Value -l aerospace original equipment manufacturers

Value-leVerage by

aerospace original

equipment manufacturers

proefschrift

ter verkrijging van de graad van doctor

aan de technische Universiteit delft,

op gezag van de rector Magnificus, prof. ir. k.Ch.A.M.luyben,

voorzitter van het College voor Promoties,

in het openbaar te verdedigen

op woensdag 27 oktober 2010 om 14.00 uur.

door

Wouter Willem Adriaan BeelAerts vAn BloklAnd

bedrijfskundig ingenieur

geboren te Apeldoorn

Value-Leverage by aerospace original equipment manufacturers

2

Dit proefschrift is goedgekeurd door de promotor:

Prof.mr.dr.ir. S.C.Santema

Samenstelling promotiecommissie:

Prof.ir. K.Ch.A.M. Luyben Rector Magnificus, voorzitterProf.mr.dr.ir. S.C. Santema Technische Universiteit Delft, promotorProf.dr.ing. J.J.A.M. Reijniers MBA Nyenrode Business University Prof.dr. A. Heene Universiteit Gent Prof.dr. M. Kleinaltenkamp Freie Universität BerlinProf.dr. P.M.J. Mendes de Leon Rijks Universiteit Leiden Prof.dr. R. Curran Technische Universiteit DelftProf.dr. J.A.A. van der Veen Universiteit van Amsterdam

Value-leverage by aerospace original equipment manufacturers

W.W.A. Beelaerts van Blokland

Proefschrift Technische Universiteit Delft

ISBN: 978-90-77951-13-2

Trefwoorden:

Value-leverage, aerospace, co-development, co-production, lean manufacturing, supply chain, open innovation

Production and publishing:

Graphicom International, Pijnacker

Copyright @ 2010 by W.W.A.Beelaerts van Blokland All rights are reserved. No part of this puiblication may be reproduced, copied to an automated database ormade public (in whatever form) without written authority in advance by the editors and authors.

Preface

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Questioning, structuring, reflecting and reasoning are the essentials of re-search, the drivers for writing a dissertation. These processes were in place tocome to scientific and societal contributions to the field of research, the ae-rospace industry. Personally, it was an intensive learning experience, a journey,which leads to the final goal: the discovery of new variables to model the phe-nomenon of value-leverage. By designing the value-leverage model, new in-sights are made available to the academic community and the aerospace fieldon having a better understanding about how value can be created with theco-development and co-production of aircraft.

To reach this goal the research process involving companies formed a new wayof learning, which was one of my personal goals. Learning about researching,literature, the aerospace field and sharing views with academia is a most chal-lenging and intellectual experience. It is not only the academic exercise, itwas the sharing of results with academics and students, which was and still isa most inspiring experience. Without their valuable contributions, it was notpossible to explore this new route and to reach the goal.

Of great importance in this respect is the supervision and guidance of my pro-moter, professor Sicco Santema. He taught me how to approach and designthe research and the way of reasoning by reflecting on my work to make stepsleading gradually to a profound result. This research would have been impossible without exploration and collabo-ration with the industry. Companies early involved in the research processwere Cisco Systems, ASML and PACCAR-DAF Trucks for which I am thank-ful. From the academic side I am grateful for sharing research results at confe-rences, important for valuable feedback on my research.

My wife played an important role for which I am thankful. Many times we dis-cussed various aspects of the research, which contributed to the realization ofthis work.

Wouter Beelaerts van BloklandSeptember, 2010

Preface


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Abstract

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With the creation of new aircraft products; Embraer E-170/190, Dassault 7X,Airbus A380 and Boeing B787, aerospace original equipment manufacturers(OEMs) involve suppliers not only with the co-production of aircraft sub sys-tems, but also with the entire development of sub systems, like fuselage andwings. Hence, the value to create and produce aircraft tends to shift for a majorpart from the OEM towards the suppliers. In fact, the aerospace OEM leversvalue on suppliers for the creation of new value, which is the subject of thisthesis: “value-leverage”.

Value-leverage is the capability of an aerospace OEM-company to lever valueon suppliers for the creation of new aircraft by co-development and co-pro-duction. The objective of this dissertation is to measure value-leverage per-formance by aerospace OEMs. It is of interest to research this phenomenon ofvalue-leverage as the aerospace industry is characterized by high capital in-tensiveness and development risk involved with the creation of aircraft.

The principle of a “lever” is used to explain the phenomenon of value-lever-age. The aerospace OEM functions as pivot, balancing demand and supply.The pivot position or value-leverage position shifts due to the down flow ofvalue from the OEM towards suppliers. The value-leverage position of the ae-rospace OEM-company depends on the degree of value-leverage on supplierson one side and the customer demand for aircraft at the other side. The goalof this research is to know if variables can be found to express and measurevalue-leverage by the aerospace OEM-company.

By exploratory interviews in the Netherlands and literature research towardslean manufacturing, supply chain, open innovation and OEM network orga-nisation, variables are found that express value-leverage, which are productor company level related. The variables related to product level are applied tofour aircraft cases; Airbus A380, Boeing B787, Embraer-E-170/190 and Das-sault 7X. The model on product level, in the form of a lever, shows how tomeasure value-leverage by aerospace OEMs and its effects by plotting the valuetime-curve, regarding time to break-even, investment level and market impact.

Abstract


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The company related variables, are applied to seven aerospace OEM compa-nies: EADS, Lockheed Martin, Boeing, Embraer, General Dynamics, NorthropGrumman and Bombardier. To pre-design the value-leverage model on com-pany level, data from aerospace OEM companies are analysed and preliminarytested in comparison with a group of automotive OEM companies to know ifvalue-leverage is applicable to more sectors of industry. The pre-designedmodel shows that the value-leverage network position and performance of theaerospace OEM-company can be determined by applying the found variables.

Table of contents

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Preface

Abstract

Table of Contents

List of abbreviations

1 Introduction

1.1 Introduction1.2 Research background1.2.1 Aircraft developments in the aerospace industry1.2.2 Trends in the aerospace industry1.3 Topic1.3.1 Value1.3.2 Leverage1.3.3 Value-leverage1.4 Research Strategy of Air Transport and Operations1.5 Scope of the research field1.5.1 Lean manufacturing1.5.2 Supply Chain Management1.5.3 Open innovation1.5.4 Focal OEM value network1.6 Research framework1.7 Exploratory practice research1.7.1 Cisco Systems1.7.2 ASML1.7.3 PACCAR – DAF Trucks1.7.4 Conclusions exploratory practice research1.8 Research contributions1.8.1 Scientific contribution1.8.2 Managerial contribution1.8.3 Societal contribution1.9 Structure of this dissertation

2 Research Design

2.1 Introduction2.2 Scope of research2.3 Research process definition2.4 Research questions2.5 Research domain

Table of contents

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2.6 Research method2.6.1 Exploratory practice research method2.6.2 Case research method for aircraft cases2.6.3 Literature research method2.7 Data analysis2.8 Research design

3 Literature research

3.1 Introduction3.2 Literature research3.2.1 Analysis of lean manufacturing along value drivers3.2.2 Analysis of supply chain along value drivers3.2.3 Analysis of open innovation along value drivers3.3 References reviewed by literature research3.3.1 Variables found3.3.2 Value driver 1: Market demand3.3.3 Value driver 2: Co-development3.3.4 Value driver 3: Co-production3.3.5 Value driver 4: OEM value network position3.4 Conclusion

4 Variables applied to aircraft cases, product level

4.1 Introduction4.2 Case research : aircraft Embraer E-170/1904.2.1 Introduction4.2.2 Variables along value drivers4.2.3 Summary case aircraft Embraer E-170/1904.3 Case research: aircraft Dassault Falcon 7X4.3.1 Introduction4.3.2 Variables along value drivers4.3.3 Summary case Dassault 7X4.4 Case research : aircraft Boeing B7874.4.1 Introduction4.4.2 Variables along value drivers4.4.3 Summary4.5 Case research : aircraft Airbus A3804.5.1 Introduction4.5.2 Variables along value drivers4.5.3 Summary case A 3804.6 Summary of cases4.7 Variables and relations4.8 Conclusion

5 Variables at aerospace OEM-company level

5.1 Introduction5.1.1 Correlation of variables5.1.2 Analysis of value network position variables: T/C-P/C

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5.1.3 Analysis of value network position variables: T/C-RD/C5.1.4 Analysis of value network position variables: P/C – RD/C5.1.5 Variables and relations5.2 Conclusion

6 Value leverage model

6.1 Introduction6.2 Relations between variables through time on product level6.2.1 Value-time analysis Embraer E-170/1906.2.2 Value-time analysis Dassault 7X6.3 Comparing value time curves Embraer E-170/190 and Dassault 7X6.4 Comparing value-leverage position Embraer 170/190 and Dassault 7X6.5 Value-leverage preliminary model on product level - aircraft6.5.1 Relation between variables through time on company level6.5.2 Method6.5.3 Data sample6.5.4 Analysis: Profit per Capita6.5.5 Analysis: R&D per Capita6.5.6 Analysis: Turnover per Capita6.5.7 Sub conclusion6.5.8 Analysis of historical correlation of value-leverage relations6.5.9 Sub conclusion6.6 Value leverage model on aerospace OEM-company level6.7 Conclusion

7 General conclusions

7.1 Introduction7.2 Research background and process7.3 Research questions7.4 Answers to the sub research questions7.5 Answer to the main research question7.6 Research contributions

8 Recommendations

9 Epilogue

References

Appendices: A, B, C, D

Appendix A: Report on exploratory practice research; interviewsAppendix B: Literature researchAppendix C: Research data on automotive and aerospace companiesAppendix D: Research data value-time curvesSummary

Nederlandse Samenvatting

Curriculum Vitea

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FIGURE 1:

COMPLEXITY REDUCTION AT AEROSPACE OEM INTEGRATOR EUROCOPTER

FIGURE 2:

DEMAND AND SUPPLY VALUE SYSTEM

FIGURE 3:

VALUE CHAIN, PORTER (1985)

FIGURE 4:

LEVER PRINCIPLE

FIGURE 5:

VALUE-LEVERAGE BY THE FOCAL OEM-COMPANY

FIGURE 6:

KRALJIC MATRIX

FIGURE 7:

CLOSED INNOVATION VERSUS OPEN INNOVATION (CHESBROUGH, 2003)

FIGURE 8:

CO-INNOVATION VALUE EFFECTS (ODENTHAL ET AL., 2004)

FIGURE 9:

HIERARCHY OF COMPETENCIES (ADAPTED FROM TORKKELI, 2002)

FIGURE 10:

THE MAKE-OR-BUY FRAMEWORK (ADAPTED FROM CANEZ, 2005)

FIGURE 11:

VALUE NETWORK (ADAPTED FROM PETRICK, 2006)

FIGURE 12:

SIMPLIFIED AEROSPACE OEM INTEGRATOR WITH SUPPLY BASE (ADAPTED FROM PETRICK, 2006)

FIGURE 13:

VALUE-LEVERAGE ANALYTICAL FRAMEWORK

FIGURE 14:

STRUCTURE OF THE DISSERTATION

FIGURE 15:

THEORETICAL CHANGES ON THE TIME CURVE

FIGURE 16:

RESEARCH DESIGN PROCESS

FIGURE 17:

VALUE-LEVERAGE VARIABLES AND RELATIONS ON PRODUCT LEVEL

FIGURE 18:

TURNOVER PER CAPITA VERSUS PROFIT PER CAPITA

FIGURE 19:

TURNOVER PER CAPITA VERSUS RESEARCH AND DEVELOPMENT PER CAPITA

FIGURE 20:

PROFIT PER CAPITA VERSUS RESEARCH AND DEVELOPMENT PER CAPITA

FIGURE 21:

VALUE-LEVERAGE VARIABLES AND RELATIONS ON AIRCRAFT OEM-COMPANY LEVEL

FIGURE 22:

EMBRAER E-170/190 VALUE TIME-CURVE BASED ON IMP

FIGURE 23:

DASSAULT 7X VALUE TIME-CURVE BASED ON IMP

FIGURE 24:

DASSAULT 7X AND EMBRAER E-170/190 VALUE TIME-CURVES BASED UPON IMP

FIGURE 25:

VALUE-LEVERAGE POSITION FOR AIRCRAFT E-170/190 FOR CO-DEVELOPMENT

FIGURE 26:

VALUE-LEVERAGE POSITION FOR AIRCRAFT E-170/190 FOR CO-PRODUCTION

FIGURE 27:

PRELIMINARY DESIGN OF THE VALUE-LEVERAGE MODEL FOR AEROSPACE PRODUCT LEVEL

FIGURE 28:

THE P/C FOR BOTH INDUSTRIES

List of figures

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List of figures

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FIGURE 29:

THE R&D/C FOR BOTH INDUSTRIES

FIGURE 30:

THE T/C FOR BOTH INDUSTRIES

FIGURE 31:

HISTORICAL CORRELATIONS; T/C VERSUS P/C

FIGURE 32:

HISTORICAL CORRELATIONS; T/C VERSUS RD/C

FIGURE 33:

HISTORICAL CORRELATIONS; P/C VERSUS RD/C

FIGURE 34:

PRELIMINARY VALUE-LEVERAGE MODEL FOR AEROSPACE OEMS

FIGURE 35:

PRELIMINARY DESIGN OF THE VALUE-LEVERAGE NETWORK POSITION MODEL FOR AEROSPACE

OEM COMPANY LEVEL

FIGURE 36:

VALUE-LEVERAGE POSITION FOR AIRCRAFT E-170/190 FOR CO-DEVELOPMENT

FIGURE 37:

VALUE-LEVERAGE POSITION FOR AIRCRAFT E-170/190 FOR CO-PRODUCTION

FIGURE 38:

DASSAULT 7X AND EMBRAER E-170/190 VALUE TIME-CURVES BASED UPON IMP

FIGURE 39:

PRELIMINARY DESIGN OF THE VALUE-LEVERAGE MODEL FOR AEROSPACE PRODUCT LEVEL

FIGURE 40:

PRELIMINARY DESIGN OF THE VALUE-LEVERAGE NETWORK POSITION MODEL FOR AEROSPACE

OEM COMPANY LEVEL

FIGURE 41:

PRELIMINARY DESIGN OF THE VALUE-LEVERAGE MODEL FOR AEROSPACE OEM PRODUCT AND

COMPANY LEVEL

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TABLE 1:

AIRCRAFT SYSTEM AND COST DISTRIBUTION

TABLE 2:

VARIABLES FOUND FROM CISCO SYSTEMS: MARKET DEMAND

TABLE 3:

VARIABLES FOUND FROM CISCO SYSTEMS: CO-DEVELOPMENT

TABLE 4:

VARIABLES FOUND FROM CISCO SYSTEMS: CO-PRODUCTION

TABLE 5:

VARIABLES FOUND FROM CISCO SYSTEMS: OEM-COMPANY VALUE NETWORK POSITION

TABLE 6:

VARIABLES FOUND FROM CISCO SYSTEMS ALONG VALUE DRIVERS

TABLE 7:

VARIABLES FOUND FROM ASML: MARKET DEMAND

TABLE 8:

VARIABLES FOUND FROM ASML: CO-DEVELOPMENT

TABLE 9:

VARIABLES FOUND FROM ASML: CO-PRODUCTION

TABLE 10:

VARIABLES FOUND FROM ASML: OEM-COMPANY VALUE NETWORK POSITION

TABLE 11:

GROUPING VARIABLES FOUND WITH ASML ALONG VALUE DRIVERS

TABLE 12:

VARIABLES FOUND WITH PACCAR-DAF TRUCKS: MARKET DEMAND

TABLE 13:

VARIABLES FOUND WITH PACCAR-DAF TRUCKS: CO-DEVELOPMENT

TABLE 14:

VARIABLES FOUND WITH PACCAR-DAF TRUCKS: CO-PRODUCTION

TABLE 15:

VARIABLES FOUND WITH PACCAR-DAF TRUCKS: OEM VALUE NETWORK POSITION

TABLE 16:

GROUPING VARIABLES FOUND FROM PACCAR DAF TRUCKS ALONG VALUE DRIVERS

TABLE 17:

GROUPING FOUND VARIABLES ALONG VALUE DRIVERS

TABLE 18:

VARIABLES FOUND ON LEAN MANUFACTURING

TABLE 19:

REFERENCES AND VARIABLES FOUND ON SUPPLY CHAIN

TABLE 20:

VARIABLES FOUND ON OPEN INNOVATION

TABLE 21:

OVERVIEW OF REFERENCES REVIEWED

TABLE 22:

OVERVIEW OF VARIABLES FOUND

TABLE 23:

EMBRAER E-170/190 COST DISTRIBUTION

TABLE 24:

ANALYSIS ON VALUE DRIVERS

TABLE 25:

DASSAULT 7X COST DISTRIBUTION

TABLE 26:


TABLE 27:

LAUNCH FUNDING FOR THE BOEING 787 (PRITCHARD AND MACPHERSON 2003)

TABLE 28:

BOEING B787 COST DISTRIBUTION

TABLE 29:


List of Tables

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TABLE 30:

AIRBUS A380 COST DISTRIBUTION

TABLE 31:


TABLE 32:

COMPARISON OF VARIABLES ALL CASES

TABLE 33:

SIGNIFICANCE OF CRITICAL VALUE

TABLE 34:

R AN R-SQUARED VALUES OF AIRCRAFT OEM COMPANIES

TABLE 35:

ANALYSIS ON VALUE TIME-CURVE

TABLE 36 :


TABLE 37:

COMPARISON VARIABLES EMBRAER-DASSAULT

TABLE 38:

INDUSTRIES CRITICAL VALUE

TABLE 39:

HISTORICAL CORRELATION OF CRITICAL VALUES

TABLE 40:

THE STUDY SAMPLE

TABLE 41:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR P/C

TABLE 42:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR R&D/C

TABLE 43:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR T/C

TABLE 44:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR HISTORICAL T/C VERSUS P/C

TABLE 45:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR HISTORICAL T/C VERSUS RD/C

TABLE 46:

INDUSTRIES’ STATISTICAL SIGNIFICANCE FOR HISTORICAL P/C VERSUS RD/C

TABLE 47:

R AND R-SQUARED VALUES OF AIRCRAFT OEM COMPANIES

TABLE 48:

GROUPING REFERENCES ON LEAN MANUFACTURING ALONG VALUE DRIVERS

TABLE 49:

GROUPING REFERENCES ON SUPPLY CHAIN ALONG VALUE DRIVERS

TABLE 50:

GROUPING REFERENCES ON OPEN INNOVATION ALONG VALUE DRIVERS

TABLE 52:

FINANCIAL DATA EMBRAER 170/190

TABLE 53:

VALUE-TIME CURVE DATA FOR EMBRAER

TABLE 54:

FINANCIAL DATA DASSAULT FALCON 7X

TABLE 55:

VALUE-TIME CURVE DATA DASSAULT FALCON 7X

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AC Aircraft

AVR Average Value R (for aerospace OEM companies)

BEQ Break-Even Quantities

BET Break-Even Time

IMP Investment Multiplier

LSSI Large Scale System Integrator

MRO Maintenance Repair and Overhaul

MS Market Share

NCV-N Net Cumulative Value - Negative

NCV-P Net Cumulative Value - Positive

NCVTP Net Cumulative Value Tipping Point

P/C Profit per Capita

PMP Production Multiplier

RD/C Research & Development per Capita

T/C Turnover per Capita

TTM Time To Market

VLNP-OEM Value-Leverage Network Position - OEM

VLP-CD Value-Leverage Position - Co-Development

VLP-CP Value Leverage Position - Co-Production

List of abbreviations

Introduction

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1.1 Introduction

This dissertation is about value-leverage on suppliers by aerospace originalequipment manufacturers (OEMs). The research comprises a study to identifyvariables to be able to measure value-leverage and include the developmentof a model based upon the identified variables. This section consists of positi-oning the context and the content of the dissertation.Firstly, in section 1.2, the background of the research is presented to get un-derstanding about the context of this dissertation. The background consistsof section 1.2.1: aircraft developments and section 1.2.2: the trends in the ae-rospace industry. Secondly, the content of this dissertation is proposed by the topic on value-leverage in section 1.3. In section 1.4, the research strategy of the chair AirTransport and Operations (ATO) is presented to create understanding for therelevance of this dissertation for the chair. In section 1.5, the scope of the re-search field is outlined by addressing the fields of theory, which are involvedwith the topic and in line with the ATO research strategy. In section 1.6, aresearch framework is proposed derived from the research background andscope of the research field and topic. Here, exploratory research is structuredby interviewing experts to identify and verify further interest to the topic andexplore variables related to the topic in section 1.7. The research contributionsare presented in section 1.8, to motivate why it is of interest to research thissubject. The outline of the dissertation is presented in section 1.9: “Structureof the dissertation” to navigate throughout the research.

1.2 Research background

This section introduces the research background, by describing the trends inthe aerospace industry and development in the aircraft industry to define thecontext of the dissertation.

1.2.1 Aircraft developments in the aerospace industry

Flying has been a dream of humankind for eras. Greek mythology has Daedulusand his son Icarus, and Leonardo da Vinci sketched an aircraft as early as 1510.It were however the Wright brothers in 1903 who achieved the first poweredflight in a ‘heavier than air’ structure. Since then, flying has become common-place. The aircraft industry is considered a high-tech industry and to many

Introduction1


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people high-tech and innovation are closely connected. Although the aircraftin itself is limited in its physical form, the technologies to build it and operateit are innovative. The episode in between 2000 and 2008 concerns an inte-resting part in the history of the aerospace industry as for instance Boeing withthe development of the B787, Airbus with the A380, Embraer with E-170/190range and Dassault with the Falcon 7X, setting the pace for the coming de-cennia. Other players in this field are for instance General Dynamics, Nor-throp Grumman, Raytheon, and Alenia Aeronautica. Related with aircraftOEM-companies are the aircraft engine companies such as Rolls Royce, Ge-neral Electric and Pratt & Witney, known for their involvement with the de-velopment and production of aircraft engines. Two cases, the A380 and B787 are examples of aircrafts, which were for theperiod 2000-2008 in development and initial production. The aviation com-munity perceived the B787 as “game changer” as it facilitates a new businessmodel for airlines being “long haul point-to-point”. This business model is analternative to the already existing “hub and spoke” business model for combi-ning short haul and long haul flights. The differences between the two arethat with the long haul point-to-point business model a destination can bereached in one flight operation, over longer distances, bypassing the large con-gested hubs, which makes the venue of the B787 aircraft so interesting. Thehub and spoke concept is making use of large pivotal airports like Heathrowin London, Charles the Gaulle in Paris, JFK at the USA east coast from whichthe final destinations can be reached. The A380 is developed to reduce airportcongestion at the large hubs. The case A380 offers an opportunity to research as well. The development of theAirbus A380 took place around the same period. This aircraft is especially deve-loped for the jumbo segment carrying 500 to 600 passengers to serve the existinghub and spoke business model. Boeing was the only player in this “jumbo” seg-ment since the past decades. The B747 fleet was at the end of its lifetime on onehand and at the other hand the venue of the A380 could improve the capacityof the large hub airports as a solution to reduce airport congestion. Boeing and Airbus cooperated during the initial development phase of thisnew Jumbo jet under the name A3XX. Boeing decided to chose finally for thedevelopment of the B787. The reason was that the market potential forjumbo’s was limited whilst the market potential for flying more direct to thefinal destinations bypassing the large congested hubs, was much larger. It is ofinterest to involve the real life cases A380 and B787 in this research to knowif variables found by exploratory and literature are applicable. Other aircraft developments fitting in this period 2000-2008, are the regionaljet by Embraer E-170/190 range and the business jet Dassault 7X Falcon. Thedevelopment of these aircraft started in 1999 respectively 2001. These aircraftare already a few years in production. Therefore, it is possible to research thesecases over a longer period. The aerospace domain provides real life aerospacecases suitable for research fitting in case research to value-leverage.

Introduction

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1.2.2 Trends in the aerospace industry

During the last sixty years, the slogan in the aerospace industry has changedfrom higher, faster, and farther to better, faster and cheaper. Murman et al,(2002) stated in this respect that a lean organisation is a more flexible and amore adaptive organisation with respect to its environment. One industry tofollow suit relatively late in the adoption of lean principles is the aerospaceindustry. In Flight International (1998), UK aerospace company BAE Systemsexpressed its view that the aerospace is ten to fifteen years behind the auto-motive industry in implementing the lean philosophy. Despite the criticismthat lean is not transferable to other industries, Cook (1999) and MIT’s LeanAerospace Initiative (Murman et al., 2002) and Crute, Ward, Brown and Gra-ves (2003), states that the aerospace industry is “in the grip of a revolution”,named ‘lean’. The relatively new theory destines from the automotive aims toeliminate waste in order to achieve “faster development, better quality andlower cost”.

Companies who struggled to adapt to the environment such as Mc Donnel-Douglas were taken over or merged with other companies. This consolidationprocess resulted in a few large conglomerates in the aerospace industry. Besidesthis consolidation trend, companies changed their business model, incorpo-rating aftermarket services and financial services. Another recent trend is observed at Boeing Commercial Aircraft (BCA), byadopting the integrators role and outsourcing more production to subcontrac-tors for the production of the Boeing B787. This business model provides anexample how a company can free up its resources by using partnerships in sha-ring risks and revenues (e.g. Petrick, 2007). A word of caution for the successof this business model is needed, however, as regular reported news in AviationWeek indicated that Boeing faces problems in fitting the parts together, lea-ding to two years of delay.

Similarly, changing business models in the aerospace industry cause a shift inresponsibilities in the supply chain. Suppliers are more involved in the designand production of parts and subassemblies while the integrator focuses on in-tegration capabilities and services. This results in strong dependence of theintegrator on the network and requires strong partnerships with all upstreamsuppliers in the supply base (Petrick, 2007). Within the new emerging supplychain structure the pressure, which forced the OEMs to coordinate and main-tain in-house productivity have reduced. This has changed the supply chainstructure and decentralised the flow of information. OEMs have transferredrisk upstream the supply chain, but in doing so they have lost direct controlof the information flows at the basic supply and demand level. Although theOEMs remain strategically powerful, they have lost operational control of out-sourced work packages, reducing their overall power over the supply chain(Bales, 2004).


18

One of the effects of this change in paradigm is that the balance of power inthe supply chain is changing, leading to different roles for integrators and sup-pliers. Tier-1 suppliers increase their power in the supply chain due to theirkey role in manufacturing parts and subassemblies. Kemppainen and Vepsa-lainen, (2003) described the trend that supply chains are tight because of thesurge in aircraft production rates. Lead-times for development programmes be-come shorter and generate relatively fast product introductions. The result isthat product development and investment in R&D, have to work well aheadof the end-customer demand requirements, which is recognized as the tech-nology push – market pull problem.

Another industry development contributing to the mentioned trends are theincreased competition due to consolidation in the aerospace industry (Birkleret al., 2003) and the increased demand for improved affordability by the cus-tomers (Smith, Tranfield, 2005). This increased competitive pressure has for-ced the aerospace companies to focus more on cost reduction. However, Smithand Tranfield (2005) indicate that the aerospace industry is still strugglingwith this strategic shift. Close supply chain cooperation has always been pre-sent in the aerospace industry, but the balance of power remains tilted to theprime contractors, i.e. the integrators. The trends in the aerospace manufac-turing industry show that the industry is challenged by the drive to make ope-rations lean and business innovative. This requires more insight in how tomanage new product introduction, how to organize the value chain, and howto leverage value on the suppliers. Smith and Tranfield (2005) list the trendsin the European aerospace sector during the last decade as follows: - Prime contractors are reducing their supplier base. - Increase of long- term agreements with suppliers.- Increase of supplier responsibility for complete subsystems as prime con-tractors are shifting value from in-house production to suppliers.

- Focus on assembly & integration by the integrators and more involvementof suppliers in development programmes.

An aircraft integrator, for instance Eurocopter, producer of helicopters withbase in Marseille France, has principally a great range of various suppliers, allrelated to a certain extent to each other. This means that aircraft productionis taking place in a highly complex supply system as can be expected withworld leading aerospace enterprises. To clear out the supply system, three op-tions of rationalization and integration are recognized (figure 1); a. pre-assem-bly/kitting, b. upstream integration and c. elimination of suppliers.

Introduction

19

a.) Pre-Assembly/Kitting; the first option is making a group of suppliers thatall produce parts for the same sub-assembly. They will all deliver to a certainsub-integrator who will assemble the part and deliver it to integrator. If youcan link one supplier to another, this sub-assembly can already be done outsidethe integrator and only one supplier will deliver a more finished part. You willonly have to manage one supplier instead of a whole range. Most of the time,one of the big suppliers A, B or C will take the initiative (A in this figure)and will be responsible for the organisation of the kitting. The integrator willonly be handling one supplier and the others deliver to this one provider. Thesupply base is decreased in number and form, the transaction costs and riskswill lower while responsiveness and innovation is increased (Choi, Krause,2005). More has to be bought and less assembled in-house.

b) Upstream Integration; in the second scheme, A, B and C can either be sup-pliers or departments within an integrator (mechanical, electrical, structuraletc.). They both deliver to the final assembly line. The idea is to shift the workupstream so that the FAL only has to deal with one provider. The departmentscan then be seen as a tier one supplier, but internally. Eventually all the partsthat arrive from the different departments are all sub-assemblies in such waythat in the FAL they only have to assemble the big parts. Assembly time isgained and work is better distributed.

c) Elimination of the lowest tiers; it is a simple visualization of the target situ-ation but in reality it is not that simple. Supplier B and C for example can stilldeliver directly to the integrator. Actually these first tier suppliers are shiftedto a second tier position, as visible in the picture, but not for all parts. Thegoal is to outsource everything to get rid of the suppliers as tier one. However,the reality is, because of the complexity of the supplier base, that some second

figure 1: complexity reduction at aerospace oem integrator eurocopter


20

tier suppliers will always deliver certain parts directly to the integrator. Some-times the supplier is not willing to change from a tier one to a tier two position.The supplier considers direct supply as a major advantage to have the integra-tor on his portfolio. From these trends, it can be concluded that the suppliers form an importantvalue driver to generate value by the aerospace OEM-company for the co-de-velopment and co-production of aircraft. Co-development in this respect is the competence of:- integrating multidisciplinary and multicultural teams during the joint de-finition phase,

- mastering key technologies by concentration on design, materials enginee-ring, system integration, project management, support to clients,

- building networks by negotiations to endeavour participation in projects,investments, quality, requirements to the technical specifications, as-signment of responsibilities in case of failures in design or manufacture.

Co-production of complete sub systems includes manufacturing as well as thequalification and testing of the sub systems.

Aircraft system and cost distribution It seems suppliers are involved for specific systems related to the functions ofan aircraft. Aircraft functions are: wings, fuselage, tail section with stabilizersor “empennage”, engines and various systems to control the aircraft. The pro-gram management to certify, test and initial market the aircraft belongs to thecost distribution. The information derived from Boeing (2002), on “aircraftcost distribution” for aircraft ranging from US$40 million up to US$ 60 mil-lion, makes it possible to know the value, based on cost of each aircraft func-tion. The division of value is expressed by a percentage of the total value ofthe aircraft, per aircraft function, and forms the reference level useful for caseresearch (table 1). By involving suppliers with co-development and co-pro-duction of aircraft, the value indeed shifts from the aerospace OEM towardsthe suppliers. The aerospace OEM integrator focussed on design, integration– assembly, and program function. To understand the value involved with thesub systems, a cost distribution is presented for an aircraft in general.

Introduction

21

Concluding, it is of interest to research new aircraft systems, which appearedon the market such as the Embraer E-170/190, Dassault 7X, Boeing B787, andA380. These are interesting cases to research in the context of this dissertationof value-leverage, the object of study. The value of an aircraft is composed bythe specific functions, which characterize the aircraft. These functions are:wings, tail with vertical and horizontal stabilizer, fuselage, landing gear, engi-nes, and navigation & control systems. Suppliers are involved with the co-de-velopment and co-production of theses systems.

AICRAFT SUB SYSTEM - FUNCTION

WING

primary

movable

Sub total wing

FUSELAGE

forward

Mid section

Aft section

Sub total fuselage

EMPENNAGE

Vertical tail

Horizontal tail

Sub total empennage

LANDING GEAR

ENGINE BUILT

Trust reverser, nacelle, strut, auxiliary

Power unit, Fuel system

ENGINES

SYSTEMS

Controls, payloads, flight deck & instru-

ments, electrical system, hydraulics,

FINAL ASSEMBLY

Sub total aircraft functions

PROGRAM FUNCTIONS

Technical Staff, engine management, devel-

opment test, static & fatigue test, flight test,

marketing direct charges ,customer services

TOTAL VALUE

Detailed Cost

distribution down (%)

8,1

3,8

4,3

8,3

1,5

1,7

2,4

1,7

6,8

17,3

20,5

5,2

81,6

18,4

100

Cost distribution per

aircraft function (%)

11,9

14,1

4,1

1,7

6,8

17,3

20,5

5,2

18,4

100

Table 1: Aircraft system and cost distribution


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1.3 Topic

Value is created through the difference between demand and supply throug-hout time. Demand value induced by the customers; (airlines and lease com-panies, forming the market) flows via the aerospace OEM-company towardsthe supply side while resources or goods materialized in complete aircraft sub-systems; wings, fuselage sections, tail sections, landing gear and drive and con-trol systems, flow the opposite direction to satisfy the demand (figure 2).

The OEM contributes with own unique value such as technology developmentand integration, and interacts as a “ value flow processor” between demandand supply to processes the “inflow” of value towards suppliers and the “out-flow” of value towards the customers. Creating a profitable value therefore re-quires a balance between what the customer wants (demand chain), the focalcompany unique value contribution (own chain), and the suppliers (supplychain). The focal aerospace company leverage value on suppliers to satisfy thedemand by customers. The following question rises how can value-leveragein the value system be measured? Firstly, we need to know about the contenton value and leverage to understand the meaning of value-leverage in the con-text of this dissertation.

1.3.1 Value

Value seems to be a natural phenomenon to express the perceived usefulnessof a product or service at the specific moment in time and space. It is the artof adding value, offering distinction and alternatives. Slack (1998) definedthe following function of value at product level:- Usefulness, in satisfying customer demand.- Relative importance of the demand being satisfied.- Availability of the product / subsystem or service when and where deman-ded, such as aircraft subsystems (wings and fuselage sections).

- Cost of ownership to make it profitable. In this dissertation the definition on value is about the availability of the pro-

figure 2: Demand and supply value system

Introduction

23

duct or subsystem when demanded by the aerospace OEM-company. TheOEM asks suppliers to co-develop and co-produce to supply the sub systemsto the assembly line for integration of the aircraft. From an organisational perspective, Porter (1985) defined the value by thevalue chain (figure 3) as a set of values through which the focal company canachieve competitive advantage from an internal and functional perspectivewith the aim to make a margin or profit. The drivers of Porter’s value chaindecomposes in primary and supportive processes. The primary activities of acompany consists of inbound logistics, operations, outbound logistics, marke-ting sales and service. The supportive processes of the focal company are thefirm’s infrastructure, human resources, technology-development, and procu-rement. These activities are inter linked and form the activities to push pro-ducts to the market from stock, based on mass production and economy ofscale principles with focus on costs and maximizing margin or profit withineach activity. Porter developed his theory of the value chain gradually towardsthe “value system” by defining this system as the larger interconnected systemof value chains adding supply and demand chains in connection with the ownvalue chain.

The value in the supply chain becomes more dominant due to focus on corecompetences (Hamel, Prahalad, 1990) and the increase of outsourcing of ac-tivities under influence of globalisation (Ohmae, 2005). As companies movetowards increased global competitiveness, the strategic issues surrounding sup-ply management increasingly demands the attention of firms. Increasing de-mands for reduced costs, increased quality, improved customer service andcontinuity of supply have significantly elevated supply management’s staturewithin organizations (Ogden et al, 2005). According to the principles of leanmanufacturing, value is based upon customer needs; activities that do not con-tribute to meeting these needs are “non-value-added” waste, or “muda” in theparlance of lean thinking (Womack, Jones, Roos, 1996). Careful consideration

figure 3: Value chain, porter (1985)


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of the tasks and functions that occur in many of the industries shows conside-rable waste is still available for process improvement activities. By streamliningthe processes that generate the goods and services that customer’s value, fewerresources need to be available, and the margin between customer value andthe cost of supply and delivery increases, improving a firm’s profit margin onecould call this value. In contrast, innovation and marketing strategies focus on improving customerperceptions of the value of goods and services by innovation and improvingthe perception of what is delivered. In either strategy, increasing the marginbetween delivery cost and perceived value is the foundation for improved busi-ness performance. The integral chain perspective is still missing, where infor-mation is shared throughout the chain reducing information imperfections,which are causing negative value or “waste”.

