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Second Tier defence manufacturers' key to success

Posted 1 December 2014 · Add Comment

Kevin Deal, VP for A&D at IFS North America, explains how Second Tier defence component manufacturers can become more competitive and appealing to Top Tier contractors.

Defence products – whether that is an engine, weapon system or military plane – often span years or decades in their use, and therefore the contracts to manage and maintain those products can be seriously long-term. Because they are often based on multiple relationships, complex contract agreements and varying levels of capability, the end-to-end manufacturing process must be managed in a simple manner in order to operate successfully. And putting in place the complex integration and control procedures has often been a challenge for 'Second Tier' suppliers. It is all to do with visibility and granularity.

All parties – whether the government department, the Systems Integrators (SIs), Top Tier manufacturers, Tier Two or component manufacturers – sit within the same constraints of defence contracts, which are often lengthy, expensive to bid for and can involve a significant level of risk. Combine this with the fact that the structure within those contracts is often very complex, with varying levels of responsibility and contractual obligations at each tier, and it's clear that challenges and regulatory demands become more or less demanding depending on where a company sits within this chain.

For Tier 2 manufacturers in particular, manufacturing essential components and sub-assemblies, the more they adapt and become aligned with their Tier 1 counterparts, the more successful they will become in such a landscape. There are three key areas in which this can be achieved.

1. Become less risky
With any defence contract, the cost of the actual purchase of equipment or vehicles only constitutes around 20% of the total cost – 80% of the cost falls in providing the through-life support. This is where Tier 2 manufacturers can find huge opportunity.

In order to provide this through-life support, Tier 2 manufacturers need to have in place robust, sustainable and transparent processes that help reduce risk to their Tier 1 manufacturers and SIs, which in turn reduces risk to government departments themselves.

Building long-term partnerships allows these manufacturers to maximise opportunities by leveraging ongoing revenue streams in defence contracts but it requires them to demonstrate more than solely their manufacturing abilities.

2. Become more competitive
The second area where Tier 2 manufacturers can gain significant advantage is by becoming more competitive in their market – and a current generation of modular advanced Information Systems (IS) increasingly allows them to relatively inexpensively enjoy the same levels of granular understanding of their processes as the Top Tier contractors have already implemented.

If manufacturers are able to gain a level of granular visibility into the supply chain, they undoubtedly will have a better grasp on project margins and, therefore, know exactly how much money can be made through such agreements – and even more importantly, how much they can lower their prices while still retaining those all important profit margins.

Presenting a more granular proposal to a Tier 1 manufacturer based on previous deals can also be a huge benefit in providing that competitive edge to help close a deal.

3. Become more compliant
The final area where we see significant potential for Tier 2 manufacturers is in compliance. The A&D industry is very highly regulated, and all parties within a contract have to adhere to strict government requirements and all of the multiple regulations they are faced with such as ITAR, Export Control and DPAS.

And with the DoD's Item Unique Identification (IUID) compliance process in place in the US, Tier 2 manufacturers must be able to demonstrate compliance and visibility throughout all processes and through-life support in order to be considered for DoD contract flowdowns. If a company supplies or maintains assets for the DoD, IUID must be addressed and implemented within the enterprise supply chain, inventory and maintenance management processes.

In any defence contract, the objective is to avoid risk and choose a supplier which they can be confident is compliant with all of these regulations. For an organisation as vast and complex as the DoD, for example, having granular visibility into which assets are held where is fundamental to improving productivity and reducing asset management costs.

Visibility and granularity
Building long-term partnerships based on the ability to showcase expertise and compliant procedures is key to all of this. If they can do this, Tier 2 manufacturers will put themselves in a much better position for a given contract, and be more likely to be used in the future by the same parties.

An advanced Information System can help significantly in achieving this visibility and compliance by incorporating total lifecycle management into all ongoing procedures. These manufacturers can identify more quickly which markets to serve and which products to develop and then have the required visibility from original concept to engineering and on to manufacturing, service and after-sales support.

They also need an IS solution that incorporates a comprehensive reporting tool to provide the necessary level of visibility that the defence industry requires. This is important both in terms of analysis – to demonstrate control and security in the supply chain – and in operational terms – in order to provide only the correct 'sliver' of information to employees on the manufacturing line as and when required. If the IS can be further configured to each shop role, this can further enhance individual employees' efficiency and productivity.

The bottom line?
In the past, governments were happy to pass on risk to the Top Tier manufacturers. Now they are increasingly looking for a full audit trail for all parties involved in a given contract, in order to manage risk.

For an organisation of the scale and complexity of the DoD, knowing unambiguously what assets are held and where is fundamental to streamlining supply chains, improving deployment and repair, as well as enhancing operational availability. It also helps to ensure compliance with financial reporting and audit requirements.

If Tier 2 manufacturers want to run like the bigger, leaner manufacturers, they have to become more appealing, more competitive, and stay compliant in order to be selected for the bigger government deals. They must therefore be able to demonstrate where everything comes from – the origin of all of the component parts – as well as where all of those components are within the supply and support chain at any given point in time. Also, they can only do this with a comprehensive IS to properly manage all processes and assets across the enterprise.

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