Bringing Vertical Integration to the Aerospace Industry: Can It Be Done?
For almost 100 years, the automotive industry has streamlined manufacturing through the process known as “vertical integration”. According to the authoritative website wardsauto.com, “Vertical integration, through which automakers owned part or all of their major suppliers, started around 1918 with General Motors Corp.’s takeover of United Motors. Henry Ford took the concept to its logical conclusion in 1929 with the fully integrated Dearborn manufacturing and assembly complex.”
In today’s modern world, automotive companies do outsource some of their products from third-party suppliers. But they do this so seamlessly, that their vertically integrated production process remains smooth and streamlined.
In contrast, the aerospace industry’s supply chain is disjointed and inefficient, leading to delays in manufacturing, repair, and product delivery. Still, the fact that both Industries rely on mass production begs a question: is it time to apply the lessons of vertical integration, as used by the automotive industry, to aerospace manufacturing and repair?
According to Bob Loycano, Vice President of Supply Chain with FDH Aero, the answer is yes. “The way automotive companies build their products — with everything arriving to the assembly floor perfectly on time — makes it feel like a well-oiled machine compared to building an airplane,” he said. “In aerospace, we often say, ‘Yeah, but we’re different.’ But in the end, when it comes to the assembly process, we’re really not that different. Sure, we have stricter requirements, but so does automotive. If there’s one area where aerospace could really learn and benefit, it’s in how we manage the final assembly, adopting a more streamlined process.”
The current state of vertical integration in OEMs and MRO
When it comes to vertical integration, there’s a substantial difference in how much this approach has been adopted by aerospace OEMs and MROs.
“For a number of years prior to the COVID-19 global pandemic, there was a focused effort by aerospace OEMs toward less vertical integration and organic production toward moving manufacturing of core cost driver products offshore to low cost regions,” said Daniel Adamski, Executive Vice President – Distribution with Kellstrom Commercial Aerospace. “Then came the COVID-19 global pandemic, which crippled global supply chains from raw materials, specialty processes, intermediate goods, component subassemblies, and end products. The OEMs that had moved to a heavily outsourced manufacturing model struggled most during and coming out of the COVID-19 pandemic compared to those OEMs who maintained a vertically integrated organic production model.”
This was not the case with MROs: Quite the contrary. Instead, “In the MRO Supply Chain, the industry has gone through a phase of consolidation of smaller component and engine MROs by larger MROs,” Adamski said. “As such, when faced with competition, the MRO providers that are vertically integrated fare best when faced with competition because they have the ability to compress end to end turn-around times (TATs) and control costs. Some MROs even take vertical integration to the point of fabricating their own extended DER [Designated Engineering Representatives] repair capabilities with extended repair detail parts in lieu of purchasing OEM parts as part of DER repairs.”
As a result of their supply chain challenges during and after COVID-19, OEMs are now more sympathetic to the idea of vertical integration. In fact, “Vertical integration is becoming more prevalent in the aerospace OEM supply chain,” said Simon Merriott, AJW Group’s SVP of Customer Service. “Major OEMs like Boeing, Airbus, GE Aviation, and Rolls-Royce are increasingly integrating upstream by acquiring suppliers or forming long-term partnerships to secure access to critical components and raw materials. They are also integrating downstream by entering the MRO space, offering extended service agreements, and controlling aftermarket services. This strategy enables OEMs to not only manage production but also maintain control over the lifecycle of their products, ensuring a steady revenue stream from aftermarket services.”
According to Merriott, the aerospace MRO supply chain is more fragmented, but vertical integration is on the rise here as well. The reason: “OEMs are increasingly entering the MRO market, either by establishing their own service centres or acquiring independent MRO companies,” he said. “This is a shift from the past, where MROs operated independently from OEMs. OEMs are now aiming to capture more of the aftermarket business, particularly for maintenance, repairs, and spare parts, thus tightening their control over the entire product lifecycle.”
