain suppliers and take other actions to ensure the availability of needed

materials, components and subsystems. We are also dependent on suppliers to provide genuine original

equipment manufacturer parts and have a robust set of standardized policies to detect counterfeit material,

especially electronic components, throughout our supply chain.

Astronics

2014 was an exceptional year at Astronics and our 11th consecutive year of growth. Our sales nearly doubled

in 2014 to $661 million from $340 million in 2013. Net income more than doubled to $56 million from $27

million, while on a per diluted share basis earnings were $2.48 compared with $1.24 in the prior year. This

strong bottom line was after a hefty $19 million in acquisition accounting expenses for the fair value step up of

inventory. Certainly, much of our success must be attributed to the strong aerospace market in which we

participate. Advances in aerodynamics, propulsion technologies and avionics have resulted in aircraft with

higher levels of safety and cost effectiveness. These advances, in turn, have driven ever higher utilization and

production rates, which is good for everybody involved in the industry. But beyond this, our long-standing

practice of consistent, regular investment in our business has paid off handsomely. We invest both in internal

research and product development, complemented by strategic acquisition. We made three such acquisitions

in the latter half of 2013 and one major one in 2014, while engineering and development spending was $76.7

million, or nearly 12% of revenue, well above industry norms. These investments resulted in organic growth of

15% in 2014 with the rest coming from acquisitions.

Lockheed Martin

In 2014, our Aeronautics business segment generated net sales of $14.9 billion, which represented 32% of our

total consolidated net sales. Aeronautics’ customers include the military services and various other government

agencies of the U.S. and other countries. In 2014, U.S. Government customers accounted for 72% and

international customers accounted for 28% of Aeronautics’ net sales. Net sales from Aeronautics’ combat

aircraft products and services represented 23% of our total consolidated net sales in 2014 and 21% of our total

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consolidated net sales in each of 2013 and 2012. Aeronautics is engaged in the research, design,

development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft,

including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics’ major

programs include:

• F-35 Lightning II Joint Strike Fighter – international multi-role, multi-variant, fifth generation stealth fighter;

• C-130 Hercules – international tactical airlifter;

• F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter;

• F-22 Raptor – air dominance and multi-mission fifth generation stealth fighter; and

• C-5M Super Galaxy – strategic airlifter.

The F-35 program is our largest, generating 17% of our total consolidated net sales, as well as 52% of

Aeronautics’ net sales in 2014. The F-35 program consists of a development contract and multiple production

and sustainment activities. The development contract is being performed concurrently with the production

contracts. Concurrent performance of development and production contracts is used for complex programs to

test aircraft, shorten the time to field systems and achieve overall cost savings. We expect the development

portion of the F-35 program will be substantially complete in 2017, with less significant efforts continuing into

2019. Production of the aircraft is expected to continue for many years given the U.S. Government’s current

inventory objective of 2,443 aircraft for the Air Force, Marine Corps and Navy; commitments from our eight

international partners and three international customers; as well as expressions of interest from other

countries. During 2014, we delivered 36 aircraft to our U.S. and international partners, resulting in total

deliveries of 109 3 production aircraft as of December 31, 2014. We have 100 production aircraft in backlog as

of December 31, 2014, including orders from our international partners. For additional information on the F-35

program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial Condition

and Results of Operations.

2015

Raytheon

U.S. government sales, excluding foreign military sales, accounted for 68% of our total net sales in 2015. Our

principal U.S. government customer is the U.S. Department of Defense (DoD). 29 32 32 40 41 48 65 68 69 69

70 30 On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (BBA) into law. The BBA

sets fiscal year (FY) 2016 and 2017 DoD spending caps that exceed recent DoD budget funding levels. These

spending caps are recognized by both the Administration and Congress and are therefore expected to lead to

a stable budget process for those two years. In addition, while the spending cap increase does not meet the

DoD's original FY 2016 base budget funding request or its planned FY 2017 funding level, it should provide for

modest growth in the DoD's modernization budgets for FY 2016 and FY 2017. Modernization funding, which

consists of procurement and research and development, is of particular importance to defense contractors.

Despite the expected stability in FY 2016 and 2017, defense budget funding levels, which are subject to

budget and appropriation decisions and processes, are difficult to predict beyond the near-term.

We are also continuing to build strong customer relationships by working with them as partners and including

them on Raytheon Six SigmaTM teams to jointly improve their programs and processes. We are increasingly

focused on responding to our customers' changing requirements with rapid and effective solutions to real-world

problems. In recognition of our customers' constraints and priorities, we also continue to drive various cost

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reductions across the Company by continuing to focus on enterprise collaboration and improving productivity

and strong execution throughout our programs. We have worked to reduce costs across the Company and

improve efficiencies in our production facilities, and we continue to increase value through Raytheon Six

SigmaTM, the implementation of lean processes, reduced cycle times and strategic supply chain initiatives, in

addition to other initiatives.

