Executive Overview A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The A&D supply chain is largely a story of supply chain excellence in procurement and sourcing strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to survive. Government spending drives the defense supply chain. Companies in this industry compete for government contracts that range from hundreds of millions to billions of dollars. The magnitude of these contracts defines winners and losers for the industry. Demand is lumpy and volatile. Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the government re defense spending, but they live contract by contract. In contrast, the commercial aircraft side is much different. It is driven by long-term economic trends Government ups the ante for the latest and best technology for global defense. As the technology in jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more complex with increasing pressures on driving innovation. To better understand the industry in relation to supply chain management, let’s start by looking at it within the larger context of the A&D value network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While the industry is more dependent on software and computer hardware, there has been little collaboration to drive value between trading partners. Also note that this industry has the longest Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-Cash of 152. Table 1. Industry Overview of Trends for the Period of 2010-2016 In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with excerpts from annual reports to enable the reader to understand the “voice” of the industry.

1. A Focus on Aerospace
& Defense Companies
A Seven-Year View of Progress on Supply Chain Excellence
10/17/2017
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC
and Samuel Borthwick
Research Associate
Supply Chain Insights LLC
Supply Chain Metrics That Matter

2. Page 2
Contents
Research
Disclosure
Executive Overview
A Closer Look at the Industry
Progress Versus Other Industries
A Closer Look at Aerospace & Defense Manufacturers’ Growth
Value
Performance
Cash-to-Cash Cycles
Industry Focus
Recommendations
Conclusion
Appendix
Other Reports in This Series
About Supply Chain Insights LLC
About Lora Cecere
About Sam Borthwick
3
3
4
6
9
11
12
13
14
15
20
21
22
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24
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Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. Each report in the series is a deep analysis of supply chain performance within
an industry. This report focuses on the Aerospace & Defense industry for the period of 2010-2016.
Here we analyze the trade-offs to balance growth, profitability, cycles and complexity.
Within the world of supply chain management, each industry is unique. It is dangerous to list all
industries in a spreadsheet and declare a supply chain leader. Instead, we believe supply chain
excellence needs to be evaluated based on a balanced portfolio of metrics, over time, by peer group.
In this series of reports, we analyze the potential of a supply chain peer group, share insights from
leaders within each industry, and give recommendations based on general market trends.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research process. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share, and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials in this report. We publish under the Creative Commons
License Attribution-Noncommercial-Share Alike 3.0 United States and you will find our citation policy
here.

4. Page 4
Executive Overview
A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in
the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology
innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The
A&D supply chain is largely a story of supply chain excellence in procurement and sourcing
strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to
survive.
Government spending drives the defense supply chain. Companies in this industry compete for
government contracts that range from hundreds of millions to billions of dollars. The magnitude of
these contracts defines winners and losers for the industry. Demand is lumpy and volatile.
Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the
government re defense spending, but they live contract by contract. In contrast, the commercial
aircraft side is much different. It is driven by long-term economic trends
Government ups the ante for the latest and best technology for global defense. As the technology in
jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more
complex with increasing pressures on driving innovation. To better understand the industry in relation
to supply chain management, let’s start by looking at it within the larger context of the A&D value
network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are
increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain
Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the
table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry
was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is
down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green
arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While
the industry is more dependent on software and computer hardware, there has been little
collaboration to drive value between trading partners. Also note that this industry has the longest
Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in
government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-
Cash of 152.

5. Page 5
Table 1. Industry Overview of Trends for the Period of 2010-2016
In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with
excerpts from annual reports to enable the reader to understand the “voice” of the industry.

6. Page 6
A Closer Look at the Industry
When we first started the research on the Supply Chain Metrics That Matter report series, we
believed that through the combination of an investment in technology, people, and process,
companies could drive improvement in inventory turns and operating margin as shown in Figure 1. As
will be seen in this report, this is not the case in the Aerospace & Defense Industry. Metrics
improvement within this industry is largely at a standstill.
Figure 1. Driving Performance Improvement
In the Aerospace & Defense Industry, Heico Corporation (Heico) is the supply chain leader, but most
of the industry is at a stasis in metrics performance. (Heico manufacturers electronic equipment for
aviation.) Heico performed above the industry averages in all metrics except inventory turns.
To understand supply chain excellence, let’s look at year-over-year patterns in metric performance
through visualization via orbit charts. To understand an orbit chart, let’s examine Figure 2. The
performance of Heico and United Technologies is charted year-over-year at the intersection of
inventory turns and operating margin (United Technologies makes products for aircraft engines). The
patterns are used to define supply chain excellence. As can be seen in Figure 2, the average
operating margin for Heico for the period of 2010-2016 is 18%, while United Technologies is lower at
13%. Inventory turns for Heico are 2.89 versus 4.99 for United Technologies.