Still an incomplete process
There is no doubt that COVID-19 shook many aerospace companies’ faith in using third party sources and relying mainly on parts that were purchased for their price, rather than their proximity. Nevertheless, “achieving full vertical integration is a significant challenge,” said Loycano. This is why, “vertical integration exists in pockets,” in the aerospace industry, he said. “Naturally, companies want to control their own destiny, which motivates them to manage more aspects and increasing levels of their supply chain. However, doing so comes with considerable obstacles.”
A case in point: “If we look at hardware as an example — just a small part of the overall aerospace supply chain — even something as simple as making a nut or bolt includes critical steps like applying a plating or coating,” said Loycano. “Many companies don’t have the ability to fully integrate that process in-house, sometimes because of evolving environmental regulations, and some companies were grandfathered in and still maintain those capabilities, giving them a competitive edge. For newer entrants, however, it’s a barrier — they have to rely on existing providers.”
Another obstacle to vertical integration in the aerospace industry is the OEMs’ reluctance to make information public, for fear of providing advantage to competitors. As a result, “there is not enough data sharing in the ecosystem which prevents efficiencies across the supply chain,” said Monica Badra. She is the founder of Aero NextGen, a digital solution brokerage in MRO that matches clients to solutions that solve specific pain points. “This reluctance is shared by all of the OEMs, from airframers to part manufacturers: visibility into new aircraft, flight schedules, and production of parts is very limited,” Badra said. “When it comes to the actual fleet that’s in service, the airlines’ reluctance to share data makes it difficult for MROs and OEMs to prepare for the level of work inflow they’re going to receive in their shops. As such, knowing when to order parts beforehand — instead of after the unit or aircraft has been received and inspected — and having the manpower in place to fulfil all of that work becomes very difficult to achieve.”
Despite the obstacles associated with achieving vertical integration, the trend is catching on. “The aerospace industry tends to watch the major OEMs very closely to see how they react and respond to the market,” Loycano observed. “Therefore, OEMs often set the trends, prompting others to consider similar strategies. For example, we are starting to see others follow in the footsteps of one of the top OEM’s 10-plus-year strategy of consolidating their sub-tier hardware spend. This strategy ensures their sub-tiers have access to the products they need to put their assemblies together, and by mirroring this approach, competitors hope to gain similar success.”
The downside? As aerospace companies that work in a similar space combine, either through joint venture or an actual acquisition, there’s fewer of them out there to serve the rest of the market.” As a result, when a large OEM comes in and acquires a supplier that serves everyone, it risks alienating that supplier’s remaining customer base, because organisations tend to not want to work with a company that’s now aligned with a competitor,” said Loycano. “This reality of industry consolidation has created some challenges with respect to certain products.
Gaps in the supply system
A supply chain works much like a set of dominoes set out in a line. so that triggering one can cause the rest to fall down in sequence. If one element in that supply chain is missing — if there’s a gap — then the process won’t work as planned.
So where are the gaps in the OEM and MRO supply chains, and why do they exist? “Well, at the airframe level there is not much more vertical integration today than in the recent past,” said Patrick Markham, VP of Technical Services with HEICO Corporation. “This is because the airframers still have high concentrations of Tier 2 (T2) OEM suppliers with little to no competition once the T2 OEMs ‘get onto the aircraft’. As a result, the airframers are much more like assembly facilities than manufacturing facilities. Even when Boeing re-integrates Spirit AeroSystems [Boeing’s former Wichita plant that the company sold off in 2005], they will still have most of their subsystems being manufactured by a small number of big T2 OEMs.”
Irony #1: Because of the power of Airbus and Boeing in the aircraft OEM market, “major subsystem suppliers typically compete to have a foot in each airframer’s supply base,” Markham said. “This is the primary reason for gaps in vertical integration: The big T2 OEMs whose umbrella covers many subsystems will typically keep the manufacturing of the various subsystems in separate facilities or divisions.”