Astronics

The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events,

which may cause operating results to fluctuate. Demand for our products is to a large extent dependent on the

demand and success of our customers' products where we are a supplier to an OEM. In our Aerospace

segment, demand by the business jet markets for our products is dependent upon several factors, including

capital investment, product innovations, economic growth and wealth creation and technology upgrades. In

addition, the commercial airline industry is highly cyclical and sensitive to fuel price increases, labor disputes,

global economic conditions, availability of capital to fund new aircraft purchases and upgrades of existing

aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of

air travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would

reduce orders for new aircraft and would likely reduce airlines’ spending for cabin upgrades for which we

supply products, thus reducing our sales and profits. A reduction in air travel may also result in our commercial

airline customers being unable to pay our invoices on a timely basis or not at all.

Lockheed Martin

Certain of our products require relatively scarce raw materials. Historically, we have been successful in

obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage

raw materials supply risk through long-term contracts and by maintaining an acceptable level of the key

materials in inventories. Aluminum and titanium are important raw materials used in certain of our Aeronautics

and Space Systems programs. While we do not anticipate material problems regarding the supply of our raw

materials and believe that we have taken appropriate measures to mitigate these variations, if key materials

become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or more of our

programs, increased costs or reduced operating profits. No material portion of our business is considered to be

seasonal. Various factors can affect the distribution of our sales between accounting periods, including the

timing of government awards, the availability of government funding, product deliveries and customer

acceptance.

Boeing

We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers

and subcontractors. The most important raw materials required for our aerospace products are aluminum

(sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites

(including carbon and boron). Although alternative sources generally exist for these raw materials, qualification

of the sources could take one year or more. Many major components and product equipment items are

procured or subcontracted on a sole-source basis with a number of companies.

We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance

specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an

extensive qualification and performance surveillance system to control risk associated with such reliance on

third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production

schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our

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customers. We are also dependent on the availability of energy sources, such as electricity, at affordable

prices.

2016

Raytheon

We launched this strategy in 2014. At the time, our U.S. government defense customers had reduced their

budgets, and we needed to respond. We did so by executing our four-pillar growth strategy: building on our

areas of strength within our key mission areas; focusing additional resources on emerging U.S. Department of

Defense opportunities and technologies; engaging key foreign countries as individual markets with multiple

customers; and expanding our advanced cyber solutions into international and commercial markets.

Astronics

2016 was a challenging year for Astronics, one in which the company navigated some significant transitions.

The final numbers are evidence of the challenge: consolidated sales were down 8.5% to $633 million and net

income declined 28% to $48 million. While 2016 was our first year of sales decline since 2003, at the same

time we made progress addressing the challenges and preparing ourselves for success in the immediate

future. Our results were largely driven by transitions in our avionics and semiconductor test product lines, both

the result of customer decisions related to their own market position and both clearly evident early in the year.

We spent much of 2016 working on recovery plans, which we expect will begin to bear fruit as 2017 goes on.

In the end, our Aerospace business saw a decline in sales of 2.9%, or $16 million, which was more than

explained by the $23 million decline in avionics sales. It should be noted that our Test segment, despite a sales

decline of 31% to $99 million, still managed to produce an operating profit of 8.6% of sales. This speaks to the

strong actions taken by our Test management team and the inherent margin potential of the business.

Lockheed Martin

We derived 71% of our total net sales from the U.S. Government in 2016, including 59% from the Department

of Defense (DoD). We expect to continue to derive most of our sales from work performed under U.S.

Government contracts. Those contracts are conditioned upon the continuing availability of Congressional

appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance

may extend over many years. Consequently, contracts are often partially funded initially and additional funds

are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on

a contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated

to the contract.

There is also uncertainty regarding actions that may be taken by the new Presidential Administration in light of

recent criticisms of the F-35 program and other large defense programs. President Trump has publicly

expressed concerns over past cost overruns and delays in the program as well as overall program cost and

has publicly requested that a competitor price out an alternative.

Boeing

Market conditions have a significant impact on demand for our commercial aircraft. The commercial aircraft

market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors

underlying long-term traffic growth are sustained economic growth and political stability both in developed and

emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of

aircraft financing, world trade policies, government-to-government relations, technological changes, price and

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other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the

airline industry has been cyclical and very competitive and has experienced significant profit swings and

constant challenges to be more cost competitive. In addition, availability of financing to non-U.S. customers

depends in part on the continued operations of the Export Import Bank of the United States. Significant

deterioration in the global economic environment, the airline industry generally, or in the financial stability of

one or more of our major customers could result in fewer new orders for aircraft or could cause customers to

seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues,

profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial

aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these

macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.

Operational challenges impacting the production system for one or more of our commercial aircraft programs

could result in production delays and/or failure to meet customer demand for new aircraft, either of which would

negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely

complex. Operational issues, including delays or defects in supplier components, failure to meet internal

performance plans, or delays or failures to achieve required regulatory certifications, could result in significant

out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to

aircraft performance and/or increased warranty or fleet support costs. Further, if we cannot efficiently and cost-

effectively incorporate design changes into early build 787 aircraft, we may face further profitability pressures

on this program.

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Recommendations In evaluating supply chain performance, it is important to look at trends within a peer group over time.