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Figure 2. Orbit Chart of Heico and United Technologies
The patterns tell the story. It is a story of year-over-year metrics changes. The tight pattern of
continuous improvement makes Heico the winner in resiliency while the upward trend defines
improvement. Even though United Technologies’ patterns have better inventory turns, the margins
are lower, and United Technologies’ wide performance swings show the lack of metrics control.
Patterns of supply chain metrics come in many different forms. Note that in Figure 3, General
Dynamics is performing at a higher level of value, with an operating margin of 11% and inventory
turns of 7.46, but there is a lack of resiliency. The metrics pattern is more variable.

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Figure 3. Orbit Chart of Boeing and General Dynamics
In a similar manner, note the patterns of Lockheed Martin and Northrop Grumman in Figure 4. While
Northrop Grumman shows improvement, both companies show wide swings on the orbit chart,
representing a lack of consistency and the inability to be resilient. It is common of for companies in
this industry to have such wide swings due the amount of volatility associated with the defense
industry making consistency hard to come by.

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Figure 4. Orbit Chart of Lockheed Martin and Northrop Grumman
Progress Versus Other Industries
The Supply Chains to Admire, and the Metrics That Matter, research rewards companies that show
improvement while outperforming their peer groups. Companies with tight upward patterns at the
intersection of the metrics are highlighted as winners, while companies with wide swings and
backward progression are penalized.
To help companies understand supply chain excellence through the insights of orbit chart
performance, we developed the Supply Chains to Admire analysis. An overview of the methodology is
shared in Figure 5, with a more complete discussion in the full Supply Chains to Admire 2017 report.
While no company in the Aerospace & Defense Industry met the criteria required to be a winner in the
2017 Supply Chains to Admire research, Astronics Corporation and Heico Corporation were the top
performers on the Metrics That Matter for the 2010-2016 time period.

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Figure 5. Overview of the Supply Chains to Admire Analysis
Figure 6. Winners of the 2017 Supply Chains to Admire Analysis
Note the short list of 24 companies for the 2017 Supply Chains to Admire Award winners.

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A Closer Look at Aerospace & Defense
Manufacturers’ Growth
Though the Great Recession did not necessarily affect government contracts with Defense
companies, it did affect the commercial side of the Aerospace industry. Growth during 2004-2006 was
15%, falling to 10% during the timeframe of 2007-2009. The industry deteriorated even further with a
4% growth rate in 2010-2016. Notice that nearly every company experienced a decrease in growth in
2007-2009 outside of Woodward and Raytheon.
Table 2. Growth and the Supply Chain Index in the Aerospace & Defense Industry
The Supply Chain Index is a measure of supply chain improvement. The lower the score the faster
the rate of metrics improvement at the intersection of inventory turns and operating margin, and
Return on Invested Capital and Growth. In many industries growth and supply chain improvement are

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tightly coupled. However, this is not the case in the A&D sector. (For more on the Supply Chain
Index, reference the Appendix.)
Note that while Astronics, Astrotech, and KLX drove the highest levels of revenue growth, only KLX
drove improvement. In contrast Astronics’ and Astrotech;s improvement levels rank at the bottom of
the list.
Value
Traditional supply chain leaders focus on costs, not on value. There is no industry-standard definition
for value. To try to drive change, here we share the results on two value metrics: market capitalization
and Price to Tangible Book Value. Overall, for the industry, the Price to Tangible Book Values are
low.
Table 3. Company Overview of Market Capitalization and Price to Tangible Book Value

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Performance
While growth fell from 15% to 4%, the story in the A&D industry for the rest of the Metrics That Matter
is stagnation. As you scan Table 4 and look at the averages, note that while Revenue per Employee
increased slightly in the period from 2004 through 2016, there was very little change in the other
metrics with the exception of Cash-to Cash. Also note that during the recession, with the pressure on
working capital, inventory turns improved slightly, but post-recession the industry reverted to the prior
state.
Table 4. Company Overview and Performance for Aerospace & Defense Companies
The most dramatic change is in the shift of the Cash-to-Cash metric. When the Cash-to-Cash value is
low, the need for working capital is reduced. In this period, while most industries improved cash-to-
cash, this was not the case for the A&D industry. This shift for A&D was driven by the elongation of
Days of Receivables.