Irony #2: “On the MRO side, the MROs either owned or controlled by the major OEMs will be vertically integrated, since they are manufacturing the parts that the MRO side of the business is consuming,” said Markham. “This tends to leave the independent MROs at a natural disadvantage.”
Another cause of gaps in aerospace vertical integration is money. “When evaluating gap areas in supply chain vertical integration strategies, at times the largest challenges are capabilities with extraordinarily large capital expenditure (CAPEX) and non-recurring engineering (NRE) requirements like casting and forging manufacturing, advanced new generation computer chip manufacturing, patented materials and processes including patented surface treatments,” Adamski said. That’s not all: “Some supply chain integration constraints go beyond cost to intellectual property constraints that are harder to overcome,” he noted. “These must be dealt with by contractual guarantees and redundancy strategies.”
Then there’s just the problem of how many parts it takes to build and maintain an airplane. “OEMs rely on a vast network of specialised suppliers, often involving thousands of components sourced globally. Integrating all tiers of this supply chain is highly complex and cost prohibitive,” said Merriott. “Meanwhile, independent MROs may rely on multiple suppliers for spare parts, which can lead to bottlenecks and inefficiencies in the supply chain. So vertical integration in MRO is limited by the fact that MROs cannot control the production of parts, creating logistical challenges.”
When it comes to this last gap, OEMs fare worse than MROs. The reason: “OEMs operate with a well-defined bill of material, so when a part is missing it becomes a real challenge to fill it because you don’t have a lot of other options,” said Loycano. “On the MRO side, flexibility is greater because the FAA has stepped in and allowed for PMAs (Parts Manufacturer Approvals) and other ways to satisfy the requirements of an original part, giving them a bit more flexibility to get an aircraft back into service.”
The impact of gaps
The gaps noted above don’t just impede vertical integration in the aviation industry. They also create distinct and different problems for OEMs, MROs, and their airline customers. “For OEMs, especially at the lower tiers of the supply chain, these gaps can create vulnerabilities in production schedules and delivery times,” said Merriott. “The complexity of the supplier network means they are often exposed to risks from supply chain disruptions, which can delay aircraft production and increase costs.”
Next, independent MROs face gap-related challenges due to their reliance on third-party suppliers for critical parts. “Delays in parts procurement can lead to longer aircraft downtimes, higher operational costs, and a reduced ability to meet customer expectations,” Merriott said. “This lack of control over the parts supply chain may reduce efficiency and competitiveness in the market.”
Finally, there’s the impact on the airlines who fly the aircraft. “These gaps can result in longer lead times for aircraft maintenance, increased costs for parts and services, and ultimately, operational inefficiencies,” said Merriott. “Airlines may experience extended aircraft downtime, which impacts their ability to generate revenue and maintain reliable schedules.”
All of these gaps caused supply chain delays for the aerospace industry prior to COVID-19. The pandemic made these delays much worse, and many of them have yet to return to pre-pandemic levels.
“Both OEMs and MROs are grappling with extended lead times,” Loycano said. “Parts that once took a few months to source can now take over a year to manufacture and get in the door, creating a significant challenge, whether you’re an OEM or MRO.”
“Gaps in vertical integration can amplify supply chain challenges,” added Markham. “Since aircraft are a sum of all of their many parts, a disruption, unforeseen demand, or a manufacturing hiccup can ripple up the supply chain and impact the MROs’ and the airlines’ ability to maintain airworthy aircraft for their planned needs. Some recent examples include having aircraft built, but waiting on engines. It’s hard to deliver an aircraft without its engines.”
Filling the gaps
If vertical integration is the key to resolving the aerospace Industry’s supply chain issues — both on the OEM and MRO sides of the coin -– then the question that must be answered is this: How do we fill the gaps?