1.3.2 Leverage

What is meant by “leverage” in the context of this research? The definitionstarts with the explaining the principle of the “lever”. In physics, a lever is arigid object that is used with an appropriate pivot point to multiply the me-chanical force (effort) that can be applied to another object (load). This le-verage is also termed mechanical advantage, and is one example of theprinciple of moments. The originator of the leverage principle is Archimedes.Mathematically, the principle of moment is expressed by “torque = force xmoment arm” where the force is always acting perpendicular to the momentarm. In the figure 4, item A is at a distance X from the pivot point, while itemB is at distance Y from the pivot.

When projected this metaphor to value-leverage, it is suggested there is a ba-lance between what is supplied to the company by suppliers and what is de-livered due to demand. The company acts as pivot to balance demand andsupply to make profit.

figure 4: lever principle

Introduction

25

1.3.3 Value-leverage

Applying the principle of “leverage” to the context of this research, “leverage”is the capability of an aerospace OEM-company to lever value on suppliers by“producing” only a small own part of the value, whilst the supply base “produces”the remaining amount of the total value. The majority of the “own production”value is flown down by the focal OEM-company to the supply chain where risk-sharing suppliers are involved in the co-development and co-production of forinstance aircraft. As such, the focal aerospace OEM company’s value chain actsas lever between own production value and demand . In figure (5) value-leverageis explained by an example. If the total demand value F2 = 100 with arm Y = 1,and the own value contribution by the OEM of the demand is 30 (F1), the valueleverage on suppliers (F1 x X) is calculated by 30 x 3,3 = 100. The arm X func-tions as the multiplier. This is the basic principle of the value-leverage modelexpressing the leverage on the suppliers by the OEM-company.

Multipliers are known from the theories around macro economics. The mul-tiplier effect is a well proven method to stimulate the economy. It was Keynesadvocating the positive effects when stimulating economy by creating newmoney for the monetary base to stimulate economic growth. If, the monetarybase is injected with 1 (billion), it causes the money supply to grow with factor10. The multiplier calculates 10/1 and effects into a growth of 10 (billion).On company level ratio’s are used for instance to express the distribution ofequities. For this dissertation the multiplier idea is projected on company level,it has not the aim to make a relation with Keynes.

1.4 Research Strategy of Air Transport and Operations

The chair Aerospace Management and Operation (AMO) at Delft Universityof Technology became operational in the year 2004 and continued in 2009

figure 5: Value-leverage by the focal oem-company

X = 3,3 y = 1


26

under the name of Air Transport and Operations. The research within theAMO chair was focused on managerial and operational company processeswithin the research fields; aerospace industry and services, airlines, airportsand government from an integral value point of view. The aerospace and airtransport industry is defined on one hand by the industry designing and buil-ding aircraft and on the other hand on the exploitation of aircraft by airlinesin combination with airports. The chair researches the optimisation of valueby value modelling throughout the integral value system.Passengers desire to travel according the price they are willing to pay for at acertain value at a certain moment in time. All involved stakeholders need tothink of how to optimise the value for the passenger, that is still enclosed incompartments; airport, airline, maintenance, repair and overhaul (MRO) oraircraft supplier. Therefore, research is necessary on:- integration of stakeholders involved in the supply of value,- the customer (airline) and final passenger perspective,- involved parties, adding new value by open innovation.

Within this research profile, the desired research results are:- Models for collaboration in the supply chain, with value creation as theultimate goal.

- Value drivers that explain, influence or improve alignment between part-ners in the supply chain.

- Models to make the supply chain more lean.- Integration processes in the supply chain facilitating the alignment inthose supply chains.

Since 2009, the chair AMO, is further developed into a more Operationsorientated chair with the name Air Transport and Operations (ATO). One ofthe focus areas of the new chair is: “value chain modelling”, applied to thetransport and aerospace industry, following the already defined research focuson supply chain modelling. This research on the topic of value-leverage onsuppliers by the aerospace original equipment manufacturers fits within thescope of research within the ATO chair. The research scope is defined by re-search on aerospace processes from an integral transport chain perspective tocontribute to the body of knowledge on value modelling at the air transpor-tation and aerospace operations domain.

1.5 Scope of the research field

For this dissertation, the scope of research is derived from the trends in theaerospace industry, aircraft developments and the research strategy of the chair.It seems aircraft OEMs (company level) become integrators of value involvingthe supply chain with the co-development and co-production of new innova-tive aircraft (product level) by benefiting from the supply chain whilst elimi-nating all kinds of waste to generate possibly higher value (better) in shorter

Introduction

27

time (faster) against lower costs (cheaper). Fields of theory related to the creation of new aircraft are; lean manufacturingdue to the publication by Murman (2002), in which lean manufacturingshowed to be related to the development of new aircraft. Supply chain, as sup-pliers are involved with the development of entire subsystems of cars and alsoaircraft, open innovation supporting the involvement of partners with the co-development of new products and the focal OEM value network, as this is theresearch perspective. These fields of theory are in line with the research scope of AMO and ATOand motivating why it is of interest to research the topic of value-leverage forthe chair. The scope of this dissertation is further detailed in the next sections; - Section 1.5.1; Lean manufacturing in aerospace, as aerospace companiesare adopting this manufacturing methodology around the year 2002 (Mur-man, 2002) in which the supply chain plays an important role.

- Section 1.5.2; Supply chain, as there is a shift of value from the focalOEM-company to the supply chain and network, indicating the possibilityof value-leverage, which probably could be expressed by an investmentmultiplier and production multiplier.

- Section 1.5.3; Open innovation, concerning the development of new pro-ducts with help of suppliers.

- Section 1.5.4; OEM-company as focal perspective to express value-lever-age on suppliers.

The research is focused on the OEM-company and its relation to the supplychain, therefore theories on financial accounting and economics are not con-sidered as field of research. Tax advantages or subsidies are out of the scope ofthis dissertation.

1.5.1 Lean manufacturing

Introduction

This section describes the content of lean manufacturing based upon theToyota Production System (TPS), principles of lean manufacturing, researchin the car manufacturing industry, lean in the aerospace industry and the re-lation with value-leverage.

Toyota Production system (TPS)

Taiichi Ohno (1988) from Toyota in Japan is the founding father of the ToyotaProduction System, from which lean manufacturing is derived. The ToyotaProduction System became a method to support change of business processes.Change was enforced by a defiant position of Toyoda (named after the familywho owned the company) as the economy in 1949 turned down into a depres-sion with plummeted sales. To survive the crises, Toyoda negotiated with theunions “flexibility” in return for life time employee guaranties; this was com-pletely in contradiction with the classic western method of massive layoffs in


28

economic down turn. As part of the restructuring process, Toyoda renamed inToyota, disintegrated its vertical integrated organisation structure in the 1950‘s in three main parts; a) Toyota Motor Sales (TMS) responsible for orderingprocesses between customers and b) Toyota Motor Company (TMC) respon-sible for development and integration of cars, and c) the suppliers, which weredisinvested.

The business model of vertical integration was abandoned with the separationof suppliers Nippondenso, Aisin Seiki, and Toyda Gosei, to become indepen-dent companies. Toyota created permanent relationships with suppliers, whichcould be measured on their own performances instead on the performance ofthe group. The methods of interaction devised for dealing with the close affi-liated companies where later applied to all 190 members of the Toyota SupplierAssociation, creating a totally different and new style of supplier relation. Toyota formed a group structure composed by a supply network “avant la let-tre” and a customer chain forming together a value network, which becamethe organisational bases of the Toyota Production System (TPS) (Ohno,1988). This production system was driven by customer pull on the demandside, pulling value through the system, producing only, demanded sub systemsand batches in combination with goods flow “just in time” supplied from thesupply chain. Toyota introduced a four-year design cycle to continuously, pro-vide the market with new updated models. For western producers a model orplatform was only replaced in a design cycle of ten years.

Due to the separation of the suppliers from TMC, the value in the supply chainallocated in case of Toyota is approx. 73% of the production value of the car(Womack, Jones, 1990). Toyota therefore only contributed 27% of the cost ofthe car. The European and USA car manufacturers still produced 90% of thevalue in house, with production on scale, on stock, maximizing profit on theown assets and resources.

Toyota was however one of the first companies, which flowed value down inthe supply chain to suppliers for the co-development and co-production ofcars, and as such leveraging value from customer demand on suppliers. This iswhat it is all about. Toyota was able to establish a value system, sharing designand production information long before Porter defined the value chain to sup-port the theory of competitive advantage, and also long before theories onnetworks, which appeared end of the 1980’s. In fact, Toyota is the first exampleof value-leverage on suppliers. The question is; can this also be applied to ae-rospace OEMs?

In the 1970’s Toyota was a large player on the North American market. Ame-rican manufacturers were wondering why Toyota was able to manufacture a car,ship it to the US, and still be able to sell it cheaper than companies in the US

Introduction

29

made cars. Both import tariffs and import restrictions could not stop the popu-larity of these cars. In addition, quality and innovation of Japanese cars increa-sed rapidly while their American counterparts were not innovative. When in1973 the oil crisis occurred, it hit Japan at least as bad as the US and Europe.In 1974, the economy of Japan stopped growing. At Toyota, although profitssuffered, greater earnings were achieved in 1975, 1976 and 1977 than other Ja-panese companies could achieve. This caused other Japanese companies to startimplementing TPS as well. In the meanwhile, Toyota became worldwide mar-ket leader in 2008, with the family Toyoda again in the driving seat!

Significant is the observation, that Toyota is leveraging value on suppliers,not only for co-production but also for co-development of cars. Lean manu-facturing seems to be connected with value-leverage on suppliers. For this re-search, it is of interest to know the variables expressing value-leverage and toknow if these variables also apply to the aerospace industry.

Lean manufacturing

At the end of the 1980’s, MIT started a 5-year research project analysing theautomotive industry in 14 countries on design, markets, and manufacturing.The main differences between TPS, the European automotive industry, andthe North American industry were written down in the publication “The ma-chine that changed the world” (Womack, Jones, Roos, 1990) in which theprinciples of the TPS were abstracted into “Lean Manufacturing”. In this pu-blication, it was stated that both the North American and the European in-dustry had assumed and accepted the mass production theory and hadperfected it. Instead, Toyota had used mass production as a starting point fromwhere it developed TPS. MIT defined “Lean manufacturing” as a unified, com-prehensive set of philosophies, rules, guidelines, tools, and techniques for im-proving and optimising distinctive systems, a process-based view. Projected oncompany processes it is aimed at the increase of the velocity and the reductionof waste in any process. The meaning of Lean Manufacturing is “containinglittle waste or spare and thrifty in management or economical”.

The lean enterprise appears with focus on development, assembly - integra-tion, supply and customer involvement. The main lean principles in theToyota Production System are based upon the following building blocks: - Reduction of all kinds of economic waste. - Process value only induced by customer demand pull.- Create continuous flow supported by “just in time” supplies from the sup-plier value chain.

- Process only batch sizes the system can add value to.

Only with this approach, the goal can be achieved to obtain a stable valueprocess.


30

According to MIT, lean production is aimed at the elimination of waste inevery area of production including customer relations, product design, suppliernetworks, and factory management. The goal is to incorporate less human ef-fort, less inventory, less time to develop products, and less space to becomehighly responsive to customer demand while producing top quality productsin the most efficient and economical manner possible. All activities are relatedto the generation of value.

There are three types of operations in respect of value, namely value-addingactivities, non value-adding activities and necessary non value-adding activi-ties. Value-adding activities are activities, which are required to process thematerials into the product as the customers specified it. Non-value adding ac-tivities are not required to transform the materials into the product. This isalso known as waste. Any activity, that requires unnecessary interaction, effort,or cost, can be considered as waste. Another view on waste is that waste isany material or activity [value] for which the customer does not want to pay.Testing or inspection can also be seen as waste. Necessary non value-addingactivities are activities that do not add value for the customer, but are requiredto manufacture the product until the current production process is changedradically. The effect of re-designing processes with value added focus is mostlythe reduction of own manufacturing activities (Arnold, 2000) by eliminationof waste, continuous improvement, multifunctional teams, vertical informa-tion systems, decentralised responsibilities and pull instead of push.

Karlsson and Ählström (1996) have stated that the lean enterprise consists ofthe following four elements: lean development, lean procurement, lean ma-nufacturing, and lean distribution, suggesting that the lean imperative has abroad impact on the total organisation and chain of value adding activitiesgiving rise to the ‘lean enterprises’ (Womack, Jones, Roos, 1990; Stonebraker,Liao, 2004). Part of lean manufacturing is concentrated on core competenciessuch as development & technology and supply management in case of anOEM-company like Toyota. The other core competence is response to custo-mer pull (Womack, Jones, 2003) and forward integration with the customerchain is imperative to respond to the increased demand for customisation(Gassmann, Enkel, 2005).

Lowell (2007) identifies the effectiveness of the people/employee in terms ofprofit per capita, as the employee represents the value driver to develop andestablish relations to built networks and exchange knowledge. Effectivenessof the employee emerges to quantify the value-leverage capability of a com-pany as it fits in the lean perspective of value add - non-value add activitiesthe employee is involved in.

Introduction

31

Research into car manufacturing market

A study of the car manufacturer market, using data obtained in the Interna-tional Motor Vehicle Program (IMVP) as performed under the auspices of theMassachusetts Institute of Technology identifies and quantifies supplier invol-vement and benefits. The main source of information is an IMVP publicationfrom 1995: Product development performance in the auto industry: 1990s up-date by Clark, Ellison, Fujimoto, and Hyun. This publication is an update toa 1980s paper with the same subject (and indeed the same name), the resultsof which are also given in the 1990s version. These research papers give thecompiled results of respectively 29 and 28 product development programs inthe 80s and 90s car industry, which are adjusted for product complexity andsummarized per region. The results are given in terms of various parameters.Clark, Ellison et al. (1995) have identified Project Strategy Variables expressingthe contribution of value by suppliers to development and production of cars.

Lean and the aerospace industry

The challenge for the aerospace industry is to innovate and improve leanness(Murman et al., 2002). Other manufacturing industries, like the automotiveindustry, have encountered the challenge decades ago and made significantimprovements (Womack, Jones, Roos, 1990). The manufacturing industry ingeneral shows several trends, which can be elaborated and tailored to the ae-rospace industry. The aerospace sector encountered a few major challenges:the rise of global competition, the maturity of core products such as airframesand engines, and industry consolidation. To meet these challenges, the aero-space sector can learn from the lean principals developed within the automo-tive sector as stated by Murman (2002). Various aircraft producers such as Boeing and Airbus started to adopt leanprinciples with just in time supplies from the supply chain. To improve flowand reduction of lead times Boeing introduced the “flowing line” or pulsedproduction line for the Boeing B737. According to Caroline Corvi, formervice president and general manger, Airplane Programs with Boeing (2009)the flow time to produce an aircraft was reduced from 22 days in 1999 to 11days in 2005 by applying lean manufacturing principles, which is an interestingexample of lean manufacturing applied in the aerospace industry. It seems inthe case of the Boeing B787, the focal company is leveraging value not onlyfor the production, but also for the development of aircraft. Entire sub systemssuch as fuselage sections and wings are co-developed with supply chain partner.Airbus introduced the “Power8” program in 2008 to introduce principles oflean manufacturing. To make the company more “lean”, Airbus disinvestedseveral divisions in 2009, which demonstrates the linkage between lean ma-nufacturing and supply chain. The question arises; “what are the variables ex-pressing value-leverage on suppliers by aerospace OEMs?” This question isdealt with in this dissertation.


32

1.5.2 Supply Chain Management

Keith Oliver a vice president in Booz Allen Hamilton’s London office is theoriginator of an integrated inventory management process as his clients hadto trade off the desired inventory and customer service goals at a continuousbasis. Because the classic functional enterprise always make sub optimal deci-sions as it is focused on the function on it’s own and not from a group pointof view (Laseter, T. and Oliver, K., 2003), the conflicts of interests needed tolook from a chain integral perspective. Supply Chain Management was refinedby large retailer Wal-Mart who used point-of-sale data to enable continuousreplenishment (Sherer, 2005).In the 1980’s Supply Chain Management (SCM) emerged as a new, integra-tive philosophy to manage the total flow of goods from suppliers to the ulti-mate user (Cooper et al. 1997) and evolved to consider a broad integration ofbusiness processes along the chain of supply according to the Supply ChainCouncil (2005). Supply chain is a term now commonly used internationally– “to encompass every effort involved in producing and delivering a final product orservice, from the supplier’s supplier to the customer’s customer (Supply Chain Coun-sel, 2005). Supply chain management (SCM) can be defined as a set of ap-proaches utilized to efficiently integrate and coordinate materials, information,and financial flows across the supply chain (SC). This specific managementapproach is in place so that merchandise is supplied, produced and distributedat the right quantities, to the right locations, and at the right time, in the mostcost-efficient way, while satisfying customer requirements. (Gibson et al.,2005). Supply chain management is based on the strategy and the analysis ofthe chain involved.

Supply management strategy

To be able to categorize suppliers in terms of supply risk and profit impact, theKraljic (1983) Matrix (figure 6) is used. It is a tool to categorize the parts port-folio of a company in four segments according to their supply risk and profitimpact for the company under consideration.

figure 6: Kraljic matrix

Introduction

33

The Supply Risk is indicated on the X-axis. This is a subjective indicator of howmuch risk a part can generate to the focal company. That means in practice thatwhen the supply of that part is interrupted, there is more chance that the productionwould not flow as usual if the part was supplied normally. The Y-axis shows the profitimpact of a part to the focal company. It determines the profit influence of the pur-chase of that specific part. The different quadrants of the matrix are explained:- Non-critical: here is low mutual dependence between buyer and seller andmost suppliers have similar capabilities, long term relationships are not arequirement.

- Bottleneck: This quadrant is characterized by the high buyer dependenceon the suppliers. Actions to be taken are high supply control, volume as-surance by the suppliers and contingency plans for emergencies.

- Leverage: Here the dependence on the supplier is low and the companystrives to exploit purchasing power. Long-term relationships are esta-blished and there has to be volume assurance.

- Strategic: The buying-selling relationship is very important and supplierperformance determines the success of the firm. Communication is oftenfully technology based and all info that was confidential before is nowshared; this to support the collective design and development.

Supply base complexity

Choi (2005) makes a distinction in the supply chain between the supply baseand the supply network. The supply base consists of only those suppliers thatare actively managed by the buying company. The supply network consists ofall suppliers in the supply chain including those with whom the buying com-pany has no direct contact. Choi reasons that the complexity of the supplybase is dependent on three factors, namely: - number of suppliers in the supply base,- level of differentiations of these suppliers, - level of inter-dependence between the suppliers.

To reduce the complexity of the supply base, reducing the number of suppliersis the most effective to improve the flow of supply and just in time supplieswith as low as possible stock. Transaction costs can be lowered and, supplyrisks be mitigated, suppliers responsiveness can be improved and innovationcan be stimulated (Choi 2005).

Supply chain delegation

Womack and Jones (2003) reasons that a tier structure is preferred as the me-thod for supply base reduction over a single sourcing approach. Supply basedelegation reduces the risks involved in reducing the number of suppliers inthe supply chain using single sourcing. However, a supply base delegation stra-tegy can cost significantly more than a supplier reduction approach, but willbe rewarding in the end.


34

Cousins (1999) reasons that companies that want to apply supply base dele-gation should carefully select the suppliers that they choose to delegate acti-vities to. The decision should not only be based on price, but also on criteriasuch as quality performance, service level and technological competence. Pro-ven record of performance plays an important role in this decision as well.Companies should also use their quality grading systems to bring every suppliergradually up to higher levels of performance and quality (Womack,1990).

Dubois (2003) also finds that high involvement with a limited number of sup-pliers is the preferred method of sourcing materials, and states that such anapproach can stimulate joint learning about the cost structures and the com-plex interdependence that take place amongst suppliers. This may improvethe potential for extensive cost rationalization compared to strategies basedon low involvement and price pressure.

Poirier (2004) furthermore reasons that the buying companies should aim forhigher levels of relationships. He identified five different levels of cooperationthat can be achieved between a buying company and the suppliers in its supplybase. Poirier explains that each level represents a different relationship withdifferent levels of communication and information sharing. The highest levela company can achieve is when partners are sharing vital information throughelectronic connections between the companies, when all processes are visiblethroughout the chain and when inventories can be viewed in real-time. Alt-hough this is achieved by only a small number of companies, this is what com-panies should aim for in general, taking into account specific circumstances.The different levels according to Poirier (2004) are:- Level 1: Internal/Functional: there is not much inter-organisational coo-peration and it is not very often encouraged either. Improvements can bedone on the level of sourcing and logistics.

- Level 2: Internal/Cross-Functional: the internal boundaries between theunits start to fade out. Technology starts to enable the systems across thefirm. Software is introduced to improve internal communication, planning(e.g. ERP) and scheduling.

- Level 3: External Network Formation: external links are being made witha selection of customers. The customer gets a more important role on thebusiness processes. More computer assisted systems are established acrossthe boundaries and improve the information stream.

- Level 4: External Value Chain: the inter-organizational cooperation inc-reases and the focus shifts entirely to the consumer. A real value chainstarts to get shape where technology and further collaboration betweenthe firms will help to improve. Supply chain outsourcing and e-procure-ment systems can be put in place.

- Level 5: Full Network Connectivity: because of the small number of firmsthat reached this level, the explanation is more theoretical than based on

Introduction

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facts. Partners are sharing vital information electronically; all processesare visible along the chain and inventories are viewed in real-time.

As can be seen from these descriptions, they all have a different focus on im-proving. To find out what initiatives have to be started with whom, the sup-pliers have to be assigned to different levels. This way an integrator can lookfor relative opportunities. Getting in a higher level with the most of the sup-pliers will increase the utility of the whole chain.

Companies should also use their quality grading systems to bring every suppliergradually up to higher levels of performance and quality (Womack, Jones,Roos,1990). Another important issue to be considered in supply base delegation are thecontracts between the buying company and the suppliers in the supply base.According to Womack, Jones, Roos (1990), a lean supply chain is only possiblewhen lean contracts are used. The contract between the supplier and buyingcompany should simply be an expression of the company’s and suppliers’ long-term commitment to work together. Also, the lean contract establishes groundrules for quality assurance, ordering and deliver, proprietary rights and materialsupply. The contract should establish a new set of ground rules for joint costanalysis, price determinations and profit sharing. This framework makes thetwo parties want to work together for mutual benefit, rather than look uponeach other with mutual suspicion. If not approached in such a way, Womackreasons that the suppliers will continue to bargain in the traditional way, un-dermining a lean supply chain. Cooper and Slagmulder (2003) proposed a me-thod to increase profitability of the firm by managing and reducing coststhrough coordination and cooperation amongst organisations, in a supply net-work. The proposed method makes use of lean principles to reduce transactioncosts, by reducing the supply base, reduction of activities causing waste andvalue creation with suppliers by involvement with innovative product design.

1.5.3 Open innovation

In the field of research and development, production networks increasinglycollaborate with external research institutes and universities, to explore, shareand exploit research outcomes (Young, Hewitt-Dundas and Roper, 2008). Asdescribed by Chesbrough (2003 and 2006), company boundaries become moreopen to increase competitive advantage. Closed innovation is considered torepresent the old strategy for research and development, while open innova-tion provides better opportunities to leverage knowledge (figure 7). Two typesof open innovation are distinguished: inbound and outbound open innovation.Outbound innovation suggests that companies seek for external organizationswith business models that are better suited to commercialise a given techno-logy, rather than relying on internal paths. Inbound innovation suggests thatcompanies can use the research discoveries of others, using their own marke-


36

ting channels, rather than relying only on its own research and developmentonly.

Traditionally, technological research was performed in-house and, as a result,large companies retained vast scores of researchers with a broad range of skillsand knowledge in their research departments (Reed, Walsh, 2002). This closedinnovation paradigm involved development activities taking place entirelyin-house (Chesbrough, 2003; Docherty, 2006), while suppliers were only in-volved for production based on build-to-print orders (Smith, Tranfield, 2005).However, this closed innovation paradigm is failing companies in respondingeffectively to the market and its needs. Companies are seeking to innovatewith research partners to guarantee business continuity. Currently, the com-panies that followed the old paradigm are focusing on their core competenciesand are outsourcing an increasing portion of their operational activities totheir suppliers (Reed, Walsh, 2002). They are focusing on a small selection oftechnologies in which they create value while the remainder of their activitiesis assembly and integration. Consequently, suppliers are now being tasked withthe design and the production of subsystems by these integrators. The addedeffect, according to Reed and Walsh (2002), is that the responsibility of cre-ating new technologies and innovations for these subsystems is being trans-ferred as well. To ensure that their products keep a competitive edge in themarket, the integrators are forced to seek suppliers capable of innovation, toguarantee business continuity and profitability.

Gassmann and Enkel (2005) distinguish three different types of open innova-tion: the outside-in process, the inside-out process and the coupled process.Chesbrough and Crowther (2006) divide open innovation in inbound andoutbound open innovation. The open innovation model explains that thecompetitive advantage is driven by inbound open innovation (lower part fi-gure 11). This type of innovation is about leveraging the discoveries of othersand not relying exclusively on own R&D. Outbound open innovation (upperpart figure 11) on the other hand is the process of realizing value without brin-ging the product to market through the internal channels; value can be cap-

figure 7: closed innovation versus open innovation (chesbrough, 2003)

Introduction

37

tured by selling IP or starting spin-off ventures. Chesbrough and Crowther(2006) state that outbound open innovation has hardly found any applicationin industry yet however some interesting examples are shown with Heineken’sBeer tender and Philips’ Senseo while inbound open innovation becomes inc-reasingly popular. One explanation for that development might be that certaintypes of organizations, such as universities, are donors of research and tech-nology stimulating inbound innovation while asking nothing in return.

Co-innovation, inbound open-innovationDue to increased focus on core competences, increasing R&D costs, and com-pany boundaries becoming more flexible due to skilled worker mobility (Reed,Walsh, 2002; Chesbrough, 2003), companies are seeking for new ways to in-novate. To cope with these challenges and gain a steeper innovation trajectory,companies are increasingly keen on collaborating with other companies andinstitutes on innovation. By collaborating with their strategic partners, they are able to complementtheir own innovative capabilities with those of their partners (Odenthal etal., 2004). A concept that is often mentioned to achieve effective collabora-tion is “co-innovation” (Bossink, 2002; Odenthal et al. 2004). Co-innovationis not only performing the same research activities faster and more efficient;it is an organizational change of the supplier relationship with the purpose tofind and develop new products and/or technologies collaboratively. Basically,co-innovation is the creation of a partnership between companies and/or in-stitutes on sharing knowledge, cost and benefit in order to create unique tech-nology and/or a unique product.

In co-innovation networks new technological opportunities are created viatechnological complementarities and synergies by bringing together differenttechnological and economic competences (Pyka, 2002). In the past, compa-nies invested in their research in order to secure competitiveness for the future.In this manner, companies try to take advantage of market opportunities beforetheir competitors do (Odenthal et al., 2004). To increase their competitive-

figure 8: co-innovation value effects (odenthal et al., 2004)


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ness, OEM companies need to attain a steeper innovation trajectory (curve a,figure 8) instead of a traditional trajectory (curve b, figure 8). This steeper tra-jectory will result in a time premium, i.e. a reduced time-to-market, and anopportunity premium, i.e. early-mover advantage, rapid response and reducedproduct development time.

Co-innovation with rivals does not occur on a very large scale, but is substan-tially more likely in high-tech sectors (Miotti, Sachwald, 2003). Two mainforms of co-innovation with competitors exist: pre-competitive R&D and jointventures. Pre-competitive R&D collaboration is a way of sharing high R&Dcosts related to high-tech innovation. Companies obtain mutual benefits fromjoining similar resources to share high costs and create scale advantages inpre-competitive research and determination of standards (Gemünden, Ritter,Heydebreck, 1996), (Caloghirou et al., 2003; Miotti and Sachwald, 2003).To acquire new technologies and expand their product/market reach, firmsuse joint ventures. Joint ventures expand information and resource access bywidening the sweep of environmental scanning and linking up with comple-mentary assets in other firms (Park, Kim, 1997).

The development of for instance the Boeing 787 is characterized by the highinnovativeness of the aircraft design. The B787 aircraft is built by using com-posites on a large scale for the fuselage and the wings to reduce weight formore efficient operations of the aircraft. Also the drive and control mecha-nisms have been changed from hydraulic systems into electric systems to re-duce weight. To realize this new type of aircraft, co-innovating, co-developing,and co-producing partners are involved. In case of the B787, Japanese com-panies like Kawasaki and Mitsubishi Heavy Industries are involved to developand produce complete composite wings and Alenia Aeronautica in Italy con-tributes with complete fuselage sections. Like with the B787 also the A380involves partners with the development phase and share value in the devel-opment phase as well in the production phase to recoup their investmentsmade for the program. By involving co-developing and co-producing partners,Boeing can move up in the chain towards an integrator position allocating as-sets and resources on development, qualification, testing, and integrationwhilst reducing working capital, following the lean-manufacturing principlesfrom the automotive industry. As such, Boeing’s position in the value chain isdeveloping from a manufacturer towards an integrator focussed position.

The shift of value from the focal OEM-company towards suppliers concernsnot only production value but also development value to realize an innovativeaircraft. The aerospace industry is adopting aspects of lean manufacturing, sup-ply chain and aspects of open innovation such as co-innovation, although theeffects in terms of higher value against lower cost in shorter time are notknown.

Introduction

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1.5.4 Focal OEM value network

Introduction

The phenomenon value-leverage is researched from a focal OEM-companyperspective in conjunction with its supply base. The following aspects relatedto the OEM-company organisational perspective are; core competences of theorganisation, resource based view and value network as value from outside theOEM-company becomes an important value driver, outsourcing facilitatingthe shift of value towards the supply chain and the Large Scale System Inte-grator (LSSI) connecting the supply chain and the OEM-company into thevalue network.

Core competencies

Prahalad and Hamel (1990) introduced the concept of “core competencies”in business strategy. Core competencies have three characteristics, which dis-tinguish them from non-vital competencies. They provide potential access toa wide variety of markets, they make a significant contribution to the percei-ved benefits of the product by the customer and they are difficult for compe-titors to imitate. Through integrating corporate wide technologies andproduction skills into core competencies, new sources of competitive advan-tage for a company occur. It will also strengthen the ability to adapt to marketopportunities.

Identifying core competencies is difficult because it requires thorough know-ledge of the capabilities, competencies, and resources of the company (Ljung-quist, 2007). In strengthening the core competencies, certain technologies areselected for further development and implementation in products or processes.The selection for the right core competences for the right technologies is in-terlinked with the technology push – market pull dilemma. The technologyof carbon fibre for the design and production of aircraft is used as an example.First question for Boeing is for instance; do they need to have the productioncompetence to design and produce subsystems such as fuselage sections withcarbon fibre? When the demand is for lighter aircraft (market pull) and carbonfibre is one of the solutions, the question eaises if it is necessary for Boeing tohave this production competence across the company. Second question is ifBoeing need this competence to compete. The answer can be that the com-petence is not necessary as there are companies offering this competence. Assuch, Boeing might not choose for carbon fibre as a core competence.

In the management of core competencies, technology selection plays an im-portant role, especially for large manufacturing, engineering, and technologydriven companies. The application of the technological capabilities of R&Dto produce new business opportunities depends on complex coordination pro-cesses. These coordination processes have a firm specific character and are an


40

important part of the organizational dimension of core competencies (figure9) (Torkkeli, 2002).

More recently, the belief in a competency based perspective that anyone canown those specific assets, as long as the firm can access them (Chesbrough,2003) and has the right capabilities (Christopher, Jüttner, 2000) and the rightlevel of knowledge (Cohen, Levinthal, 1990) to benefit from it has grown.From a transaction cost view, this would confront the firm with costs, unlessother firms allow usage of their assets without charging. Williamson (1985)already assumed that firms would engage in co-operative relationships in orderto minimize their transaction costs.

Resource based view

An other view on core competencies is found with Barney (2000), with theresource based perspective (RBV). The RBV proposes that a firm only cancreate sustainable competitive advantage due to unique resources that createsvalue in the marketplace. According to Barney (1991), a resource is valuablewhen it enables strategies that improve efficiency and effectiveness. The valueof a resource is determined in one or more dyadic relations (Santema, van deRijt, 2002). The authors have added the supply chain perspective to the RVB,advocating the supply chain can be seen as a external resource of the firm.This new view corresponds with what actually happens in the aerospace in-dustry, where the competition seems to focus on a competition between supplychains. Some organisations competences appear to be derived from their useof own firm specific resources, while the competences of other companies seemto be derived from their ability to access and coordinate resources beyond theirown organizational boundaries (Sanchez, 2004). The firm addressable resour-ces or network resources are resources, which a firm does not own or tightlycontrol, but can have access to. Heene and Sanchez and (2004) introduced the organisation as an open systemin their publication “The New Strategic Management”. The rational behindthis perspective is the competence of an organisation to interact and mobilize

figure 9: Hierarchy of competencies (adapted from torkkeli, 2002)

Introduction

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intangible and tangible assets by means of Strategy Logic approach to tap intoa multilayer of value generators; specific markets, industries, national and glo-bal economy. The Strategic Logic approach defines three main value driversto create value: 1) the business concept to match with 2) organisational re-sources with demand and 3) the core processes necessary to create, realize,transform and adoption by stakeholders of the proposed value.

Outsourcing

Outsourcing reflects the decision to buy products or services instead of makingproducts or providing in-house services. Outsourcing is used for a variety ofactivities, including core processes such as product development and produc-tion (Kakabadse and Kakabadse, 2005). The sourcing strategy is critical for acompany’s competitiveness in terms of quality, dependability, flexibility, andinnovation (Birou and Fawcett, 1993). Outsourcing is considered as the ve-hicle for innovation (Bengtsson and Berggren, 2008) and became more po-pular, especially in the IT sector, where some larger companies haveoutsourced their IT departments to India. Other business functions like re-search and development, logistics and production are outsourced increasingly.The consequences for job mobility, corporate social responsibility and concernfor legal issues are areas to further investigate in the field of outsourcing (Busiand McIvor, 2008).

Outsourcing production, is about to produce components in-house or to out-source its production domestically or offshore (Van Assche, 2008). The firstaspect reflects the make-buy decision, while the second aspect focuses on glo-balisation. Motivations to outsource can be divided in two basic categoriesnamely tactical reasons and strategic reasons, while the overall objective is al-ways to improve the performance of the company or to offer more value tothe customers (Weele, 2005). Outsourcing however brings both operationaland strategic risks, which must be acceptable and manageable by the com-pany.

As outsourcing became more important, researchers investigated the oppor-tunities and threats of the outsourcing process. While the disadvantage of out-sourcing is that the company relies more on their suppliers, the advantage isthat companies can free up resources and focus on their core competencies.An important observation by Prahalad and Hamel (1990) is the possibility forcompanies to outsource core competencies. Companies need to protect theirpatents and intellectual property core capabilities to remain competitive. Inalignment with other trends, outsourcing is used to manage relationships withkey suppliers effectively (Kakabadse and Kakabadse, 2005). The outsourcingtrend not always presents the best solution, as Bengtsson and Berggren (2008)describe. They observed a counter trend in the telecommunications industry,where companies, in-source production work due to efficiency issues. This


42

change in integration logic provides new insights for manufacturing companiesto reconsider their strategies in a rapidly changing environment. Motivationsto in source production are based on increasing specific components whilstdecreasing standard modules, system integration competences, and platformsynchronization (e.g. for electronic applications).