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Cash-to-Cash Cycles
Cash-to-cash is a compound metric that combines Days of Receivables, Days of Inventory, and Days
of Payables. The formula is:
𝐶𝑎𝑠ℎ − 𝑡𝑜 − 𝐶𝑎𝑠ℎ = 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
In Table 5 we share the impact of supply chain decisions on the components of cash-to-cash. As
seen, all three components associated with Cash-to-Cash increased from 2004-2006 to 2010-2016.
Days of Receivables and Cash-to-Cash both nearly doubled in this timeframe. This is driven largely
by government receivables.
Table 5. Impact on Cash-to-Cash Elements

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Industry Focus
To get a flavor for the industry, we comb through annual reports to consolidate supply chain related
trends. This allows the reader to “hear the voice of the industry.” Supply chain and procurement in
A&D are often used interchangeably. Innovation is the lifeblood of the industry. In the annual reports,
note the focus on supply, risk management, corporate social responsibility, and improving
procurement processes.
2014
Raytheon
Raytheon Company, together with its subsidiaries, is a technology and innovation leader specializing in
defense and other government markets throughout the world. We are dependent upon the delivery of
materials by suppliers, and the assembly of major components and subsystems by subcontractors used in our
products. Some products require relatively scarce raw materials. In addition, we must comply with specific
procurement requirements which may, in effect, limit the suppliers and subcontractors we may utilize. In some
instances, for a variety of reasons, we are dependent on sole-source suppliers. We enter into long-term or
volume purchase agreements with certain suppliers and take other actions to ensure the availability of needed
materials, components and subsystems. We are also dependent on suppliers to provide genuine original
equipment manufacturer parts and have a robust set of standardized policies to detect counterfeit material,
especially electronic components, throughout our supply chain.
Astronics
2014 was an exceptional year at Astronics and our 11th consecutive year of growth. Our sales nearly doubled
in 2014 to $661 million from $340 million in 2013. Net income more than doubled to $56 million from $27
million, while on a per diluted share basis earnings were $2.48 compared with $1.24 in the prior year. This
strong bottom line was after a hefty $19 million in acquisition accounting expenses for the fair value step up of
inventory. Certainly, much of our success must be attributed to the strong aerospace market in which we
participate. Advances in aerodynamics, propulsion technologies and avionics have resulted in aircraft with
higher levels of safety and cost effectiveness. These advances, in turn, have driven ever higher utilization and
production rates, which is good for everybody involved in the industry. But beyond this, our long-standing
practice of consistent, regular investment in our business has paid off handsomely. We invest both in internal
research and product development, complemented by strategic acquisition. We made three such acquisitions
in the latter half of 2013 and one major one in 2014, while engineering and development spending was $76.7
million, or nearly 12% of revenue, well above industry norms. These investments resulted in organic growth of
15% in 2014 with the rest coming from acquisitions.
Lockheed Martin
In 2014, our Aeronautics business segment generated net sales of $14.9 billion, which represented 32% of our
total consolidated net sales. Aeronautics’ customers include the military services and various other government
agencies of the U.S. and other countries. In 2014, U.S. Government customers accounted for 72% and
international customers accounted for 28% of Aeronautics’ net sales. Net sales from Aeronautics’ combat
aircraft products and services represented 23% of our total consolidated net sales in 2014 and 21% of our total