One way is by creating partnerships with third party suppliers that mimic the seamless smoothness of true vertical integration. “OEMs and MROs can establish stronger, long-term partnerships with key suppliers, as AJW Group has done over its 92 year legacy,” Merriott explained. “By working closely with our partners and suppliers, we reduce bottlenecks and improve parts availability and logistics.”
“Alternative Parts, FAA-PMA approved parts & DER repaired parts, help to fill the demand for spare parts,” Markham added. “These FAA approved alternatives are natural gap fillers. Some of the OEMs have even bought FAA-PMA parts to include in their new build when their supply chain could not keep up. Likewise, OEM (or OEM controlled) MROs will often use the PMA and DER alternatives when their OEM parts are unavailable. On the independent MRO side, some MROs develop relationships with PMA part producers to develop supply chain redundancy. This is especially true for the HEICO companies: The HEICO repair stations collaborate effectively with the HEICO PMA divisions to develop completely independent Bills of Material to break the reliance on the OEM supply chain.”
A second solution is to use advanced technology such as artificial intelligence (AI) to improve the monitoring, purchasing, and warehousing/distribution of needed parts, so that true just-in-time delivery can be executed without delay. “We have implemented advanced data analytics, real-time tracking, and predictive maintenance systems within our Group operations to improve visibility and efficiency across the supply chain,” said Merriott. “Our digital transformation efforts allow for more streamlined processes, better inventory management, and quicker responses to supply chain disruptions we may encounter.”
A third way to fill the gaps is by using the combination of onboard aircraft systems’ monitoring and real-time AI analysis of those results to support preventive maintenance of aircraft. According to Badra, “AI can also support predictive maintenance by going through the historical records of aircraft maintenance events and unit repairs, to identify the intervals in flight cycles between part removals, using those rates to detect when parts will be removed, to order the parts needed based on historical bill of materials and plan the manpower to manage the repairs on time and potentially avoiding an Aircraft On Ground [AOG] situation from taking place.”
Another way to fill the gaps is by working closely with suppliers, alerting them to both OEM and MRO needs as far into the future as possible. “The more we can understand what our customers require, the more we can buffer those requirements,” said Loycano. “That’s what we do as a distributor: We go out ahead of that demand to get the parts and put them on the shelf, alleviating the OEM or aftermarket company’s inability to understand what their requirements are. Essentially, we have the parts they need, whenever they need them.”
Lessons learned from the automotive sector
At the outset of this article, we talked about the automotive industry and its success with vertical integration. This success is something that the experts interviewed for this article are well aware of. So what lessons do they believe can be learned from the automotive industry and applied to aerospace?
“Standardising certain aircraft components, where possible, could help reduce complexity and improve supply chain efficiency,” Merriott replied. “This would enable easier sourcing and manufacturing of parts across different platforms. As well, automotive companies often use just-in-time (JIT) production to minimise inventory costs and reduce lead times. While more challenging in the aviation industry due to safety and regulatory requirements, elements of JIT could improve efficiency in the aviation MRO supply chain.”
This is just one example: “Best in class aerospace OEMs have benefitted over the years from borrowed concepts from the automotive industry,” said Adamski. “Lean, 6 sigma practices, kaizen and many of the Shingo masters principles originally championed in the automotive industry by Toyota and others. In fact, continuous improvement through kaizen have been applied effectively not just to aerospace production facilities but also to aerospace supply chains through kaizen activity, along with data-driven management informed by control towers at the production cell level, management by walking around (gemba), daily risk management and mitigation strategies, and a variety of other strategies with the objective of managing all risk areas including those in the supply chain, which can include an effective vertical integration strategy including built-in redundancies.”
The bottom line: Although the aerospace industry may not be able to apply all elements of vertical integration to the same extent that the automotive industry has, there is much that can be done to make aerospace supply chains work better and more rationally for OEMs, MROs and the customers they serve. What it will take to get there will be a mix of determination, innovation, and the motivation to do things better. Given some of the results described by the experts quoted for this article, this push is already underway.
By James Careless
