Forecasting Demand in the Aerospace and Defense Industry
Safavi, Alex, The Journal of Business Forecasting
Describes forecasting practices in the Aerospace and Defense industry, as well as various problems which this industry encounters in its forecasting efforts ... because of low demand, it is advisable to forecast in quarterly or annual buckets ... the quality of data available in this industry is not as good as in other industries ... proper application of forecasting models and S&OP process is also important.
Forecasting in the Aerospace and Defense (A & D) industry is as important, if not more, as in the consumer products industry. High levels of inventory - that often exceeds multiple years of sales - highlight the opportunity that accurate forecasts offer in this industry to improve operating margins and service. In this article, we will discuss the challenge the Aerospace and Defense industry faces in forecasting demand and ways to address it.
PRODUCTS AND SERVICES
A & D products range from Aircraft, Helicopters, Ships and Tanks to Satellites, Space Shuttle, Missiles, Surveillance Systems and Radar Systems. (see Figure 1) They typically cost several million dollars each, require long lead times and are made to order. They are highly engineered and costly to design and manufacture. Its products often have a long life span. Once manufactured, they go through multiple engineering changes over their lifespan. Maintenance, Repair and Overhaul (MRO) is indispensable for operating A&D products. Maintenance may be conducted at multiple levels of the supply chain - in the Airfield, Contractor Facility or Depot.
Since few customers buy relatively small numbers of multi-million dollar Aircrafts and other Aerospace systems, these products are considered low demand compared to consumer goods. Although the components are built-to-last, annual demand for common components could be in the order of tens of thousands. Orders for new systems often involve long negotiations, but orders for spare components can be typically placed from the manufacturer's catalog.
The suppliers can be categorized into two tiers. Tier 1 Aerospace manufacturer and Defense contractors consist of a handful of large OEMs such as Boeing, Lockheed Martin, Raytheon and EADS that manufacture and provide spare part and MRO (Maintenance, Repair and Overhaul) service for fixed wing Aircraft, Rotorcraft and other commercial and military systems. Tier 2 includes major component suppliers such as General Electric which provides engines for an array of Aircraft. Tier 2 companies provide Depot level support for their hardware. Aerospace systems are fairly expensive and typically enjoy a long lifespan that may exceed 20 years. Therefore, it is often more economical to re-manufacture or repair the old ones than to buy new ones. MRO is a significant source of revenue for the Aerospace manufacturers and Defense contractors. Increasing, Tier 1 suppliers outsource manufacturing and focus on hardware design, assembly and after-market service. Other large Aerospace suppliers, such as Honeywell, provide a variety of parts, services and logistical support.
CUSTOMERS AND DRIVERS OF DEMAND
Since A & D suppliers rarely sell products to individuals, demand for commercial hardware is very much affected by macro economic factors such energy prices, discretionary spending, population growth, and wage inflation. In the absence of passengers and vacationers or in the face of operating losses, commercial airlines and tour operators curtail or delay the purchase of new aircrafts. Aerospace military demand, on the other hand, is subject to geo-political changes, congressional spending, budgetary constraints and government regulations. The primary customers for such products are US Armed Services and Foreign Governments.
VARIABLES REQUIRED FOR A FORECAST
Prior to making major R&D investment to develop a commercial A&D or weapon system, a long-range forecast is required. …