In recent years, the Aerospace industry has witnessed structural changes as major product development programmes have entered the manufacturing and operational phases of the product lifecycle. Significant production pressures and maintenance requirements are requiring OEMs to improve production efficiency and reduce operating costs. As a result, there has been a move towards “Value engineering” as opposed to” cost cutting” – which are not related terms!
“Cost cutting” is about saving money whether it is in programming, design or operational phases whereas “Value engineering” is all about (cost) optimisation. In fact, “Value Engineering” may require more upfront investment in order to reduce production and/or operational costs in the long term.
A holistic approach to cost optimisation is therefore required across the full lifecycle. This ensures that true cost optimisation is realised and with significantly larger benefits and greater opportunities.
However most large OEMs and their supply chains struggle to implement such activities for several key reasons:-
All of the above lead to poor implementation (typically only about 50% of initiatives are delivered).
Driven by changes in demand and rates of production, many business models and practices in the Aerospace industry have been disrupted. Increasingly, the Total Cost of Ownership (TCO) has become a key strategic component for new product development and programme planning representing a paradigm shift to programme planning and product operations.
It has become clear that analysis of TCO will enable an end to end view of the product lifecycle to aggregate and analyse costs and production efficiency. There are several definitions for TCO which are well understood:
“The whole life cost of the asset including capital expenditure, ongoing maintenance, future repair and / or renewal and eventual disposal[i]”
“Initial investment costs (less resale value), replacements, operation (including energy use), and maintenance and repair of an investment decisions (expressed in present or annual value terms)”[ii].
“The total cost to the organization of acquisition and ownership of a system over its entire life. It includes all costs associated with the system and its use in the concept, development, production, utilization, support and retirement stages.”[iii]
“Direct costs (i.e. all costs that can be allocated to a system / product) and indirect variable costs (i.e. costs that can be associated to several systems / products and is fluctuating with a characteristics of the system / product it refers to)”[iv].
“The total cost of ownership to the customer of acquisition, operation and maintenance and disposal of a product over the whole life cycle”[v].
However, despite TCO being clearly defined it has proved very difficult to implement. What has become quite clear is that a focussed and holistic approach to cost optimisation is a struggle for large companies. There are several reasons for this:-
“Much of the capability that an aerospace company needs to
get cost under control is already present in its organization,
in the form of the many experts whose ideas make the business
possible. What most companies lack, however, is the right
mechanism to coordinate those experts’ contributions to
directly attack perceived barriers to cost reduction.” [vi]
In a survey carried out by Deloitte in 2016, out of the executives surveyed, 59%, said they had annual cost reduction targets of 10% or more. 33% alone have cost reduction targets of more than 20%. However, 58% also reported not being able to meet cost reduction targets, up from 48% in the previous Deloitte cost survey. Just 28% of executives said they met their cost reduction targets, down from 33% in the last survey.
In the same survey it was highlighted that implementing cost management initiatives is another barrier to hitting targets. More than half, 55%, of executives said they struggle to implement initiatives, preventing them from effective cost management. A lack of understanding was identified by 36% of survey respondents and 26% pointed to a weak business case as other barriers to improving cost management initiatives.
There are 4 major root causes of engineering company’s inability to deliver cost optimisation efficiently:
Traditionally data has been created over a number of years and without the foresight of how this could be used in the future. This has resulted in the following issues:-
All of the above make it very difficult to collate, cleanse and make available a holistic view of the cost of a commodity through its life cycle. It can be time consuming to collect and cleanse the data, which can outweigh the benefits or take so long that the benefit realisation is impacted. That plus it can be a very inefficient and costly process.
Additionally the lack of reliable quality data and the ability to analyse it can lead to focussing cost optimisation efforts on the incorrect issues and thus miss opportunities.
Processes can either be non-existent or in some cases too complicated to allow effective identification and delivery of cost optimisation initiatives. Too much time is spent driving an initiative over the line for little or no return when a risk based assessment early on in the process and the resolve to reject ideas if they do not fit set criteria would have ensured it was killed as early as possible. The requirements for some review gates are onerous and require lots of administration, which stifles innovation and creativity. Extensive approval loops and bureaucracy are also a hindrance to progress. In very large OEMs there can even be different processes dependant on commodity, point in the life cycle and location resulting in inconsistent approaches and varying ways of measuring cost benefit.
