The aerospace industry is pivotal to connecting the world for economic growth and global security. But while other industrial supply chains have recovered from the shocks from the pandemic, aerospace continues to grapple with significant operational challenges: persistent shortages in key commodities, uncertainty of future demand, supply chain consolidation, and a workforce in transition. All of these put procurement leaders in a precarious position.
Commercial aerospace leaders must rethink their procurement and supply chain strategies to stabilize operations and prepare for growth. Below, we explore in more detail the challenges these leaders are facing and propose four actions to overcome such challenges and help leaders reshape their strategies.
Aerospace procurement functions are facing several challenges
Global supply chains are under considerable pressure, still recovering from a succession of unprecedented shocks that have thrown operations and planning into disarray. A few challenges are particularly pressing.
Demand uncertainty and shortages
The aerospace sector has been acutely affected by the recent global supply chain disruptions, given its dependence on a complex, multilayered network of suppliers and manufacturers across different continents. The fundamental issue now is not just about recovering from these disruptions to achieve supply chain stability—if such a thing even is even possible. It’s about navigating an environment in which future demand is highly volatile and unpredictable shortages of critical commodities, such as investment castings, are becoming more common.
Demand uncertainty in aerospace is driven by several factors: uncertain production rates for narrowbody platforms, the uneven recovery of widebody flying levels, and potential surges in defense demand because of global conflicts. This variability complicates budgeting, forecasting, and strategic planning, compelling companies to adopt more flexible and responsive procurement strategies.
It should be no surprise, then, that although most aerospace suppliers have ample production capacity for known demand, shortages continue to be a significant issue. An analysis of investor reports and presentations on maintenance, repair, and operations from global top aerospace companies shows a notable increase in mentions of “shortage” over mentions of cost or pricing (Exhibit 1). This sentiment analysis underscores a shift in focus from cost efficiency to risk management and supply assurance. Such shortages not only affect production timelines but also ripple across the service and maintenance landscapes, affecting overall industry efficiency and reliability.
Supply chain consolidation
One factor in the continuing struggles of the aerospace supply chain is the structural reshaping of the industry that has occurred over the past decade. While the deal thesis for most acquisitions and mergers has been sound—focused on traditional value creation from scale and efficiency—the reality is that this consolidation has resulted in a less diverse and sometimes less resilient supply network. Historical data on these acquisitions highlights a concentration of the tier-two and tier-three supply base, which diminishes the diversity of supply sources and inadvertently heightens the risk of shortages.
The scarcity of supply options in specific categories, such as specialty metals or electronic components, has grown more pronounced. This scarcity poses not only a logistical challenge but also a strategic one, compelling firms to rethink their supply chain models. The consolidation has often meant that when disruptions occur, their effects are magnified, affecting a larger portion of the production line and, by extension, more end customers.
Preexisting issues in aerospace supply chains
Research suggests that, entering the recent crisis period, many aerospace supply chains were already less financially stable than those of their peers in adjacent advanced-manufacturing sectors. An analysis of the aerospace sector’s Altman Z-score—a measure of company financial health—compared with those of other adjacent advanced-manufacturing sectors (specifically automotive and advanced electronics) reveals several insights. Coming into 2020, before the disruptions from the COVID-19 pandemic, aerospace already significantly trailed peer industries. Then, from 2020 to 2023, these peer industries saw either negligible change or improvement in the financial health of the supply chain: automotive was down 1 percent, while advanced electronics was up 4 percent. Meanwhile, the financial health of the aerospace supply chain health decreased an incremental 9 percent (Exhibit 2).
Many aerospace organizations were not well positioned to react to these challenges in terms of their overall procurement capability. According to a McKinsey study of overall procurement functional maturity, aerospace companies have underperformed relative to their peers in automotive by an average of nearly 15 percent over the past 18 years. However, within aerospace, performance among participating firms has maintained a narrow variance. In nearly every other sector, a small group of companies stand apart, performing about 30 percent better than their peers’ average.
A workforce in transition
The aerospace industry is struggling to meet the demands for current roles and needed skills. Several factors are contributing to this: for instance, there is increasing competition for high-performing talent in adjacent sectors such as semiconductors, automotive, and tech, and the industry is experiencing a “gray to green” transition, in which an increasing share of the highest-skilled workers are nearing retirement. This younger and less experienced workforce is less familiar with the nuances and history of the aerospace industry’s operations and therefore will take longer to reach required productivity levels, compounding the challenge of addressing the difficult supply chain environment many aerospace organizations are operating in today. There has also been a shift in what attracts employees and encourages them to stay in a role, adding to the talent challenges facing aerospace players.