16. Page 16
consolidated net sales in each of 2013 and 2012. Aeronautics is engaged in the research, design,
development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft,
including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics’ major
programs include:
• F-35 Lightning II Joint Strike Fighter – international multi-role, multi-variant, fifth generation stealth fighter;
• C-130 Hercules – international tactical airlifter;
• F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter;
• F-22 Raptor – air dominance and multi-mission fifth generation stealth fighter; and
• C-5M Super Galaxy – strategic airlifter.
The F-35 program is our largest, generating 17% of our total consolidated net sales, as well as 52% of
Aeronautics’ net sales in 2014. The F-35 program consists of a development contract and multiple production
and sustainment activities. The development contract is being performed concurrently with the production
contracts. Concurrent performance of development and production contracts is used for complex programs to
test aircraft, shorten the time to field systems and achieve overall cost savings. We expect the development
portion of the F-35 program will be substantially complete in 2017, with less significant efforts continuing into
2019. Production of the aircraft is expected to continue for many years given the U.S. Government’s current
inventory objective of 2,443 aircraft for the Air Force, Marine Corps and Navy; commitments from our eight
international partners and three international customers; as well as expressions of interest from other
countries. During 2014, we delivered 36 aircraft to our U.S. and international partners, resulting in total
deliveries of 109 3 production aircraft as of December 31, 2014. We have 100 production aircraft in backlog as
of December 31, 2014, including orders from our international partners. For additional information on the F-35
program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
2015
Raytheon
U.S. government sales, excluding foreign military sales, accounted for 68% of our total net sales in 2015. Our
principal U.S. government customer is the U.S. Department of Defense (DoD). 29 32 32 40 41 48 65 68 69 69
70 30 On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (BBA) into law. The BBA
sets fiscal year (FY) 2016 and 2017 DoD spending caps that exceed recent DoD budget funding levels. These
spending caps are recognized by both the Administration and Congress and are therefore expected to lead to
a stable budget process for those two years. In addition, while the spending cap increase does not meet the
DoD's original FY 2016 base budget funding request or its planned FY 2017 funding level, it should provide for
modest growth in the DoD's modernization budgets for FY 2016 and FY 2017. Modernization funding, which
consists of procurement and research and development, is of particular importance to defense contractors.
Despite the expected stability in FY 2016 and 2017, defense budget funding levels, which are subject to
budget and appropriation decisions and processes, are difficult to predict beyond the near-term.
We are also continuing to build strong customer relationships by working with them as partners and including
them on Raytheon Six SigmaTM teams to jointly improve their programs and processes. We are increasingly
focused on responding to our customers' changing requirements with rapid and effective solutions to real-world
problems. In recognition of our customers' constraints and priorities, we also continue to drive various cost

17. Page 17
reductions across the Company by continuing to focus on enterprise collaboration and improving productivity
and strong execution throughout our programs. We have worked to reduce costs across the Company and
improve efficiencies in our production facilities, and we continue to increase value through Raytheon Six
SigmaTM, the implementation of lean processes, reduced cycle times and strategic supply chain initiatives, in
addition to other initiatives.
Astronics
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events,
which may cause operating results to fluctuate. Demand for our products is to a large extent dependent on the
demand and success of our customers' products where we are a supplier to an OEM. In our Aerospace
segment, demand by the business jet markets for our products is dependent upon several factors, including
capital investment, product innovations, economic growth and wealth creation and technology upgrades. In
addition, the commercial airline industry is highly cyclical and sensitive to fuel price increases, labor disputes,
global economic conditions, availability of capital to fund new aircraft purchases and upgrades of existing
aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of
air travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would
reduce orders for new aircraft and would likely reduce airlines’ spending for cabin upgrades for which we
supply products, thus reducing our sales and profits. A reduction in air travel may also result in our commercial
airline customers being unable to pay our invoices on a timely basis or not at all.
Lockheed Martin
Certain of our products require relatively scarce raw materials. Historically, we have been successful in
obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage
raw materials supply risk through long-term contracts and by maintaining an acceptable level of the key
materials in inventories. Aluminum and titanium are important raw materials used in certain of our Aeronautics
and Space Systems programs. While we do not anticipate material problems regarding the supply of our raw
materials and believe that we have taken appropriate measures to mitigate these variations, if key materials
become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or more of our
programs, increased costs or reduced operating profits. No material portion of our business is considered to be
seasonal. Various factors can affect the distribution of our sales between accounting periods, including the
timing of government awards, the availability of government funding, product deliveries and customer
acceptance.
Boeing
We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers
and subcontractors. The most important raw materials required for our aerospace products are aluminum
(sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites
(including carbon and boron). Although alternative sources generally exist for these raw materials, qualification
of the sources could take one year or more. Many major components and product equipment items are
procured or subcontracted on a sole-source basis with a number of companies.
We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance
specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an
extensive qualification and performance surveillance system to control risk associated with such reliance on
third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production
schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our