Visibility of initiative progress and identification of blockers is also traditionally poor and extends the time taken to deliver the benefit thus reducing the amount of value delivered. Metrics also need to be SMART and incentivised in order to ensure the right ideas are selected and delivered. Poor, unclear and non-incentivised metrics tend to lead late delivery and focus on the incorrect initiatives.
Traditionally cost optimisation is part of an individual’s responsibilities but not their key responsibility. They will normally have other tasks to do as part of their role such as new product introduction, design and development, production support etc. This means that cost optimisation takes a back seat as it is not their prime responsibility. In some organisations there are cost engineers but they tend to have to liaise with other areas and generally do not have direct resources they can utilise to deliver benefits. This all leads to a lack of focus and frustration when they cannot deliver and over time their contribution and enthusiasm wanes.
As well as data being in siloes so are organisations, especially large ones. Cost targets tend to be at commodity level or product life cycle stage e,g design targets, manufacturing targets or aftermarket targets. This view of cost can lead to missed opportunities but even more worryingly incorrect assumptions on the overall cost benefit. A small reduction in manufacturing cost could lead to a large increase in aftermarket costs. A change in aftermarket costs could lead to a larger demand on the production supply chain thus increasing manufacturing costs or impact on new manufacture deliveries.
These organisational structures limit the ability to operate true cross functional works streams to optimise costs of a product across its life cycle.
So what are the potential solutions? Many organisations have tried to overcome these issues with varying levels of success. One solution not typically considered is to outsource this type of work. This allows the customer to focus on product development, innovation and introduction of new technology which are their core skills. Outsourcing will allow a service provider to cut across the organisational and data siloes that exist without a major disruption to the existing organisation. It will also provide focussed resource on optimising costs. Another benefit is that the right service provider will have experience across other industries that could be applied and shared with the customer.
Assystem Technologies has worked with many large OEMs supporting their cost reduction activities within different areas of the lifecycle (Design and Development, Manufacturing & Supply Chain, Aftermarket). Based on this experience Assystem Technologies has developed its elsio (Lifecycle Cost Optimisation) offering.
elsio is a continually evolving, integrated solution to Life Cycle Cost Optimisation, delivered by a trusted team of engineering experts here at Assystem Technologies.
elsio will help you to, improve your business, your product and your profitability; maximise time and cost efficiencies across your business and offer you the best return on investment; empower change within your working processes and help you to realise your strategic vision.
This will be achieved through the following core principles:-
elsio is a continuous process – that’s how cycles work and how, in partnership with you, we can deliver the best results. Our lifecycle cost optimisation service aims to stay one step ahead of the curve, ensuring you receive an innovative service that provides a competitive edge.
Large companies have historically struggled to implement lifecycle cost optimisation primarily due to organisational structures and their associated barriers, disparate data sources and resource constraints on the tasks due to other priorities.
One option rarely considered is outsourcing the work to specialist companies, thus allowing the OEM to focus on their core capabilities.
Assystem Technologies’ elsio Service, developed over a number of years, is based on robust processes, integrated data analytics with focussed and agile resources which allows true cost optimisation across the lifecycle to be realised with minimum input from the client.
With innovative commercial models which incentivise the teams to deliver value, elsio typically delivers a better than 4:1 return on investment.
As well as the hard measurable benefits from delivering technical and commercial cost optimisation initiatives, the service also allows the customer to focus their resources on more pressing priorities such as safety and new product introduction.
To get in touch, please contact:
Head of elsio service
+44 (0) 1332 386735
+44 (0) 7850 716465
[i] The Association of Cost Engineers (AcostE) and the American Association of Cost Engineering (AACE).
[ii] Humphreys, K.K., Wellman, P.. Basic Cost Engineering; 3rd ed. Cost Eng.; New York, NY: Dekker; 1996.
[iii] Systems Engineering Handbook: A Guide for System Life Cycle Processes and Activities, version 3.2.2. Tech. ep. INCOSE-TP-2003-002-03.2.2.; International Council on Systems Engineering (INCOSE); San Diego, DA, USA; 2012.
[iv] NATO Analysis and simulation panel task group SAS-028, RTO Technical report tr-058, Cost structure and life cycle costs for military systems. Tech. Rep.; North Atlantic Treaty Organisation (NATO); 2003.
[v] Jansohn, P., editor. Modern Gas Turbine Systems. High Efficiency, Low Emission, Fuel Flexible Power Generation. Energy; Elsevier – Woodhead Publishing; 2013.
[vi] Excellence in cost management McKinsey & Co August 2013