Opinion: Suppliers Go From Just In Time To Just Don’t Know

Misaligned supply and demand, now exacerbated by the International Association of Machinists & Aerospace Workers strike at Boeing, continues to affect the supply chain in a profound way. Production master schedule changes by the airframe OEMs are obfuscating production rates and spurring suppliers to stockpile inventory, as I discussed in my last Up Front column (AW&ST July 29-Aug. 11, p. 10).

Suppliers have struggled since the COVID-19 pandemic’s decline to position themselves for an eventual—albeit distant—increase in commercial aircraft production rates. The challenge has been bridging to that while not going out of business in the meantime because so much money is tied up in maintaining readiness. But a key method for remaining ready, stockpiling goods, is coming back to haunt suppliers.

Company balance sheets measure inventory levels in the areas of raw material, work in progress (WIP) and finished goods. Overall, these three categories are rising in relation to production rate increases by the airframe OEMs. 

Raw material has been piling up because companies need to buy material when it is available to avoid the risk of shortages.

There is more WIP as well because a variety of components, such as bearings or fasteners, continue to have long lead times. Shortages of these components cause WIP to grow as machined parts and assemblies are held in production waiting for components. WIP is also increasing because of industry constraints in special processing and continued growth in processing lead times.

Finished goods are accumulating at suppliers due to the continued volatility of demand caused by the misalignment of production rates and inventory. Customers throughout the supply chain are ordering more parts from their suppliers than they are able to consume, produce and ship to their end customers, which results in excess levels of inventory for all suppliers.

There are three primary reasons for aerospace companies to procure and hold excess inventory. The first is purchasing power in the supply chain. Ordering larger quantities of raw material or components tends to drive price breaks. The second is uncertainties around future lead times and cost. The third is inefficiencies in manufacturing planning and scheduling.

In the short term, the labor strikes currently at Boeing and recently at Spirit AeroSystems will have a negative impact on production rates and lead to higher finished goods levels. However, customers throughout the production value stream are not pulling at scheduled rates, and parts are staying in stock longer for their suppliers.

Financing costs are still stubbornly high, twice what they were before 2021, and the costs of financing increased inventory levels is problematic for the supply chain.

Both inventory and financing costs have been trending upward for the last 10 quarters. Increases in inventory and rising interest rates, effectively twice what they were before the pandemic (see chart), are creating a challenging situation for suppliers.

The industry has benefited from long lead-time windows of firm demand and projected demand from previous OEM forecasts and purchase orders. A key lesson here is to address increasing inventory levels by:

1. Creating a system and process around “target inventory level” utilization.
2. Defining projected lead times, lower-limit inventory and appropriate reorder points.
3. Analyzing the history of usage and forecast demand.

These activities can help companies prepare for the coming quarters of increased inventory levels.

Higher borrowing rates to fund inventory growth have affected the entire supply chain. The rising inventory levels and higher borrowing rates are combining into a pernicious effect on suppliers.

Inventory in the supply chain will continue to grow, and as long as interest rates stay high, the carrying costs of inventory will remain problematic, since higher capital costs make the inventory more expensive. The industry has gone from systems like just-in-time to just-in-case to now just-don’t-know. Just-don’t-know inventory reality and the higher capital and carrying costs will weigh heavily on balance sheets in the quarters to come.

Alex Krutz is managing director at Patriot Industrial Partners, an aerospace and defense advisory firm that focuses on manufacturing strategy and supply chain optimization.