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customers. We are also dependent on the availability of energy sources, such as electricity, at affordable
prices.
2016
Raytheon
We launched this strategy in 2014. At the time, our U.S. government defense customers had reduced their
budgets, and we needed to respond. We did so by executing our four-pillar growth strategy: building on our
areas of strength within our key mission areas; focusing additional resources on emerging U.S. Department of
Defense opportunities and technologies; engaging key foreign countries as individual markets with multiple
customers; and expanding our advanced cyber solutions into international and commercial markets.
Astronics
2016 was a challenging year for Astronics, one in which the company navigated some significant transitions.
The final numbers are evidence of the challenge: consolidated sales were down 8.5% to $633 million and net
income declined 28% to $48 million. While 2016 was our first year of sales decline since 2003, at the same
time we made progress addressing the challenges and preparing ourselves for success in the immediate
future. Our results were largely driven by transitions in our avionics and semiconductor test product lines, both
the result of customer decisions related to their own market position and both clearly evident early in the year.
We spent much of 2016 working on recovery plans, which we expect will begin to bear fruit as 2017 goes on.
In the end, our Aerospace business saw a decline in sales of 2.9%, or $16 million, which was more than
explained by the $23 million decline in avionics sales. It should be noted that our Test segment, despite a sales
decline of 31% to $99 million, still managed to produce an operating profit of 8.6% of sales. This speaks to the
strong actions taken by our Test management team and the inherent margin potential of the business.
Lockheed Martin
We derived 71% of our total net sales from the U.S. Government in 2016, including 59% from the Department
of Defense (DoD). We expect to continue to derive most of our sales from work performed under U.S.
Government contracts. Those contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance
may extend over many years. Consequently, contracts are often partially funded initially and additional funds
are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on
a contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated
to the contract.
There is also uncertainty regarding actions that may be taken by the new Presidential Administration in light of
recent criticisms of the F-35 program and other large defense programs. President Trump has publicly
expressed concerns over past cost overruns and delays in the program as well as overall program cost and
has publicly requested that a competitor price out an alternative.
Boeing
Market conditions have a significant impact on demand for our commercial aircraft. The commercial aircraft
market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors
underlying long-term traffic growth are sustained economic growth and political stability both in developed and
emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of
aircraft financing, world trade policies, government-to-government relations, technological changes, price and

19. Page 19
other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the
airline industry has been cyclical and very competitive and has experienced significant profit swings and
constant challenges to be more cost competitive. In addition, availability of financing to non-U.S. customers
depends in part on the continued operations of the Export Import Bank of the United States. Significant
deterioration in the global economic environment, the airline industry generally, or in the financial stability of
one or more of our major customers could result in fewer new orders for aircraft or could cause customers to
seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues,
profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial
aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these
macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
Operational challenges impacting the production system for one or more of our commercial aircraft programs
could result in production delays and/or failure to meet customer demand for new aircraft, either of which would
negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely
complex. Operational issues, including delays or defects in supplier components, failure to meet internal
performance plans, or delays or failures to achieve required regulatory certifications, could result in significant
out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to
aircraft performance and/or increased warranty or fleet support costs. Further, if we cannot efficiently and cost-
effectively incorporate design changes into early build 787 aircraft, we may face further profitability pressures
on this program.