With the recent trend of increasing levels of outsourcing, orchestrating acti-vities with suppliers in the supply base has become a strategic issue. Duringthe past decade, the most commonly observed supply base management prac-tice was focused on reducing the number of suppliers, called supply base opti-misation or rationalization. However, reducing supply base complexity byrelentlessly reducing the number of suppliers may be a cost efficient approachbut may potentially reduce the OEMs’ overall competitiveness. Reducing sup-ply base complexity therefore must include optimisation of the number of sup-pliers, degree of differentiation and level of inter-relationships among thesesuppliers (Choi and Krause, 2006) in relation to supply risk. OEMs leveragingbeneficial value on the supply network may have rationalized their supply net-works to reduce their transaction costs, thus increasing profitability. Variablesexpressing value-leverage are of help to know if OEMs are leveraging valuebeneficial. The aerospace industry is following the trend of outsourcing in caseof the Embraer 170/190, Dassault 7X, Boeing787 and Airbus A380. Outsour-cing contains not only production of aircraft parts, it concerns the outsourcingof complete sub systems including the investment new technology by the part-ners, design, qualification and testing.

Modularisation (Novak and Eppinger, 2001) in design heightened the abilityof an OEM to determine the product architecture with firms in the supplyingtiers responding to an OEM-company organisation. Here, OEMs retained res-ponsibility for product design and engineering, coupled with a focus on assem-bly and process automation. The relative importance of individual supplierfirms was directly related to the value of their contribution to the final productin terms of customer value. Novak and Eppinger (2001) suggest that the mo-dularisation of product components and the complexity of the final productboth influence the structure of the supply chain. In their argument, productcomplexity is a proxy for transaction costs within the supply chain.

Within the aerospace industry a make-or-buy framework is suggested by Per-rons (1997). From an integrators perspective in the aerospace industry, twoimportant factors drive the decision for the make-or-buy decision. The firstone is the technological maturity of a component and the second one is thesignificance for a firm’s competitiveness:- Technological maturity; an aerospace integrator (or OEM) is the ultimateresponsible company for the quality and performance of everything in theairplane. Therefore, integrators want to have a good working knowledge

Introduction

43

of every sub system and part of the aircraft to avoid application of non-mature technology. Buying also requires a known and trusted supplier withthe same technological familiarity for producing the component. Tech-nological maturity is a strong factor in the make-or-buy decision, especiallyin cases of major critical components where the degree of technologicalmaturity also serves as a reliable indicator of the degree of technical risk.

- Firm’s competitiveness: In case of new technology applied such as carbonfibre composites for the design and production of the Boeing B787, therole of the suppliers is on one side to add with a valuable resource in termsof technology and production capacity to the integrator Boeing. This isa strategic decision around make or buy for instance a wing designed andproduced with a new technology and qualified according to governmentregulations on safety.

As business environments become more complex, strategies for the make-buydecision will advance. Besides the two mutual exclusive outcomes of producinginternal or external of the company, Parmigiani (2007) describes a hybridmode. In this mode, companies concurrently source, make and buy certainproducts in order to spread the risk and learning purposes. If a short time tomarket is needed, a company can make and buy at the same time, which willbe expensive, but leads to time advantages (Ruffo, et al., 2007).

Especially in the field of manufacturing technology, corporations face themake-buy trade-off frequently, like Boeing in case of the design, developmentand production of the B787. This strategy evaluates every product in the valuechain, how and by whom the component should be manufactured before as-sembly in the final product. Some products are produced at the manufacturer’sfacility while others are produced outside the company, using suppliers andexternal partners. According to Patneaude (2008) it seems Boeing is buyingrelatively more components and subassemblies from suppliers than Airbus dueto outsourcing strategies.

Cánez, Platts and Probert, (2000) suggest the three layers to go through formaking the make or buy decision: are triggers, considerations, and performancemeasures (figure 10). - Triggers; represent the focus and the intent of the company. Triggers aredriven by both internal and external factors and can be e.g. decreasingcost, risk and increasing innovativeness and responsiveness.

- Considerations; covers four areas of focus: technology and manufacturingprocesses, cost, supply chain management and logistics, support systems.

- Performance measures; represent the metrics used to judge effectivenessand efficiency of the make-buy decision. Metrics can be cost savings, uti-lization rate, time to market, quality, and flexibility.


44

Value network

The effectiveness of a company is not only given by its own capacity definedby primary and supportive processes but also defined by its capability to acquireresources through exchange with other parties outside the focal enterprise(Hankansson and Snehota, 1989). It is therefore the activities taking placebetween the organization and other parties, next to activities within the or-ganization itself with primary and supportive processes, which are the deter-minants of the focal companies competitive position and the overalleffectiveness of the organization in achieving its goals. The ability to get accessto external assets and resources is what a value network characterizes. Santema(1991) contributed with his research on financial lease of capital goods, ad-vocating that some of the assets and resources such as the capital invested inproduction equipment can be sourced outside the focal company to generatevalue directly related to the customer demand in business to-business markets. Activities that have strategic implications for a company are classified as pri-mary activities in the value chain. The value chain configuration is a two-level generic taxonomy of value creation activities (Porter, 1985). Primaryactivities are directly involved in creating and bringing value to the customer,whereas support activities enable and improve the performance of the primaryactivities (for a similar two-level activity categorization see also Komai, 1971;de Chalvron and Curien, 1978; Stabell, 1982). The 'support' label underlinesthat support activities only affect the value delivered to customers to the ex-tent that they affect the performance of primary activties. Primary value chainactivities deal with physical products (Porter, 1985: Stabell and Fjeldstad(1998) proposed three alternative value chain configurations; value chain, thevalue shop and the value network. The value chain enables value creation byprimary activities with production on scale and maximize utilisation. Thevalue shop creates value by problem solving for customers with primary acti-vities; problem finding, problem solving, choice, execution, control / evalua-tion. The term “value network” refers to the enterprise as a provider of anetworking service with primary activities; infrastructure operation, serviceprovisioning and capability of networking. Within aerospace the network be-comes important due to multiple partners involved in concurrent design in areal time environment at a global scale.

figure 10 : the make-or-buy framework (adapted from canez, 2005)

Introduction

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Original manufactures that are involved in strategic networks, either in an in-tegrator role (hub firm) or in various partnering roles for other hub firms e.g.technology partner, component supplier, distributor partner (Möller, Svahn,2003). The authors argue that by developing specific networking capabilities,firms are able not only to transfer complex knowledge, but also to co-createnew resources through intentional business nets. The interaction regarding howorganizations manage the flow of goods and the information between them, in-fluences the development into a network structure (Huemer, 2004). Networkstructures can take many forms, e.g. narrow or broad, single or multi-sourced(Harland et al., 2004), centralized or decentralized (Grandori, Soda, 1995;Perks, Jeffery, 2006), formal or informal (Grandori, Soda, 1995), weak or strong(Tracey, Clark, 2003), and optimal solutions might be balancing between thedichotomy of those factors. There is no overall successful network configurationtype; network intensity and pattern should suit the network’s specific strategicaim for value creation. The intensity of cooperation is however a strong deter-minant of innovation success (Gemünden et al., 1996). For this research inparticular, the value network from a supply perspective is relevant as aircraftare co-developed and co-produced by a network of supplying companies. Building a supplier network is a challenging task for the OEM to match productdesign and supply chain design (Appelqvist et al., 2004). All stakeholders; endcustomers, suppliers catagorised in first, second and third tier suppliers , uni-versities, research institutes, OEM integrators and airlines must understand thedynamics and the capabilities of their network and translate this into valuenetwork (figure 11) practices to strengthen the value networks’ performance(Petrick, 2006). If all parties in the value network benefit, partnerships are anon-zero sum game as opposed to buying-selling relationships (Ploetner, Ehret,2006). This non-zero sum effect can be achieved if for instance the total marketshare increases due to the partnership, resulting in higher turnover and possiblyhigher profit margins to be gained. This is only possible if the customers posi-tively adopt the products. Therefore, the customer demand is crucial to catch,otherwise the pie will not grow for the network.

figure 11 : Value network (adapted from petrick, 2006)


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Large- scale aerospace system OEM integrators

In the past, the trends in the manufacturing industry showed an evolution inthe configuration and management of a production network. Especially forthe integrator, strategies to maintain competitive power changed to differentfocal areas. This is most evident in industrial sectors that have competed oneconomics of scale and whose OEMs have focused on core competencies whileoutsourcing non-core production (Petrick, 2007). The balance in the supplychain shifts and the most innovative integrators or OEMs become a “largescale systems integrator” (LSSI) in the aerospace industries. The LSSI modelrequires a change in the roles and responsibilities of both the OEM and thesuppliers. In the LSSI model, an OEM assumes the role of an integrator of su-bassemblies that are produced elsewhere. Core competencies of the integratorare: to be able to share knowledge, possess skills to collaborate, hold a clearproduct vision and a solid market knowledge (Petrick, 2006). Consequently,tier 1, 2 and 3 suppliers gain influence as risk, responsibility and revenues flowupstream the supply base from the left towards the right side (figure 12) to-wards the OEMs and from there, to the customer. The supply base consists ofonly those suppliers that are actively managed by the buying company.

The aerospace OEMs in the current supply chains focus more on core compe-tencies, causing a shift in responsibilities in the supply chain. Suppliers aremore involved in the design and production of parts and sub systems whilethe integrator focuses on overall product creation and integration capabilities.This results in strong dependence of the integrator on the network and requi-res strong partnerships with all upstream suppliers in the supply base. TheOEM becomes a large-scale systems integrator (LSSI) with capabilities to in-tegrate product development, integrate products and integrate the supplychain, sharing knowledge. These are emerging as the new primary activitiesdefining the core competencies. The integrator is generating value in a diffe-rent manner. Rather than focused within the own value chain, most of thevalue is allocated in the supply chain. This integrator role has similarities withthe automotive industry, where subsystems are “flowing in” according to “justin time” principles destined from lean manufacturing theories. It is the balance

figure 12: simplified aerospace oem integrator with supply base (adapted from petrick, 2006)

Introduction

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of power (Maloni and Benton, 2000) (Petrick, 2006) in the supply chain,which has become an important aspect of how to organise the value chain dueto the increased value effects and interdependencies. It seems the aerospaceOEM is transforming into a large-scale system integrator of value. This impliesthe aerospace OEM-company is leveraging value on suppliers. It is not knowhow value is actually leveraged by these aerospace OEM’s.

The observation from previous sections is that OEM companies of today areintegrators of value, flowing down value to the supply chain. This suggests thefocal OEM-company leverage value for which support is found in the sections;1.5.1: Lean manufacturing, 1.5.2: Supply chain, and 1.5.3: Open innovationand 1.5.4: Focal OEM-company value network, it seems that OEM companiesleveraging value on suppliers by co-development, co-production, and on theposition within the value network, can benefit from cost reductions, time re-ductions, and demand improvements. Based upon these observations the re-search framework emerges.

1.6 Research framework

The following value drivers are giving support to the value-leverage pheno-menon from a focal OEM-company value network position perspective to formthe value-leverage analytical framework.

Market Demand: by specifying market demand, the focal OEM-company in-troduces customer pull (Womack, Jones, Roos, 1990) into the value system.As such, customers form a part of the value system (Prahalad, Ramaswamy,2001), in which the focal company fulfils demand by supplying value for whichdemand is specified. The focal company fulfils market demand value by addingown unique value and supply value (figure 2).

Co-development: the needs and desires of the customers can be used as inputfor the development of new products or services (Von Hippel, 2005). This ena-bles the creation of new products in cooperation with partners, which offers newvalue to the value system. This driver has an organizational nature. To optimallybenefit from the driver given above, the development process should be organi-zed such that (expected) value is optimized while minimizing the risks, costs anddevelopment time, which is something that can be achieved using early supplierinvolvement (Zsidisin, Smith, 2004). This entails collaboration with invest-ment- and risk-sharing partners to create added value, which is precisely whatco-innovation is all about. By involving suppliers early in the development pro-cess, the focal OEM-company can benefit from a time and opportunity premium(Bossink, 2002), (Odenthal, 2004). Suppliers are co-investing in developmentand as such, share development costs with the focal OEM-company. The risksharing partners recoup their investments in the production phase.


48

Co-production: Flow indicates the level of sophistication of the value system(Womack, Jones, Roos, 1990). The concept of “just-in-time “(JIT) suppliescan be realised by a decrease in complexity of the system and elimination ofstock (waste) to create an uninterrupted flow of goods towards the customers.Choi (2005) has found in this respect that complexity is positively related tothe total transaction costs (Williamson, 1998, 2005), i.e. if the complexitydecreases so do the transaction cost.

Focal OEM value network position: The focal OEM-company competes onthe capability to exchange value outside the own value chain (Hankanssonand Snehota, 1989) and to create access to resources beyond the focal OEM-company boundary (Sanchez ,2004). The value-leverage position of the focalOEM-company is determined by value-leverage on co-development value (de-sign) [F1a] and co-production value (integration) [F1b] on one hand and de-mand for development value [F2a] and market demand for aircraft [F2b] at theother hand. The phenomenon of value-leverage is visualized in figure 13.

1.7 Exploratory practice research

To explore the relevance of the topic and identify preliminary variables, ex-ploratory interviews were held with experts on supply chain logistics and pro-duct development within companies in the Netherlands, to understand theaspects of value-leverage. The following persons were interviewed regardingproduct developments. This part of the research took place during 2006: - Mr. R.Kuppens; Managing Director EMEA from Cisco Systems on “CallManager”,

- Mr.R. Sandijk; Director Supply Chain logistics from ASML on Twins-can”,

- Mr.ing T.N.M.Pas; Director Product & Service Planning from DAF Truckson “Hybrid truck”.

figure 13: Value-leverage analytical framework

Introduction

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1.7.1 Cisco Systems

Introduction

Cisco Systems, was founded in 1984 by a small group of computer scientistsfrom Stanford University USA. It is a computer hardware and software pro-duction-company present at 300 locations in 90 countries. It has about 49.000employees worldwide. With yearly revenue of US$ 28.5 billion, it is one ofthe leading companies in its sector. It has about 200 major product models,from home to small business and large business computer- and communicati-ons-networking hardware and software. Cisco Systems is a major player on the market for availability and accessibilityof information at any place at any time against the lowest costs by using tech-nologies like IP (Internet Protocol) and broadband via the internet (fixed)and wireless applications. Cisco Systems delivers products and services to“route” information using Internet and broadband technology to deliver theinformation in a suitable form for the customer using the most efficient net-work, wireless or via cable.

The strategy is to interlink network systems to exchange information receivedfrom products “internet protocol” or IP marked. Every product with an IP ad-dress can be linked to data exchange and communicate to inform about thestatus of a certain demand and supply. An example is the linkage betweenRFID’s with Cisco broadband technology, which makes it possible to improveefficiency of demand and supply systems. Voice Over IP (VOIP) is another technology by Cisco Systems for routing information via the Internet.Paying per minute is the past; Internet opens up new possibilities paying evennothing (Skype). Initial question to start the inquiry is: “what are the mainvalue drivers behind the business model of Cisco Systems?” The answers on thisquestion were: customer demand and satisfaction, technology and innovation,and the network.

Market demand

Cisco Systems is a transparent and customer driven organisation with a clearmission. John Chambers, CEO stated: “The soul of Cisco is driven by customersuccess and satisfaction” (Cisco Systems, 2005). To make customers successfulthey need to have availability of the products within the shortest time possible.The Internet makes it possible to process 97% of the orders digitally, whichdemonstrates the accessibility for the customers to the organisation. Customerservice information plays an important role to improve customer satisfaction.Cisco Systems rates the customer service regularly for management and con-tinuous improvement actions. New products and services are derived from thisprocess. The ability to serve the customer demand better in comparison withits competitors is expressed by market share, time to market and profit of thenew products (table 2).


50

With the “Call manager” product, a co-development with Nokia, the aim isto approach the consumer market by leveraging on the Nokia product andbrand. Nokia benefits by having access to the enterprise market of Cisco Sys-tems, which is strong in enabling communication network connections Inter-net routed. It seems both partners have reciprocal advantages from thisco-development.

Co-development

Partners are involved with development and innovations by partly carryingthe development and roll out costs for a new product. The development costsbecome more transparent with the co-investment approach as the develop-ment costs are part of the unit price and not hidden somewhere in overheadcosts. This investment strategy reduces the investment pressure for Cisco Sys-tems, which means that the available capital can be used for investments incore values such as customer service and innovations. To keep the partnership“sharp” continuous improvement is part of the deal. Yearly price reductionsare forcing the partners to improve and innovate their products and services.Co investing in development and innovation has the following effects:- The OEM Cisco Systems has to invest less as the partners are investingtoo,

- The partners at first tier level are investing “more” than asked as they in-vest themselves and are forced to have a payback period as fast as possibleto maximize profit in time,

- lower tier level contractors are investing in innovation too, induced bythe higher-level tiers.

- Partners have obligations to perform in delivery but also in efficiency, forbenefiting from the learning curve effect resulting in reduction of pricesand lead times.

The “Call manager” product is a co-development between Cisco Systems andNokia. Cisco Systems provides in Internet Protocol enabling: meeting placeand videoconference driven by voice over IP technology, to make meetingsand managing at a distance more sustainable and efficient. This newly deve-loped product combines hardware from Nokia with software from Cisco Sys-tems. Cisco Systems and Nokia share their investment in development andinnovation on a 50/50 basis, which calculates an investment multiplier “IMP”

Table 2: Variables found from Cisco Systems: Market demand

Value driver

Market demand

Variable found related

Market share (Ms)

time to Market (ttM)

Profit

Introduction

51

of 2. A separate arrangement is made for sharing revenues from the numberof sold hand set telephones by a royalty fee (table 3).

Co-production

To become more “Lean“, Cisco Systems changed its outsourcing policy dra-matically. The last decade a large base of subcontractors was built up to out-source manufacturing. In total thirty manufacturers where connected. Thenext decade Cisco Systems will continue this strategy of supply chain ratio-nalisation and reduce the supplier base to four strategic partners for manufac-turing the so called “main contract manufacturers”. These contractmanufacturers invest themselves to improve their processes to follow the de-mand from Cisco Systems. The production value of Cisco Systems is for a largeproportion contributed by the partners (approx. 80%). In fact, Cisco is mul-tiplying its own production value of 20% on the value network with factor 5,called the Production Multiplier “PMP” (table 4).

OEM-company value network position

The organisation has to be organised and managed differently, coping withthe “virtual networked organisation”. The classic sequential processes likesales, production and purchasing have made place for a parallel process. CiscoSystems is not managing any more sub suppliers lower in the chain. Therefore,classic hierarchical positions and related complexity are eliminated from themanagement structure. Main primary management fields are Customer Rela-tions, Technology & Innovation, Partner Operations, Finance, and HumanRelations. The Partner Operations are taking over the classic production fac-tor. Because of shifting value towards the supply network, Cisco Systems le-verage value per employee. Cisco Systems employs for one employee insidethe company, six employees outside the company, contributing to the totalturnover of Cisco Systems. This brings the turnover per capita on US$ 700.000,-. The objective is to leverage, US$1.000.000. - per employee or capita on thevalue network with 20% profit within five years (table 5).

Table 3: Variables found from Cisco Systems: co-development

Value driver

Co-development

Variable found

Investment Multiplier “IMP”

Table 4: Variables found from Cisco Systems: co-production

Value driver

Co- production

Variable found

Production Multiplier “PMP”


52

Examples of other partnerships are the customer service centre and logistics.Partners are becoming increasingly important and are taking over completesegments of the value chain like; UPS-Menlo does the entire logistics fromcontract manufacturer to the end customer. Without the contribution of thepartner like UPS-Menlo, there will be no delivery of any Cisco product at anyplace in the world. With UPS- Menlo, Cisco Systems saves approx $ 80 mil-lion by eliminating the need for its own logistic operations. The effect of out-sourcing logistics to the value network completely is a reduction of investedcapital, costs and increase of benefit by; - Increase of flexibility to the customers (integrators, distributors and serviceproviders),

- Reduction of costs and lead times,- Increase of scalability important to grow in emerging markets,- Transparency, by defining dedicated partners specifically for that costingoperation.

Cisco Systems can easily find partners, which leave more investment capacityfor core business processes.

Variables found

The variables found from Cisco Systems and related to value-leverage are pre-sented in table 6.

Table 5: Variables found from Cisco Systems: OEM-company value network position

Value driver

oeM Company value network Position

Variable found

turnover per Capita (t/C)

Table 6: Variables found from Cisco Systems along value drivers

Value driver

Market demand

Co-development

Co- production

oeM-company value network position

Variable found related to value-leverage

Market share (Ms)


Profit

Costs

r&d Investment Multiplier (IMP)

Production Multiplier (PMP)

turnover Per Capita (t/C)

Introduction

53

1.7.2 ASML

Introduction

ASML is market leader in the semiconductor lithography market with a mar-ket share of 80% for the top end market in competition with Nikon andCanon from Japan. Customers are wafer production plants for producing mi-crochips, like Samsung in South Korea and TSMC in Taiwan. ASML machi-nes are working under extremely vulnerable conditions regarding vibrationsand cleanliness as the chip circuits are within nano [nm] reach. ASML strategyis focusing on Technology and Customer service. The investment in the de-velopment of the TWINSCAN platform, commencing ten years ago, wasabout €1 billion. The development time was three years. The machine wasfor 6 years in production. In total, 650 units have been delivered. ASML hada production planned for 2006 of 250 lithography machines. Machines havea selling price between €14-25 million. Total expected turnover 2006; €2,5billion with 5000 employees on their payroll. ASML’s newest production ma-chine is the AFR 1700-1400 for the development of the newest “Flash me-mory” chips. The ASML machines are developed in close cooperation withthe customers. ASML focuses on the following competences; - technology leadership,- customer focus,- development & production with partners.

Market demand

From the TwinScan product range 650 units are delivered starting six yearsago (2000). TwinScan ARF-1400-1700 mounts to 80% market share for thetop end of the market. The KRF 850 product range covers, the high-end mar-ket with 60% market share, and Eylines product range covers, the low-endmarket with 35% market share. In competition with Nikon and Canon fromJapan ASML has an average market share of 60% measured in units.

Time to market is extremely important to bring the customer in an advanta-geous position. Developments regarding the design of semi conductors are de-pendent on the design of the lithography machine. The sooner the machineis available the sooner the production can start. For this reason, ASML de-livers prototype machines, which are finally developed together with the cus-tomer on site to have the final machine configuration. Development time fornew machines is about three years, as is the Break-Even time (table 7).

Table 7: Variables found from ASML: market demand

Value driver

Market demand

Variable found

Market share (Ms)


Break-even (Be)


54

Co-development

ASML has taken a position as “Design & Integrator” working together withpartners supplying complete integrated subsystems to the final assembly line.The supply network partners are sharing in development and production.ASML works closely together with five main partners for the development ofoptical and drive & control technology, the main sub systems for the new ma-chine ART 1700-1400 range; Zeiss ,Symer, Philips ETG, Jena Optik, BerlinGlass, Aglient. Zeiss is main partner concerning optical technology with acontribution of 45% of the total value of the machine. Involved institutes areTNO, Philips NAT LAB and Universities.ASML has obtained extensive knowledge concerning optical technology anecessity for development of the next generation machines. Zeiss as a partneracquired knowledge on electronic microscope technology applied to the se-miconductor industry.

The development costs for a new generation machines are around €1 billion.Partners are sharing 40% of the total investment in development. Partner’srecover investments by normal profit margin mark up. About 80% of the sup-pliers are investing on their own risk for ASML programs. ASML is multiply-ing its own investments in development with a 100/40=2,5 ratio over thesupply network (table 8). ASML share patents with partners such as Zeiss ona mutual cross over exclusive licence. ASML has a dedicated VP – IP resortingunder the Chief Technology Officer (CTO) to handle all patent matters wit-hin ASML as well with the (main) partners. ASML had to defend patent po-sition against Nikon and finally settled disputes. Zeiss is contributing to thedefence of patent infringement.

Co-production

ASML is outsourcing / purchasing in total for €1,7 Billion according planning2006, which is 95 % of the total turnover, which calculates a production multi-plier of 100/5=20. ASML works close together with twenty partners in the sup-ply network and multiplies the own production value twenty times (table 9).

Table 9: Variables found from ASML: co-production

Value driver

Co- production

Variable found


Table 8: Variables found from ASML: co-development

Value driver

Co-development

Variable found


Introduction

55


ASML makes intensively use of the value network consisting of co-developingand co-producing suppliers. The Turnover per Capita in 2006 was Euro500.000.-(table 10)

Variables found

The variables found from ASML and related to value-leverage are presentedin (table 11).

1.7.3 PACCAR – DAF Trucks

Introduction

The enterprise was established in 1928 in Eindhoven, The Netherlands andwas acquired in 1996 by PACCAR (USA), one of the largest truck manufac-turers in the world. PACCAR as a group produced 175.000 trucks in 2006with the brands Kenworth, Peterbilt and DAF Trucks. Recovering from dis-continuity in 1994 due to recession in Western Europe DAF Trucks continuedwith limited capital and a strongly reduced workforce from 11.000 to 6.000employees. DAF Trucks had to be smart to survive and allocate the limitedcapital available in the right way. Due to shortage of capital, DAF Trucks be-came creative to involve sub- suppliers taking over stock of semi-finished parts,reducing working capital. In this way, making the enterprise already more lean.In fact, the suppliers are “co-investing” in their customer.

Table 11: Grouping variables found with ASML along value drivers

Value driver

Market demand

Co-development

Co- production



Market share (Ms)


Break-even (Be)



turnover per Capita t/C

Table 10: Variables found from ASML: OEM-company value network position

Value driver


Variable found

turnover Per Capita (t/C)


56

Production of complete trucks without customer order, thus creating waste instock, was abolished and replaced with production on customer order, only.Research and Development workforce was strongly reduced, paving the wayfor co-development with suppliers structurally.

Market demand

The market has been researched in detail to find the relevant niches and topresent DAF Trucks only if desired products could match to the customer de-mand. The truck as a system and the configuration options were standardized,reducing complexity. The customer order could be processed much fasterthrough the organization making shorter delivery times. The customer demandis present within the whole value chain and creating pull in the entire valuechain from development to production to services. According to Aad Gou-driaan, President of DAF Trucks [press article Eindhovens Dagblad 09-01-2007]:As a result, the trucks from DAF are increasingly better appreciated by thecustomers compared to products from competitors, the production in 2006increased by 7.6 % compared to 2005. Compared to 2004 the growth was 25%.This is sustained by the increase of market share during the last years. Totalmarket share 2006 is 14.5%. Ranking in Europe is 1.Mercedes, 2. MAN, 3.DAF Trucks. Goal for 2007 is a market share of 15% with growth to 20%.DAF Trucks launched in 2006 four new products to the market: a new lighthybrid, a middle and heavy truck product, the XF was honoured as truck ofthe year 2007. Market share is the metric used to express how the DAF productcopes with customer satisfaction (table 12).

Co-development

The enterprise has an external market orientation with regard to the devel-opment of new products. This means that DAF initiates development as a res-ponse to customers’ need- a pull situation. DAF makes sure to liaison with itscustomers about expectations for future developments. DAF tries to thinkahead and acts accordingly in its development cycle. However, DAF will notoften develop new technology, as it prefers to use proven and reliable techno-logy. For the truck owner the operational costs and reliability are crucial fac-tors. The user-operator [driver] and the fleet owner are both involved in theinnovations to create better value.

DAF Trucks offers mileage at the lowest cost per kilometre related to the qua-lity of the product. DAF Trucks developed the new MX engine for the new

Table 12: Variables found with PACCAR-DAF Trucks: Market demand

Value driver

Market demand

Variable found

Market share (Ms)

Introduction

57

XF range with a capability to run 1,6 million kilometres. The new engine isdesigned to the latest requirements regarding environmental impact, fuel eco-nomy and maintenance interventions. For future engine developments, PAC-CAR decided to co-develop with DAF Trucks new engines for the brandsKenworth and Peterbilt in addition to Cummins and Caterpillar engines.PACCAR will invest $400 Million into a new engine production plant in theUSA coming on stream in 2009.

DAF Trucks invests mainly in concept design and the development of engines,tuning, cabins, and the testing, qualifying, and assembling of trucks. The de-velopment costs are for a large extend amortized in the sub system products,as this is a mass production market. Own investments in innovation can befound in the development of engines, the core of the truck and influencingdirectly the productivity of the truck. DAF Trucks invested €50 million innew development and testing facilities during 2006.

DAF Trucks develops products by involving not only the user / customer inthe development process but also the suppliers. For all sub systems of thetrucks, suppliers are developing new systems on their own risk. Examples ofco-innovators are ZF for gearboxes and complete drive trains, Bosch for fuelinjection systems and Renault for cabins. The partners of the large OEM’s inthe automotive industry have gained know how to develop systems on theirown.

To improve product innovation processes regarding the cabin, DAF Truckswent for orientation to the innovation centre of Boeing in the surroundingsof Seattle (USA) in 2006. DAF Trucks was specifically interested in the in-novation of the “cabin”, as the major part of a truck is the cabin. DAF Truckslearned as did Boeing, to incorporate the user into the development process.They are really experiencing the area in which they work, sleep, communicateand produce kilometres.

The newest development of the truck with hybrid traction is a co-developmentwith Eaton from the USA where the complete drive train is developed. In thisdevelopment, DAF Trucks is responsible for specification of drive train andintegration, qualification, testing and assembly of the vehicle making the de-velopment less expensive for DAF Trucks as the drive train was completelyoutsourced without upfront investments and the cabin co-developed with Re-nault. In total 75% of the value of the truck is contributed by suppliers. Thiscalculates an investment multiplier of 100/25=4 (table 13).


58

Co-production

DAF Trucks developed the Internet based ordering system “Build to order” to con-nect the market demand via distributors directly with the production system. Thisis a unique process only possible due to standardization of the market demand andproduct configurations. Many bureaucratic layers are eliminated reducing deliverytime to the customer by half. The production of DAF Trucks makes use of supplierscontributing 80% of the production value. DAF Trucks own production value ismultiplied with a factor five by the supply chain (table 14).


DAF Trucks makes intensively use of the value network consisting of co-de-veloping and co-producing suppliers in the supply chain. The Turnover perCapita in 2006 was Euro 571.428,- The Profit per capita was Euro 42.857,- forthe same year, which appears as a new variable expressing how the value addper employee is reworded by demand (table 15).

Variables found

The variables found from PACCAR-DAF Trucks and related to value-leverage(table 16).

Table 15: Variables found with PACCAR-DAF Trucks: OEM value network position

Value driver


Variable found

turn over per Capita (t/C)

Profit per Capita (P/C)

Table 14: Variables found with PACCAR-DAF Trucks: co-production

Value driver

Co- production

Variable found


Table 13: Variables found with PACCAR-DAF Trucks: co-development

Value driver

Co-development

Variable found


Introduction

59

1.7.4 Conclusions exploratory practice research

Within the main value drivers, the following quantifiable variables related tovalue-leverage are found and presented in table 17. In total 19 times is referredto variables along value drivers: market demand (7x), co-development (5x),co-production (3x) and value network (4x). Corresponding with the fourvalue drivers, in total 9 variables are found: Market Share, Time To Market,Profit, Break – Even, Costs, R&D Investment Multiplier “IMP”, ProductionMultiplier “PMP”, Turnover per Capita, Profit per Capita.

Table 16: Grouping variables found from PACCAR DAF Trucks along value drivers

Value driver

Market demand

Co-development

Co- production



Market share (Ms)



turnover per Capita: t/CProfit per Capita: P/C

Table 17: Grouping found variables along value drivers

Variables

Market demand

1) Market share (Ms)

2) time to Market (ttM)

3) Profit 1

4) Break-even (Be)

Co-development

5) Costs ( C )

6) leverage on invest-

ment in r&d (IMP)

Co- production

7) leverage on produc-

tion (PMP)

OEM-company value

network position

8) turnover per Capita

(t/C)

9) Profit per Capita (P/C)

Total

Cisco Systems

1

1

1

1

1

1

1

7

ASML

1

1

1

1

1

1

1

7

PACCAR-

DAF Trucks

1

1

1

1

1

5

Variables found

3

2

1

1

7

2

3

5

3

3

3

1

4

19


60

The variables are described per value driver to serve as input for further lite-rature research:

Value driver: Market demand:

Along this value driver, all interviewed persons refer to market share (MS) asthe variable expressing the ability to fulfil customer demand in comparisonwith its peer group of competitors. The other variable referred to is Time ToMarket (TTM) in years as this variable expresses the time necessary to havethe new product into the market to satisfy new addressed customer demand.Other variables mentioned are the quantities to break even (BEQ) and thetime to break even (BET) to recover the investments made to develop the ca-pital good.

Value driver: Co-development:

IMPAlong this value-driver, the R&D investment multiplier “IMP” is found to berelevant as it appears in all three cases. The variable expresses value-leverageby the division between the total investment in development and the own in-vestment in development for products. The variable suggests the OEM canmultiply its own investment over the supply chain, as partners are willing toinvest in the co-development of the focal OEM-company. The other variable is “Costs” as it is referred to in relation with suppliers in-volved with development.

Value driver: Co-production:

PMPAlong this value driver the production multiplier “PMP” is found which ex-presses value-leverage by dividing the total production value in revenues di-vided by the own production value. The variable suggests the focalOEM-company can multiply its own production value over the supply chain,as partners are willing to be involved in the co-production of the product.

Value driver: OEM-company value network position:

Along this value driver, the following variables are found: the variables Profitand Profit per Capita form a cluster and have in common the “capita” as de-nominator. The “capita” refers to one of the principles from Lean manufactu-ring, which is; value adding versus (necessary) – non value adding processesand the contribution customers are willing to offer for the OEM position inthe value network. As the research focus is on value-leverage perspective, thevariable P/C, is considered for further research. The T/C variable measuresthe shift of value from the focal OEM-company towards the network (T/C).The T/C and P/C, measures value-leverage from an OEM-company value net-work position.

Introduction

61

1.8 Research contributions

This dissertation contributes to the body of knowledge on value drivers invol-ved with value-leverage on suppliers by aerospace OEM companies, with theco-development and co-production of aircraft. Variables to measure this value-leverage phenomenon on product and company level are currently missing,which makes it useful from a scientific and societal perspective to researchthis phenomenon. The theories on lean manufacturing, value chain, focalcompany value network, supply chain and open innovation show linkages, in-troducing a new vision on how value can be created by leveraging value onsuppliers from an aerospace OEM integrator perspective. This section moti-vates the relevance of the contributions to science and society.

1.8.1 Scientific contribution

This dissertation contributes to the development of theory on how value-le-verage by focal aerospace OEMs on suppliers works. By interlinking theorieson lean manufacturing, supply chain, open innovation and OEM-companyvalue network, the phenomenon of value-leverage emerges.

Lean manufacturing

Womack and Jones (1990), (2003) describe the lean philosophy as “a way todo more and more with less and less – less human effort, less equipment, lesstime and less space – while coming closer and closer to providing customerswith exactly what they want”. This is achieved by specifying the demandedvalue, introduction of “flow” by just in time supplies for suppliers and elimi-nation of different forms of waste that can be present in company processes.The employee plays an important role in this process-based approach of leanmanufacturing, with respect to value add versus non- value add. The maingoal in lean thinking is directed at ‘optimising the total value’ instead of ‘mi-nimizing the cost’. The essence of the theory on lean manufacturing is the op-timisation of the whole value chain and network. Lean companies are lessconcerned about the cost of the individual products within the value flow andare more concerned with the costs of the value flow as a whole (Maskell, Ken-nedy, 2007).

In fact, the “lean enterprise” is involving suppliers in the development andproduction of capital goods. It is leveraging value on resources and competen-ces, outside the focal company. Variables to measure this value-leverage effectare missing. The contribution of this dissertation is to add new theory onvalue-leverage to the already existing theories on lean manufacturing to createa new understanding around lean manufacturing.

The other intriguing aspect of lean is the statement of Murman et al., (2002)by the publication on “Lean Aerospace Initiative”. The conclusion in thiswork is that the lean organisation is a more flexible and a more adaptive or-


62

ganisation with respect to its environment, and that companies can create“Better, Faster, Cheaper” value, but it still not answers how this occurs in aquantitative expressed manner. Therefore, it is interesting to continue this re-search with finding the variables able to express “Better, Faster Cheaper”,through value-leverage processes.

Supply chain

Regarding the increasing importance of the supply side of the OEM-company, Choi (2005) concluded that the transaction costs are positively related withthe increase of complexity. It was also stated that rationalizing the supply baseand the network can reduce complexity. The supply network is the extendedasset and resource of the OEM integrator-company, which develops towardsand Large Scale Systems Integrator (Petrick, 2006). The balance of power be-tween OEM integrator and suppliers is shifting due to the transfer of value to-wards the suppliers. The shift of the balance of power can be expressed by thevalue-leverage position of the aerospace OEM-company. This dissertation iscomplementary to earlier research on the field of supply chain and contributesto the understanding of the balance of power between the aerospace OEMand suppliers.

