From a competitive standpoint, 2016 has been a choppy year for major aircraft manufacturers. Intense pricing competition between Airbus and Boeing, as well as increasing competition from Bombardier, have led both companies to pursue cost-cutting efforts. The ripple effects to suppliers from Boeing’s latest efforts, including requests for longer payment terms, have significant business implications. This post highlights steps suppliers can take to offset the financial impact of longer billing cycles and other cost-cutting demands.
Marketplace turbulence ahead?
Based on sales numbers and industry backlog, these are great times for aircraft manufacturers.1 But that’s only the beginning of the story. When you factor in competitive considerations and profit margins, the reality is more nuanced. Improving bottom-line performance is becoming a bigger challenge for Boeing and Airbus as the companies spar intensely over price. While Boeing used to have a firm competitive edge on value, Airbus has made significant strides in closing gaps in recent years and also been buoyed by the weakening euro.2 And with widening customer interest in Airbus, price has become a bigger factor3 in sales wins and an increasing orders gap for Boeing.4 For Boeing, these and other factors have all added up to a renewed focus on controlling and cutting costs.
Aggressive cost cutting efforts
Boeing’s most recent cost-cutting efforts began in earnest in early 2016, starting with extending its controversial Partnering for Success (PFS) program. Yet, while Boeing demanded significant cost reduction5 from suppliers in the first round of PFS, in this round it is focused on extending the terms and conditions for accounts payable6 for most of its suppliers to anywhere from net 60 to net 120 days, depending on their size. Other costs cutting measures have included job cuts,7 and limits for overtime pay.8
Airbus too, which has operated on even tighter margins than Boeing,9 is getting more aggressive about cost cutting. Recently, however, Airbus has been quiet about its latest cost-cutting and restructuring plan.10
Caught in the middle: what can suppliers do?
Clearly, given the marketplace environment and aircraft manufacturers recent moves, the cost pressures on suppliers won’t be going away any time soon. That’s why it’s so important for suppliers to keep a constant focus on controlling their own costs, regardless of the latest manufacturer edicts or requests. As a CFO consulting services provider, we regularly help companies get their arms around this challenge. Here are five steps that we frequently find help companies make significant strides in reducing costs or improving performance.
1) Analyze current efforts at every level
Gaining a clear understanding of your current efforts is a key first step in positioning yourself for making the kind of informed surgical decisions required for effective ongoing cost cutting or performance and improvement efforts. That means understanding the who, what, when where—and especially why—of everything that’s happening in operations (and keeping your understanding up to date). Then you can more easily pinpoint procedures, steps or features whose costs exceed value to your customers or company and prioritize them accordingly.
2) Document processes and procedures
In addition to analyzing efforts, documenting processes and procedures is critical because it’s often very difficult to find opportunities for improving efficiencies until you thoroughly outline all key workflows. Once workflows are defined, it’s also important to revisit them regularly.
3) Assign a cost to every effort
To effectively manage costs, you need to assign and track costs associated with every effort and ensure that you understand the numbers in your plan. A clear budget along with an accurate forecasting approach are essential, as is an efficient cost-tracking system that fits almost seamlessly into the workflow.
4) Track the costs of the right things
Simply tracking costs of things in your budget isn’t enough, when it comes to meeting customer demands for lower prices. You also need to ensure elements of your cost tracking system match the efforts that are deemed most valuable to your customers.
5) Implement processes to identify variances
Finally, it’s essential that people are held accountable for variances and asked to explain them so that you can develop action plans for improving results.
Planning ahead pays
As you can imagine, it takes time to work through the above steps and get the right systems and processes in place for controlling costs. That’s why it’s better to work on these things before a big customer hits you with new demands. Not only will early action soften the impact of customer demands, it can help you improve margins and profits in the meantime.
If you run a Seattle-area company and are looking for CFO services that can help you rein in costs and improve efficiencies, the Seattle vcfo team is standing by to help. Just drop us a line.
Michael Scheaffer is a Consulting CFO for vcfo Seattle. As a top financial consulting and HR consulting firm, vcfo provides contract CFO and CFO Consulting services, HR outsourcing and interim HR services. Additionally, we provide technology strategies consulting and cost-effective recruiting solutions. Whether you seek part-time, interim, project-based or full-time support, vcfo’s customizable engagement model will fit your specific business needs.
1 Airbus Tightens Belt with Corporate Shake-up, The Wall Street Journal, September 30, 2016.
2 Price war, plane transitions put Boeing in financial crunch, The Seattle Times, April 1, 2016.
3 The new reality: A more efficient Boeing can better weather whatever challenges come its way; Frontiers, Volume 14, Issue 10; March 2016.
4 As the Farnborough Air Show ends, concern over Airbus production and Boeing sales, The Seattle Times, July 14, 2016.
5 McNerney: Boeing will squeeze suppliers and cut jobs, The Seattle Times, May 23, 2016.
6 Boeing launches PFS 2.0, Leeham News and Comment, July 7, 2016.
7 Tough competition from Airbus spurs Boeing cuts, MarketWatch, March 31, 2016.
8 Boeing curtails OT pay for 80,000 workers in latest cost-cutting move, The Seattle Times, September 14, 2016.
9 Boeing slows payments to suppliers as it accelerates cost cutting, Reuters, July 7, 2016.
10 Airbus declines to comment on report of cost-cutting plan, Reuters, September 19, 2016.