Business is booming again in the aerospace industry. In 2006, Boeing booked orders for 1,044 new planes and Airbus nearly 800. With production slots for most of Boeing's models already largely filled for the next three years and a healthy backlog for several Airbus models, aerospace factories world-wide can expect higher production rates until at least 2010.
This is good news for an industry that has suffered in the last few years. And while the aerospace industry may be allowing itself to breathe a small sigh of relief for the moment, the lean years have taught the industry some valuable lessons. Suppliers have had to learn to adopt efficient manufacturing methods, for example, enabling them to become more productive. Every cloud has its silver lining, and such practices will help manufacturers to capitalize on the upswing in orders for commercial airliners that we are seeing today.
But the pressure hasn't lifted completely. With the continuing demand to cut the cost and carbon emissions of air travel, aircraft manufacturing companies are increasingly compelled to reduce development costs and improve the operating efficiency of their aircraft. To this end, the outsourcing of engineering services is playing an ever more important role, enabling manufacturers to maintain margins and lower costs without compromising quality. This article will chart the progress of outsourcing in the aviation industry to date, and investigate how the relationship between outsourcers and the major players in the industry is set to develop in the future.
First Steps Offshore
Outsourcing in the aviation industry has come a long way from the low-end projects undertaken in the early 1990s, which involved the basic use of computer-aided design (CAD)/computer-aided manufacturing (CAM) for the creation of drawings and modelling from 2D to 3D. By the turn of the millennium, the industry, taking a lead from the automotive sector, started to wake up to the fact that outsourcing projects in general, and outsourcing them to places like India in particular, held many advantages. Not only was there a large pool of highly-trained engineers to hand in India, but the time-zone and cost advantages were also highly attractive. In an industry that operates at low margins, any such advantage over competitors was a boon.
The increased maturity level of the IT services outsourcing industry also played a large role in bringing engineering outsourcers up the value chain, demonstrating the capability of various consulting firms that moved into the aerospace space to work alongside customers on ever-more complex core projects. As a result, aerospace original equipment manufacturers (OEMs) and tier-one suppliers are these days entrusting increasingly high-end and complicated projects into the hands of outsourcers. Correspondingly, the large IT services players have extended their offerings and core skills to enable them to bring high quality, high value and intelligent engineering services to market.
Aviation Outsourcing Today
The majority of OEMs and tier-one suppliers now outsource their work to some degree or another. IT in transport, aviation included, involves some of the most cutting-edge technologies, an increasing proportion of which are designed, tested or implemented by third parties. The development and introduction of radio frequency identification (RFID), for instance, could not have taken place without outsourcing part of the research and development (R&D) to third parties. Tata Consultancy Services' (TCS) aerospace engineers, for example, worked in partnership with Oracle in 2005 to pilot RFID with the Engineering arm of UK’s second largest long haul airliner. The trial used RFID to tag critical parts used in aircraft maintenance and repairs at Virgin's Heathrow Airport warehouse in the UK. This enabled the airliner to reduce costs and increase efficiency through improved visibility and accountability, and to gain better automated control of its engineering parts supply chain. The success of such trials have ensured that RFID technology is making waves in the aerospace industry: 14 percent of airports have already adopted RFID technology for employee tracking, with 9 percent using RFID tags for baggage tracking. And when Airbus introduced RFID for tagging tools loaned out to customers to maintain its aircraft, it saved EUR 100,000 in a single year.
However, as well as cutting-edge technology, the right skills at the right cost are also needed to achieve success. The increased value of outsourcing to the aviation industry could only have come about if the industry was prepared to trust third parties to take on projects. And only with the right talent and the right skills can outsourcers prove that they are capable of delivering results. To this end, outsourcers look to hire not only the best engineering graduates, but also increasingly recruit laterally from within the industry and internationally, building up a workforce from around the globe, including the United States and United Kingdom. In the same way that IT services outsourcing now no longer means simply shipping projects off to low-cost destinations such as India, in the future the aerospace outsourcing industry will move toward an increasingly global delivery model, with outsourcers providing the capability to design anywhere and build anywhere.
Aerospace OEMs like Airbus, Boeing and Bombardier are turning to third-party outsourcing organizations to outsource engineering services and tap into a global skills pool to find the expertise they need to improve processes and products. Captive units are already being set up or partnerships formed to outsource structural design and development, embedded development, control system design, simulation, high-level cockpit equipment support software and composite structuring. Lower-tier suppliers too will have to adopt this more flexible approach if they are to survive the cost pressures from above.
Recognizing this, most IT services outsourcing companies are strengthening their focus on providing engineering services to the global aerospace industry. Most companies in the sector are exploring collaborative partnerships with niche players in industry, the technology sector and academic streams to be able to provide specific competencies to their customers.
What the Future Holds
Engineering services outsourcing in the global aerospace industry is continuing to grow. Thanks to the ongoing competitive pressures on the aerospace sector. With this continuing market pressures, it is expected that the aerospace industry will represent a $4 billion market in India for outsourcers in the next 10 years.
Service providers have to understand the nuances of the needs of the client along the life cycle to deliver value. Initially cost and quality have taken an upper hand but as one moves along, the factors that would enable service providers to create a sustainable competitive and comparative advantage lie in the aspects relating to creation of more value for aerospace clients in terms of speed, flexibility, productivity, innovation and risk management. Service providers need to strive towards creating a space for themselves that would emphatically position them as ‘service partners’ who create business solutions and not as mere service providers.
As outsourcers and aerospace OEMs work in a more collaborative fashion, outsourcers will be expected to provide end-to-end capabilities, working on conceptual design, sourcing and component manufacturing. And it will be those organizations that have the specific engineering skills, vision and innovative qualities in-house that will be able to benefit and win out for this forthcoming boom in engineering services outsourcing.
Challenges like economic pressures, strong competition and changing buyer requirements are forcing the A&D industry players to develop and deliver new products and services by being efficient as well as responsive. Outsourcing partners’ solutions should be able to address the full value chain to help these players succeed at growing their business. They should be able to support these players and integrate their processes right from sourcing, to fulfilment and sales service. They need to build capabilities that enable integrative value chain transformations by collaborating all the stakeholders from supplier through OEM to the customer.
About the Author: Suresh Babu is the Global Head of the Aerospace Practice at Tata Consultancy Services. www.tcs.com.