Open innovation

From an open innovation perspective many authors studied innovations inrelation with value and supply chains Moore, (1995), Leifer, (2000), Ches-brough, (2003), Hamel & Ramaswamy, (2004), Von Hippel, (2005), all ad-vocating involvement of suppliers and customers with the development ofnew products and services. Benefits and drawbacks of co-innovation have beenexplored and supported by qualitative data (Bossink, 2002; Odenthal etal.,2004) however; quantifiable research on open innovation involving sup-pliers is still underdeveloped. Research by Choi (2005) showed that there is anegative quadratic relationship between complexity and suppliers involvedwith innovation or open innovation. This indicates that suppliers are of in-fluence to reduce the complexity and as such transaction costs, with the cre-ation of new value. Currently there is no quantitative proof on a time basisthat leveraging value on suppliers with co-development of new products overtime, delivers additional value. This research contributes to already existingtheories on aspects of open innovation such as co-innovation of aircraft fromthis new value-leverage perspective.

The other aspect is that until now it is not transparent what the contributionof R&D activities is. In case of open innovation, the R&D becomes more sha-red and as such, the investments in R&D can become in line practice withthe actual demand, instead of a fixed budget for R&D, which is common prac-tice in the OEM industries.

Introduction

63


As mentioned the value network plays a crucial role in the development andproduction of aircraft. Hakansson and Snehota (1989) are putting the classicvalue chain, as described, in a different, network perspective. The networkgenerates business by positioning the focal company in relation to its outerenvironment. In this way, the amount of resources to generate and exchangevalue with other distinctive enterprises increases for the focal company. A“classic” organisation is mainly driven by focusing on cost and efficiency wit-hin a controllable inner environment.

The network becomes the strategy to generate value. The shift of value to-wards the supply chain and network suggests that the complexity of transac-tions increases. This introduces the link with the Transaction Cost Theory(TCT) by Williamson (1985). Within this theory, transactions are theorizedon parties interacting from different hierarchical levels but still opting for op-timisation transactions from an own asset perspective. In fact, transactionsbased upon own core assets relate to the optimisation of cost reduction in theconventional way.

Above mentioned theories show some ambiguity, as the network approachmay increase complexity of transactions, and as such, it may increase cost.Missing is how this can be expressed and measured from an OEM-companyvalue network position perspective. The value network position of the focalOEM-company can be expressed by variables, which is novel contribution toalready existing theories linking supply chain, lean manufacturing and openinnovation. Supported by these theories the value network position, measuringthe value-leverage capability of an aerospace OEM-company can be determi-ned, so aerospace companies can be compared on the value-leverage perfor-mance.

1.8.2 Managerial contribution

From this new perspective on value-leverage, aerospace OEM business pro-cesses; supply chain, manufacturing and R&D can be managed more from anintegral value perspective. For instance, the level of investment sharing forco-development and production sharing is relevant in decision making aroundthe development of new products for specific customer demand. The contri-bution of this research is that management can base their decisions by knowingthe variables involved with value-leverage.

1.8.3 Societal contribution

Toyota was able to (re)allocate employees to reduce wasted capacity and op-timise production processes from an integral value perspective in the 1960s.Comparing this employment policy with USA car manufacturers, GM closeddown 10 factories and lay off thousands of employees in 2007-2008, which is


64

very harmful to society. From a lean manufacturing perspective, one can saythat reducing all kinds of waste in business processes that are not contributingto customer and supplier value is supporting sustainability, which is of valuein many ways for society.

Open innovation and lean manufacturing theories are showing the way to co-create value, which is beneficial for all stakeholders without optimising valuefor only one of the chain partners, which is the classic paradigm. Society be-nefits from balanced distribution of value throughout interlinked systems ofvalue chains.

Wasted assets and resources are unnecessarily harming our ecological environ-ment. Knowing this, enterprises and other stakeholders can benefit from thisknowledge. By leveraging value on suppliers, the provided assets and resourcescan be used more optimal to satisfy useful customer demand also in a sustai-nable manner.

1.9 Structure of this dissertation

The overview of the dissertation is presented in figure 14, to navigate throughthe chapters.

Chapter 1: This first chapter explores the research topic ”value-leverage” bydescribing the research background including trends, new products in aero-space and orientation on theoretical aspects of the topic. Exploratory qualita-tive interviews have taken place to create understanding about the aspects ofvalue-leverage. All aspects together form the motivation why the topic is ofinterest to research and the scientific and societal contributions.

Chapter 2: This chapter defines the research domain, objectives, the exact re-search questions, and the methodology to be followed to find answers on theresearch questions.

Chapter 3: The results of the combined exploratory and literature research arepresented in chapter 3, forming the basis for the dissertation and the answeron the first sub research question SRQ 1:“What are the variables measuringvalue-leverage by OEM companies?” The variables are shown to have anorientation to product level on one hand, and on company level at the otherhand.

Chapter 4: The found variables in chapter 3 on product level are applied toaerospace cases; Embraer E-170/190, Dassault 7X, Airbus A380 and BoeingB787 to know whether the variables are applicable in this domain. The resultsare presented answering the second research question SRQ 2a: “What varia-bles are applicable for aircraft products?”

Introduction

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Chapter 5: The found variables in chapter 3 on company level are applied toaerospace companies (company level) to know whether the variables are ap-plicable in this domain; Boeing, Bombardier, Embraer, EADS, General Dyna-mics, Lockheed Martin and Northrop Grumman. The linear least squaresanalysis is used to quantify value-leverage for aerospace OEM companies, toanswer the second sub research question: SRQ 2b: What variables are appli-cable for aerospace OEM companies? ”

Chapter 6: The applied variables in chapter 4 and 5 are researched from a timeperspective by making use of value time-curve analysis for the cases EmbraerE-170/190 and Dassault 7X on product level, and with the linear least squaresmethod for the relation with time on company level for aerospace OEM com-panies in comparison with automotive OEM companies. The analyses are usedto research if the variables are interrelated to form the value-leverage modelon product and company level. This to answer the third research question intwofold: SRQ 3: “How are the variables interrelated through time? Subse-quently: can the variables form a model for value-leverage for aerospace com-panies?”

Chapter 7: This chapter concludes on the research questions by synthesisingthe conclusions through designing the value-leverage model. MRQ: “How tomeasure value- leverage by aerospace OEM companies.”

Chapter 8: In this chapter exploration of further research is described, followedby recommendations.

Chapter 9: The review of the research is coupled with reflection by means ofan Epilogue.


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figure 14: structure of the dissertation

Research Design

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2.1 Introduction

This chapter presents the strategy by the research design, for finding answersto the research questions. The strategy consists of the following steps: a) de-termine the scope of research, b) the research process with research objective,value drivers and variables, c) definition of the research questions, d) specifi-cation of the domain to which the research is applicable and e) the researchmethod for case research and collecting data and for finally finding to answerson the research question.

2.2 Scope of research

The research towards the topic value-leverage on suppliers by the OEMs fitswithin the scope of research regarding the ATO chair. The research scope isdefined by research on aerospace from an integral chain perspective. Coveringdevelopment, production and operation of aircraft, with the aim to contributeto the body of knowledge on value chain modelling at the aerospace domain(see chapter 1). Supported by theories on lean manufacturing, focal OEMvalue network, supply chain and open innovation. This research is a combi-nation of case research, where a small number of cases are researched andquantitative research, where a larger data set is considered to measure value-leverage over a period of time.

This research started with exploratory practice research in 2006, case researchin 2006-2007, and research towards value-time effects in 2008. In 2009, thisdissertation was written for defence of the dissertation in 2010. During the re-search period, various papers have been published to share this research withthe academic society, and get peer reviews in order to improve the research.

2.3 Research process definition

According to Dul and Hak (2008), the research process is structured aroundthe following aspects: the topic (chapter 1), the research objective, the valuedrivers, the variables, and the relation between variables forming the modeland the research domain. These aspects are structuring the research design.

Research objective: the objective of this research is to contribute to the de-velopment of theory by discovering and explaining the variables to design a

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model expressing value-leverage, the topic to research. Variables that expressvalue-leverage and the way they are interrelated are not known within the ae-rospace industry. The objective of this dissertation is to know how to measurevalue-leverage by aerospace original equipment manufacturers. Value drivers: the research framework is designed upon the drivers of value-leverage; co-production, co-development and market demand, from a focalOEM-company perspective. These are identified in chapter 1 with figure 13.

Variables: the variables are expressing value-leverage for the specific valuedrivers, co-development and co-production. To identify value-leverage, vari-ables such as ratios are useful. Variables are researched from a focal OEM-com-pany perspective. The variables can shape a model that explain how aerospace OEM companiesleverage value. The model is formed by newfound variables and specifying therelation between variables within the scope of research from a focal aerospaceOEM-company perspective.

2.4 Research questions

In chapter one it is motivated that the topic, value-leverage on suppliers bythe focal aerospace OEM-company, is of interest to research, and contributeto the development of theory. The scope, addressed theories and research pro-cess are defined, the core of the dissertation, the objective and research ques-tions are formulated. The general objective of this research is to contribute tothe development of theory regarding value-leverage by discovering and ex-plaining this phenomenon. Which variables can be defined and what kind ofrelations can be determined to identify the phenomenon of value-leverageand how can value-leverage be measured? The main research question is for-mulated as follows:

How can value-leverage by aerospace original equipment manufacturers (OEMs)be measured?

1. What variables express value-leverage on suppliers from a focal OEM-com-pany perspective?

2. What variables are applicable to the aerospace industry, and are they inter-related?2A. What variables are applicable to development and production of aircraft?2B. What variables are applicable to aerospace OEM companies?

3. What is the relation between variables through time and how can the va-riables form a model, measuring value-leverage?3A. At aircraft product level?3B. At aerospace OEM-company level?

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The result of this research is a new perspective on how aerospace OEM com-panies can benefit from value-leverage regarding the co-development and co-production of aircraft, by modelling. With the new variables, it is possible torank aerospace OEM companies on their value-leverage performance.

2.5 Research domain

The aerospace domain consists of aircraft, engine, and equipment manufac-turers, supplying to aircraft and engine manufacturers. This research is focussedon aircraft manufactures and companies developing and manufacturing air-craft.

Aircraft cases and aircraft manufacturers

There are a few interesting cases in the real life context such as the introduc-tion and subsequently concept development and introduction or marketlaunch of the aircraft for sales to the customers: Boeing B787, in 2004, AirbusA380, in 2002, Dassault 7X, in 2000, Embraer E-170/190, in 1999.

After the introduction to the customers, the aircraft developed from conceptdesign into design for production. The production is followed by the test andqualification phase with the first flight after which the aircraft is delivered tothe customer, the moment the value is “time to market”.

The mentioned aircraft cases represent the timeframe, close to the momentthis research started in 2005, to bring insight in the phenomenon of value-le-verage. The involved aircraft manufactures or integrators (Boeing, EADS, Em-braer, and Dassault) are part of this research to identify value-leverage on valuenetwork level, which is a higher abstraction level compared to the aircraftcase research, that took place on product level.

The drivers found applicable to the value network are preliminary tested onthe larger group of aerospace OEM companies, consisting of aircraft and enginemanufacturers and suppliers. The preliminary test is performed in comparisonwith the group of automotive OEMs, to know if the variables show similaritiesand if the variables found, have a relation with the theories on lean manufac-turing, focal value chain, supply chain, and open innovation. The automotiveindustry is chosen, because this sector of industry started with the adoption oflean manufacturing in the 1980’s.

The capital intensiveness to develop, produce, integrate, and market theseproducts, characterizes Aircraft OEM, similar to the category of cars, trucksand computers. To develop these products hundreds of millions or even billi-ons of Euros are required.


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2.6 Research method

The research methodologies are explained and related to the sub researchquestions. First, an exploratory practice research is performed to find prelimi-nary variables. The found variables are used as input to the literature review.Secondly, a case study research is performed, to apply the variables to the ae-rospace domain with aircraft products and related companies. Thirdly, thefound variables are preliminary tested with the group of aerospace companies,both OEMs and suppliers. Finally, the variables are analysed in comparisonwith the automotive sector of industry to know, whether the variables do havea relation to the theory and the model.

2.6.1 Exploratory practice research method

The exploratory practice research is set up by making use of interviews (De-crop, 1999) with experts on the field of supply logistics and development, wit-hin OEM companies. After recording, transcribing and summarizing theinterviews, the interviews were sent back for verification by the intervieweeto improve the validity of the information (Yin, 2003). From three OEM’s in the Netherlands; ASML, Cisco Systems and Paccar-DAF Trucks, three product developments are involved to search for variables.With experts personal in depth interviews were conducted about their invol-vement in development and production of their company’s specific capitalgoods, such as trucks, lithography machines. Within the Netherlands, thereare no aerospace OEM companies since the discontinuity of Fokker Aircraftin the 1990s. Therefore, the mentioned non-aerospace OEM-companies, ho-wever belonging to the same group of capital goods, are involved in the ex-ploratory practice research phase. The outcome of the interviews are reportedin chapter 1, section 1.7.

2.6.2 Case research method for aircraft cases

The goal of the case study research methodology is to find variables expressingvalue-leverage. The numbers of new aircraft types being in development andin production are just a few throughout the world as mentioned in chapter 1.The small number of cases available, leads to a cases study based approach(Dul, Hak, 2007), (Yin, 2003). This part of the research took place in 2006.The variables found are input for the literature research, section 3.4., withcases in the aerospace industry as mentioned in paragraph 2.5 : Boeing B787,Airbus A380, Dassault 7X, and Embraer E-170/190, to know if the variablesfound are applicable to the aerospace industry, and can form a model. As thereare a small number of aircrafts in the development phase and initial productionphase, the case research methodology, a qualitative and theory–oriented study,is the appropriate method for this particular research.

According to Yin (2003), a case study is an empirical inquiry that investigatesa contemporary phenomenon within its real life context, especially when the

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boundaries between object of study and context are not known. The aerospacedomain offers a small number of instances to research as explained in chapter 1,section 1.3.2., and the previous section 2.5, research domain.

Within the case research methodology, several types of case research processesare available. Dul and Hak (2008) discriminate: exploration, theory-testing,and theory-building methodologies: - Exploratory research is the first option and contains the registration of in-stances with relevance for practitioners only and therefore not a basis forthe development of new theory, which is the aim of this research.

- The second option is “theory testing”, which is the valid method whenvariables are known and propositions can be tested. In this particular si-tuation, variables are not known.

- The third option is “theory - building research”. This research methodo-logy corresponds to the current situation of this research in which the va-riables are not known and the desired outcome is a model contributing tothe development of theory.

This research is about the discovery of variables to express value-leverage byaerospace OEM companies to form a new model on value-leverage, to explainhow these aerospace OEM companies are leveraging value on suppliers. Thevariables are not known and first need to be researched. The appropriate caseresearch methodology is “theory building research”.

Once the variables are found an initial or preliminary testing of the variablesis the next step in place if the variables never have been tested before (Dul,Hak, 2008) and if sufficient data are available, which is the situation for re-search on aerospace OEM companies. The variables are exposed to this preli-minary test in comparison with companies from the automotive industry toknow whether the different type of industries, show deviating or similar pat-terns regarding value-leverage performance. The automotive industry startedwith the adoption of lean manufacturing involving suppliers with the devel-opment and production of cars in the 1990’s long before adoption by the ae-rospace industry, which started around the year 2000.

2.6.3 Literature research method

The literature research is the foundation for the theoretical perspective of thedissertation. The literature is researched and analysed according a conceptcentric approach (Webster, Watson, 2002). Theory domains involved withvalue-leverage in aerospace are identified by the scope of research within theATO chair as stated in chapter 1, section 3.4 and 4. These domains are leanmanufacturing and supply chain and network, and open-innovation. The sour-ces that are used to obtain the data are from books, papers, internet, and pre-sentations from companies. The combined exploratory and literature review


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has the purpose to answer the first sub research question: “What are the vari-ables expressing value-leverage from a focal OEM-company perspective?”Until now, various authors refer to the shift of value towards the supply net-work however; currently there are no variables available to express the lever-age of value from an integral value perspective.

The involvement of suppliers with co-development and co-production leadsto the field of supply chain as a useful theoretical perspective to find variablesinvolved in value-leverage. The aerospace industry started adopting the leanmanufacturing theory at the beginning of 2000 to improve production pro-cesses by involving suppliers with the development and production. Besidessupply chain and lean manufacturing, it seems open innovation is an interes-ting theoretical perspective as suppliers may have an influence on the valuegrowth in time, which can be expressed by the value time-curve. Therefore,it is motivated to involve open innovation into the research as well. It seemsthat these research perspectives, which are also motivated in chapter 1, arerelevant to research for finding variables relevant to value-leverage.

Sources are found in the academic environment by relevant books and papers.Web sites are used to find background information on aerospace companiesregarding yearly financial publications and background on aircraft develop-ments. Specifically for the aerospace domain it is difficult to get detailed in-formation on specific aircraft developments. Reports from consultant firmssuch as the TEAL group specialized on aerospace are used as source of infor-mation.

The literature is reviewed and analysed along the value drivers (figure 13);market demand, co-development, co-production and the value network posi-tion of the focal OEM-company, to find variables. The value drivers are sha-ping the structure for all cases researched.

2.7 Data analysis

The found variables are analysed upon relations to develop a value-leveragemodel. The variables and relations in between are the building blocks for buil-ding the theory around value-leverage, the phenomenon to research. The va-riables and relations are visualized by means of scatter plots showing therelation of the identified variables.

Scatter plots

Data found on the specific aerospace cases are analysed, making use of scatterplots to know the distribution of the variables found. For the quantitative ana-lysis of the cases, data is recovered from annual reports on workforce, annualrevenue, profit, and research & development expenses. With this data, corre-lations between the data are defined by statistical evidence in order to identify

Research Design

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relevant and useful relations between variables. The variables are exposed tothe aerospace industry in chapters 5 for aircraft OEMs and in chapter 6 for ae-rospace OEMs in comparison with the automotive OEMs. The aerospace in-dustry is compared with the automotive industry measuring value-leverageover a 12 years period for both industries. Statistical analysis of the collecteddata is performed by means of a linear regression model for time series be-tween1996 and 2007 plus the combination of variables to know if the variableshave relations. In order to assess the internal validity, the statistical signifi-cance of the identified linear trends have been tested through a two-tailed testat a level of significance of 0.05. The trends showing a correlation coefficient(R) greater than the critical value, are considered as statistically significant.The slopes of the trend lines given by the regression model are considered asindicators of value-leverage. A scatter plot of instances indicating the exis-tence of relations between variables seems to be the best practice accordingto Dul and Hak (2008) to support the evidence that the variables form rela-tions to develop the model. This method is the most appropriate to quantifypossible qualitative relations. With this analysis, support is found to designthe model. Variables found in chapter 3 are exposed to this analysis to validatethe variables in chapter 5 and 6. This analysis method is selected to find ananswer on research question 2b.

Graphs

To quantify value-leverage through time in case of aerospace aircraft products,the cases are quantified by plotting the value time-curve (figure 15) to de-monstrate the value-leverage phenomenon. The value time-curve is relatedto the product life cycle, which is based on the principles of the “S” curve.According to (Eversheim, 2003) if one is able to determine the direction ofthe curve it might be possible to determine the phase of the life cycle the pro-duct is in and thus the capability of flowing value. The value time-curve con-siders the investment phase when the value built up is negative and theproduction phase, when the curve turns to generate positive value. Once thedata are available to plot the curve it is also possible to calculate the successof the product development by the directional coefficients.

figure 15: theoretical changes on the time curve


74

When the value-time curve is differentiated twice, another coefficient revealsitself, the growth coefficient (d2V/dt2). This coefficient indicates the variationin changes in the value-time curve. The growth coefficient first becomes ne-gative due to the large investments, but becomes positive when investmentsare decreased and aircraft are being delivered to the market. When productionis at a steady rate, the growth coefficient will become zero, as there is no moregrowth. This value time-curve analysis method is selected to find an answeron research question 3a. “What is the relation between variables through time andhow can the variables form a model?”

2.8 Research design

The research design process (figure 16) is based upon three main parts; Intro-duction to the topic and field, methodology and analysis and research ques-tions. The introduction to the topic and field results in a theoreticalframework, which form the input to the second part; case research methodo-logy and analysis, to find and analyse variables expressing value-leverage. Thevariables are found from exploratory practice research and literature review,applied to case research, and exposed to correlation analysis, in relation withthe topic, within the aerospace domain. The found variables are preliminarytested on a group of automotive OEMs to answer the main research question.By designing a preliminary model, which is the third part of the research designprocess, the main research question;” How can value- leverage by aerospaceOEM companies be measured?” is answered.

figure 16: research design process

Literature research

75

3.1 Introduction

This chapter reports on literature research. The variables found with explora-tory practice research are the input to the literature research on lean manu-facturing, supply chain and open innovation, to find variables for answeringthe fist sub research question “What are the variables, expressing value-leverageon suppliers from a focal OEM-company perspective? ”The literature research is reported in section 3.2 followed by conclusions. Theresearch design process presented in figure 16 structures the literature researchalong value drivers; market demand, co-development, co-production, proposedby the value-leverage analytical framework in figure 13.

3.2 Literature research

The results of literature and explorative practice research are input for casestudy research. In this section 3.2, literature research on lean manufacturing(3.2.1), supply chain (3.2.2) and open innovation (3.2.3) is analysed on therelation with value-leverage along the value drivers; market demand, co-devel-opment, co-production and value network. The aim is to search and find variablesto quantify value-leverage according the methodology described in chapter 2.

This section 3.2 on literature research, lists per subsection (3.2.1, 3.2.2, 3.2.3)the references and quotes in relation with the value driver and possible relatedvariable. The number of references referring to a specific, quantifiable variablecorresponds with the number of variables found. References referred to, mayappear with more than one value driver as the content of the reference relatesto these other value driver and to a related variable. In the count, a referenceis mentioned per specific year. The conclusions are presented in section 3.3.In section 3.4 the variables are discussed upon the possible relations in be-tween.

3.2.1 Analysis of lean manufacturing along value drivers

This section analyses the researched literature on lean manufacturing alongthe value drivers; demand, co-development and co-production. Lean manu-facturing is the body of knowledge with focus on value generated from a cus-tomer pull perspective, in cooperation with suppliers, supplying “just in time”the value demanded. Literature findings are categorized according to the value

Literature research 3


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drivers, to relate the found variables as presented in table 18, appendix B.1.1.,table 48.

Sub conclusion on lean manufacturing

The relation between lean manufacturing and the four value drivers is referredto by 24 times (B.1.1.,table 48) from which; market demand (4x), co-devel-opment (6x) and co-production (5x) and the value network position (9x).Co-development and co-production (11x) are referred to for 46 %, which ex-plains that lean manufacturing is driven by co-development and co-produc-tion. The relation with value network indicates that lean manufacturing is abroader theory than only a method on manufacturing. Lean manufacturing isdriven by the value network (9x) as 38 % of the references refer to this valuedriver. The focal OEM is leveraging value on the value network as a compe-titive advantage. It seems lean manufacturing principles originated from theautomotive industry have relevance to the aerospace industry with the devel-opment and production of products such as aircraft. The PMP found with ex-ploratory research is confirmed by literature research. The PMP from Toyotacalculates by the ratio between total production value and the own productionvalue, which is 100/27=3,7. The investment multiplier is referred to by a “sup-plier participation ratio. The variable “S” is the supplier participation ratio,which expresses the fraction of parts that is developed by the supplier (as apercentage of engineering hours). By extension, it is a measure of the engi-neering effort and thus the supplier investment made in the development pro-cess. The PMP is referred by the “DC” variable, which indicates the fractionof parts that is developed entirely by car manufacturers. Since these are usuallycritical parts for the car manufacturers, it is envisaged that the suppliers, torecover the investments in development, also produce critical parts. The em-ployees enabling the formation of networks drive the value network. From alean perspective the employee is the ultimate cause of value add, necessarynon value add or waste.The answer on sub research one: “What are the quantifiable variables expressingvalue-leverage by OEM companies?” From a lean manufacturing perspective thefollowing variables found according table 18 are; Market Share, Time To Mar-ket, IMP, PMP, Profit per Capita.

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3.2.2 Analysis of supply chain along value drivers

This section analyses the researched literature on supply chain along the valuedrivers; market demand, co-development, co-production and value network po-sition. Supply chain and network is the body of knowledge with focus on supplyvalue, which is a major value component of the total generated value by thefocal OEM-company. Literature findings are categorized according the valuedrivers to relate the found variables as presented in appendix B.1.2., table 49.

Sub conclusion on supply chain

In total 71 references (B.1.2, table 49) refer to the relation between the supplychain and the three value drivers from which; market demand (13 x), co-de-velopment (27 x), co-production (19 x) and value network position (12 x).The variable TTM is found five times, indicating there is a relation betweenthe supply chain and TTM. Co-development seems to be a dominating aspectfrom which cost contribute with 62 % of the references. The value networkappears 12 times indicating the focal OEM is leveraging value on the valuenetwork as a competitive advantage supported by cost advantage with co-de-velopment and co-production.

The answer on sub research one: “What are the quantifiable variables expressing value-leverage by OEM companies?” From a supply chain perspective, the following quan-tifiable variables found according table 19 are; market share and time to market.It seems the supply base is of influence on TTM and partly on market share.

In literature no explicit variable on co-development, co-production, and net-work is found, however the suppliers are involved in contributing value. Thesupply network is of influence on development costs and cost efficiencies.

Table 18: Variables found on lean manufacturing

Market demand

MsttMBeCo-development

CostsIMPCo- production

PMPOEM-company value

network position

t/CP/C

Total

4

31

6

33

5

59

81

24

Market demand

MsttM

Co-development

IMPCo- production


network position

t/CP/C

Total

11

-1

-1

6

Variable References

reviewed

Value

driver / variable

Quantifiable

variable found


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3.2.3 Analysis of open innovation along value drivers

This section analyses the researched literature on open innovation along thevalue drivers; market demand, co-development and co-production. Open in-novation is the body of knowledge incorporating the cooperation in R&D interms of co-innovations, co- investment in innovation and co-developmentwith suppliers, for customers. Literature findings are categorized according thevalue drivers to relate the found variables as presented in appendix B.1.3.,table 50.

Sub conclusion on open innovation

In total 61 references are reviewed (B.1.3.,table 50) from which co-develop-ment counts for with 34 references (56%), which confirms that value-leverageon co-development is an important aspect of value leverage. The other valuedrivers are referred to more equally, with 12 references on market demand, 8references refer to co-production and 7 references refer to value network po-sition.The answer on sub research 1: “What are the quantifiable variables expressingvalue-leverage by OEM companies?” From an open innovation perspective thefollowing variables are found according table 20; Time To Market, BE and IMP.

Table 19: References and variables found on supply chain

Market demand




network position

t/C / P/C

Total

13

85

27

1710

19

1912

12

71

Market demand

MsttM

Co-development



network position

t/CP/C

Total

15

--

-

--

6

Variable References

reviewed

Value

driver / variable

Variables found

Literature research

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3.3 References reviewed by literature research

This section summarizes the references reviewed and the variables found de-rived from the references. The section finalizes with description of the varia-bles found, which are used as input for continuation of research in chapter 4and 5. In total 156 references are found related to the value drivers (table 21).Market demand 29 times, co-development 67 times, co-production 32 timesand the value network 28 times.

From value driver co-development, the costs are referred to by 48 %, where52 % of the references refer to leverage on R&D. It seems, cost advantagesare related to leverage on R&D. Value driver co-development and co-produc-tion and is referred to 67 times (43 %) and 32 times (20%), whilst value net-work position is referred to 28 times (18%), which indicates the networkindeed becomes a relevant factor in respect of value-leverage (table 21). Fromthe references found it seems literature on lean manufacturing is less availablecompared to literature on supply chain and open innovation. However itseems value-leverage is enabled by the value network, which is a different per-spective than the previous focus on manufacturing. This finding adds a newinsight to the body of knowledge regarding lean manufacturing.

Table 20: Variables found on open innovation

Market demand




network position

t/C / P/C

Total

12

561

34

1222

8

87

7

61

Market demand




network position

t/CP/C

Total

51

1

7

Variable References

reviewed

Value

driver / variable

Variables found

3.3.1 Variables found

The value driver’s market demand, co-development, co-production and valuenetwork position are analysed on the references referring to quantifiable vari-ables (table 22). Variables related to value-leverage are referred to in total 29,from which 20 variables are related to market demand. It is an interesting ob-servation that value-leverage is clearly related to value driver; market demand,however it is even more interesting that there are only 9 variables referred tofor each of the value drivers co-development (3 x) , co-production (3 x) andvalue network position (3 x).


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Table 21: Overview of references reviewed

Variable Lean

manufacturing

Supply chain- Open innovation Total of

references

reviewed

Market demand



PMPOEM-company

value network

position

t/CP/C

Total

4

31

6

33

5

59

81

24

13

85

27

1710

19

1912

12

71

12

561

34

1222

8

87

7

61

29

16121

67

3235

32

3228

271

156

Table 22: Overview of variables found

Variable Variables

found on lean

manufacturing

Variables

found on

supply chain

Variables

found on open

innovation

Variables found

by exploratory

research

Total number of

variables found

Market demand



PMPOEM-company

value network

position

t/CP/C

Total

11-

-1

2

-1

6

15-

--

-

--

6

-51

-1

-

--

7

321

-1

1

11

10

20

5132

3

33

33

12

29

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3.3.2 Value driver 1: Market demand

Market shareThe relevance to market demand is referred to 20 times by various authorsfrom which market share is explicitly referred to five times. This variable isuseful to evaluate the success of aircraft development and production program-mes, as a measure of customer demand. Benefit for suppliers is the “pie growingeffect”. If OEMs market shares are growing, the suppliers have the opportunityto grow as well.

Time To market This variable TTM is explicit referred to by 18 times. It seems this variabledoes relate with supply chain, lean manufacturing, and open innovation andappears to be an interesting variable. The company having its product first onthe market has an advantage over the competition exposed by market sharebuilt up, the initial higher margin, and the defence by releasing derivative “fa-mily” products. This first mover advantage may have also a positive effect onthe build up market share and break even time.

Break-Even Break-Even is referred to two times. This variable becomes relevant when de-velopment of a product is projected in time in conjunction with the numbersof aircraft delivered and time. If investments in development are shared withrisk-sharing partners it will possibly effect the break-even period.

3.3.3 Value driver 2: Co-development

CostThe variable cost is left out for further research as there is no specific variablefound which relates to value-leverage. However, costs seem to be importantas this factor is referred to 32 times (table 21), the variable Profit per Capita(value driver: OEM value network position) is in place to measure the benefitsof cost advantages, from a value-leverage perspective.

Co-development The co-development is referred to by 67 times from which 3 times variablesare mentioned. Two explicit variables are found expressing value-leverage: - Pritchard and MacPherson, (2004); Boeing is leveraging investments in de-velopment regarding the development of the B787 aircraft. From the totalinvestment, Boeing carries initial 4,2 billion dollars; suppliers are carrying9,2 billion dollars. An investment multiplier “IMP” is calculated as the di-vision between the total investments in development and the own invest-ments. The IMP for Boeing is 13,4 / 4, 2= 3,3. The value chain partnersare benefiting from an initial investment by Boeing of $4,2 Billion. The in-vestment is multiplied with factor 3,3 throughout the chain. This form ofvalue-leverage is also found with the interviewed OEM-companies.


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- Clark, Ellison et al, 1995; the found project strategy variable is the supplierparticipation ratio “S”, which expresses the fraction of parts that is deve-loped by the supplier (as a percentage of engineering hours). By extension,it is a measure of the engineering effort and thus the supplier investmentmade in the development process.

Co-development Multiplier (IMP)Along this concept of co-development, two found variables IMP and “S” havesimilarities. Where the “S” is referring to the fraction of part entirely developedby the supplier the IMP refers to the value-leverage on suppliers from an OEM-company perspective. The OEM-company is leveraging on investments in de-velopment to create new value. The IMP is the ratio between the totalinvestment in aircraft development and the companies own contribution tothe development of the aircraft. This enables the formulation of the “Invest-ment Multiplier” or IMP. - The Investment Multiplier (IMP) is defined as the total aircraft develop-ment investment divided by the development investment of the aerospaceOEM-company.

3.3.4 Value driver 3: Co-production

The co-production is 32 times referred to from which 3 times a variable isfound. Two variables are expressing value-leverage: - The Toyota case (Womack, Jones and Roos, 1990) clearly identified theinvolvement and importance of the supply chain as a driver of value to thecustomer. Toyota reduced the value it added to the average vehicle from73% in 1937 to 27% in the 1950s. Car manufacturers in the USA and Eu-rope where producing 90% of the value. From this observation, the focalcompany Toyota leverages by a 100/27 ratio [3,7] production value on thesupply chain. A similar indicator as the IMP is found for Production Sha-ring, which is the “Production Multiplier” PMP. Its definition is comparableto the IMP but the PMP gives an indication of the portion of productionactivities taking place outside the company. A high PMP points at moresubcontractors and integrators taking over production from the prime con-tractor. The “Production Multiplier” PMP emerges from this analysis. Thetotal production value is 100% whilst Toyota is only contributing 27%.

- Clark, Ellison et al, 1995: The project strategy variable found is the detailcontrol variable (DC) is found, which indicates the fraction of parts thatis developed entirely by car manufacturers. Developing on own cost sug-gests the development costs will be recovered in the production phase.Since these are usually critical parts for the car manufacturers, the assump-tion is made that these parts are also produced in-house correspondingwith the production value with suppliers.

Literature research

83

Co-production Multiplier (PMP)Along this concept of co-production, two found variables PMP and DC havesimilarities. Where the DC is referring to the participation of the parts madeentirely in house, the PMP refers to the value-leverage on suppliers from anOEM-company perspective for the production of parts and systems involvingthe supply chain. This enables the formulation of the “Production Multiplier”: - The Production Multiplier (PMP) is defined as the total production valueof the aircraft divided by the production share of the aerospace OEM-company.

3.3.5 Value driver 4: OEM value network position

With respect to this value driver, 28 times is referred to two specific variables.These two variables are: the turnover per capita (T/C) found with Cisco Sys-tems, which expresses the shift of value to the value network and the profitper capita (P/C), which is found in literature and exploratory interviews. Thevariables have relation to the value adding versus non value adding activitiesof the employee and the capability to create and maintain value networks.Both variables have the value network aspect in common. The employees aredirectly involved with the design, built and operation of the value network.In addition to the T/C and P/C, it is proposed to introduce the RD/C, as a va-riable to express the value-leverage on R&D from a value creation perspective,which relates the effort of putting R&D budget in relation with the supplychain, the value network and the market demand.

3.4 Conclusion

The variables are found with exploratory interviews and literature researchalong value drivers; market demand, co-development, co-production andOEM-company value network position. The found variables show to belongto two levels:

Product levelVariables containing aspects of market value, time and supply value are; Mar-ket Share, Time To Market, Break-Even, Co-development- Investment Mul-tiplier “IMP” and Co-Production Multiplier “PMP”. - The Investment Multiplier (IMP) is defined as the total aircraft develop-ment investment divided by the development investment of the aerospaceOEM-company.

- The Production Multiplier (PMP) is defined as the total production valueof the aircraft divided by the production share of the aerospace OEM-company.


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Company levelVariables with the “capita” as denominator, which expresses value-leverageon suppliers by the focal OEM value-leverage network position. The variablesare: T/C, RD/C and P/C.

With the finding of the variables, the first sub research question: “What vari-ables express value-leverage on suppliers from a focal OEM-company perspective?”is answered.

Now the variables are discriminated by the clusters of variables, the secondsub research question; “What variables are applicable to the aerospace a) At aircraftproduct level and b) At company level?” can be answered in the next chaptersfour and five.

Variables applied to aircraft cases, product level

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4.1 Introduction

The objective of this chapter is to know if the variables found (table 25) inchapter 3 can be applied in the aircraft development. Firstly, four aerospacecases on product level; Embraer E-170/190 and Dassault 7X, Airbus A380 andBoeing B787, are researched to know if variables are applicable. The aircraftcases are analysed with respect to their value-leverage performance along thevalue drivers; market demand, co-development and co-production to find ananswer to sub research question 2; “What variables are applicable for aerospaceindustry, and are they interrelated? Accompanied with sub question 2a; Whatvariables are applicable to development and production of aircraft?