Recent data highlights a trend of recycling talent in aerospace and defense (A&D)—that is, talent losses and gains are mostly within the sector itself. The insular nature of the industry reflects the complexity of managing the A&D supply chain, but the lack of cross-pollination among industries means that the industry may be slow to evolve, relying on practices that might be considered outdated in other industries.
Given the tight labor market and competition for talent across sectors, we’ve applied a skills lens to more precisely define the current supply chain gap (see sidebar, “Methodology”). Our analysis shows A&D companies have the highest mismatch in supply and demand for skills in general supply chain management, contract management, production planning, and supplier quality management. For some skills, there’s a four- to six-percentage-point gap between open positions citing a need for these skills and talent available in the market with these skills, and many workers with these skills are already employed (Exhibit 3).
Four actions for the future of aerospace procurement
Without a reset, existing disruptions could compound. Successful procurement leaders are therefore refocusing on first principles: they’re devising strategies to stabilize their supply chains, mitigate risks from consolidation, and address the lingering effects of inflation.
Manage direct materials
Procurement professionals must expand their solution sets to deliver on even the most basic procurement responsibility of managing costs and on-time arrival of high-quality direct materials—such as composite materials, metals and alloys, and electronic components—while ensuring supply chain resilience.
The recent period of instability in the supply chain has emphasized the degree to which aerospace procurement strategies have become significantly more complex. In addition to the basic procurement responsibilities above, spending category and supplier strategies must take into account geopolitical constraints, scarcity of key components, and increasingly consolidated supply chains. One aerospace manufacturer recently achieved savings of roughly 20 percent in the electricals category by aggregating requirements, combining multiple similar work packages, and bidding them as one.
Invest for growth. One of the foremost strategies is investing in growth by increasing redundancy in critical raw materials and parts segments. This approach is not merely about having backups but also about strategically enhancing the supply chain’s capacity to meet increased production rates. This surgical investment in redundancy helps buffer against unforeseen disruptions, thereby stabilizing the supply chain. This also means that procurement should look to invest in mitigating some of the risks that are inherent in industry consolidation. Procurement must assess the risk of supplier consolidation and explore alternatives that can offer similar value without compromising supply chain integrity. This involves mapping out the supply landscape, identifying potential single points of failure, and investing in contingency plans. Our internal estimates indicate global investments in the hundreds of millions of dollars are needed to ensure sustainability and resilience.
Adapt the approach to sourcing. Particularly for original-equipment assembly, the standard practice of many organizations in A&D is to build to order. With lead time increases sticking even after the worst supply chain constraints have abated, building to order simply doesn’t work. Adapting the sourcing approach to better align with production forecasts rather than only order volumes can significantly reduce supply chain unpredictability, though this shift will require working capital. This adjustment ensures that procurement is not only responsive but also proactive in anticipating material needs, thus reducing the risk of shortages or delays that could impede production schedules.
Manage cash flow for profitability and growth. Procurement functions must balance the necessity for savings with the need to invest in net working capital to support growth and stabilize the supply chain while meeting quality requirements. Understanding and anticipating the differences in cash flows are vital for maintaining profitability while scaling up production rates. Procurement professionals must develop strategies that allow them to flexibly allocate resources, ensuring that investments contribute directly to supply chain resilience and rate increases.
Develop a true ‘should cost’ model. A comprehensive understanding of the drivers of cost for critical elements in the bill of materials is imperative. Procurement teams need a view of how commodity price fluctuations affect their spending base. This analysis not only allows leaders to budget and forecast more accurately but also equips procurement professionals with the knowledge to negotiate better terms with suppliers, allowing procurement teams to maintain affordability without compromising on the quality or availability of materials.
Target indirect materials and services
Procurement leaders will need to undertake a long-term effort to stabilize the supply chain and remediate shortages of direct materials. By contrast, indirect materials and services—ranging from process chemicals, welding supplies, and paints and sealants to IT hardware and services, travel, and transportation—represent an area procurement teams can target in the near term to reduce costs with a more traditional tool kit involving competitive bidding and negotiations.
Indirect categories represent a meaningful share of the overall cost base of aerospace organizations. Many of the top indirect categories also reflect areas within the spending base that saw significant increases during the inflationary period following COVID-19 shutdowns. Today, costs have mostly returned to (or fallen below) prepandemic levels, making it an opportune time to go to the market and target savings. Take transportation spending, in which multiple modes of transportation have seen rates fall significantly since their COVID-19 peak. Measures of both demand and capacity suggest now may be an opportune time to launch competitive bidding—before rate increases return.