Here we look critically at the Aerospace & Defense industry for the period of 2010-2016. A focus on

procurement, cost containment, and continuous improvement drove the industry. Few companies

delivered on a balanced scorecard. As a result, the industry is stuck, and even going backwards, in

important metrics like growth, inventory, and particularly cash-to-cash. Days of receivables is

increasing at a massive rate. As companies study supply chain excellence and corporate

performance, we recommend that supply chain leaders:

1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.

Organizations should benchmark companies within an industry. Each industry has unique rhythms

and cycles. As a result, supply chain excellence analysis needs to be within an industry.

2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier. The

supply chain is a complex system, with interrelated metrics, with nonlinear relationships. Supply

chain leadership teams should analyze the total portfolio of metrics and study progress at the

intersections of the Effective Frontier. Growth has the highest correlation to market capitalization.

Companies with higher performance are using more advanced analytics to plan outcomes and

design the supply chain.

Figure 7. The Supply Chain Effective Frontier

3) Apply Systems Theory. Teams should evaluate performance over time to understand

improvement, while realizing they are managing a complex system. The functions should be

aligned to a balanced portfolio of metrics representing the Effective Frontier, while functional

metrics should be focused on improving reliability (e.g., first-pass yield, hands-free orders, and

supplier quality, etc.).

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4) Focus on Building Value Networks. While many of these companies could be a powerbroker in

the industry to redefine outside-in processes, all companies are accepting the limitations of the

inside-out supply chain. They operate functional silos with a traditional supply paradigm. The

traditional focus of Lean is not sufficient. This is an opportunity for the industry.

5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.

To make the necessary improvements, companies today must move past an “ERP-centric view”

and build outside-in processes with a focus on value-based outcomes. Network design, supply

chain planning, and revenue management are opportunities for process excellence. The aerospace

and defense industry should turn to the high-tech industry to benchmark and drive innovation.

Conclusion The story of the A&D industry is a story of survival. With larger increases in the requirements in

working capital, and the lumpy demand of the defense industry, the industry developed strong

procurement practices to drive technology improvements. In order to drive growth and perform better

on the balance sheet, A&D companies need to adopt new procurement practices and stop resistance

to change. For most industries, volatility is the result of seasonality; however, the defense industry is

one that is driven on the unpredictability of government contracts. The lack of seasonality makes it

much more difficult for companies to prepare for such demand volatility. The commercial aircraft

market is the complete opposite in that it depends on long-term economic trends, and is very much

affected by seasonality. These are two very different industries with different challenges, and yet

many companies have a stake in both commercial aircraft and defense. The challenge will be for

companies to effectively create two different strategies that effectively addresses the specific

challenges (government and seasonal volatility) for each sub-industry.

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Appendix The Supply Chain Index is a measurement of supply chain improvement. We find that supply chain

leaders are usually above their peer group in performance, in the upper 2/3 of the Supply Chain

Index. Companies with low Supply Chain Index scores are usually driving improvement, but are new

at the journey. As a result, the rate of change on Supply Chain Improvement is quicker than that of a

more mature company.

Table A. Performance Factor Analysis on the Supply Chain Index

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Other Reports in This Series Supply Chain Metrics That Matter – A Focus on Automotive Companies 2017

Published by Supply Chain Insights in August 2017

Supply Chain Metrics That Matter – A Focus on Chemical Companies

Published by Supply Chain Insights in July 2017

Supply Chains to Admire 2017

Published by Supply Chain Insights in June 2017

These reports, and additional information on the Supply Chain Metrics That Matter methodology, are

available at our Supply Chain Insights website and in the Beet Fusion community.

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About Supply Chain Insights LLC Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is in its sixth year of operation.

The Company’s mission is to deliver independent, actionable, and objective advice for supply

chain leaders. If you need to know which practices and technologies make the biggest difference to

corporate performance, we want you to turn to us. We are a company dedicated to this research. Our

goal is to help leaders understand supply chain trends, evolving technologies and which metrics

matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and

the author of popular enterprise software blog Supply Chain Shaman currently read

by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and

is a a contributor for Forbes. She has written five books. The first book, Bricks

Matter, (co-authored with Charlie Chase) published in 2012. The second book, The

Shaman’s Journal 2014, published in September 2014; the third book, Supply

Chain Metrics That Matter, published in December 2014; the fourth book, The

Shaman’s Journal 2015, published in August 2015, the fifth book, The Shaman’s Journal 2016,

published in June 2016 and the sixth book, The Shaman’s Journal 2017, published in July 2017.

With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner

Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has

worked with over 600 companies on their supply chain strategy and is a frequent speaker on the

evolution of supply chain processes and technologies. Her research is designed for the early adopter

seeking first mover advantage.

About Sam Borthwick As a Research Associate, Samuel Borthwick analyzes balance sheet and income

statement data for the Supply Chains to Admire Report along with the monthly

Metrics That Matter series. A recent graduate of Purdue University, majoring in

Supply Chain Management, Sam loves data. He lives in Indianapolis, Indiana

where he enjoys playing tennis and spending time with his family.