4.2 Case research : aircraft Embraer E-170/190

4.2.1 Introduction

The Embraer E-jets series are twin-turbofan-powered regional transport air-craft, consisting of the Embraer E-170, E-175, E-190 and E-195 models. Afterhaving conducted a number of studies among 46 regional airlines in Northand South America, Asia and Europe, the Brazilian company announced in1999 the introduction of a new 70-passenger transport aircraft, the E-170, anda 90-passenger aircraft, the E-190. The product was completely new, but sharedmany commonalities between the various models (Forecast International,2009). The E-190 and E-195 share 95% commonality and share 89% commo-nality with the Embraer E-170 and E-175. The Embraer E-190 differs from theEmbraer E-170 by possessing a stretched fuselage, longer wingspan, higher-rated engines and strengthened landing gear.

4.2.2 Variables along value drivers

Market demand

Market ShareEmbraer acknowledges that the E-170/190 development trajectory started inJuly 1999 – with rollout in October 2001 and first flight in February 2002 forthe E-170, with an anticipated 32 month development duration from launchto first flight (Botelho, 2002). Further testing and certification took two year,with first delivery to the customer in 2004. It is clear that the E-170/190 hasbeen a large factor in making Embraer the world’s fourth largest airline manu-

Variables applied to aircraft

cases, product level

4


86

facturer (Broad et al., 2005). As of 2007, accounting for the Embraer E-170/190 model range, Embraer had a 42% market share in the world’s up-to-120-seat segment (Embraer, 2008).

Time To MarketStart of the development in 1999, with first deliveries of the E-170 to custo-mers in 2004 and the E-190 to customers at January 2006. Time to market(TTM) E-170 is 5 years.

Break-Even The average list price for the E-170-190 range is US$ 33.4m. This is basedupon E-170 US$ 29.5 million, E-175 US$ 31.8m, E-190 US$ 35.3m, E-195US$ 37.3m. Taking an over-all profit margin of 5.5% (Eurocontrol, 2006),and the IMP of 1,48 (section co-development) the break-even quantity (BEQ)becomes 503 aircraft. Up to 2008 in total 590 aircraft are delivered (EmbraerQuarterly Reports). The investments by Embraer started in the year 2000. Thebreak-even time (BET) is reached in 2008, which calculates BET at 8 years.

When the assumption is made that profit is shared based on IMP, Embraer willreceive 1/IMP = 68%, and the risk sharing partners 32% of the total profit.This represents US$ 1.24m and US$ 0.6m respectively. The cost price per air-craft is different for Embraer and its partners, as production isn’t equally divi-ded. Based on the PMP, Embraer produces 36% (US$ 11.5m) and the partners64% (US$ 20.2m). Now that both cost price and profit are known, the indi-vidual profit margin can be calculated, which is 3.0% for the partners, and10.8% for Embraer. Appendix D contains an overview of Embraer's financialdata used in this case research.

Co-development

The E-170/190 model development incorporated suppliers from the very be-ginning of the development trajectory, allowing Embraer to evaluate them todetermine which would provide the best value to the entire development valuesystem. This resulted in an initial 85 potential partners, of which 58 were pre-qualified and eventually 16 were chosen (Bernardes, 1-21) ,(Figueiredo, Sil-veira, Sbragia 2008). Some of these partners are C&D Interiors, Gamesa,General Electric, Hamilton Sundstrand, Honeywell, Kawasaki, Latecoere,Liebherr, Parker Hannifin and Sonaca. Intellectual property is crossover sharedbetween partners. Embraer is responsible for the design and development ofthe aircraft, manufacture of the forward fuselage, fuselage centre section II,wing-to-fuselage fairings, wing assembly and whole aircraft integration.This allowed Embraer to take on a “system integrator” role for the E-170/190,integrating the 28,000 parts that makeup the aircraft, and letting itself focuson the business processes where it had a clear competency and was able to cre-


87

ate the most value for itself. Embraer has left the development and productionof the fuselage to be “in-house”, determining that some suppliers were of in-sufficient technical quality to warrant outsourcing (Bernardes, 1-21).

Co-development Investment MultiplierSixteen risk sharing partners participated in the development trajectory, withtwenty-two partners serving as main equipment and component supplier. Thetotal research and development costs of the E-170/190 model is US$850 mil-lion. According to Embraer’s quarterly reports dating from 2000 through 2007,the cumulative investments by Embraer are US$624 million, and those of risksharing partners US$302 million making a total of US$926 million. It seemsEmbraer is leveraging value on suppliers by multiplying its own investmentspartly on suppliers. Total investments divided by the own investments:

Co-production

Embraer placed special emphasis on the unique nature of this developmenttrajectory as compared to its previous development efforts, referring to theunique nature of the collaborating agreements and the international natureof the research effort. To this extent, in its 4th quarter 2002 statement, Em-braer acknowledges (Embraer, 2002): “We believe one of our major strengths is the flexibility of our production pro-cesses and our operating structure, including our risk-sharing partnerships,which are designed to minimize fixed costs, allowing us to increase or decreaseour production in response to market demand without significantly impactingour margins. We believe this flexibility has enabled us to strengthen our rela-tionships with our customers and positions us well for the future.”

The flow throughout the network is supported by the decision of some majorsuppliers such as Liebherr, Sonaca, and Kawasaki Heavy Industries to establishlocal production sites at Embraer’s Brazilian production facility, where theplane is assembled. This close proximity enables JIT deliveries with very smallbatches and a very high frequency for critical parts, such as the wings (Kawa-saki Heavy Industries) and fuselage sections (Sonaca). Embraer employed anEDI system during development as a platform where the partners could updatetheir designs continually, while in coordination with evolving designs of otherparts (Goldstein, 2002). It has also asked its partners to use the same programsto design the parts, so that integration of the various subparts could easily beachieved. The relationships with partners in conjunction with suppliers aretight; the design has been made in continuous cooperation with the partnersthat were co-located at Embraer to assist in the design effort (Goldstein, 2002).According to Embraer, more than 70 percent of the value of parts and com-ponents come from U.S. partners and suppliers.

IMP Embraer170/190

= 624 + 302

=1.48

624


88

Co-production Multiplier

Embraer’s risk sharing partners on the program are General Electric (CF34engines), Honeywell (avionics), C&D Aerospace (passenger cabin and cargocompartment interior), Gamesa (vertical and horizontal stabilizers, rudder,elevators, and rear fuselage section), Hamilton Sundstrand (tail cone, APU,electrical systems, air management system), Latecoere (center fuselage sectionsI and III, forward fuselage doors), Parker Hannifin (hydraulic, flight control,and fuel systems), Liebherr (landing gear system), Kawasaki (wing stub, controlsurfaces, engine pylons), and SONACA (wing slats). Embraer itself is respon-sible for the forward fuselage, the nose cone, centre fuselage section II, andthe wing-to-fuselage fairings, final assembly & installation and program. It isalso responsible for fabrication of the torsion box and for wing integration (Fo-recast International, 2009). The work break-down is analysed along the costbreak-down of aircraft reported in chapter 1, section 1.2.2. which presentedthe reference level of the value break down of a regional liner and applicableto the E-170/190. In this case the own production content is 31%, includingfinal assembly, the value increases to 36,2%, which calculates the Co-Produc-tion Multiplier (PMP) by 100/36,2 = 2,76 according table 23.


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Table 23: Embraer E-170/190 cost distribution

AICRAFT FUNCTION / SUB SYSTEM /

SUPPLIER

Cost break down in % Cost per function % Embraer own

production value

in %

WING

Primary

Movable

Sub total wing by 1.Kawasaki

Heavy Industry 2. Sonaca

FUSELAGE

Forward

Mid section / torsion box by

Embraer

Aft section by 3. Latecoere

4.Hamilton Sundstrand

Sub total fuselage

EMPENNAGE

Vertical tail

Horizontal tail

Sub total empanage

5.Gamesa 6. C&d aerospace

LANDING GEAR

Landing gear by 7.Liebherr

ENGINE BUILT

Trust reverser, nacelle, strut, auxi-

liary Power unit, Fuel system

ENGINES

8.Ge

SYSTEMS

Controls, payloads, flight deck &

instruments, electrical system,

hydraulics,

9.Honeywell, Hamilton Sund-

strand, 10.Parker Hanifin

FINAL ASSEMBLY

Embrear

Sub total aircraft funtions

PROGRAM FUNCTIONS

Technical Staff, engine manage-

ment, development test, static &

fatigue test, flight test, marketing

direct charges, customer services

by Embraer

TOTAL

Co-Production Multiplier

PMP= total value / own value

8,13,8

4,38,31,5

1,72,4

1,7

6,8

17,3

20,5

5,2

81,6

18,4

100

11,9

14,1

4,7

6,8

17,3

20,5

5,2

18,4

100

-

4,3

8,3

-

-

-

-

-

5,2

18,4

36,2

100/36,2=2,76


90

4.2.3 Summary case aircraft Embraer E-170/190

The variables found in the case Embraer E-170/190, are summarized in table24 along value drivers and variables identified in chapter 3. Besides the vari-ables corresponding with exploratory and literature research new variables arefound due to analysing the value time curve.

Embraer managed to reduce supplier complexity by bringing down the numberof suppliers from 85 to 22 main suppliers and 16 risk-sharing partners co-in-vesting in the development of aircraft. Supplier complexity reduction in com-bination with standardization of aircraft parts and systems by 89%commonality supports other aspects of lean manufacturing.

4.3 Case research: aircraft Dassault Falcon 7X

4.3.1 Introduction

The Dassault 7X entered the market in 2007 in direct competition to the Gulf-stream V and the Bombardier Global Express. The 7X is the first business jetin this market area with fly by wire technology (AviationWeek, 2005). In its2005 annual report, Dassault refers to its partnering program for the 7X as an“industrial revolution.” For the 7X project it claims to be the first to introducea virtual development platform for all its partner companies on the project,which consisted of a shared digital model with a central database (DassaultAviation, 2005). This platform contributed significantly to a reduction in as-sembly time from 16 months to 7 months (IBM, 2004). Considerable costs sa-vings were realized by incorporating the same fuselage cross-section as theexisting Dassault 900EX, while extra costs were incurred in the 7X’s increasedwing span, differentiating itself from its Falcon family members due to its newsupercritical airfoil design (Sarsfield, 2002).


Market demand

Market shareDassault Aviation started development of a new business jet, the Falcon 7X,

Table 24: Analysis on value drivers

OEM-company /variable

Market demand

Market share [Ms] %time to Market [ttM] [y]Bet [y]BeQ [ac]Co-development

leverage on r&d investment [IMP]Co-production

leverage on production [PMP]

Embraer E-170/190

4259

503

1,48

2,76


91

in 2001. To gain market share and capitalize on the new airplane’s advancedfeatures, Dassault needed to begin deliveries of the Falcon 7X by 2006. Themarket reception and acceleration of building up market share are demonstra-ted by the orders received; already 78 orders in 2005, 36% of the aircraft tobreak even (GIFAS, 2006)) and the estimation of Aboulafia (2005) that withthe Falcon 7X the market share of Dassault is expected to increase from 16.7%in 2004 to nearly 19% in 2014. (Business jet manufacturer market shares;Aboulafia, 2005)

Time To MarketTo create competitive advantage Dassault’s new business jet had to have ashort development trajectory and a swift market introduction. This was ma-naged by several innovative solutions, of which the most important one wasthe virtual development platform, which gave all stakeholders an integratedworking environment. This significantly reduced time-to-market and createda cost-effective development phase (Dassault Aviation, 2004). The develop-ment started in 2001, the launch was in 2005, and delivery to customers star-ted in 2008, which makes it to 7 years for the TTM.

Break-Even The break-even point for risk sharing partners is reached when 300 aircraftare sold (Dubois, 2007). This implies that the total profit per aircraft for risksharing partners is US$ 265m / 300 = US$ 0.9m. When profit sharing betweenDassault and partners is based on IMP, the partner’s profit represents 1 – 1/IMP= 28%. Dassault’s profit can now be calculated, being US$ 3.2m. Now thatDassault’s profit per 7X is known, the BEQ for Dassault can be calculated, andis US$ 700m / US$ 3.2m = 218 aircraft.

The cost price per 7X is different for Dassault and partners, as production isn’tequally divided. The total cost price per 7X is the average list price minus totalprofit, which is US$ 41m – US$ (0.9 + 3.2) = US$ 36.9m. This cost price,which represents the total production cost of one 7X, is divided based on thePMP. Dassault produces 1/PMP = 47%, which represents US$ 17.2m, whilethe partners provide 53%, which represents US$ 19.7m. At this point the pro-fit margins can be calculated, as both profit and cost price per 7X are known.The partners have a profit margin of US$ 0.9m / US$ 19.7m = 4.5%, whileDassault generates US$ 3.2m / US$ 17.2m = 18.7%. This significant differencein profit margin illustrates the advantage of leveraging on the supply chainfrom an OEM perspective. Appendix D contains an overview of Dassault’s fi-nancial data used in this case research.

Co-development

During the development phase, approximately 190 of the 350 engineers wereDassault employees, while the remainder of work was shared among the 18


92

risk-sharing partners (Dubois, 2002). The engineers were all working on onesingle platform, which consisted of Dassault Systems CATIA, ENOVIA andDELMIA Solutions (Dassault Aviation, 2004). The total development phasetook five years, starting in 2001, and its market introduction was in 2007(Flight Daily News, 2007).

Co-development Investment MultiplierThe value-time curve of an aircraft is largely influenced by the research anddevelopment investments upon initiation of the development trajectory, andthe resulting revenue generated by its market introduction. The investmentsin the Dassault 7X program vary according to the source. The respected Frenchnewspaper Le Figaro claims investments over the development trajectory tobe total €700 million (Vigoureux, 2007), or approximately US$784 million(2001–2006 average exchange rate), while Business Week claims a total Das-sault investment of US$700 million (Matlack, 2005). AviationWeek reportsinvestments around US$600-700 million. It is clear that the total Dassault in-vestments in the 7X project lie in the realm of approximately US$700 million,which will be used from now on. According to Dassault officials, developmentof the 7X will cost all the risk-sharing partners (not including the engine ma-nufacturer) US$265 million (Dubois, 2002). Knowing Dassault’s and the part-ner’s investments, the IMP can be calculated:

Co-production

Risk-sharing partners for the Dassault 7X include Pratt and Whitney Canadawith the PW307A engines, Honeywell for the avionics architecture, auxiliarypower unit, air management system, and in conjunction with Parker Aero-space, the aircraft power system. Aircraft Braking Systems will supply thewheels, brakes and brake control system with TRW Aeronautical providingthe hydraulic flap and air-brake systems. EADS Sonaca supplies the upper fu-selage and body fairing, with Latécoère providing the rear fuselage. EADSCasa will fabricate the horizontal stabilizer with Fokker Aerospace, manufac-turing the trailing edge moveable surface. Sonaca will fabricate the wing lea-ding edge, with Hurel Hispano and Aeromacchi making the nacelles andthrust reversers (Sarsfield, 2002). The company realized a 50% reduction in assembly time, 66% decrease in too-ling costs and a successful, first-time assembly (Dassault Aviation, 2004). Thecontent of co-production by suppliers is not know, however it is clear that risk-sharing partners are involved.

Co-production MultiplierReferring to the analysis in chapter 1, section 1.2.2, which presented the re-

IMP Falcon XI

= 700 + 265

=1.38

700


93

ference level of the cost break down of a regional airliner and applicable tothe Dassault 7X. In this case the own production content is 41,5%, includingfinal assembly, the value increases to 46,7%, which calculates the Co-Produc-tion Multiplier (PMP) by 100/46,7 = 2,14 in table 25.

Table 25: Dassault 7X cost distribution


SUPPLIER

Cost break down

in %

Cost per function

in %

Dassault 7X own

production value

in %

WING

Primary by Dassault

Movables / slats by Fokker and Sonaca

Sub total wing

FUSELAGE

Forward by Dassault

Mid section / torsion box by Dassault

Aft section by Latecoere

Sub total fuselage

EMPENNAGE

Vertical tail

Horizontal tail by EADS-Casa

Sub total empanage

LANDING GEAR

ENGINE BUILT



Hurel Hispano and Aeromacchi

ENGINES

By Pratt & Withney

SYSTEMS



trW Aeronautical Parker Aerospace

FINAL ASSEMBLY


PROGRAM FUNCTIONS

Technical Staff, engine management,

development test, static & fatigue test,

flight test, marketing direct charges,

customer services

TOTAL



8,13,8

4,38,31,5

1,72,4

1,7

6,8

17,3

20,5

5,281,6

18,4

100

11,9

14,1

4,7

1,7

6,8

17,3

20,5

5,2

18,4

100

8,1

-

4,3

8,3

-

1,7

-

-

-

-

5,2

18,4

46,7

100/46,7=2,14


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4.3.3 Summary case Dassault 7X

The variables found in case of the Dassault 7X are summarized in table 26along value drivers and variables identified in chapter 3.

Dassault makes use of risk-sharing partners who are co-investing in the devel-opment of aircraft and co-production of it.

4.4 Case research : aircraft Boeing B787

4.4.1 Introduction

The Boeing B787 ‘Dreamliner’ has its roots in the abandoned Sonic Cruiserdevelopment program. The main attraction of the Sonic Cruiser was its highspeed, but concerns about fuel efficiency in the ailing airline industry promp-ted Boeing to redirect its focus in 2002. The result was the B7E7 program,later dubbed the B787 ‘Dreamliner’. This airplane is Boeing’s effort to meetthe expected demand for an aircraft that costs less to own, operate, and main-tain. The B787 is developed from the perspective to fly point to point overlong distances; it has a capacity of 210 to 330 passengers (depending on thevariant) and a maximum range of 14800 to 15700 kilometres (for the largestvariant, the B787-9). Airbus developed the A350 XWB to compete with theB787 from Boeing. Together, these model families will likely replace the cur-rent offerings for this market, which are variants of the Airbus A300, A310,A330 and A340 models, as well as the Boeing B757 and B767.

Boeing’s explicit goal with respect to its supply chain is to leverage its globalpartners to reduce cost, speed time-to-market and increase customer valuewhile maintaining the highest level of safety. However, do the supply chainstrategy and its execution confer to this goal? According to Boeing’s supplychain strategy for the 787 can be captured in the following objectives: - Leverage best-in-class component and technology providers from aroundthe world.

- Establish shared risk model between Boeing and its supply partners.- Synchronize demand/supply, order, and inventory information across allsupply partners.


Variable

Market demand


leverage on r&d investment [IMP]Co-production


Dassault 7X

16,77

12218

1,38

2,14


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- Establish a highly coordinated set of logistic processes and transportationmechanisms to ensure on-time delivery of all assemblies.

These objectives are in line with the stated goal of Boeing, with respect to itssupply chain, and reflect principles of lean manufacturing, such as early sup-plier integration into design and development, synchronized flow throughoutthe supplier network, visibility and transparency through open communicati-ons, long-term, trust-based, mutually beneficial relationships, and continuoussupplier development and improvement (Bozdogan and Horng, 2007). Ho-wever, are the aforementioned objectives truly executed in the arrangementand managing of the supply chain? The examples are numerous: the B787composite wings are produced (and were designed) in Nagoya, Japan by vari-ous Japanese companies (e.g. Mitsubishi Heavy Industries), the horizontal sta-bilizers are manufactured by Alenia Aeronautica (Italy), whereas the fuselagesections are produced by Vought (USA), Alenia Aeronautica (Italy), Kawa-saki Heavy Industries (Japan) and Spirit Aerosystems (USA). These partnersprovide so-called ‘stuffed’ sections (Lam, 2007), sections with all structuralelements, electrical components and sometimes even interiors fully installed.Boeing moves up in the supply chain to a role as an assembler and integrator,rather than doing all the production and sub assembly work itself. The supplypartners are leveraged via contributions to the development budget and thetotal work share, which also makes them risk-sharing partners in the 787. Theassociated shared risk model has been worked out in agreements with the keypartners (Lam, 2007), so objective 2) has been covered. Information sharingamongst the partners is critical to maintain the quality of the production pro-cess and its result. To ensure this, Boeing has put in place various systems,which include a supplier portal (Boeing, 2007) and a shared EDI system basedon E2open software (Exostar, 2007). As a part of the supplier relationshipmodel that Boeing is pursuing, it is working closely together with its partnersto match logistic processes and transportation mechanisms for on-time de-livery of the assemblies. Examples are the implementation of JIT principleswith the help of Kanban indicators (Baldwin, 2005). And, as recent eventsshow, if things go wrong, Boeing is committed towards helping its partnerswhen problems crop up; it responded by sending teams of engineers to suppliersto help solve problems with parts supply (Busch, 2007).


Market demand

Market shareThe relevant indicator is the market share (MS) for demand value. For themarket share analysis, the focus is on the orders for the Boeing B787 and itsdirect competitor, the A350 XWB. This comparison encompasses orders forall product variants of both planes. The B787 currently has 710 firm orders


96

(Boeing, 2007), with 107, more orders pending (these orders have been an-nounced publicly, but have not been formalized yet). The Airbus A350 XWBcurrently has 182 firm orders, with 112 pending orders. This translates into amarket share of 80% for the B787 in the case of firm orders. When consideringcommitments along with the firm orders, the B787 market share is 74%. Cus-tomer orders are the value driver of development and production.

Time To Market; TTMA different indicator of customer demand value is the time-to-market. Devel-opment started in 2002, while the first commercial B787 flight was expectedto take place in 2008, which is postponed to 2009 mainly due to problemswith design and integration of modules. Now, All Nippon Airways (ANA)will receive its first ordered airplane earliest in 2010. This results in an exten-sion of Time To Market from 6 into 8 years. The availability of the aircraft isof ultimate relevance for the airlines as their product development (connec-ting destinations) and revenue management are directly related to the availa-bility of the new product.

Break-EvenWith respect to the Break-Even of the B787, Boeing is tight-lipped. Informalestimates from industry insiders ranges from 500 to 700 aircraft. The current listprice of the main B787 model in terms of orders (the B787-8) is 157 to 167 mil-lion dollar per plane (Boeing, 2007). As Pritchard and Macpherson (2004) state,Boeing’s direct own investment into the B787 is estimated to be 4,2 billion dol-lar. Assuming a 5% profit margin on a single product sale (while covering pro-duction and development interest costs) puts the Break-Even Quantity at 525aircraft. This calculation does not take into account multiple factors, such astrade deals with launch customers and the learning effect during production(two factors that directly have impact the profit margin) and subsidies/loansfrom various governments, which amount to nearly US$6,1 billion (Pritchardand Macpherson, 2004), which may have to paid back (partially).

Co-development

Co-development Investment MultiplierThe relevant indicator from the focal company perspective category is the Co-development Investment Multiplier (IMP). According to Pritchard and Mac-pherson (2004), the total launch investment costs amount to $13,4 billion.Boeing directly invests US$4,2 billion itself, whereas the suppliers account forUS$3,1 billion. The resulting US$6,1 billion is provided for by various pro-duction subsidies (for instance, US$3,2 billion from the state of Washington,and nearly US$1,6 billion by the Japanese government) and an interest-freebond of US$200 million by the state of Kansas. When purely looking at theinvestment situation, Boeing share of the bill is 30%, which results in an IMPof 3,33 (Boeing, 2007).


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However, since a US$6,1 billion share is not leveraged on the supply chainbut provided through subsidies and loans, the correct way of calculating theIMP is to discount this share (13,4 -/- 6,1= 7,4) and recalculate. The IMP forthe B787 is 7,4 / 4,2 = 1,76.

Launch aidBoeing is collecting US$6.1 billion launch aid. As can be seen in the table 27bellow, the aid is mostly from the governments of the risk-sharing partnersand Boeing itself. The production transport subsidy will also be paid by thestate where the final assembly is done. Thus, the aid come from governmentalsubsidies. Boeing has associated Alenia, an Italian company responsible forthe mid and back section of the fuselage including the tail plane. An argumentto do so, is to receive aid from the Italian government. The launch aid by theItalian government in this case is not known.

Co-production

Co-Production MultiplierCalculating the PMP is less cumbersome. Boeing is estimated to perform maxi-mum 30 percent of the total work share (Adams, 2007). This percentage hasbeen confirmed directly by a Boeing. According to the TEAL Group the workshare of Boeing will drop in near future from 30% to 15%. According to thebreak-down of value (table 28) a analysis is made on how the value is dividedbetween Boeing and its risk-sharing partners with reference level accordingto the cost break down for aircraft in general as reported in chapter 1, section1.2.2 and a publication by the TEAL Group on Boeing 787 Dreamliner onthe division of value for systems and risk-sharing suppliers. Due to the recon-solidation of Spirit AeroSystems the PMP = 2,99. Before the reconsolidationof Spirit the supply content was 74,7%, which calculates the PMP = 3,9. Theintention of Boeing to leverage on risk sharing partners was therefore higherthan it actually is, due to the reconsolidation of Spirit AeroSystems.

Table 27: Launch funding for the Boeing 787 (Pritchard and MacPherson 2003)

Funding Source Millions US$ Item Launch Aid

state of Washington Us$3,200 Final Assembly Production subsidy state of kansas Us$200 nose and Cockpit Interest Free Bond Japanese Government Us$1,588 Wing and Fuselage Production subsidy Italian Government Us$590 rear Fuselage Production subsidy 747 special Freighters Us$500 Production transport Production subsidy 787 rail Barge Us$16 Production transport Production subsidy

Total US$6,100


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4.4.3 Summary

Variables found regarding the case B787 are presented in table 29. Break-Evenis more difficult to calculate due to launch aid from the government. Therefore,this is an indicative value. By taking loans into consideration the IMP needs tobe discounted for that, which brings the actual leverage down from 3,3 to 1,7.

Table 28: Boeing B787 cost distribution


SUPPLIER

Cost break

down in %

Cost per

function in %

Boeing B787

own production

value in %

Suppliers

WING

Primary by Mitsubishi

Movable by Spirit

Sub total wing

FUSELAGE

Forward by Spirit

Mid section by Alenia and Kawasaki, Fuji

Aft section by Vought

Sub total fuselage

EMPENNAGE

Vertical tail by Boeing

Horizontal tail by Alenia

Sub total empanage

LANDING GEAR

by Messier-Dowty

ENGINE BUILT



ENGINES

SYSTEMS



FINAL ASSEMBLY


PROGRAM FUNCTIONS



flight test, marketing direct charges,

customer services

TOTAL



8,13,8

4,38,31,5

1,72,4

1,7

6,8

17,3

20,5

5,281,6

18,4

100

11,9

14,1

4,1

1,7

6,8

17,3

20,5

5,281,6

18,4

100

3,8

-

4,3

-

1,7

-

-

-

-

5,2

18,4

33,4

100/33,4= 2,99

8,1

8,3

1,5

2,4

1,7

6,8

17,3

20,5

66,6


99

The analysis of the IMP-PMP variables shows a particular pattern. The PMPis higher than the IMP, secondly risk sharing partners are willing to co-investin development, if they can recover the investment by co-production value.The market share follows this pattern with a high share of 80%. The IMP-MSrelation gives credibility to the statement that the market success of the B787has a relation with value-leverage on co-development and co-production.

4.5 Case research : aircraft Airbus A380

4.5.1 Introduction

Airbus started development of a very large airliner in the early 1990s with thegoal of completing its range of products and breaking the dominance of Boeingin this market segment. Early market research and development gave rise tothe A3XX program in June 1994, which was re-christened the A380 in De-cember 2000, when the program was formally launched. The A380 is specifi-cally geared towards the hub-spoke market concept, with a capacity of 525 to853 passengers (depending on the chosen configuration). It has a range of15200 km at design load.

Airbus has collaborated with multiple companies in its tier-organized supplierbase, who participate as risk-sharing partners in the program. The A380 startedwith main partners; Aerospatiale Matra, CASA and DASA, which comprisenow EADS. BAE Systems, one of the partners left, EADS in 2006 by sellingits shares to EADS. From this perspective, all former main risk-sharing partnersare united within EADS. From a supply complexity perspective one couldargue that the supply chain became vertically consolidated making the supplychain virtually more complex to govern instead of reducing supply complexityby working with main risk-sharing partners for complete sub assemblies stuffedwith “electric an hydraulic drive and control” components. The Airbus Con-sortium Members with airframe responsibilities (TEAL Group October 2009)are: 1.BAE Systems, 2.EADS (Aerospatial Matra), 3.EADS (CASA),4.EADS-Daimler Chrysler Aerospace. 5. Engine Alliance GP7200, 6.Rolls-


Variable

Market demand


leverage on r&d investment [IMP]leverage on r&d investment [IMP]discounted due to loansCo-production


B787

748 ?

525

3,31,76

2,99


100

Royce. All other suppliers are on subcontractor level. In total EADS has about90 subcontractors; Safran (nacelles, braking controls, nose landing gear, com-munication and data systems), United Technologies (APU, air conditioningsystem), Goodrich (landing gear, flight control systems, aerostructures, etc.),Finmeccanica (airframe production, insulation, etc.) and tier 2 suppliers likeStork Aerospace (GLARE). Many suppliers have been involved early in thedesign and development phase of the A380. To ensure a synchronized flowthroughout the supplier network and maintain open communications, Airbushas put in place a supplier portal (Airbus, 2007) and uses DHL as a logisticsprovider to optimize its logistics performance. The risk-sharing agreementshave been geared towards establishing mutual beneficial relationships. Howe-ver, the 2-year delay on the Airbus A380 and the resulting “Power8” impro-vement program, based upon principles of lean manufacturing, have resultedin high pressure on suppliers to cut costs, which is a step back to old adversialsupplier-buyer relationships. Another critical point in which the A380 differsfrom the B787 is the level of outsourcing; Airbus has kept core technologiessuch as composite technology and wing design in-house, whereas Boeing hasgone the extra mile by moving up in the supply chain towards a pure integratorrole (Bozdogan and Horng, 2007).


Market demand

Market shareThe Boeing 747-8 forms the only competition for the A380. How the futuremarket will develop is not yet clear, but some trends can be identified by loo-king at the current number of orders. The A380 has 165 firm orders (Airbus,2007), with 25 options, all for the passenger version. In the near past, theA380F freighter version had 27 orders, but these have dwindled to zero follo-wing the delays. Currently, development and production of the A380F versionis suspended. The 747-8 has 25 firm orders for its passenger version and 65firm orders for the freight version. In addition, there are 29 options in theorder book. The A380 has a market share of 65% when discounting the opti-ons. Including the options brings the market share of the A380 to 61%.

Time To marketThe Time To Market of the A380 is 13 years; because the A3XX program star-ted in June 1994, whereas the maiden commercial flight of the A380 tookplace in October 2007.

Break-EvenThe break-even time estimate of the Airbus A380 has evolved over the yearsfollowing the massive 2-year delay on the program. Initial BET estimates werein the order of 270 airplanes (Clark, 2006). However, following the delays,


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estimates have risen to at least 420 aircraft to achieve break-even. Combinedwith Airbus’ intended production schedules, achieving break-even will takeat least 11 years (Clark, 2006). Airbus’ problems are not over yet, because, ac-cording to chief executive officer Louis Galois, the break-even estimate hasrisen again to an undisclosed number (which analysts put at around 470) (Wal-lace, 2007).

Co-development

Co-development Investment MultiplierThe total development budget of the Airbus A380 before the costly 2-yeardelay was approximately US$13,7 billion. This figure originates from an Air-bus break-even analysis. The total amount can be divided into three parts.First, US$5,9 billion is invested by Airbus’ parent companies (EADS and BAESystems). Next, another US$3,5 billion is invested by the risk sharing partners.The last part, US$3,6 Billion consists of loans from the various governmentsassociated with Airbus and its partners. Airbus will have to pay back theseloans, meaning that this part could be considered as an investment by Airbusitself. In this case, the IMP is 13,7 / 9,5 = 1,44. When the loans are discounted(13,7 -/- 3,6 = 10,1) in the analysis, as was the case with the Boeing B787, theIMP comes down to 10,1 / 5,9 = 1,71. However, it should be noted that thesefigures are calculated before the cost overruns associated with the productiondelays. The total development budget is now reported to run as high as $18billion (Rothman, 2007). The cost overruns are most likely on the account ofAirbus, which will significantly decrease the IMP value.

Launch aidEuropean countries are soft loaning the US$3,6 billion launch aid to Airbus.The soft loans become repayable when the A380 is sold successfully. The loanscome from the governments related to countries where the risk-sharing part-ners are based. IMP without aid shows solely the ability to multiply the investment over thesuppliers, which gives a more realistic comparison between the levels of co-investment in development and distribution over the different partners.

Co-production

Co-Production MultiplierThe risk-sharing partners account for approximately 40% of the productionwork share, while it is anticipated, to outsource a further 20% to partners inNorth America and Asia. According to press releases, Airbus already shared40% of its production in 2000 and planned to outsource another 20% makingthe total outsourced value to 60%. The risk-sharing partners account for approximately 40% of the work share,while a further 20% is outsourced to partners in North America and Asia. Ac-cording to the break-down of value (table 30) a analysis is made on how the


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value is divided between Airbus and its risk-sharing partners with referencelevel according to the cost break down for aircraft in general as reported inchapter 1, section 1.2.2 and a publication by the TEAL Group on Airbus In-dustries A380 (2009) on the division of value for systems and risk-sharing sup-pliers. The analysis leads to a PMP of 1/0,4 = 2,5. By analysing the valuebreak-down (table 30) the PMP = 2.

Table 30: Airbus A380 cost distribution


SUPPLIER

Cost break

down in %

Cost per

function in %

Airbus A 380

own produc-

tion value in %

Suppliers

WING

Primary by BAE Systems

Movable by Saab

Sub total wing

FUSELAGE

Forward by EADS

Mid section EADS

Aft section EADS (Alenia &Fokker)

Sub total fuselage

EMPENNAGE

Vertical tail by EADS

Horizontal tail by EADS

Sub total empanage

LANDING GEAR

ENGINE BUILT



ENGINES

SYSTEMS



FINAL ASSEMBLY


PROGRAM FUNCTIONS



flight test, marketing direct charges

,customer services

TOTAL



8,13,8

4,38,31,5

1,72,4

1,7

6,8

17,3

20,5

5,281,6

18,4

100

11,9

14,1

4,1

1,7

6,8

17,3

20,5

5,2

18,4

100

4,3

8,3

-

4,1

-

-

5,2

18,4

40,3

100/40,3=2,48

8,1

3,8

1,5

1,7

6,8

17,3

20,5

59,7


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4.5.3 Summary case A380

Unsurprisingly, the PMP of the A380 exceeds the IMP. While the IMP is af-fected by the subsidies, the PMP is not. However, its value is quite average,which is due to Airbus’ decision to keep critical technologies in-house. Alt-hough confounding issues occur (most notably the 2-year production delay),the relatively low IMP and PMP account in part for the longer Time To Mar-ket, the longer Break-Even Time and the relatively limited market success(when viewed in light of the limited competition). The variables are presentedin table 31.

4.6 Summary of cases

Having analyzed the four cases, the following question automatically rises:“How do the four products compare in their value-leverage performance?” Table 32gives the combined indicators of the three cases.

- For all cases the variables related to the value drivers are found. The va-riables show the different performances on the variables.


Variable

Market demand


leverage on r&d investment [IMP]leverage on r&d investment [IMP]discounted for loansCo-production


A380

6113 ?

> 470

1,441,71

2,48

Table 32: Comparison of variables all cases

Variable

Market demand


leverage on r&d investment [IMP]leverage on r&d investment [IMP]discounted for loansCo-production


E-170/190

4259

503

1,48

2,76

Dassault 7X

16,77

12218

1,38

2,14

B787

748?

525

(3,33)1,76

3,99

A380

6113 ?

> 470

1,441,71

2,48


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- In all cases, the IMP and PMP are present in combination, where thePMP supersedes the IMP. The IMP decreases if the IMP is corrected forloans.

- There is also a relation with quantity of aircraft and time to turn intoBreak-Even, which is demonstrated by the cases Embraer and Dassault.The Dassault 7X, has a lower IMP and PMP compare to Embraer. This isprobably due to Dassault’s less dominant position in the demand & supplychain in combination with the more focus on own generated productionvalue when compared to Embraer, leveraging higher on IMP and PMPand thus performs more advanced in value-leverage.