One US-based A&D company capitalized on this opportunity. It tackled a significant portion of the indirect spending base in structured waves of initiatives, utilizing strategic sourcing levers such as introducing new suppliers, running multiround requests for proposal (RFPs), and executing fact-based negotiations. These efforts led to cost reductions of up to 20 percent in key categories, including facilities services, IT, temporary labor, and transportation, without affecting the quality of outputs.
Harness digital and automation
With heightened attention on the critical role suppliers play in the successful execution of the enterprise, aerospace procurement organizations will need to increase their focus on up-front “source to contract” activities in the procurement cycle, including strategy development and execution. Digitalizing and automating manual procurement processes can help to unlock the organizational capacity to enable this shift by increasing the scalability, efficiency, depth, and speed of core procurement processes.
Some digital use cases that are prevalent in most industries have still not been fully adopted in A&D. For example, integrating spending data sets into a digital “spend cube” provides a single source of truth from which category managers can generate insights, saving them from having to integrate disparate data sources. And digital RFP tools, which have been available for nearly 25 years, can streamline the bidding process and enable more-sophisticated bid analytics and supplier interactions.
Nearly every element of the up-front source-to-contract process is a candidate for this type of transformation. Such use cases have a high ROI and can lead to significant improvements in a short time by providing visibility into spending details. Indeed, several North American commercial aerospace suppliers have used these tools to gain visibility into areas of actual spending and trends that otherwise might be missed.
Our research has shown that up to 40 percent of procure-to-pay activities can be automated through well-established tools such as robotic process automation and machine learning. Generative AI could also be used, such as to automate the organization and analysis of complex, unstructured spending data sets, as well as to advance the speed, accuracy, and overall cost of procure-to-pay tasks.
Procurement leaders should carefully plan investments in these tools with an eye for the impact they will have. A recent McKinsey survey of chief procurement officers across industries suggests that nearly 60 percent of them have not seen the ROI of their digital procurement investments manifest in their operations. One of the most commonly cited reasons is a lack of end user adoption driven by multiple factors, including complex user interfaces, a lack of tailored and relevant tool content, underinvestment in end user training, and an absence of seamless orchestration across a fragmented landscape of tools. Leaders should thus base decisions on where to invest on the value they will bring, with a parallel focus on end user experience, while limiting investments to the few most valuable use cases for the organization.
Invest in capabilities
Closing the skill gap requires a targeted focus on both talent acquisition and upskilling. These efforts should include a renewed emphasis on the role managers play in role modeling and apprenticing, in addition to traditional classroom-based learning and certification programs. This approach is essential for sustaining innovation and competitiveness in today’s A&D procurement environment.
To start, aerospace companies can size the largest skill gaps in the organization today through a databased, current-state capability assessment. The goal is to understand where the organization is strongest today, what future skills will be required to deliver on the supply chain strategy, and where the largest gaps are.
With a foundational view of the current skill gaps in the organization, supply chain leaders can make focused investments to attract talent with critical skills, taking a skills-based hiring approach. In addition, leaders can tailor upskilling efforts for existing talent on the most in-demand skills and capabilities. To maximize the ROI in talent, training, and development, leaders can ask the following questions: What gaps are most critical to close? Where must that talent come from outside the organization? And where can existing talent be upskilled and developed to meet today’s needs? Such targeted investments not only optimize resource use but also ensure that the workforce evolves in sync with the industry’s requirements.
It’s important to focus on both technical and soft, cross-cutting skills. As a sector traditionally dominated by technical demands, A&D tends to place an overwhelming focus on hard skills. However, overlooking soft skills, particularly those related to people management, can exacerbate existing challenges because effective communication, leadership, and adaptability are crucial for managing complex projects and leading teams through transformative changes.
According to McKinsey research, companies are 4.1 times more likely to see successful outcomes in transformations when leaders act as role models for the behaviors they expect in the organization and provide apprenticeship. Middle managers are therefore critical in closing this skill and capability gap. Investing in the development of leadership skills for middle managers can catalyze positive change, enhancing their ability to mentor, guide, and develop their teams.
All of these efforts can help aerospace companies focus precious investment dollars in areas that matter most for delivering their products to customers.
It’s broadly known that aerospace supply chains are facing numerous hurdles. Despite the converging challenges, there are clear steps companies can take to secure their supply chains for the long term and ensure they can get their product where it needs to go—so people and goods around the world can get where they need to go.
