- 10
- JUL
- 2012
Airlines consolidate their risk: will this reduce innovation?
Author: Jonathan Webb - Categories: Risk
Both Airbus and Boeing have signalled intentions to lead a new wave of consolidation among their supplier bases.
The aeroplane manufacturers indicated a preference for their suppliers to increase mergers and acquisitions.
Tom Williams, Airbus’s head of aircraft programmes, told the FT that the European company was encouraging suppliers to "bulk up" through acquisitions or partnerships "so that they get big enough and have a strong enough balance sheet".
Where does this place the risk in the supply chain?
The companies are currently struggling to meet orders. Despite the general malaise in the industry with many airline operators recording losses in mature markets, the demand for new aircraft is unabated.
New demand is seen for craft that minimises fuel consumption or transports large numbers of people, such as the Airbus A380. This economic pressure at the consumer end has driven more demand for innovative manufacturing at the production end.
Consolidation among the suppliers is a means to increase the agility of the supply chain for the manufacturers, as Boeing and Airbus seek to subsume greater proportions of capacity within the supply network. The fate of larger suppliers is tied closer to the fortunes of the buying organisations. In turn, the prime will organise the lower tiers around the needs of Airbus or Boeing, without these companies making direct interventions.
The purpose of this is primarily the reduction of administrative burden of managing large numbers of disparate suppliers, but there are also advantages in risk reduction. Simply put, reducing the number of variables in the supply chain reduces the amount of things that can go wrong.
IBM, for instance, famously has the objective of reducing the number of suppliers for each category to four or five key global suppliers. Big Blue encourages, suggests and cajoles its suppliers to merge together.
However, although this reduces some of the risk, it also reduces the competitive energy in the market that drives innovation. The edge that many buyers are looking for in their dealings with suppliers historically moves towards more innovative aspects as the relationship matures. But the potential removal of business rivalry also weakens the imperative to innovate that a more vibrant marketplace may possess.
The concern for both Airbus and Boeing is whether their respective drives for consolidation may actually undermine their own business models which are so reliant on innovation.