- The A380 has a lower PMP compare to Boeing, reflecting Airbus’ decisionto keep vital technologies in-house. The time-to-market of the A380 isby far the highest. This has more to do with the gigantic complexity ofdeveloping such a large airplane than with insufficient co-developmentperformance, though Airbus’ reluctance to share production has certainlynot helped. Embraer and Dassault, shows relative short time to marketand Break-Even, compared to the B787 and A380, which have are morecomplex aircraft.

- The market share performance of all products is impressive. However,some confounding issues regarding subsidies of the B787 and the A380,suggest that certainly not all that is achieved follows from the co-devel-opment and co-production effort. For instance, the B787 has benefitedfrom a two-year period in which Airbus did not announce a competitiveproduct. Furthermore, its market introduction precedes that of the A350XWB by at least 4 years. Similarly, the A380 was the sole Super-jumboon the market for some years, until the B747-8 was introduced. Even so,the B747-8 constitutes only limited competition for the A380 given itslower passenger capacity.

- The E-170/190 is the only product that has faced stiff competition frommultiple sources; Boeing, Airbus, and Bombardier all have offers for thesame market segment. Despite this, the E-170/190 has taken the marketshare crown in the 90-120 seat segment; an impressive feat in which co-development has certainly played its role.

- As we have calculated, Boeing has an IMP of 1,76 while Airbus followswith a 1,44. This states that the B787 with his higher IMP is in a moreadvanced stage concerning co-investment in development. Even withoutthe launch aid and subsidies included, discussed in the previous section,Boeing is ahead with its IMP of Airbus. Both companies are in disputeabout launch aids, which is under investigation with the WTO. Secondly,


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Boeing has a stronger and more developed definition of the risk-sharingpartners in terms of co-investment in development and co-production bythe supply chain. It seems that Airbus just improved its risk sharing asBoeing took a new step by making the partners responsible.

- The IMP with aid shows the extra multiplying effect of co- developmentin a global organisation while an IMP without aid shows solely the abilityto multiply the investment over the suppliers.

- Because of the supply chain strategy, Boeing is able to share a higher valueon the supply chain and network following the PMP compared to Airbus.The different quantities make it even more interesting for suppliers to joindevelopment and production. It seems high PMP is related to high quan-tities and the opposite way round with the A380 having lower PMP andlower quantities. Airbus is involving the largest Japanese companies Fu-jistu Heavy Industries, Kawasaki Heavy Industries and Mitsubishi HeavyIndustries in the A380 program. However, it is evident that Boeing hasbeen more effective at incorporating them in the design phase and out-source large portions of the development and production, especially whenconsidering the large integral composite front fuselage section manufac-tured by KHI for the Boeing B787. Hence, it may be concluded that Boe-ing has been more successful than Airbus in implementing a collaborative,co-development and co-production strategy (Marsh, 2005) to cope withthe large quantities of B787 on order (600 aircraft per 2009).

- Both Airbus and Boeing get launch aid from their own governments andgovernments related to suppliers. The reason why Boeing is collectingmore aid is not clear. Though one detail is probably of importance, Boeingis using multiple governments (not only nationally) to receive aid as Air-bus only uses the EU.

4.7 Variables and relations

Variables found by exploratory and literature research reported in chapter 3,are applied to aircraft cases. The application of the variables for the cases re-searched is confirmed. The variables IMP, PMP, MS, BEQ, BET and TTMhave relations.

Variables found by exploratory and literature research reported in chapter 3,are applied to aircraft cases. The application of the variables for the cases re-searched is confirmed. The variables have relations in between. However, thecharacter of the relations, dependent or independent are not known. The va-riables IMP, PMP, MS, BEQ, BET and TTM have relations and form together,value-leverage relations (figure 17).


106

4.8 Conclusion

The objective of the chapter is to answer the sub research question 2.”Whatvariables are applicable to development and production of aircraft?” With subquestion 2a: “What variables are applicable for aerospace industry, and arethey interrelated on product level?” The answers to the research question are:

- The variables concluded in chapter three on product level are applied atcase research regarding the aircraft cases; Embraer E-170/190, Dassault7X, B787 and A380,

- The variables applicable to value driver market demand value are; MarketShare (MS) / Break-Even Quantity (BEQ), Break-Even Time (BET) andTime to Market ( TTM), the variable applicable to co-development is theIMP, the variable applicable to co-production is the PMP.

- In all researched cases the variables IMP and PMP are found, the valuesfor these variables are calculated, when comparing cases, in all researchedcases the PMP supersedes the IMP,

- Quantities have a relation with IMP and PMP, high quantities are relatedwith high score on both IMP and PMP,

- Government aid has effect on the IMP. The IMP discounted for loansshow to be higher compared to the IMP including loans from government.

- Although, variables are applicable to the aircraft developments, and re-lations between variables are found, the nature of the variables by causeand effect or dependencies, it is not confirmed,

- The cases of the B787 and A380 show that government aid is present,

figure 17: Value-leverage variables and relations on product level

MS / BEQ / BET / TTM


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which may influence the value drivers market demand, co-developmentand co-production. Both programs are under dispute by the WTO, bothprograms are entirely different from aircraft size perspective, and thereforemore difficult to compare in further case research. Due to these confoun-ding issues, it is decided to leave out these cases B787 and A380 for furtherresearch.

By applying the found variables in chapter three at the aerospace industry re-presented by four aircraft developments, the second research question: “Whatvariables are applicable for aerospace industry, and are they interrelated? accompa-nied with sub question 2a; What variables are applicable to development and pro-duction of aircraft? is answered.

To know if the variables have a relation through time two cases the EmbraerE-170/190 and Dassault 7X are interesting to compare as these aircraft are wit-hin the same order of value and size, the variables are used to plot the valuetime curve, to know if the variables can form a model in chapter six.


108

Variables at aerospace OEM-company level

109

5.1 Introduction

This chapter applies the variables found in chapter 3 to the aerospace OEMcompanies, to find out if the variables can express value-leverage to measurethe OEM-company value network position, as an answer to sub research ques-tion 2b: “What variables are applicable to the aerospace industry, and they interre-lated for company level?”

Variables found by exploratory and literature research to express the value-lever-age on the value network are: turnover per capita (T/C); research & developmentper capita (RD/C), and the market demand value variable; profit per capita (P/C)as concluded in section 3.6. These variables are used to identify the value-leveragerelations; 1: P/C-T/C, 1: RD/C-T/C 3: RD/C-P/C, using data regarding aerospaceand automotive OEMs, covering a 12 year period; 1996-2007. Yearly reportsfrom OEM companies could be retrieved no further then 1996 by sourcing infor-mation direct to companies and via the internet. The variable P/C is based uponEBIT to correct for different local tax regimes companies are exposed to.

Within the group of aerospace companies containing aerospace companies ingeneral (table 40, chapter 6) the sub group of seven aircraft OEMs is selectedand market with (*). The companies are; 1. Bombardier, 2. Boeing, 3. GeneralDynamics, 4. Lockheed Martin, 5. Embraer, 6. EADS, 7. Northrop Grumman.The company Dassault is left out of this part of the research for the reasonthat, there were only a little number of yearly reports available, which makesthe possible outcome of this OEM not significant. The data points for eachcompany are projected to a correlation calculation. A linear least squares linefor each company is composed, combining the data points from relations. Thefinancial data on the companies can be found in appendix C.

5.1.1 Correlation of variables

Referring to the research question it is necessary to know if the variables foundP/C, T/C and RD/C, have the capability to express value-leverage. The datafrom the annual reports and the financial websites provide for the straightfor-ward calculations of the T/C, P/C and RD/C. With the Least Squares Method,the R-squared is calculated from correlations between the time series of thevariables. From this, the correlation coefficient (R) can be calculated and com-

Variables at aerospace

OEM-company level

5


110

pared to a critical value for different confidence intervals (1%, 2%, and 5%or 10% ) and degrees of freedom (7 companies in the sample group minus 2degrees of freedom leads to a ν of 5). The conclusion whether a correlation isstatistically significant for this analysis is presented in the next table 33. Thistable shows that for a group of 7 instances [df =7-2=5], variables are correlatedwithin a accuracy of 10 %. If the R- value is 0,669 or higher, the relation be-tween variables is statistically significant, which is the case for the relations;1:T/C - P/C and 2:T/C - RD/C. Relation 3: RD/C – P/C, seems to be lessstrong and therefore less significant.

In table 34, the R-values of the variables per aerospace company are presen-ted.

5.1.2 Analysis of value network position variables: T/C-P/C

Figure (18) represents the value network position variable T/C on the verticalaxis ranging from US$100.000 to US$500.000 versus the variable P/C on thehorizontal axis, ranging from US$-/- 1.000 to US$40.000, for a time seriesover the years 1996-2007. The analysis of the relation T/C-P/C, shows that

Table 33: Significance of critical value

Level of significance

df = 5

p=0.20p=0.10p=0.05p=0.02p=0.01

Value-leverage relations

I: t/C - P/CII: t/C - rd/CIII: P/C - rd/C

Critical R-Value

0.5510.6690.7540.8330.874

Average R2

0.460.590.34

Average R

0.680.770.58

Significance

0.100.05

>0.10 <0.20

Table 34: R and R-squared values of aircraft OEM companies

R Values T/C vs. P/C T/C vs. RD/C P/C vs. RD/C Data series

Boeing 0,85 0,86 0,71 (1997-2007)

lockheed Martin 0,88 0,96 0,89 (1996-2007)

General dynamics 0,77 0,86 0,50 (1996-2007)

northrop Grumman 0,65 0,45 0,89 (1996-2007)

Bombardier 0,51 0,79 0,70 (1996-2007)

embraer 0,97 0,49 0,22 (1998-2007)

eAds 0,12 0,96 0,16 (2000-2007)

AvG r 0,68 0,77 0,58(AvG r)-squared 0,46 0,59 0,34


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the correlation R=0,68, which is above the critical value of R=0.669 and the-refore significant at p=0.10 (table 33). Most companies show an upward andpositive trend indicating these companies are able to increase value-leverageon the value network.

Embraer is able to leverage the highest profit per capita P/C of US$40.000 ho-wever, leverages average on the supply base with a T/C of US$25.000. Ge-neral Dynamics and Lockheed Martin are generating market demand valuebetween US$20.000 and US$35.000, and leveraging on the value networkbetween US$25.000 and US$ 42.000, suggesting they can leverage more onthe value network. However, they are less profitable compared to Embraer.

EADS shows a flat trend line composed by a downward T/C trend line and anupward P/C trend line suggesting there is unbalance in value-leverage on sup-pliers. However, the relation between P/C and T/C is statistically not signifi-cant (Table 33). The low R-value of 0.12 expresses the value-leverage is inunbalance. This is an interesting observation. However, for other companiesthe relation TC-PC is significant, for EADS it seems supply chain rationali-sation is one of the issues to focus on.

Bombardier show a low correlation with R=0,53 according to table 36. Thenegatively sloped trend line from Bombardier represents a decreasing T/C withincreasing P/C. However, demand value increase in combination with dec-reasing value-leverage on the value network suggests on the long term the pos-sibility of unbalance. Boeing, Lockheed Martin, Geneneral Dynamics, andEmbraer are leveraging above average, which suggests these companies aremore in balance compared to EADS, with positive trend lines.

5.1.3 Analysis of value network position variables: T/C-RD/C

Figure (19) represents the value network position variable T/C; on the verticalaxis ranging from US$100.000 to US$500.000 versus the R&D value-leverage

figure 18: turnover per capita versus profit per capita


112

RD/C ranging from US$1.000 to US$33.000 on the horizontal axis, for a timeseries over the years 1996-2007. Analysing the relation between T/C andRD/C, shows that the correlation is R=0,77, which is above the critical valueof R and therefore significant within the 5% rate (table 33). Traditionally therelation of the research and development and the turnover is close. Normally the R&D budget increases or decreases with the turnover numbers,which means that companies more or less fix the research and developmentbudget as percentage of the turnover. This corresponds with the trend to putmore weight into the technology and development strategy. The position ofEmbraer is not a “trend follower”. It seems Embraer is leveraging R&D on thevalue network when necessary in time. Boeing and EADS are able to leveragethe most research & development value in combination with supply networkvalue. The question rises, whether that is beneficial or not.

5.1.4 Analysis of value network position variables: P/C – RD/C

Figure 20 represents the value-leverage on market demand by the variable P/Con the vertical axis ranging from US$-/-5.000 up to US$45.000 versus thevalue-leverage on co-development by the variable RD/C ranging fromUS$1.000 to US$35.000 on the horizontal axis, for a time series over the years1996-2007. Some companies with a lower RD/C value are leveraging highermarket demand value-leverage like Embraer. This suggests that these type ofcompanies are more efficient in the use of their assets and resources. Embraerhas in this respect the highest P/C with a relatively low RD/C.

A high RD/C in combination with a high P/C suggests these companies havea strong technology focus in combination with benefit from the value network.Boeing, General Dynamics, Lockheed Martin and Bombardier have a signifi-cant correlation, whilst Embraer and EADS are not significant due to fluctu-ation of data points. This suggests Embraer is able to leverage R&D on the

figure 19: turnover per capita versus research and Development per capita


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value network, sourcing development value with risk and revenue sharingpartners, different from the other companies. EADS shows a flat pattern whereR&D and profit are not “in balance”, possibly because of the start-up problemswith the A380 and later the A 400M, with budget and time overshoots. Thetechnology focus is not turned into market demand value yet. Airbus and Boe-ing are developing and producing the largest and most complex aircraft com-pared to for instance Embraer and General Dynamics. However, it isinteresting to observe the differences.

5.1.5 Variables and relations

The analysis of value-leverage by aircraft OEM companies confirms the vari-ables T/C, RD/C and P/C, are expressing value-leverage on the value network,have relations, demonstrated by statistical significance of relations betweenvariables over a twelve-year timeframe (figure 21). The analysis points out,that the correlations; T/C-P/C, T/C-RD/C are statistically significant abovethe critical value of R (see table 33) and within the 5% boundary. The corre-lation; P/C-RD/C is statistically significant for the boundary of 10%.

5.2 Conclusion

The objective of the chapter is to answer the sub research question 2b: “Whatvariables are applicable to aerospace OEM companies?” The answer to the re-search question 2 b, is that the found variables are applicable to aerospaceOEM companies for the sub group aircraft OEMs.

- In the first place it is demonstrated that the relations between variablesT/C, RD/C and P/C are statistical significant over a twelve-year timeframe

figure 20: profit per capita versus research and Development per capita


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for aerospace OEM companies. The analysis points out, that the correla-tions; T/C-P/C, T/C-RD/C are statistically significant above the criticalvalue of R (see table 33) and within the 5% boundary. The correlation;P/C-RD/C is statistically significant for the boundary of 10%,

- In the second place, the direction of the trend line plays a crucial role in thisobservation. There are companies with decreasing trend lines suggestingvalue-leverage on the value network decreases. Increasing trend lines suggeststhe company is increasingly benefiting from value network value-leverage.

- In the third place, aerospace OEM companies can now be assessed onvalue-leverage performance by using the average R- value (AVR) in com-bination with the trend line. Companies scoring under average with adecreasing trend line are leveraging low on the value network, with alsolow benefit.

- In the fourth place, it seems plausible R&D is related to profit. However,for some aircraft OEM companies the relation RD/C-P/C is weak, whichis in conflict with the aim of research; creating new value. One of the re-searched companies is EADS, which shows a large variation of the mea-sured variables (table 34).

- Research is necessary on a larger data set to know if the relation betweenvariables; RD/C – P/C is significant or why it is indeed not. The largergroup of aerospace OEM companies is used to a further preliminary testof the variables in chapter six

figure 21: Value-leverage variables and relations on aircraft oem-company level

Value leverage model

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Value leverage model6

6.1 Introduction

In this chapter, the variables found in chapter 4 on product level and chapter5 on company level, are now initial tested. The goal of initial testing is findan answer on sub question 3: What is the relation between variables through timeand how can the variables form a model, measuring value-leverage? A) At aircraftproduct level and B) At aerospace OEM-company level.

First, the variables found on product level, are analysed by the value time-curve for the aircraft cases Embraer E-170/190 and Dassault 7X. The variablesare analysed to know if the variables have relations through time, to form apreliminary model, measuring the value-leverage position and plotting thevalue time curve for the mentioned aircraft cases.

The variables found on aerospace OEM-company level, are preliminary testedon the group of aerospace companies consisting of suppliers to these aircraftcompanies. The preliminary test compares aerospace companies with a groupof automotive OEM companies. To know if the variables can form a prelimi-nary model, the value-leverage position (VLP) per aerospace OEM-company,is measured.

6.2 Relations between variables through time on product level

In this section, the value time-curve on two cases is plotted and analysed toknow if variables can form a preliminary model based upon relations betweenvariables and by comparison of cases. The value time-curve and related direc-tional and growth curves are plotted for the E-170/190 and the Dassault 7X,to analyze the cases. The performance data per case are presented in appendixD. The value time-curve, described in chapter 2, section 2.7 is the proposedmethod for data analysis to apply the variables to show how value developsover time, considering sharing of investments in new product design over acertain period.

6.2.1 Value-time analysis Embraer E-170/190

The value time-curve established for Embraer encompasses several key ele-ments. Primary, the value time-curve incorporates the entire Embraer E-170/190 model range. Secondary, it is based upon the entire research and


116

development trajectory of the Embraer E-170/190 model range. The graphicalanalysis (figure 22), consists of a) the value time-curve b) the directional coef-ficient and c) the growth coefficient.

The value time-curve is based upon the following data and constraints:- Starting time of the development: The E-170/190 development trajectorystarted in July 1999, with first delivery of the E-170 in 2004.

- Investments: up to 2009 actual facts and figures on investments and air-craft sales came from Embraer’s quarterly reports. Data for 2010 and bey-ond came from Forecast International, 2009. Embraer’s R&D investmentsfrom 2002 until 2006 are completely dedicated to the E-170/190 devel-opment. Embraer invested in total US$624 million.

- Deliveries: data on actual aircraft deliveries up to 2009 are obtained fromEmbraer’s quarterly reports. Data for 2010 and beyond is obtained fromForecast International, 2009. An average list price is used of US$29.5 mil-lion, US$31.8 million, US$35.3 million and US$37.3 million for respec-tively the 170, 175, 190 and 195 models.

- A profit margin of 5,5 % is used (Forecast International, 2009), and is di-vided between Embraer and its risk-sharing partners based on the IMPvalue of 1.48, to plot the value time-curve (table 35).

Value time-curve The value demonstrates a negative direction from the year 2000 when the in-vestments starts. The value time-curve is composed by two phases; the phasewhen value is negative expressed by the Net Cumulative Value Negative(NCV-N) due to investments and the phase when the value becomes positive(Net Cumulative Value Positive), due to reduction of investments in combi-nation with revenues starting coming from licenses and down payments. The NCV-N is reached in 5 years at US$ -/- 464 million, at the Net Cumula-tive Value Tipping Point (NCV-TP), which is the lowest level of the net cu-mulative value. The NCV-P becomes positive crossing the Break-Even Timeafter 4 years. In total, the Break-Even Time is 9 years. The value time profiledisplays a relatively shallow bottom, with a break-even date in the first quarterof 2008. At the end of 2009, the Embraer E-170/190 models delivered a cu-mulative net value of US$48 million. The values regarding the value time-curve in the case Embraer E-170/190 are summarized in table 35. The detailedcalculation of the value time-curve can be found in appendix D.

Table 35: Analysis on value time-curve

Value time-curve

Bet (2000-2008) nCv-n (years)nCv-P (years)nCv-tP (mUs$)

Embraer E-170/190

954

-/- 465


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The following assumptions and notifications are to be made about the valuetime-curve and value-gradients graph: - The inputs for the graphs are the starting time, investments in develop-ment and deliveries.

- Data for the value time-curve is obtained by analyzing Embraer’s quarterlyand annual reports. Data for 2010 and beyond is obtained from ForecastInternational, 2009.

- Embraer acknowledges significant cost, allocated to the certification ofthis model before its production. This is partially the reason for the sharpincrease in research and development costs towards the end of the E-170/190 development trajectory.

- Similarly, in the third and fourth quarter of 2002 and onwards, Embraerrecognizes significant costs related to the development and certificationof the E-190 model.

Directional coefficient and growth coefficientBy combining the net investments against the value produced by every de-livery’s net acknowledged profit of 5,5% per aircraft, we can create the direc-tional coefficient. This metric, shown with green triangles in figure 22, is adirect measure of the success of a product. The directional coefficient expe-riences a drop up to 2003 to become positive up to 2008. The curve shows po-sitive exponential growth from mid 2003 until 2008, after which it stabilizes,indicating together with a positive directional coefficient, steady growth. Thenegative growth coefficient in 2009 is due to a 27% decrease of sold aircraftin that year.

6.2.2 Value-time analysis Dassault 7X

The value time-curve established for Dassault 7X is based upon data from Das-

figure 22: embraer e-170/190 value time-curve based on imp


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sault’s quarterly and annual reports. The graphical analysis (figure 23) consistsof a) the value time- curve b) the directional coefficient and c) the growthcoefficient. The inputs for the graphs are the starting time, investments in de-velopment and deliveries.

The value time-curve is based upon the following data and constraints:- Starting time of the development: The Dassault 7X development trajec-tory started in 2001, with rollout in 2006 and entered into service in 2007.

- Investments: Dassault Aviation positions itself as final integrator of thetotal aircraft system. It demands sub-integrated systems from the supplyingpartners, instead of components. The total development costs were ap-proximately US$965 million, excluding the engine manufacturer. Dassaultcarried US$700 million.

- Deliveries: The order history data came from Dassault press releases, whichoften include the total firm orders to date. The deliveries from 2008 on-ward are estimated based upon the historical order growth and productioncapacity. According to Dassault the production capacity from mid 2007onwards is about 3 aircraft per month, or 40 aircraft per year. The produc-tion capacity is expected to increase to 50 aircraft per year around 2011to recover some of the existing order backlog, which currently surpasses200 firm orders. The profit is divided between Dassault and its risk-sharingpartners based on the IMP value of 1.38., see table 32.

Value time-curve Now that the starting time, investments and deliveries are known, the valuetime-curve can be drawn, as shown in figure 23. As can be seen in the figure23, the value time-curve reaches a minimum of US$700 million, which re-presents the total investment made by Dassault. The value time-curve based upon the net cumulative value incorporates thepartner investments, which are of influence to the Net Cumulative Value Tip-ping Point (NCV-TP). The NCV-N (negative) shows the investment phase,the NCV-P (positive) shows the phase in which positive value is generated,and crossing the NCV-BE. The NCV-TP reaches a low of -/- US$700 million.This NCV-N is reached in 6 years. The NCV-P crosses the NCV-BE after 6years. In total the period to become break even is 12 years. The values regar-

Table 36 : Analysis on value drivers

Value time-curve

Bet (2001-2012) nCv-n (year)nCv-P (year)nCv-tP (mUs$)

Dassault 7X

1266

-/- 700


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ding the value time-curve in the case Dassault 7X are summarized in table 36.The detailed calculation of the value time-curve be found in appendix D.The following assumptions and notifications are to be made about the valuetime-curve and value-gradients graph: - For the value added per order, the delivery date is taken as the momentupon which an increase in value is realized.

- The maximum production capacity is set at 40 aircraft per year, and is es-timated to increase to 50 aircraft per year in 2011 to gain on the largeorder backlog.

- It is assumed that no further outlays in investments after the initial de-velopment phase, which reaches from 2001 to 2006.

- The quantity of delivered aircraft has a high uncertainty, as many of theplaced orders will be delivered between 2010 and 2015 and many compa-nies suffer from the recent economic downturn.

Directional coefficient and growth coefficient - By combining the net investments against the value produced by everydelivery, the directional coefficient is calculated. This metric, shown withtriangles in figure 23, is a direct measure of the success of a product. Thedirectional coefficient starts negative up to 2003 to turn positive from2003 up to 2008 and stabilizes to zero. The growth coefficient indicatesexponential growth from mid 2002 up to 2007, after which it stabilizes.

6.3 Comparing value-leverage position Embraer 170/190

and Dassault 7X

Value-leverage is measured by calculating the value-leverage position regar-ding co-development VLP-CD and co-production VLP-CP in case of the Em-

figure 23: Dassault 7X value time-curve based on imp


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braer E-170/190 and the Dassault 7X. The VLP is calculated by taking the in-verse of the IMP or PMP, to position the VLP value at the right side of thebalance point [1]. The VLP value expresses the value-leverage position of theaerospace OEM in case of the specific aircraft as a result between leverage onsuppliers and the own value content in demand value.

VLP-CD for E-170/190 Co-development (figure 24)

The value leverage regarding co-development VLP-CD = 1/IMP = 1 / 1,48 =0,68. The system is in balance by the demand for development expressed bythe investment in new aircraft development is US$926 million. In case of Das-sault 7X the total investment in development is US$962. The VLP-CD = 1 /1,38 = 0,73 (dotted line).

VLP-CP for E-170/190 Co-production (figure 25)

The value-leverage regarding co-production VLP-CP = 1 / PMP = 1 / 2,76=0,36. The system is in balance by the market demand expressed by the numberof aircraft or value to break-even, which is 503 aircraft. For Dassault 7X (dot-ted line), the VLP-CP = 1 / 2,1= 0,47.

figure 24: Value-leverage position for aircraft e-170/190 for co-development

figure 25: Value-leverage position for aircraft e-170/190 for co-production


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Embraer E-170/190 has a higher value-leverage position on co-development andco-production compared to Dassault 7X, expressed by the VLP-CD and VLP-CP.

6.4 Comparing value time curves Embraer E-170/190

and Dassault 7X

When plotting the Dassault 7X and Embraer E-170/190 combined graph asshown in figure 26, it becomes apparent that these curves demonstrate diffe-rent trends. The difference amongst the value time-curves may be examinedin particular by comparing the co-development, co-production and marketdemand. The variables found are presented in table 37 and figure 26 for com-parison followed by discussion. Market Share (MS), Break-Even Quantities andtime (BEQ), (BET) and Time To Market (TTM) are derived from table 37.

- The large difference between the two graphs may be related to several fac-tors. The Dassault 7X enters a market valued at US$10.50 billion in 2008(AviationWeek, 2004), while the Embraer E-170/190 enters a market va-lued at US$31.5 billion (Forecast International, 2007).

OEM-company /variable

Start of the curve

Market share (%)time to Market (year)IMPPMPBet BeQnCv-n (year)nCv-P-(year)nCv-tP (mUs$)

Embraer E-170/190

1999425

1,482,76

9503

54

-/- 465

Dassault 7X

200016,7

71,382,1412

21866

-/- 700

Table 37: Comparison variables Embraer-Dassault

figure 26: Dassault 7X and embraer e-170/190 value time-curves based upon imp


122

- The larger market, in combination with the design approach allowing afamily of four aircraft to be built from one development trajectory, in com-parison to one aircraft for the Dassault 7X, is a large factor for the discre-pancy seen between the directional and growth coefficients of the EmbraerE-170/190 and Dassault 7X. For the Embraer E-170/190, there is simplythe opportunity to capture more market share. The Break-Even Time of12 years for the 7X versus 9 years for the E-170/190 speaks for this.

- Considering the investment profiles of each product, it is clear that theEmbraer E-170/190 research and development effort had a structurallybetter approach at incorporating early supplier involvement. This is a sig-nificant reason of the discrepancies seen between the two developmenttrajectories in terms of their IMP values. The IMP relates to the amountof leverage that a company is able to place on the development trajectoriesof an initiative. A higher IMP implies that a company is able to createmore value while investing less itself. The IMP value of 1,48 value forEmbraer in combination with a NCV-TP of -/- US$465 million and Das-sault, with IMP= 1,38 and NCV-TP of -/-US $700 million is an illustra-tion of this.

- Consequently the period to recover the investments is considerably longerfor Dassault with 6 years compared to Embraer with 4 years. As such Em-braer is better able to benefit from production scalability supported with aPMP of 2,78 of the production compared to Dassault with a PMP of 2,14.

- The phenomenon of value-leverage by aerospace OEMs is identified bycase research in chapter 4. The IMP and PMP are the value-leverage va-riables expressing the co-development and co-production effort, whileTime To Market and Market Share are all related to the value time-curve.The Break-Even Time expressed by the NCV-BE is directly observable inthe value time-curve. Time To Market is related to the moment the firstaircraft is generating value and influencing the NCV-TP (Tipping Point).

- The value time curve shows value effects for new products over a certainperiod. From the comparison of cases, it seems that the IMP and PMPare present in both cases, where the PMP is higher, compared to the IMP.In case of Embraer, the Time To Market is shorter and Market Share ishigher.

6.5 Value-leverage preliminary model on product level

The objective of the section is to answer the sub research question 3a: “Whatis the relation through time and can the variables form a model on product level?”


123

- By measuring the value-leverage position (VLP), the degree of value-le-verage is expressed for co-development and co-production. EmbraerE170/190 has a higher value-leverage performance, compared to Dassault7X expressed by the value-leverage position VLP. The value-leverage inc-reases when the VLP moves to the right side of the balance.

- The value time-curve analysis shows that higher value-leverage on co-de-velopment and co-production, demonstrated in the case Embraer E-170/190, generates value in shorter time (Break-Even and TTM) “faster”,with lower own investments “cheaper” in a “better” way fulfilling customerdemand compared to the case Dassault 7X.

- The negative value expressed by the NCV-TP is for Embraer E-170/190US$ -/- 465m with BET of 9 years in comparison with Dassault7X with aNCV-TP of US$ -/-700m. and BET of 12 years.

- The value-leverage variables IMP and PMP are related to each other; ifthere is IMP, there is PMP and vice versa. The PMP is higher, comparedto the IMP. The dependencies between variables are not known.

- Although variables are applicable to aircraft development and relationsbetween variables are found, the nature of the variables by cause and effector dependencies is not confirmed. The variables MS, BEQ, BET, TTM,IMP and PMP are interrelated and form a preliminary value-leveragemodel expressing value-leverage on product level (figure 27).

6.5.1 Relation between variables through time on company level

The objective of this section is to find an answer to the third research question3B: “What is the relation between variables through time and how can the variablesform a model on aerospace OEM-company level?” To find an answer on thisthird research question in the first place, the applied variables in chapter 5 aretested on a larger group aerospace OEMs and suppliers of other related aerospace

figure 27: preliminary design of the value-leverage model for aerospace product level



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OEM products such as engines, landing gear and electronic systems. In the se-cond place, the automotive sector of industry is used from a comparative per-spective, to see whether the variables are related in a long existing leanpractice. From both industry sectors, a group of companies constitute the re-search sample. The relevant financial and company data from the two industrysamples were collected from the companies’ annual reports with a time frameof 12 years, from the years 1996 to 2007. In the third place, it is important toknow if the analysis shows significant outcome for advising further research.The performance data per company are presented in appendix C.

6.5.2 Method

To compare the aerospace with the automotive industry with respect to theirhistorical value-leverage performance the following methodology has beenadopted. In the first place, a number of companies from both industries are identifiedto constitute the research sample (table 40). The sample for the aerospaceconsists of 23 companies for which data is found (N=23). The sample for theautomotive consists of 12 companies for data are found (N=12). The overviewof financial data can be found in appendix C.

In the second place, the relevant financial and company data from the twoindustry samples was collected from the companies annual reports spanning aperiod of twelve years, from 1996 to 2007 (N=12). For each year and per com-pany the variables along value drivers reported in chapter 5: market demand(P/C), co-development (RD/C) and co-production (T/C) and the relationsare calculated. Subsequently, for each year, the mean for each variable is cal-culated for the aerospace and the automotive sample. The variables are nor-malized based on the number of employees per company. The unit of measureis that of the United States Dollars (US$) per employee. Financial figures inthe companies’ annual reports not listed in US$ were converted using the US$conversion rate at the end of each respective year.

Statistical analysis of the collected data is performed by means of a linear re-gression model for each time series for the automotive and aerospace indus-tries, respectively. In order to assess the internal validity of this study, thestatistical significance of the identified linear trends has been tested througha two-tailed test at a level of significance of 0.05 (Field, 2009). As such, thetrends that showed a correlation coefficient (R) greater than the critical value(table 38 and 39) are statistically significant. The automotive and aerospaceindustry, show both statistical significance.


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Slope of the trend linesThe slope of the trend lines given by the regression model indicates the inc-rease or decrease of the change expressed by the variable (dV/dt) (dPC/t,dTC/t, dRDC/t) over the measured period.

6.5.3 Data sample

The two industry samples have been composed of leading global companiesin their respective industrial sectors. Table 40 present the time series for thecompanies whose financial data from the public domain by yearly reports isused to calculate the variables found and applied in chapter 4 and chapter 5referring to company level. The sample of the aerospace industry is composedof leading US, European, and other international players in the sector. Aero-space companies marked (*) are aircraft OEM companies.The sample of the automotive industry is composed of leading US, Europeanand Asian motor vehicle manufacturers, added to the world’s leading tractorand agricultural vehicle manufacturer and the world’s leading earth movingvehicle manufacturer respectively John Deere and Caterpillar. This sample isused to preliminary test variables. The data series are covering the years ofwhich the research budgets could be found.

Industry

Aerospace andAutomotive

N (year)

12

df = N-2

10

Significance Level

0.05

Critical Value

0.576

Table 39: Historical Correlation of Critical Values

Industry

AerospaceAutomotive

N (company)

2312

df = N-2

2110

Significance Level

0.050.05

Critical Value

0.4130.576

Table 38: Industries Critical Value


126

6.5.4 Analysis: Profit per Capita

The automotive and aerospace industry trend lines both show statistical sig-nificance and are found to be positive (see Table 41). As such, both industriesare following a path towards becoming value-leveraged with respect to valuedriver; market demand. The slope of the trend line of the automotive industryshows a much higher rate of increase with respect to the aerospace industry.The gap between the two industries (figure 28) was a lot smaller in 1996. Inthe subsequent years however, the gap has increased, suggesting higher value-leverage on market demand expressed by the P/C of the automotive industry,compared with the aerospace industry.

Table 40: The Study Sample

Aerospace Industry

OEM Company

1.Alliant techsystems (1997-2007)

2.Be Aerospace (1999-2007)

3.Boeing (1997-2007)*

4.General dynamics (1996-2007)*

5.Goodrich (1998-2007)

6.Honeywell (1998-2007)

7.l-3 Communications (2003-2007)

8.lockheed Martin (1996-2007)*

9.northrop Grumman (1996-2007)*

10.raytheon (2000-2007)*

11.rockwell Collins (2005-2007)

12.textron (1996-2007)

13.United technologies (1996-2007)

14.BAe systems (2007)

15.dassault Aviation (2004-2007)

16.eAds (2000-2007)*

17.Finmeccanica (2003-2007)

18.MtU Aero engines (2002-2007)

19.rolls royce (1996-2007)

20.tHAles (2000-2007)

21.Bombardier (1996-2007)*

22.embraer (1998-2007)*

23.MHI (2003-2007)

Region

United

states

europe

Canada

Brazil

Japan

Automotive Industry

OEM Company

1.Caterpillar (1997-2007)

2.Ford Motors (2002-2007)

3.General Motors (2001-2007)

4.John deere (1996-2007)

5.PACCAr (2000-2007)

6.BMW (2000-2007)

7.Porsche (2003-2007)

8.PsA (Peugeot-Citroen) (2004-2007)

9.renault (2002-2007)

10.volkswagen (1998-2007)

11.Honda (1996-2007)

12.toyota (1999-2007)

Region

United

states

europe

Japan


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6.5.5 Analysis: R&D per Capita

Both industries are following a path towards becoming higher leveraged ontheir R&D. Indeed, in this case, the automotive industry is a better performer,but different from the other value-leverage performance indices, the rate ofimprovement with respect to R&D/C is approximately equal for both indus-tries (Table 42) (figure 29). While the automotive industry is again a betterperformer because of adopting the principles of lean manufacturing long beforethe aerospace industry, it may be appreciated how the aerospace industry isfollowing suit. The recent co-development and co-investment policies adoptedby the leading aircraft manufacturers in their product development are a clearexample of the effort that the aerospace industry as a whole is putting on im-proving the scale of its co-development partnerships.

