In the wake of the two 737 MAX crashes that resulted in the grounding of 737s around the world, aircraft manufacturer Boeing has signaled that they will be cutting production of the aircraft by approximately 19 percent in an effort to preserve on-hand capital. In addition, Boeing will also be taking additional care to provide comprehensive software updates and pilot training materials, reflecting Boeing’s commitment to restoring consumer confidence and guaranteeing public safety.
“Safety is our responsibility, and we own it,” Boeing Chief Executive Officer Dennis Muilenburg said in a statement. “When the Max returns to the skies, we’ve promised our airline customers and their passengers and crews that it will be as safe as any airplane ever to fly.”
While Boeing stock continues to struggle in the last month, falling 7.2 percent since March 10, many reactions to Boeing’s actions since the grounding have been positive. Bernstein Research, for example, writes that this temporary “pause” in production “should help Boeing bring the supply chain fully on track” as many suppliers continue to ramp up production at a record pace. In addition, many buyers such as The China Aircraft Leasing Holdings Group (CALC) have held firm in their commitment to Boeing, saying in a statement to Reuters news outlet that it “currently does not have plans to change [their] Boeing aircraft orders.”
But as Boeing continues to recover after posting over $101.1 billion in annual revenue just last year, the situation presents an interesting case study in the importance of supply chain flexibility, as well as the reverberations a single disruption can have throughout a supply chain.
Boeing in recent years has been a global leader in the movement toward a consolidated aerospace industry, promoting an increased reliance on Tier-1 suppliers as a “one-stop shop” to fulfill their inventory needs. Such a trend has largely been beneficial for the industry as a whole, increasing overall transparency while allowing suppliers to increase production without feeling the effects of greater market trends. Working with a limited buyer pool, suppliers are capable of plotting a long-term strategy more insulated from a competitive, volatile environment.
This only holds true, however, if the buyer in question remains on track to deliver on production goals. Certain risk can be mitigated through long-term contracts, but as the current scenario with Boeing shows, it is impossible to eliminate disruption entirely. When such disruptions do occur, and suppliers are unable to pivot their production goals to reflect their buyer’s delay, it has the potential to leave suppliers with a significant amount of inventory that neither they nor the OEM is capable of accommodating.
Even in a situation where an OEM such as Boeing is able to store the inventory until original production commitments (Boeing has explained that their production cut is temporary), there then lies the issue of inventory storage costs. Until a time where such an increase in output if feasible, the OEM can expect to pay as much as 15 to 25 percent the value of the component in annual inventory carrying costs.
While this does present a challenge for all parties involved in the supply chain, it also opens the door for supply chain partners such as EDX to alleviate such concerns. With our AS-9120-certified storage facilities, EDX is the only long-term inventory storage provider who is equipped to meet the current needs of the aerospace industry, with no term limits regarding owned inventory. And to help retain cash on hand for the OEM while allowing Tier-1 suppliers to maintain their ambitious production schedules without backlog, EDX also offers a Last Time Buy Solution where we will purchase the inventory in question on the OEM’s behalf using our own capital, as well as store it for as long as needed while saving customers an average of 42 percent in annual inventory storage costs.
In an environment where OEMs will require such open cash flows to address disruptions before returning production to expected levels, solutions such as this are poised to play a critical role. Even the direst skeptics believe Boeing will recover, and when they do, supply chain partners with inventory management solutions that eliminate friction between OEMs and suppliers in a consolidated industry are going to be a big reason why.