20. Page 20
Recommendations
In evaluating supply chain performance, it is important to look at trends within a peer group over time.
Here we look critically at the Aerospace & Defense industry for the period of 2010-2016. A focus on
procurement, cost containment, and continuous improvement drove the industry. Few companies
delivered on a balanced scorecard. As a result, the industry is stuck, and even going backwards, in
important metrics like growth, inventory, and particularly cash-to-cash. Days of receivables is
increasing at a massive rate. As companies study supply chain excellence and corporate
performance, we recommend that supply chain leaders:
1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.
Organizations should benchmark companies within an industry. Each industry has unique rhythms
and cycles. As a result, supply chain excellence analysis needs to be within an industry.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier. The
supply chain is a complex system, with interrelated metrics, with nonlinear relationships. Supply
chain leadership teams should analyze the total portfolio of metrics and study progress at the
intersections of the Effective Frontier. Growth has the highest correlation to market capitalization.
Companies with higher performance are using more advanced analytics to plan outcomes and
design the supply chain.
Figure 7. The Supply Chain Effective Frontier
3) Apply Systems Theory. Teams should evaluate performance over time to understand
improvement, while realizing they are managing a complex system. The functions should be
aligned to a balanced portfolio of metrics representing the Effective Frontier, while functional
metrics should be focused on improving reliability (e.g., first-pass yield, hands-free orders, and
supplier quality, etc.).

21. Page 21
4) Focus on Building Value Networks. While many of these companies could be a powerbroker in
the industry to redefine outside-in processes, all companies are accepting the limitations of the
inside-out supply chain. They operate functional silos with a traditional supply paradigm. The
traditional focus of Lean is not sufficient. This is an opportunity for the industry.
5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.
To make the necessary improvements, companies today must move past an “ERP-centric view”
and build outside-in processes with a focus on value-based outcomes. Network design, supply
chain planning, and revenue management are opportunities for process excellence. The aerospace
and defense industry should turn to the high-tech industry to benchmark and drive innovation.
Conclusion
The story of the A&D industry is a story of survival. With larger increases in the requirements in
working capital, and the lumpy demand of the defense industry, the industry developed strong
procurement practices to drive technology improvements. In order to drive growth and perform better
on the balance sheet, A&D companies need to adopt new procurement practices and stop resistance
to change. For most industries, volatility is the result of seasonality; however, the defense industry is
one that is driven on the unpredictability of government contracts. The lack of seasonality makes it
much more difficult for companies to prepare for such demand volatility. The commercial aircraft
market is the complete opposite in that it depends on long-term economic trends, and is very much
affected by seasonality. These are two very different industries with different challenges, and yet
many companies have a stake in both commercial aircraft and defense. The challenge will be for
companies to effectively create two different strategies that effectively addresses the specific
challenges (government and seasonal volatility) for each sub-industry.

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Appendix
The Supply Chain Index is a measurement of supply chain improvement. We find that supply chain
leaders are usually above their peer group in performance, in the upper 2/3 of the Supply Chain
Index. Companies with low Supply Chain Index scores are usually driving improvement, but are new
at the journey. As a result, the rate of change on Supply Chain Improvement is quicker than that of a
more mature company.
Table A. Performance Factor Analysis on the Supply Chain Index

23. Page 23
Other Reports in This Series
Supply Chain Metrics That Matter – A Focus on Automotive Companies 2017
Published by Supply Chain Insights in August 2017
Supply Chain Metrics That Matter – A Focus on Chemical Companies
Published by Supply Chain Insights in July 2017
Supply Chains to Admire 2017
Published by Supply Chain Insights in June 2017
These reports, and additional information on the Supply Chain Metrics That Matter methodology, are
available at our Supply Chain Insights website and in the Beet Fusion community.

24. Page 24
About Supply Chain Insights LLC
Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is in its sixth year of operation.
The Company’s mission is to deliver independent, actionable, and objective advice for supply
chain leaders. If you need to know which practices and technologies make the biggest difference to
corporate performance, we want you to turn to us. We are a company dedicated to this research. Our
goal is to help leaders understand supply chain trends, evolving technologies and which metrics
matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in August 2015, the fifth book, The Shaman’s Journal 2016,
published in June 2016 and the sixth book, The Shaman’s Journal 2017, published in July 2017.
With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and is a frequent speaker on the
evolution of supply chain processes and technologies. Her research is designed for the early adopter
seeking first mover advantage.
About Sam Borthwick
As a Research Associate, Samuel Borthwick analyzes balance sheet and income
statement data for the Supply Chains to Admire Report along with the monthly
Metrics That Matter series. A recent graduate of Purdue University, majoring in
Supply Chain Management, Sam loves data. He lives in Indianapolis, Indiana
where he enjoys playing tennis and spending time with his family.