Industry

AerospaceAutomotive

r2

0.81080.5548

r

0.90040.7448

Significant

YesYes

Slope

1454.74089.5

Table 41: Industries’ Statistical Significance for P/C

figure 28: the p/c for both industries


128

6.5.6 Analysis: Turnover per Capita

The automotive and aerospace industry trends both show statistical signifi-cance and are found to be positive (see Table 43) (figure 30). As such, bothindustries are following a path towards becoming more leveraged with respectto value driver; co-production. The trend line of the automotive industryshows a slightly stronger trend with respect to the aerospace industry. This may be explained as follows: the automotive industry has adopted leanmanufacturing in the 1990s, long before the aerospace industry adopted prin-ciples of lean manufacturing around the year 2000. Also the product com-plexity of the aerospace industry makes it harder to develop and execute leanmanufacturing and the value-leverage on suppliers. However, evidence of theimprovement with respect to value-leverage on the supply chain and networkin the aerospace industry is increasing, considering for instance that the majorcommercial aircraft programs are increasingly reliant on global supply chainsof co-producing partners.

The automotive industry is not only performing better than the aerospace in-dustry but is also improving at a faster rate as the slope of the automotive in-dustry is developing more steep compared to aerospace.

Figure 29: The R&D/C for both Industries

Industry

AerospaceAutomotive

r2

0.92650.5041

r

0.96250.7107

Significant

YesYes

Slope

874.91863.49

Table 42: Industries’ Statistical Significance for R&D/C


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6.5.7 Sub conclusion

The variables P/C, RD/C and T/C are used to calculate the value-leverage atindustry level. The analysis showed that the variables are expressing value-le-verage in order to validate the variables found in the aerospace industry bypreliminary testing these to the automotive industry.

The relations between variables are statistically significant, which makes itpossible to compare companies on their value-leverage performance, usingthese variables.

Now the question rises how the relations between variables perform over time. Therelations P/C-T/C, T/C-RD/C and P/C-RD/C, are shown in the next sections.

6.5.8 Analysis of historical correlation of value-leverage relations

The statistical analysis of the historical correlation of the value-leverage perfor-mance indices has resulted for all three cases in a relatively strong historical cor-relation with respect to the statistical significance interval chosen, together witha positive trend for both the aerospace and the automotive industries. It may beappreciated how, for all three cases the automotive industry is the better perfor-mer of the two. However, it is also be appreciated how the aerospace industry ispicking-up with regard to value-leverage performance, as is the case for T/C ver-sus P/C and P/C versus RD/C, where the trends indicate a slightly faster rate ofimprovement for the aerospace industry compared to the automotive industry. The relevant statistical data (table 44, 45, 46) as well as the graphs following(figures 31,32,33).

figure 30: the t/c for both industries

Industry

AerospaceAutomotive

r2

0.96260.7288

r

0.98110.8537

Significant

YesYes

Slope

1448919651

Table 43: Industries’ Statistical Significance for T/C

Turn

ove

r p

er C

ap

ita

[$/

emp

l.]


130

T/C versus P/C

Interesting is the steeper slope the aerospace graph is showing, indicating thatproduction of aircraft becomes more profitable, due to increasing leverage onsuppliers as the T/C is growing. Increase of P/C and T/C indicates companiesare rationalizing their supply chains and network. The automotive companiesare presented in the upper part of the graph (31) ranging from T/C =US$400.000 - US$600.000.-. The aerospace companies are presented in thelower part of the graph and ranges between US$150.000-US$325.000,-

For the automotive the T/C value-leverage on suppliers is higher comparedto the aerospace however, the profit growth expressed by the slope of automo-tive is less steep compare to aerospace. Reason for the extreme high value-le-verage P/C-T/C in the year 2007, is due to the performance of Porsche.

Industry

AerospaceAutomotive

r2

0.81680.7589

r

0.90380.8711

Significant

YesYes

Slope

8.263.61

Table 44: Industries’ Statistical Significance for Historical T/C versus P/C

figure 31: Historical correlations; t/c versus p/c


131

T/C versus RD/C

Regarding the T/C-RD/C analysis it is of interest to notice that the correlationis strong for both groups, where the aerospace supersedes the automotive. Theaerospace develops however with a lower slope coefficient. The statistical sig-nificance analysed for the aircraft OEMs in chapter 5 is confirmed by this ana-lysis. The automotive companies are presented in the upper part of the graph(32) ranging from T/C = US$400.000 - US$600.000.-. The aerospace com-panies are presented in the lower part of the graph and ranges betweenUS$150.000-US$325.000,-

P/C versus RD/C

The P/C-RD/C analysis shows an interesting development. The correlationfor both groups fit within the critical value (table 46). The aerospace has alower correlation values compared to the automotive group. This is a differentoutcome compared to the analysis in chapter 5, were the relations have a weakcorrelation. The trend for the automotive industry shows a steep increase ofvalue-leverage on P/C-RD/C. The automotive companies are presented inthe right side of the graph (33) ranging from P/C = US$15.000 - US$90.000.-. The aerospace companies are presented in the left part of the graph (33) andranges between US$8.000-US$325.000,-

Industry

AerospaceAutomotive

r2

0.96720.8485

r

0.98350.9211

Significant

YesYes

Slope

15,9817,23

Table 45: Industries’ Statistical Significance for Historical T/C versus RD/C

figure 32: Historical correlations; t/c versus rD/c


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6.5.9 Sub conclusion

- The statistical analysis of the historical correlation of the variables has re-sulted for all three cases in a strong correlation with respect to the statis-tical significance interval chosen, together with a positive trend for boththe aerospace and the automotive industries. It is found, that indeed theautomotive industry as a whole is leveraging higher value compared tothe aerospace industry, but that the aerospace industry is showing the sametype of progress, however lower in its value-leverage performance. Theaerospace is following suit, displaying an upward trend in its value-leverageperformance variables. Overall, the historical value-leverage trends showthat the automotive industry has been ahead of the aerospace industry inthe past. This, on the other hand, was to be expected due to the automo-tive industry started to implement lean practices consistently in the1990’s, long before the aerospace industry. Literature research confirmedthis in chapter 3.

- It appears this research towards value-leverage, identified new variablesable to measure the value-leverage with the capita as denominator of thevariables and referring to aspects of lean manufacturing on value addingand non-value adding activities. The automotive serves in this researchas reference level of “lean” as this sector of industry adopted the principals

Industry

AerospaceAutomotive

r2

0.71980.8063

r

0.84840.8979

Significant

YesYes

Slope

2,234,05

Table 46: Industries’ Statistical Significance for Historical P/C versus RD/C

figure 33: Historical correlations; p/c versus rD/c


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of lean manufacturing already in the 1980s. This research contributes tothe content and context of lean manufacturing and the understanding ofthe leanness of the two respective industries and as such is an addition tothe "Lean Aerospace Initiative" by MIT.

- Not only does this result constitute further support for the validity of thevalue-leverage variables to quantify the value-leverage on suppliers froman aerospace OEM-company perspective, but it also proves the usefulnessof these variables for industry benchmarking purposes. The relations forma preliminary value-leverage model for aerospace OEMs

6.6 Value-leverage preliminary model on aerospace

OEM-company level

To know if the variables can form the value-leverage model, the variables areapplied to aerospace OEMs representing aerospace aircraft integrators. Thevariables are preliminary tested on a group of automotive OEM’s over a periodof 12 years. It seems the variables are statistically significant proven by the li-near least squares method. To pre-design the model expressing and measuringvalue-leverage for aircraft companies the leverage position is calculated by ta-king the average R-value per aerospace OEM-company as researched in chap-ter 5 and table 34. In table 47 the value network position (VLNP) perOEM-company is measured by taking the average R (AVR) values of the re-lations; 1) T/C-P/C, 2) T/C-RD/C, 3) P/C-RD/C.

figure 34: preliminary Value-leverage model for aerospace oems


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The average value R value (AVR) (table 47) is expressing the value-leveragenetwork position (VLNP). A high value-leverage position relates to high pre-dictability of the value-leverage variables and the relation between variables.A low VLNP indicates the aerospace OEM is less stable, in flowing value bythe value network. The value-leverage position for three companies; Boeing,Embraer and EADS is expressed by the next figure 35. The classification; low,medium and high is based upon the Critical R values in table 47.A low value-leverage network position VLNP=0.41 for EADS correspondswith a range of p= >0.20. Value-leverage is less stable in value flow and lessin balance compare to the “medium value-leverage position of Embraer withan VLNP=0.56 corresponding with a range of p= >0.1<0.20. A high value-leverage position for Boeing with VLNP=0.80 corresponds with a more stable,position within a range of p=> 0.02 < 0.005.

Table 47: R and R-squared values of aircraft OEM companies

R Values T/C vs. P/C T/C vs. RD/C P/C vs. RD/C Data series AVR

lockheed Martin 0,88 0,96 0,89 (1996-2007) 0,91Boeing 0,85 0,86 0,71 (1997-2007) 0,80General dynamics 0,77 0,86 0,50 (1996-2007) 0,71northrop Grumman 0,65 0,45 0,89 (1996-2007) 0,66Bombardier 0,51 0,79 0,70 (1996-2007) 0,66embraer 0,97 0,49 0,22 (1998-2007) 0.56eAds 0,12 0,96 0,16 (2000-2007) 0,41

AvG r 0,68 0,77 0,58(AvG r)-squared 0,46 0,59 0,34

Value-Le-

verage

Network

Position

VLNP

figure 35: preliminary Design of the Value-leverage network position model for aerospace oem company

level


135

6.7 Conclusion

The objective of this section is to found an answer on sub question 3: “Whatis the relation between variables through time and how can the variables form a modelmeasuring value-leverage? A) at product level and B) at OEM-company level?”

A) Product level

- The value time-curve analysis shows that higher value-leverage on co-de-velopment and co-production, demonstrated in the case Embraer E-170/190, generates value in shorter time (Break-Even and TTM) “faster”,with lower own investments “cheaper” in a “better” way fulfilling customerdemand compared to the case Dassault 7X.


- The IMP and PMP have a relation with value by MS, and time by the va-riables BEQ, BET and TTM. In the researched cases, a higher IMP andPMP, have a relation with a shorter TTM and BET in combination witha higher MS. The dependencies between variables are not known.

- By preliminary testing of variables for the cases Embraer E-170/190 andDassault 7X, the relations form the model expressing value-leverage onproduct level.

B) Company level

- The variables expressing value-leverage on company level are found with theaircraft OEMs and a group of 23 aerospace companies. The found variablesin chapter 3, are applied to aerospace OEMs in comparison with automotiveOEMs over a period of 12 years, show to have a relations for the aerospaceand automotive OEMs. What stands out from the preliminary test that isperformed in order to investigate the historical correlation of the value-lever-age variables, as derived T/C, P/C, and RD/C, is that correlation persists.

- By taking the average R-value of the combined variables per aerospaceOEM (sub section aircraft OEM), the value-leverage network position(VLNP) of the specific aerospace OEM is measured. Boeing has a scoreof VLNP=0,80 which suggests the value-leverage position is more in ba-lance compared to Embraer, with a value-leverage position of VLNP=0,56.EADS scores the lowest from the group with VLNP=0,41. As such, com-panies with a low VLNP score on the variables are less stable to flow valuecompared with companies scoring higher on average R value (AVR) ofthe combined variables.


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- It was found, that automotive OEM companies are leveraging higher valuecompared to aerospace companies, however aerospace OEM companiesare following suit. This links with the adoption of the principles of leanmanufacturing, which is developed by the automotive industry and nowadopted by the aerospace industry.

- The variables are related to each other; if there is T/C, there is P/C andRD/C and vice versa for aerospace and automotive OEMs.

- By pre-testing the variables at the aerospace industry in comparison withthe automotive industry, the relations are found to be are statistically sig-nificant and form a preliminary value-leverage model expressing value-leverage on company level.

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7.1 Introduction

The objective of this chapter is to summarize the conclusions of the researchand the scientific and societal contributions regarding the body of knowledgeon value-leverage. This next section summarizes the research background, de-sign approach and sub research questions to answer the main research ques-tion.

7.2 Research background and process

BackgroundAerospace companies are shifting value from the focal company towards thesupply base not only for the production of aircraft but now also for the devel-opment of complete aircraft sub systems. The characteristics of the aerospaceindustry are high capital intensity and development risks. Value-leveragemeans the capability of an aerospace original equipment manufacturing(OEM) company to lever value on suppliers for the co-development and co-production of aircraft. The objective of this dissertation is to find how value-leverage can be measured.

Research processBy exploratory interviews and literature research, variables expressing value-leverage are found along value drivers; market demand, co-development andco-production. The variables found are product or company level related. Thevariables related to product level are applied to the following aircraft cases:Embraer-E-170/190, Dassault 7X, Airbus A380 and Boeing B787. To know ifthe variables have a relation through time, the value time-curve is plotted tocompare cases on the value-leverage performance. By applying the variablesfound, the model on value-leverage regarding product level is pre-designed.

Variables which are company related are applied to aerospace OEM companiessuch as EADS, Boeing, Embraer and Bombardier. To pre-design the value-le-verage model on company level, data from aerospace OEM companies cove-ring a period of 12 years are analysed to know if the variables are statisticallysignificant. The variables are preliminary tested in comparison with a groupof automotive OEM companies. The variables show statistical significance forboth (aerospace and automotive) data samples, however, the value-leverage

General conclusions7


138

performances are different. By applying the variables found, the model onvalue-leverage network position regarding OEM-company level is pre-de-signed.

7.3 Research questions

The objective of this dissertation is to find an answer to the main researchquestion; “How can value-leverage by aerospace original equipment manufacturers,be measured?” The main research question is divided into the following subquestions:

1. What variables express value-leverage on suppliers from a focal OEM-com-pany perspective?

2. What variables are applicable to the aerospace industry, and are they inter-related?2A. What variables are applicable to development and production of air-craft?2B. What variables are applicable for to aerospace OEM companies?

3. What is the relation between variables through time and how can the va-riables form a model, measuring value-leverage?3A) At product level and 3B) At company level?

After answering the sub questions, the main research question is answered.

7.4 Answers to the sub research questions

In this section the answers to the research questions are given, in the sameorder as the questions were posed in chapter 2, section 2.4.

Sub research question 1The first sub question to be answered is: “What variables express value-leverageon suppliers from a focal OEM-company perspective?”Variables are found through exploratory interviews and literature review onthe theory fields; lean manufacturing, supply chain and open innovation. Thevariables found are related to A) product level or B) company level. The va-riables are structured along three value drivers; market demand, co-develop-ment and co-production.

A) At product levelThe variables found related to aircraft product level are structured along thevalue drivers:

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Market demand- Market Share (MS) is the percentage of the market, which is covered bythe specific aircraft type compared to its direct competitors,

- Time To Market (TTM) is the time an aerospace OEM needs to deliverthe first aircraft, qualified and tested, to the market, expressed in years,

- The Break-Even Quantity (BEQ) is the number of aircraft necessary torecover the own investments, by delivering aircraft to customers,

- The Break Even Time (BET) is the time the aerospace OEM needs to re-cover the own investments.

Co-development- The Investment Multiplier (IMP) is defined as the total aircraft develop-ment investment divided by the development investment of the aerospaceOEM-company.

Co-production- The Production Multiplier (PMP) is defined as the total production valueof the aircraft divided by the production share of the aerospace OEM-company.

B) At company levelThe variables found at company level have the capita as denominator in com-mon. The employee or capita takes into account, from a lean manufacturingperspective, the value-add versus non value-add and as such disclosing thewaste in the organisation. The capita also refers to supply chain managementby identifying the shift of value from the focal OEM-company towards thesupply chain regarding production activities. By outsourcing production acti-vities the employee base of the OEM-company reduces, hence the value-le-verage on the supply chain increases. The financial data used are turnover,profit (EBIT), research and development (R&D) expenditures and finally thenumber of employees. Variables found related to company level are structuredalong the value driver; OEM value network position.

OEM Value Network Position- The Profit per Capita (P/C), is the variable which gives an outlook on acompany’s ability for business continuity. The P/C reflects that a companyis able to benefit from customer demand by offering the right value at theright time at the right place from a customer perspective.

- The Research and Development expenditures per Capita (RD/C), is thevariable which provides information about the focus on technology. TheRD/C is an indicator of the ability to leverage on its value system in orderto develop new products.


140

- The Turnover per Capita (T/C) is the variable indicating the ability ofan OEM-company to leverage value on the supply base and network.

Sub research question 2AThe second sub question was divided into two sub questions, one on productlevel (2A) and one on company level (2B). In this section, the sub question2A is answered. The sub question is: ”What variables are applicable to the aero-space industry, and are they interrelated on product level?” The sub question isanswered by comparing four cases: Embraer E-170/190, Dassault 7X, BoeingB787 and Airbus A380.

The answer to sub research question 2A is that all the variables found and re-lated to product level are applicable to the researched cases. With the varia-bles, it is possible to compare products on value-leverage performance. Withthe cases B787 and A380, government aid is influencing value-leverage. Thecases Embraer E-170/190 and Dassault 7X are comparable regarding the valueinvolved. The Boeing B787 and A380 are entirely different in size and valueand therefore less suitable to compare, additional to that is the fact that thesetwo cases are under dispute with the WTO. Therefore, it is decided to leave outthese cases for further research, due to confounding issues, such as governmentsubsidies, to continue with the cases Embraer E-170/190 and the Dassault 7X.

Sub research question 2B In this section, the sub question 2B is answered. The research question is:“What variables are applicable to the aerospace industry, and are they inter-related for OEM-company level?”

The sub question is answered by comparing seven cases on value-leverage per-formance: Boeing, Lockheed Martin, Bombardier, General Dynamics, Em-braer, EADS, and Northrop Grumman. The cases are researched using datacovering a 12-year period. The answer to sub research question 2B is that thevariables found are statistically significant for the relations 1) T/C-P/C and2) T/C-RD/C. The relation 3) P/C-RD/C showed to be less significant, whichis interesting as it would be reasonable to assume R&D has a relation withprofit.

Research question 3AThe third sub question was divided into two subquestions, one on productlevel (3A) and one on company level (3B). In this section, the sub question3A“What is the relation between variables through time and how can the variablesform a model measuring value-leverage?”A) At product level?” is answered by pre-liminary testing the variables on the cases Embraer E-170/190 and Dassault7X, by measuring the value leverage position and plotting the value time-curve. The VLP is calculated by taking the inverse of the IMP or PMP, to po-

General conclusions

141

sition the VLP value at the right side of the lever balance point [1]. The VLPvalue expresses the value-leverage position of the aerospace OEM.

VLP-CD for E-170/190 Co-development The value leverage on co-development (VLP-CD) is 1/IMP = 1 / 1,48 = 0,68(figure 36). The system is in balance by the demand for development expressedby the investment in new aircraft development is US$ 926 million. For thecase Dassault 7X the total investment in development is US$ 962 million.The VLP-CD = 1 / 1,38 = 0,73 (dotted line).

VLP-CP for E-170/190 Co-production The value-leverage regarding co-production (VLP-CP) is 1 / PMP = 1 / 2,76 =0,36 (figure 37). The system is in balance by the market demand expressed bythe number of aircraft or value to break-even, which is 503 aircraft. For Das-sault 7X (dotted line), the VLP-CP = 1 / 2,1= 0,47. For Dassault 7X the marketdemand to break even is 218 aircraft. Embraer has a higher value-leverage onco-development and co-production compared to Dassault, as Embraer scoreslower values on the VLP-CD and VLP-CP.

Figure 36: Value-Leverage Position for aircraft E-170/190 for co-development


142

Value time-curveThe variables have relations through time and form a preliminary value-le-verage model (figure 38). The effect of value-leverage is visualized by plottingthe value-time curve for both cases. The graph shows that there is a relationbetween value-leverage and time. Higher value-leverage on co-developmentand co-production by Embraer E-170/190, supported by the higher value-le-verage position expressed by the VLP-CD and VLP-CP suggested by the upperline, generates “faster” (break-even), “cheaper” (lower investments) and “bet-ter” (market share) value compared to Dassault 7X with lower value-leverageon the VLP-CD and VLP-CP.

Figure 37: Value-leverage Position for aircraft E-170/190 for co-production

Figure 38: Dassault 7X and Embraer E-170/190 value time-curves based upon IMP

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Preliminary value-leverage modelThe variables; IMP, PMP and MS, BEQ, BET and TTM are measured for theaircraft cases and have relations in between (figure 39).

- By measuring the value-leverage position (VLP), the degree of value-le-verage is expressed for co-development and co-production. EmbraerE170/190 has a higher value-leverage performance compared to Dassault7X, expressed by the value-leverage position VLP. The value-leverage inc-reases when the VLP moves to the right side of the balance.

- The value time-curve analysis shows that higher value-leverage on co-de-velopment and co-production, showed in the case Embraer E-170/190,generates value:

• “faster”: in shorter time (Break-Even and TTM); • “cheaper”: with lower own investments, • and “better”: by creating more value regarding customer demand incomparison with the case Dassault 7X.


- The value-leverage variables IMP and PMP are related to each other; ifthere is IMP, there is PMP and vice versa. The PMP is higher, comparedto the IMP. The dependencies between variables are not known.

- Although variables are applicable to aircraft development and relationsbetween variables are found, the nature of the variables by cause and effector dependencies is not confirmed. The variables MS, BEQ, BET, TTM,IMP and PMP are interrelated and form a preliminary value-leveragemodel expressing value-leverage on product level (figure 39).

Figure 39: Preliminary Design of the Value-Leverage Model for Aerospace Product Level



144

Research question 3BIn this section, the sub question 3B, “What is the relation between variablesthrough time and how can the variables form a model measuring value-leverage?”B) At OEM- company level?” is answered by preliminary testing the variables.

- The relations between variables T/C, P/C and RD/C, are statistically sig-nificant for aerospace OEMs in comparison with a group of automotiveOEMs. The variables are related to each other; high T/C usually corres-ponds with high P/C and RD/C and vice versa.

- Automotive OEM companies are leveraging higher value compared to ae-rospace companies, however aerospace OEM companies are following suit.From a value-add perspective, this links with the adoption of the princi-ples according theory on lean manufacturing, originally developed by theautomotive industry, and now adopted by the aerospace industry.

- By taking the average correlation coefficient (R-value) of the combinedvariables per aerospace OEM, the value-leverage position of the specificaerospace OEM is measured. Boeing has a score of VLNP=0,80, Embraer,with a value-leverage position of VLNP=0,56. EADS scores the lowest inthe group with VLNP=0,41.

- The variables have relations through time and form the preliminary value-leverage model on aerospace OEM-company level (figure 40). As such,value-leverage variables are useful to measure aerospace OEM companieson their value-leverage network position.

Figure 40: Preliminary Design of the Value-Leverage Network Position Model for Aerospace

OEM Company Level

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7.5 Answer to the main research question

The following conclusion is drawn, regarding the main research question;“How can value-leverage by aerospace original equipment manufacturers be mea-sured?”.

Value-leverage measures the capability of an aerospace OEM-company to levervalue on suppliers to fulfill market demand. To demonstrate this, the principleof a lever shows how value-leverage can be measured. By finding the variablesinvolved in measuring value-leverage and application of the found variablesto aerospace products (aircraft) and aerospace OEM companies, it is knownhow value-leverage can be measured. The working principle of the lever inthe context of value-leverage is defined by measuring the leveraged positionof the OEM-company. Through case research on product level and researchon company level, it is measured that if the focal OEM-company levers morevalue on suppliers, the value-leverage position moves to the right side of thelever. This is measured for the VLP-CD, the VLP-CP and the VLNP-OEM.The figure suggests product level and company level are interrelated.

The variables found related to aircraft product level are structured along thevalue drivers;

Market demand- Market Share (MS) is the percentage of the market, which is covered bythe specific aircraft type compared to its direct competitors,

- Time To Market (TTM) is the time an aerospace OEM needs to deliverthe first aircraft, qualified and tested, to the market, expressed in years,

- The Break-Even quantities (BEQ) are the number of aircraft necessary torecover the own investments, by delivering aircraft to customers,


Co-development- The Investment Multiplier (IMP) is defined as the total investment indevelopment for the aircraft divided investment share in development ofthe aerospace OEM-company.

Co-production- The Production Multiplier (PMP) is defined as the total production valueof the aircraft divided by the production share of the aerospace OEM-company .

The variables found related to aircraft company level are structured along thevalue drivers;


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OEM Value Network Position- The Profit per Capita (P/C), is the variable which gives an outlook on acompany’s ability for business continuity. The P/C reflects that a companyis able to benefit from customer demand by offering the right value at theright time at the right place from a customer perspective.

- The Research and Development expenditures per Capita (RD/C), is thevariable which provides information about the focus on technology. TheRD/C is an indicator of the ability to leverage on its value system in orderto develop new products.

- The Turnover per Capita (T/C) is the variable indicating the ability ofan OEM-company to leverage value on the supply base and network.

7.6 Research contributions

Scientific contributionThe research and development of the value-leverage models on product andcompany level give insights about how value-leverage by aerospace OEM com-panies can be measured, by the new variables found. The variables refer totheories on a) lean manufacturing, b) supply chain management, c) open in-novation and d) OEM value network.

Lean manufacturingThe variables on product and company level refer to the principles of leanmanufacturing by specifying products for which sufficient market demand isidentified. The variables with the capita as denominator refer to value adding

Figure 41: Preliminary design of the Value-Leverage Model for Aerospace OEM product

and company level

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and non-value adding activities by the employees and disclosure of economicwaste in the value system. The three variables P/C, RD/C and T/C refer tostability and predictability of continuous flow by just-in-time supplies fromthe supply chain and delivering value according to the demand from the cus-tomer, balancing demand and supply.

Supply chain managementThe variables found on product and company level refer to the shift of valuefrom the focal OEM-company towards the supply base. The variables refer tothe reduction of supply base complexity and transaction costs. The shift of thebalance of power can be expressed by the value-leverage position VLNP ofthe aerospace OEM-company.

Open innovationThe variables on product level PMP, IMP, BEQ, BET and TTM have a relationwith the principles of open innovation, i.e., value and time expressed by thevalue time-curve. The variable IMP expresses the benefit of multiplying in-vestments in new product design. The production multiplier PMP expressesthe benefit to fulfil market demand in shorter time.

Value networkShifting value from the OEM-company towards the supply base suggests thatthe number of transactions and thus the transaction costs become higher. Ho-wever, when partners are involved with co-development and co-production,the transaction cost can be reduced as supply complexity can be reduced whenprinciples of lean manufacturing and open innovation are applied.

Value-leverageFrom the research and development, knowledge is derived and theory is builtfor calculating and measuring the performance of the aerospace OEM-com-pany from a value-leverage perspective. Is occurs that the more value is lever-aged on the supply base, the more stable the OEM-company can flow value.This is expressed by the value-leverage network position (VLNP). All menti-oned fields of theory have the value-leverage perspective in common.

Managerial contributionThe aircraft industry has difficulties to judge R&D efforts, and to turn theavailable R&D efforts into beneficial development of aircraft, matching suf-ficient demand. It seems there is an unbalance in some cases between R&Defforts and benefit for aircraft manufacturers as sub group of the aerospace in-dustry. Aerospace OEM companies allocating a fixed percentage of the turn-over for R&D are possibly over-processing technology development.


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The variable IMP is of interest to express the level of suppliers sharing invest-ment in engineering-development. New research with Fokker (2010) on“value levers” showed that investment sharing is one of the value levers totake into account with estimating the value of new aero structure conceptssuch as wing sections (movables).

Societal contributionOEMs and suppliers working more closely together can encounter up’s anddown’s in business. This probably reduces the government’s expenditure onsocial security, reducing waste in the economic system. Further research is pre-ferable to understand the mechanism of these economic systems. However,subsidies to the aircraft industry occur frequently, as found in cases of A380and B787. Governments should perform further research on how to supportadvanced high technology companies in commercial aerospace industry, froman all stakeholders benefit perspective, and less focused on the company inparticular.

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The preliminary value-leverage model on product level has shown relationsbetween variables. However, the influence of the IMP on the PMP and viceversa, combined with the influence on the market demand variables needs tobe investigated by further research. Based upon this dissertation, more casesneed to be researched to build up knowledge to further validate the model.

Variables on company level show to have either a strong or weak correlation.A strong correlation between variables suggests that value-leverage perfor-mance leads to stability of value flow, and a weak correlation suggests thatvalue-leverage performance is less stable. Further research is necessary to knowthe optimum of the value-leverage.

The value-leverage model can be refined by looking at other domains such asthe Construction industry, Automotive, Oil and Gas, and Aviation Industries.Research (2010) on the automotive OEM industry showed that it is possibleto rank OEMs on value-leverage performance. Further development of abenchmark tool to compare OEM-companies on their value-leverage perfor-mance is the next step.

Classic financial metrics do not reflect the increased value flow down to sup-pliers, including investments. Even current metrics such as cash-flow are pro-bably not expressing what actually happens inside OEM companies, asinvestments in production machines are more and more replaced by invest-ments in technology, which are more knowledge focussed with less tangibleassets. Further research is necessary to compare the classic financial metricsand these new value-leverage metrics.

This research forms the basis for further research to find support for the rankingof first, second and third tier suppliers. Two new PhD research projects havebeen started to research the supply base in the airline industry from a value-leverage perspective.

The aircraft industry has difficulties to size R&D efforts. It seems there is anunbalance between R&D efforts and benefits for the aircraft manufacturers assub group of the aerospace industry. This needs to be researched to understand

Recommendations8


150

possible time effects in combination with value-leverage effects in conjunctionwith disciplines such as economics, finance, legal and management.

Epilogue

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Since the start of this PhD research, we now know a lot more about value-le-verage and the associated variables within aerospace OEM-companies. Thiswas achieved because I had the curiosity and drive to know how and to whatdegree aerospace OEM-companies make use of the value network with the de-velopment and production of aircraft.

Reflecting on the path towards the results of this research has been a most in-teresting and inspiring journey, which started in 2005. The search for under-standing a phenomenon on one side and the development of logic andreasoning behind it on the other side was the best learning experience I haveever had. This was also a personal goal set.

It is definitely not a lonely journey, as sharing research results with academia,learn from each other, and get valuable advice at conferences such as Euroma,IMP (International Marketing & Purchasing), JBM (Journal of Business Mar-kets), QIKM (Quality Innovation and Knowledge management), ATIO (Avi-ation, Technology, Integration and Operations) and ATOS (AirTransportation and Operations Symposium) was very inspiring. The approachto publish at conferences was an integral part of the research strategy, whichwas an excellent experience and kept the pace with the development of thedissertation.

This research has taught us that value-leverage links knowledge fields such assupply chain management, open innovation and lean manufacturing. It is nowpossible to classify OEM-companies on their value-leverage network position,which is something new and valuable to all stakeholders.

The relevance of this research is that the results are transferred into the edu-cational program at Delft University of Technology, chair Air Transport andOperations. Students are writing papers to share with academics at conferencesand contribute to the development of the proposed value-leverage model. Mo-delling of value-leverage is currently applied at research projects with airlines,aerospace, automotive and wind turbine industries. Start-up companies suchas Quintech Engineering Innovations and Airplay Kite sailing also make useof this new way of thinking. The search for quantifying value-leverage through

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demand and supply chains is currently under research and at the agenda ofgovernment bodies such as Schiphol Innovative Main Port (SIM). Instead ofoptimising the classic “silos”, optimisation is now pursued from an integral de-mand and supply perspective driven by open innovation, involving supplychains at a lean manner.

Personally, I have experienced that it is an honour to contribute to the aca-demic world and to inspire students and researchers to explore this new topicon value-leverage.

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Conference papers

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170

Appendix A: Report on exploratory practice research by interviews

A.1 Cisco Systems – “Call Manager”

A.2 ASML – “TwinScan”

A.3 PACCARD – DAF Trucks “Hybrid truck”

Appendix B: Literature research

Appendix C: Financial data regarding aerospace and automotive industry to calculate the variables T/C, P/C and RD/C and plot the graphs28, 29, 30, 31, 32, 33

B.1. Financial data on automotive industry

B.2. Financial data on aerospace industry

B.3. Currency exchange rates

Appendix D: Value time curve data Embraer 170/190 and Dassault 7X

Appendices: A, B, C, D

Appendix A

171

Appendix A.1: Cisco Systems – “Call Manager”

Interview Cisco Systems on the 17 th of May, 2006 Amsterdam with RobbertKuppens, MD EMEA Manufacturing / and James van der Leij, Supply ChainManagement

Robbert Kuppens has a role as Ambassador for Cisco Systems to level withlarge Global Enterprises about the future internet enabled communicationstandards and the benefits of the “Internet Organised Enterprise” for whichCisco Systems has become the world wide standard.

The core competence of Cisco Systems is essential; providing in systems andservices to explore the internet capabilities via fixed or wireless connection.Technology; consists of hard and software around Internet Protocol (IP) andapplication to enablers. With the development and innovation of productsand services the following main value drivers are: 1) customer orientation andperformance of the customer (market demand), 2) Technology and Innovationwith partners, (Co-development) 3) configuration of the network to supplyvalue to the customer (co-production).

I. MARKET DEMAND: how does your company measures market demand /performance ?

a. Variables expressing customer focus are based upon product performance:i. Market share in unitsii. Time To Market for new productsiii. Profit

II. CO-DEVELOPMENT:What is the role of the network regarding development of new products with partners?

a. Co-developing partners:i. Cisco Systems and Nokia

b. Technology sharing between Cisco Systems and Nokia by co-develop-menti. Cisco Systems: the Internet Protocol world meets the Telephoneworld“Both of best worlds” The core competence of Cisco Systems is es-sential; providing in systems and services to explore the internet ca-pabilities via fixed or wireless connection.

Appendix A: Report on exploratory

practice research; interviews


172

ii. Technology; consists of newly developed hardware from Nokia a n dsoftware from Cisco Systems designed around Internet Protocol (IP)and application to enable

iii.Cisco Systems contributes in this co-development and innovationwith the development of unique software called “Call Manager” thissoftware is developed to communicate in a dual mode umts / wirelesswith the Nokia hand set to facilitate:

1. Meeting place2. VOIP3. Video Conference

iv. Nokia is famous for wireless hand held telephone systems. Nokia de-velops the mobile telephone containing the Cisco Systems softwarefor distribution to the consumer market.

v. Investment sharing for development and innovation with partners;Cisco Systems and Nokia share there investment on a 50/50 basis.Cisco System is able to multiply its own investment twice. The IMPcalculates : IMP= 100/50=2.

III. CO-PRODUCTION: What is the role of the network regarding the pro-duction of products? what is the contribution of partners to co-produce? a. In case of the “Call Manager” product it was expected to outsource theproduction. Cisco System in general counts for only 20% of the produc-tion, which calculates the production multiplier PMP= 100/20=5. It isanticipated Cisco Systems will even further reduce the own productionvalue, by making use of the network.

IV. NETWORK ORGANISATION: How to express the value from partnersin relation to the network organisation? a. Cisco Systems employee stands for 6 employees contributing productionvalue outside the enterprise. The employee is a measure for value-lever-age on the network.

b. Today turnover per capita is US$ 700.000,- The objective isUS$1.000.000.- with 20% profit.

c. Cisco is considered by there peer group as NVO (Network Virtual Or-ganisation) an advanced form of organisation.

Appendix A.2: ASML – “TwinScan”

I. MARKET DEMAND: how does your company measures market demand /performance ? Market share as an indicator of success applied to ASML andto a specific product line in compassion with the competition. Break-Even tomeasure recuperation of investments in machines for satisfying customer de-mand. Time To Market is an important factor as the customer differentiatestheir offerings on the availability of state of the art production technology andcorresponding performance.

Appendix A

173

a. Product performancei. Units sold

1. Total for ASML: planned 250 units for 20062. TwinScan: 650 units starting 6 years ago

ii. Market share in units 1. ASML; 60% in competition with Nikon and Cannon from Japan.

2. TwinScan ARF-1400-1700; 80% (top end market)3. KRF 850; 60% (high end market)4. Eylines; 35% (low end market)

iii.Break Even1. TwinScan; 3 years2. Development time for new machines is about 3 years.

iv. Time To Market; 3 years. The first new machines are for 80% readyand finalized (co-developed and co-produced with the customer) forthe final 20% at the “Wafer Fab” of the customer (for instance Sams-ung).

II. CO-DEVELOPMENT : What is the role of the network regarding devel-opment of new products with partners?

ASML has been developed all products in combination with partners. At themoment 20 different products are still in production / service.a. Co-developing partners: Partners sharing development i. Zeiss, Symer, Philips ETG, Jena Optik, Berlin Glass, Aglient, Conti-nuously 4-5 main partners.

ii. Newest machine ART 1700-1400 range; Zeiss is main partner with acontent of 45% of the total value of the machine.

iii.Institutes: TNO, Philips NAT LAB, Universities.

b. Technology sharingi. ASML has the technology for lithographing wafers to produce semi-conductors. ASML is enabler with the newest production machineAFR 1700-1400 for the development of the newest “Flash memory”chips. The ASML machines are developed in close cooperation withthe customers.

ii. Zeiss has the optical technology essential part of the lithography pro-cess. This is a most crucial process and contributes to approx. 45% ofthe value of the AFR machine.


174

c. Investment sharing with partners for the newest developed machine(Euro 25 mio per unit) ; Development & innovation phase? (InvestmentMultiplier -IMP) i. TwinScan; ASML 40% / Partners 60%; IMP=100/40= 2,5. ii. Total investment in development for a new machine platform? Ballpark figure Euro 1 billion.

iii.Zeiss contributes 30-50% of the value of a last generation machinewith sales value Euro 25 million.

iv. ASML has 15-20 OEM enterprises involved directly in co-develop-ment.

v. ASML invests on a yearly basis 20% of the turnover in developmentvi.80% of the suppliers are investing on their own risk for ASML pro-grams.

III. CO-PRODUCTION: What is the role of the network regarding the pro-duction of products?, what is the contribution of partners to co-produce? a. Production Sharing; i. The production value of ASML is for 95% contributed by suppliers.ASML obtains supplies for Euro 1,7 Billion from third parties accor-ding planning 2006, which is % 95 of the total turnover.

IV. NETWORK ORGANISATION: How to express the value from partnersin relation to the network organisation? a. Network Organisationi. Number of employees;5000ii. Turnover per capita ratio; Euro 2.500.000.000 / 5000= Euro 500.000per capita

Appendix A.3: PACCARD-DAF Trucks – “Hybrid truck”

Report on interview with Mr. Pas, Directeur Product Development, dd 23.11.06

The enterprise originally established in 1928 in Eindhoven, The Netherlandsand was acquired in 1996 by PACCARD (USA) one of the largest truck ma-nufacturer in the world. Paccard as a group produced in 175.000 trucks in 2006with the brands Kenworth, Peterbilt and DAF Trucks. Recovering from discontinuity in 1994 due to recession in Western EuropeDAF Trucks continued with limited capital and strongly reduced workforcefrom 11.000 to now 6.000 employees. DAF Trucks had to be smart to surviveand allocate the limited capital available in the right way. Due to shortage ofcapital DAF Trucks became creative to involve sub suppliers taking over stockof semi finished parts reducing working capital making the enterprise alreadymore lean. Production of complete trucks without customer order, thus crea-ting waste in stock, was abolished and replaced with production on customer

Appendix A

175

order only. Research and Development workforce was strongly reduced whichopened the way to co-development with suppliers in a more structural way.

I. MARKET DEMAND: How does your company market demand / perfor-mance ? Market share as an indicator of success applied and to a specific pro-duct line in compassion with the competition. As a result the trucks fromDAF are increasingly better appreciated to comparable products sustainedby the increase of market share during the last years. Turnover 2006 is esti-mated > Euro 4 Billion (600 million increase). Profit is estimated on approx.300 million (was 285 million 2005). Especially the market in Central andEastern Europe were positive with an increase of 40% compared with 2005.DAF Trucks produces 170 trucks per day with 7000 employees on the pay-roll. DAF Trucks launched in 2006 a new light, middle and heavy truck pro-duct This is an outstanding performance knowing the XF was honoured astruck of the year 2007.

a. Product performance i. According Ad Goudriaan, President of DAF Trucks [press releaseEindhovensdagblad 09-01-2007] the production in 2006 raised up to56.250 vehicles which is + 3750 vehicles compared to 2005. Type AXF105 [ truck of the year 2007] Heavy trucks segment > 15 tonnes,the sales increased with 7.6 % compared to 2005. Compared to 2004the growth was 25%. Especially the market in Central and EasternEurope were positive with an increase of 40% compared with 2005.

ii. Market share in percentage? Climbing from 9% in 1996 up to 14%in 2006

1. Total market share 2006 is 14.5%. Ranking in Europe is:1.Mercedes, 2. MAN, 3.DAF. Goal for 2007 is a market share of 15% with growth to 20%.

iii.Consumption performance in the sense of customer success; in litres,kilometres, pads etc. quantities consumed based upon the IP / hard-ware? (leverage).

1. DAF Truck emphasis on the lowest cost per kilometre forthe user/ owner and a comfortable workspace for the driver.

II. CO-DEVELOPMENT: What is the role of the network regarding devel-opment of new products with partners? DAF Trucks innovated products by involving not only the user / customerinto the development process but also the side suppliers are involved in thedevelopment process. To improve product innovation processes regardingthe cabin, DAF Trucks went for orientation to the innovation centre of Boe-


176

ing in the surroundings of Seattle (USA) in 2006. DAF Trucks was specifi-cally interested in the innovation of the “cabin” as a major part of the truckis the cabin. DAF Trucks learned similar to Boeing to incorporate the userinto the development process as they are really experiencing the area inwhich they work, sleep, communicate and produce kilometres. Most impor-tant value DAF Trucks offers is mileage at the lowest cost per kilometre re-lated to the quality of the product. DAF Trucks developed the new MXengine with a capability to produce 1,6 million kilometres for the new XFrange. The new engine is designed to the latest requirements regarding en-vironmental impact, fuel economy and maintenance interventions. To op-timise the production of kilometres and truck availability, customer servicesmakes an important part of the total product. For future engine developments Paccard decided to co-develop with DAFTrucks new engines for the brands Kenworth and Peterbilt in addition toCummins and Caterpillar engines. Paccard will invest US$ 400 Million intoa new engine production plant in the USA coming on stream in 2009. Theknow how will be provided for a large part by DAF Trucks.

a. Co-developing partners:iii.ZF for gearboxes, Bosch for fuel injection systems, Renault for Cabins,EATON for drive trains.

iv. Newest truck Hybrid : the newest development of the truck withhybrid traction is a co development with Eaton from USA where thecomplete drive train is developed. In this development DAF Trucksis responsible for specification of drive train and integration, qualifi-cation, testing and assembly of the vehicle making the developmentless expensive for DAF Trucks as the drive train was completely out-sourced without upfront investments and the cabin co-developed withRenault.

b. Investment sharing with partners; Development & innovation phase? i. In total 75% of the value of the hybrid truck is contributed by sup-pliers.This calculates the Investment Multiplier of IMP=100/25= 4.

III. CO-PRODUCTION: What is the role of the network regarding the pro-duction of products?, what is the contribution of partners to co-produce?

a. The production of DAF Trucks makes use of suppliers contributing 75%of the production value. Production Multiplier, PMP=100/25= 4. DAFTrucks is multiplying their own production value with factor five overthe value system.

IV. NETWORK ORGANISATION: How to express the value from partnersin relation to the network organisation?

Appendix A

177

i. The turnover per capita [T/C] is Euro 571.428 [Euro 4 billion on 7000employees with output 56.250 vehicles]. The T/C expresses the le-verage on the supply chain per employee.

ii. The profit per capita is Euro 42.857,- per employee. The P/C expressesthe benefit the employee is contributing leveraging value chain andcustomer demand.


178

Value drivers and

variables

Market demand

Ms

ttM

Be

Co-development

Costs

IMP

References reviewed

(Clark, ellison et al, 1995); identified market share (Ms), and time to

market (ttM) expressing value to the customer.

(Murman et al., 2002): a lean organisation is more adaptive to market

demand.

(eversheim 2003); direction of the product life cycle (PlC) and as such

value benefit is related to the adoption by customers and market

phase of the product.

3 references reviewed variables found: 1x Ms

(Clark, ellison et al, 1995); identified market share (Ms), and time to

market (ttM) expressing value to the customer.

1 references reviewed variables found: 1x ttM

Market demand: Variables found: 1x TTM and 1x MS

total of 4 references reviewed

(Womack, Jones and roos, 1990); (stonebraker, liao, 2004); elimina-

ting unnecessary activities – waste – and cooperatively integrating and

‘leaning’ the chain of value adding activities eventually should give rise

to ‘lean enterprises’.

(Hicks, 2007);the lean manufacturing philosophy provides a focused

approach for continuous process improvement and targets a variety of

tools and methods to bring about such improvements.

3 references reviewed no variables found

(Womack, Jones and roos, 1990); supplier involvement with develop-

ment of systems.

(Clark, ellison et al, 1995); supplier participation ratio (s) expressing

investing in co-development with suppliers.

(das, narasimhan ,2000); purchasing and supply management are re-

lated to value creation.

3 references reviewed variable found: 1xIMP

Co-development: Variable found: 1xIMP


Appendix B: Literature research

Table 48: Grouping references on lean manufacturing along value drivers

Appendix B: 1.1

Appendix B

179

Co- production

PMP

OEM-company value

network position

t/C, P/C

(Womack, Jones and roos, 1990); a manufacturer, operating in a kei-

retsu, purchases a relative high percentage of their products from sup-

pliers.

(Clark, ellison et al, 1995); the detail control (dC) ratio: this ratio indi-

cates the fraction of parts that is developed entirely by car manufactu-

rers, and reflects the participation of the supplier with the

co-production of parts to recoup investments made.

(Womack and Jones, 1996); from the total production value toyota

contributes 27% of the production value, the value in the supply chain

allocated is 73%. toyota leverage production value on suppliers with a

PMP of 110/27=3.33

(Arnold, 2000); the effect of re-designing processes with value added

focus is mostly the reduction of own manufacturing activities.

(nellore et al., 2001); cost based global sourcing is a threat to lean

supply for complex products.

5 references reviewed variable found: 2x PMP

Co-production: Variable found: 2x PMP


(Womack, Jones and roos, 1990); (stonebraker, liao, 2004); elimina-ting unnecessary activities – waste – and cooperatively integrating and‘leaning’ the chain of value adding activities eventually should give riseto ‘lean enterprises’.(karlsson and Ählström ,1996); lean enterprise focuses on procure-ment manufacturing, distribution and development.(Chapman et. al., 1998); purchasing and supply management beco-mes competitive advantages. (van der veen and robben, 2000);the lean manufacturing philosophyis about building effective supply and demand networks to produceproducts. (Burt, dobler, starling, 2003); supply management becomes a corecompetence, suggesting the value involved is of primary importancewithin the value chain, system and network.(Choi and krause, 2006); building a competitive supplier network is akey lean manufacturing principle. By identifying the pull of the end cus-tomer and by adding value to the product or service, requirements forsuppliers can be extracted. these requirements comprise transactioncosts, supply risk, supplier responsiveness, and supplier innovation . (lowell.B.l, 2007); effectiveness of the employee can be expressed bythe profit per capita securing continuity of the enterprise. From a leanperspective the value per capita relates with value add versus nonvalue add in which the employee is the value driver.(Patneaude, s.M., Bozdogan, k. ,2008); shows that practices from thetoyota Production system regarding networks are useful for the aero-space industry to generate value.

Value network position: Variable found: 1x P/C


Lean manufacturing: Total number of variables found: 6



180

Variables

Market demand

Ms

ttM

Be

References reviewed

(Cooper et al., 1997); in the 1980s supply Chain Management (sCM)

emerged as a new, integrative philosophy to manage the total flow of

goods from suppliers to the ultimate user in respect of customer demand.

(leifer et. al., 2000); are advocating value can be created by radically

change the value chain and mine the resources and assets in the sup-

ply chain whilst integrating the customer demand with the chain.

(Mascarenhas et. all., 2004);the supply chain is related to the custo-

mer value chain.

(Fließ, kleinaltenkamp, 2004); discriminate customer dependent and

independent activities influence costs, time and tasks carried out by

the supplier’s employees and the customers itself.

(Gibson et al., 2005);supply chain management (sCM) is a set of ap-

proaches so that merchandise is supplied, produced and distributed at

the right quantities, to the right locations, and at the right time, in the

most cost-efficient way, while satisfying customer requirements.

(sherer, 2005); supply Chain Management was refined by large retailer

Wal-Mart who used customer point-of-sale data to enable continuous

replenishment to satisfy customer demand.

(Ploetner, ehret, 2006); pie growing by supplier involvement, increase

of market share for suppliers.

(Petrick, 2007); the customer driving demand is the economic power in

the chain.

8 references reviewed variable found: 1x Ms

(Cánez, Platts and Probert, 2000); performance measures represent

the metrics used to judge effectiveness and efficiency of the make-buy

decision, metrics are cost savings, capacity utilization rate, time to

market, quality, and flexibility.

(Zsidisin, smith, 2004); reduction of time to market, influence on the

product life cycle.


independent activities influence costs, time and tasks carried out by


(Gibson et al., 2005);supply chain management (sCM) a set of approa-

ches so that merchandise is supplied, produced and distributed at the

right quantities, to the right locations, and at the right time, in the most

cost-efficient way, while satisfying customer requirements.

(ruffo, et al., 2007);if a short time to market is needed, a company can

make and buy at the same time, which will be expensive, but leading to

time advantages.

5 references reviewed variable found: 5x ttM

Table 49: Grouping references on supply chain along value drivers

Appendix B: 1.2

Appendix B

181

Co-development

Costs

Market demand: Variables found: 1x MS and 5x TTM


(Williamson, 1985); already assumed that firms would engage in co-

operative relationships in order to minimize their transaction costs.

(Cánez, Platts and Probert, 2000); performance measures represent

the metrics used to judge effectiveness and efficiency of the make-buy

decision. Metrics can be cost savings, capacity utilization rate, time to

market, quality, and flexibility.


independent activities influence costs , time and tasks carried out by


(Gibson et al., 2005);supply chain management (sCM) a set of approa-

ches so that merchandise is supplied, produced and distributed at the

right quantities, to the right locations, and at the [d]right time, in the

most cost-efficient way, while satisfying customer requirements.

(Bozdogan et al., 1998); success factors that would contribute to the

supplier involvement are target costing, investments in development by

suppliers.

(Bonaccorsi, lipparini, 1994);( Zsidisin, smith, 2004); (Hoegl, Wagner,

2005); (leenders et al., 2006);partnerships with strategic suppliers

have influence on, increased product quality, increased control over de-

velopment costs-reduced development costs, conservation of resour-

ces, access to technology, competencies, expertise of the supplier,

reduced risk.

(van echtelt et al., 2004); (Zsidisin, smith, 2005); benefits (or the lack

thereof) have been commented on, several studies have summarized

the drawbacks of supplier involvement Increased relationship costs

(due to incorrect level of supplier involvement, selection of incapable

suppliers, improper sequencing of tasks), organizational resistance,

diffusion or loss of knowledge (due to sharing of intellectual property,

trade secrets, implicit know-how),chance of lock-in by supplier’s tech-

nology.

(Birou, Fawcett, 1993); (trent, Monczka, 2003);globalization, deregula-

tion, and design modularization stimulated firms to reduce operational

cost by tuning their purchasing function to global sourcing.

(smith and tranfield, 2005); prime contractors are reducing their sup-

plier base to reduce coordination complexity for cost benefit.

(rossettie and Choi, 2005); the aerospace industry is entirely cost fo-

cused.

(Choi and krause, 2006);reducing supply base complexity by relentles-

sly reducing the number of suppliers may be a cost efficient approach

but may potentially reduce the oeMs overall competitiveness. redu-

cing supply base complexity therefore includes optimization of the

number of suppliers, degree of differentiation and level of inter-relati-

onships among these suppliers .

(Ploetner, ehret, 2006); with purchasing switching to sourcing supply

chain members started co-operating hence reducing costs.


182

IMP

Co- production

PMP


(lamming, 1993); talented suppliers are characterized by the following

three factors: able to integrate technologies for their subsystem, able

to coordinate and manage their supply chain.

(Bozdogan et al., 1998); success factors that would contribute to the

supplier involvement are target costing, investments in development by

suppliers.

(novak and eppinger, 2001); modularisation in design heightened the

ability of an oeM to determine the product architecture with firms in

the supplying tiers responding to an oeM architecture and product fea-

ture set specifications.

(Phaal, 2003);trM frameworks are used for strategic and long-range

planning to explore and communicate relationships between partners

evolving and developing markets, products and technologies over time.

(teng, 2003); collaboration with competitors is established to pursue

enhanced market power, joint r&d, pre-empt similar alliances, econo-

mies of scale, or power against suppliers.

(Appelqvist et al., 2004); building a supplier network is a challenging

task for the oeM to match product design and supply chain design.

(kandybin and kihn, 2004); found that companies would like to inc-

rease the design work placed at suppliers from an average of 10 per-

cent to almost 40 percent.

(Zsidisin and smith, 2005); early supplier involvement typically occurs

with design partners and is frequently used in new product develop-

ment for complex products to manage supply risk.

(Hoegl and Wagner, 2005); review different researches that point out

that positive supplier involvement in itself is difficult to realize in pro-

duct development.

(kakabadse and kakabadse, 2005); outsourcing is used for a variety

of activities, including core processes such as product development

and production.


Co-development: No variables found


(kraljic, 1983); there is a shift from many to just a few (strategic) sup-

pliers.

(Christopher and towill, 2000); researchers observed that during the

last years, competition in the manufacturing industry changed from

competing companies to competing supply chains.

(Christopher and Jüttner, 2000,( Zauberman, 2003). oeM companies

must balance outsourcing of innovation and production with the inc-

reasing lock-in effect.

(Gelderman & van Weele, 2005); kraljic’s portfolio approach, allows

for sufficient guidance for developing effective purchasing and supplier

strategies. new insights into the relationship between the usage of

Appendix B

183

OEM-company value

network position

t/C , P/C

portfolio models and purchasing sophistication are provided.

(Arnold, 2000); specificity of assets in relation with supply rationalisa-

tion.

(Bozdogan et al., 1998);(tidd et al., 2001); (Petersen et al., 2003);

(smith, tranfield, 2005); (Petersen et al., 2005); (Hoegl, Wagner,

2005); (Wagner, Hoegl, 2006); (schiele, 2006) (van echtelt et al.,

2004); (Zsidisin, smith, 2005); (Johnsen et al. 2006);the enablers of

early supplier involvement are described by numerous researchers: ca-

reful supplier selection on capabilities, culture, long-term commitment

by management to the partner and the programme, well-established

performance measures beforehand, shared responsibility for design

and production, participation of suppliers on decision making, integra-

ted product teams, open and balanced communication in terms of fre-

quency and intensity, open sharing of information, mutual support &

accommodation, co-location.

(kakabadse and kakabadse, 2005);outsourcing is used for a variety of

activities, including core processes such as product development and

production.

(leenders et al., 2006); prime contractors are seeking partnerships

with their suppliers as they view partnerships as an alternative to

“make” in the make-or-buy decision.


Co-production: No variables found


(Cox et al. (2001); three flows through a supply chain are money, infor-

mation and physical goods.

(Hakansson and snehota, 1989); capability to acquire resources

through exchange with other parties in value nets.

(Williamson, 1998, 2005); the structure of a firm can be related to the

frequency, uncertainty, and asset-specificity of the transactions.

(Christopher, Jüttner, 2000); competition between firms gradually

shifts towards competition between supply chains.

(Burt, dobler, starling, 2003); the world class purchasing function is re-

presented by developing and implementing commodity strategies and

supply management as a core competence.

(torkkeli, 2002); the application of the technological capabilities of

r&d to produce new business opportunities depends on complex coor-

dination processes. these are an important part of the organizational

dimension of core competencies.

(Buxton, 2005); a company uses joint venture alliances with suppliers

to enhance its supply base differentiation to enter a new market by co-

specialization establishing vertical relationships in the value chain and

increase entry barriers excluding competitors.

(niezen, Weller, 2006); supply management elevates from an operatio-


184

nal function to an integral part of business strategy.

(Petrick, 2007); oeMs become large scale system integrator making

use of first, second and third tier suppliers.

(Phaal, 2009); the ability of a company to use technology road map-

ping is considered as a core competence as it is vital for a company to

determine a correct strategy.

(van Assche, 2008); in the process of considering outsourcing, a busi-

ness must concurrently make a two-dimensional choice: whether to

produce its components in-house or to outsource its production to ano-

ther firm, and whether to make its components domestically or off-

shore.

(Bengtsson and Berggren, 2008); important drivers for companies to

consider outsourcing are globalization and the emergence of high-

growth, low-cost economies in Mexico, eastern europe and Asia.

outsourcing is subdivided by meaning geographical relocation.

Value network: No variables found


Supply chain: Total variables found: 6

total of references reviewed: 71

Appendix B

185

Appendix B: 1.3

Variables

Market demand

Ms

ttM

Be

Co-development

References reviewed

(Gemünden et al., 1996);customer integration with the value system

(Perrons, Bozdogan, 1997);the principle of technology push not consi-

dering customer demand pull can be a threat to companies.

(von Hippel, 2005); expresses that innovation is not only related to

technology and products but to customers having influence on what

they want as lead users starting the PlC.

(Gassmann, Wecht, 2005); forward integration with the customer is im-

perative to respond to the increased demand for customization.

(Johnsen et al. (2006); suppliers gain broader access to the market to

launch innovations.


(langerak,Peelen,Commandeur ,1997); firms operating in low turbu-

lent environment realize the shortes development time and shortest

time to market, firms with well developed internal and external inter-

faces have the highest share of new products and quickest reaction

times to changes in competitor behavior.

eversheim (2003); the direction of the product life cycle value and

time is related to the life time phase of the product.

odenthal et al. (2004); time opportunity, market premium by involving

co-innovating partners

von Hippel (2005); expresses that innovation is not only related to

technology and products but to customers having influence on what

they want as lead users starting the PlC.

Moore (2005) ;value time curve, fast innovation by focus on a limited

number of projects.

Mohr et al. (2005); link collaboration forms and the types of innovati-

ons to the product life cycle.

6 references reviewed variables found: 5x ttM

(langerak,Peelen,Commandeur ,1997); firms operating in low turbu-

lent environment realize the shortest development time and shortest

break-even time, firms with well developed internal and external inter-

faces have the highest share of new products and quickest reaction

times to changes in competitor behaviour.

1 reference reviewed variable found: 1x Be

Market demand : Variables found:

total of 12 references reviewed 5x TTM and 1X BE

Table 50: Grouping references on open innovation along value drivers


186

Costs

IMP

(Grandori, soda, 1995); (Gemünden et al., 1996); (reed, Walsh,

2002); (tracey, Clark, 2003); (Hoegl et al., 2003); (tracey, Miotti, sach-

wald, 2003); (Caloghirou et al., 2004); (Pittaway et al., 2004); (Pyka,

2002); (Perks, Jeffery, 2006), mentioned advantages of co-innovation;

sharing risk, sharing cost, sharing resources, access to complementary

knowledge and skills, increase speed to market, increase scale of

reach, access to current and future market information, sharing infor-

mation on network environment, improved trust and social cohesion, –

when public institutions are involved – access to public funding, and

learning innovative work practices from other organizations.

odenthal et al., (2004); co-innovation is the creation of a partnership

between companies and/or institutes on sharing knowledge, cost and

benefit in order to create unique technology and/or a unique product,

which they could not develop or produce separately with the goal to

create and flow value. there is an market opportunity premium due to

a time premium which effects in faster value and more value.

(Choi and krause, 2006);building a competitive supplier network has

positive influence on transaction costs, supply risk, supplier responsi-

veness, and supplier innovation.


(reed, Walsh, 2002);current collaborations with suppliers on new pro-

duct developments are based on programme-related issues and do not

span the longer term needed for technology alignment.

(Bossink, 2002); collaboration has the goal to strengthen the competi-

tive position of each participant in this collaboration.

(Grandori, soda, 1995); (Gemünden et al., 1996); (Clark, 2003); Hoegl

et al., 2003); (tracey, Caloghirou et al., 2004); (Pittaway et al., 2004);

(Pyka, 2005); mentioned advantages of co-innovation; sharing risk,

sharing cost, sharing resources, access to complementary knowledge

and skills, increase speed to market increase scale of reach, access to

current and future market information, sharing information on network

environment , improved trust and social cohesion

(Miotti, sachwald, 2003); odenthal et al.,(2004);competitiveness firms

need to invest in innovation.

(van echtelt et al., 2004);supplier involvement on innovation can help

the integrator to differentiate its products and to gain a competitive

edge over the competition.

(Pritchard and MacPherson, 2004).the total launch investment costs

of the B787 are estimated on $ 13, 4 billion, Boeing carries approx.

$4, 2 billion the partners and government invests $9.2 billion. Boeing

leverages investment in innovation- development on suppliers. the “in-

vestment multiplier appears as “IMP” for Boeing is 13, 4 / 4, 2= 3, 3.

the value chain partners are benefiting from an initial investment by

Boeing of $4, 2 Billion. the investment is multiplied with factor 3,3

throughout the chain

odenthal et al., (2004); co-innovation is the creation of a partnership

Appendix B

187

Co- production

PMP

between companies and/or institutes on sharing knowledge, cost and

benefit in order to create unique technology and/or a unique product.

there is an market opportunity premium due to a time premium which

effects in faster value and more value.

(kandybin and kihn, 2004);increase of design work shifted towards

suppliers.

Hoegl and Wagner (2005); supplier involvement in innovative projects

has received very little research attention.

Choi (2005); there is a negative quadratic relationship between com-

plexity and supplier innovation. Choi (2005) has found in this respect

that complexity is positively related to the total transaction costs, i.e. if

the complexity decreases so do the transaction cost.

(Johnsen et al., 2006);supplier involvement on innovative processes

has mostly dealt with suppliers tasked with technology application, and

not tasked with technology development . In this scheme, suppliers

also gain broader access to the market to launch new innovations.

(Choi and krause, 2006);building a competitive supplier network has

positive influence on transaction costs, supply risk, supplier responsi-

veness, and supplier innovation.

(docherty, 2006);of-the-shelf technologies can be sold, or licensed, to

other companies and actively add value to the company’s activities.

new technologies can be developed in house and spun out later to

partners.

Perks, Jeffery (2006); disclosing information can help foster external

innovation and appears to act as a key mechanism safeguarding the

third party’s freedom to innovate especially during the early phases of

innovation network configuration internal (intra-firm) networks ties be-

tween r&d and marketing should be strong to help reduce uncertain-

ties and speed up the conception stage.

Petrick (2007); “for truly compelling innovations to reach the end po-

duct, intellectual property (IP) often must be shared,

Bengtsson and Berggren (2008), outsourcing is considered as the ve-

hicle for innovation.

22 authors reviewed variable found: 1x IMP

Co-development: Variable found:

total of 34 references reviewed 1x IMP

(Birou and Fawcett, 1993).the sourcing strategy is critical for a compa-

ny’s competitiveness in terms of quality, dependability, flexibility, and

innovation.

lamming (1993) suggests that talented suppliers are potentially more

innovative or more actively involved in innovation.

Grandori, soda (1995) and Harland et all. (2004) an increasing

amount of long term agreements with suppliers, increased supplier

responsibility for complete subsystems as prime contractors move

away from in-house production and focus on assembly & integration ,


188

OEM-company value

network position

t/C, P/C

involvement of suppliers in development programmes forging of co-in-

novation networks .

(Christopher and Jüttner, 2000, Zauberman, 2003). oeM companies

must balance outsourcing of innovation and production with the inc-

reasing lock-in effect

(Wynstra et al., 2003); an increasing focus on involving suppliers in the

development of products is looked for by companies with the potential

benefit to align research strategies with key suppliers.

(Petrick, Purdam and Young, 2004); recently studied four industrial

sectors to identify patterns of economic and innovation power: aero-

space, automotive, building materials, and medical devices in relation

with supply chain.

8 authors reviewed no variables found

Co-production: No variables found


Prahalad,ramaswamy (2004); the joint efforts of the consumer and

the firm – the firm’s extended network and consumer communities to-

gether – are co-creating value through personalized experiences that

are unique to each individual consumer.

Freeman (1991); lists cooperative r&d efforts from tight to loose: joint

ventures and research corporations, joint r&d agreements, contrac-

tual arranged exchange of r&d results, direct investment, licensing of

technology , subcontracting, research association, participating govern-

ment sponsored programs, the building up of a common r&d infra-

structure, to the informal exchange of know-how between scientist and

engineers of firms in a network.

(Möller, svahn, 2003); firms co-create new resources through interna-

tional business nets .

Chesbrough (2003); states that innovation should be viewed as the

product of a new technology, product or process and the business

model to capture its value. the right business model for a certain tech-

nology might find the best path to market outside the company. Multi-

ple paths to market can be e.g. in the form of spin-offs or licensing IP

to others creating opportunities to capture value on projects that would

disappear on the shelf otherwise.

George, Works, Watson-Hemphill (2005); the chief innovation officer is

necessary to manage innovation.

Menzel, Aaltio, Ulijn, (2007);technology has an extensive impact on the

society and economy, and the organisation’s ability to continuously in-

novate its products and business model is essential to the future suc-

cess.

Andrew and sirkin (2007); state that true innovation must lead directly

or indirectly to increased profits driven by customer demand.

Value network position: no variables found


Open innovation: Total variables found:

total of 31 references reviewed 1x IMP and 5x TTM

Appendix C

189

Appendix: C.1. Financial data on automotive industry to calculate the variables T/C, P/C and RD/C and figures 28, 29, 30, 31, 32, 33. Currency in $US

Appendix C: Research data on

automotive and aerospace companies


190

Appendix C

191


192

Appendix C.2 Data for calculating variables T/C, P/C and R&D/C forthe aerospace industry, figures 28, 29, 30, 31, 32, 33. Currency in $US.

Appendix C

193


194

Appendix C

195


196

Appendix C

197


198

Appendix C

199


200

Appendix D: Research data

value-time curves

Table 52: Financial data Embraer 170/190

Table 53: Value-time curve data for Embraer

Appendix D

201

Table 54: Financial data Dassault Falcon 7X

Table 55: Value-time curve data Dassault Falcon 7X


202

Summery

203

Research motivation With the creation of new aircraft products; Embraer E-170/190, Dassault 7X,Airbus A380 and Boeing B787, aerospace original equipment manufacturers(OEMs) involve suppliers not only with the co-production of aircraft sub sys-tems, but also with the entire development of sub systems, like fuselage andwings. Hence, the value to create and produce aircraft is shifting for a majorpart from the aerospace OEM company towards the suppliers. In fact, the ae-rospace OEM levers value on suppliers for the creation of new value, which isthe subject of this thesis: “value-leverage”.

Value-leverage is the capability of an aerospace OEM-company to lever valueon suppliers for the creation of new aircraft by co-development and co-pro-duction. The objective of this dissertation is to measure value-leverage per-formance by aerospace OEMs. It is of interest to research this phenomenon ofvalue-leverage as the aerospace industry is characterized by high capital in-tensiveness and development risk involved with the creation of aircraft.

The principle of a “lever” is used to explain the phenomenon of value-lever-age. The aerospace OEM functions as pivot, balancing demand and supply.The pivot position or value-leverage position shifts due to the down flow ofvalue from the OEM towards suppliers. The value-leverage position of the ae-rospace OEM-company depends on the degree of value-leverage on supplierson one side and the customer demand for aircraft at the other side. The goalof this research is to know if variables can be found to express and measurevalue-leverage by the aerospace OEM-company. By applying the variablesfound, the model on value-leverage was pre-designed. The variables found areproduct or company related.

Research findings: product relatedBy exploratory interviews and literature research, variables expressing value-leverage on product level are found along value drivers; market demand, co-development and co-production. The found variables are:

Market demand

- Market Share (MS) is the percentage of the market, which is covered by

Summery


204

the specific aircraft type compared to its direct competitors, - Time To Market (TTM) is the time an aerospace OEM needs to deliverthe first aircraft, qualified and tested, to the market, expressed in years,

- The Break-Even quantities (BEQ) are the number of aircraft necessary torecover the own investments, by delivering aircraft to customers,


Co-development

- The Investment Multiplier (IMP) is defined as the total aircraft develop-ment investment divided by the development investment of the aero-space OEM-company.

Co-production

- The Production Multiplier (PMP) is defined as the total production valueof the aircraft divided by the production share of the aerospace OEM-company.

Case research product levelThe variables found are applied at the following aircraft cases: Embraer-E-170/190, Dassault 7X, Airbus A380 and Boeing B787. All variables are appli-cable to aircraft cases. The outcomes are presented in table 1.

As the cases A380 and B787 are disputed by the WTO due to governmentsubsidies, these case were left out for further research. For two cases, EmbraerE-170/190 and Dassault 7X, the value-leverage position is determined and thevalue time-curve was plotted to know if the variables had a relation throughtime and to compare cases on the value-leverage performance.

Table 1: Comparison of variables all cases on product level

Variable E-170/190 Dassault 7X B787 A380

Market Demand

Market share [Ms] %time to Market [ttM] [y]Bet [y] BeQ [ac]Co-development

leverage on r&d investment[IMP]vlP-Cdleverage on r&d investment[IMP] discounted for loansCo-production

leverage on production[PMP]vlP-CP

4259

503

1,48

0,68

2,760,36

16,77

12218

1,38

0,73

2,140,47

748?

525

(3,33)

1,76

3,99

6113?

> 470

1,44

1,71

2,48

Summery

205

Measuring the value-leverage position (VLP) on product level Value-leverage is measured by preliminary testing the variables on the casesE-170/190 and Dassault 7X. The value-leverage position is calculated by takingthe inverse of the IMP or PMP, to position the VLP value at the right side ofthe pivot, which has the value one [1] to balance demand and supply.

The VLP on co-development (VLP-CD) is calculated by 1/IMP =1 / 1,48 = 0,68. The system is in balance by the demand for development expressed by the in-vestment in new aircraft development which is US$926 million. For the caseDassault 7X the total investment in development is US$962 million. The VLP-CD = 1 / 1,38 = 0,73 (dotted line). The VLP on Co-production (VLP-CP) iscalculated by 1 / PMP = 1 / 2,76 = 0,36. The system is in balance by the marketdemand expressed by the number of aircraft or value to break-even, which is503 aircraft. For Dassault 7X (dotted line), the VLP-CP = 1 / 2,1 = 0,47. ForDassault 7X the market demand to break even is 218 aircraft. Embraer has ahigher value-leverage on co-development and co-production compared to Das-sault, as Embraer scores lower values on the VLP-CD and VLP-CP.

Figure 1: Value-Leverage Position for aircraft E-170/190 for co-development

Figure 2: Value-leverage Position for aircraft E-170/190 for co-production


206

Value time-curveThe effect of value-leverage is visualized by plotting the value-time curve basedupon the IMP variable for both cases. It seems that there is a relation betweenthe degree of value-leverage and time. Higher value-leverage on co-develop-ment and co-production by Embraer E-170/190 measured by the VLP-CD andVLP-CP generates more value in shorter time (upper line for Embraer andlower line for Dassault).

Preliminary value-leverage model for aerospace OEM productThe degree of value-leverage is expressed for co-development and co-produc-tion by measuring the value-leverage position. Embraer E-170/190 has a highervalue-leverage performance compared to Dassault 7X. The value-leverage inc-reases when the VLP moves to the right side of the balance.

The value time-curve analysis shows that higher value-leverage on co-devel-opment and co-production, showed in the case Embraer E-170/190, generatesvalue:- “faster”: in shorter time (Break-Even and TTM), - “cheaper”: with lower own investments, - and “better”: by creating more value regarding customer demand in com-parison with the case Dassault 7X.

The negative value expressed by the Net Cumulative Value Tipping Point(NCV-TP) is for Embraer E-170/190 US$ -/- 465 million with BET of 9 yearsin comparison with Dassault7X with a NCV-TP of US$ -/-700 million andBET of 12 years.

Figure 3: Dassault 7X and Embraer E-170/190 value time-curves based upon IMP

Summery

207

The value-leverage variables IMP and PMP are related to each other; if thereis IMP, there is PMP and vice versa. The PMP is higher, compared to the IMP.The dependencies between variables are not known.

Although variables are applicable to aircraft development and relations be-tween variables are found, the nature of the variables by cause and effect ordependencies is not confirmed. The variables MS, BEQ, BET, BEQ, TTM,IMP and PMP are interrelated and form a preliminary value-leverage modelexpressing value-leverage on product level (figure 4).

Research findings: aerospace OEM-company relatedThe variables found at aerospace OEM-company level have the capita as de-nominator in common. The employee or capita takes into account, from alean manufacturing perspective, the value-add versus non-value-add and assuch reveal the waste in the organisation. The capita also refers to supply chainmanagement by identifying the shift of value from the focal OEM-companytowards the supply chain regarding production activities. By outsourcing pro-duction activities the employee base of the OEM-company reduces, hence thevalue-leverage on the supply chain increases. The financial data used are turn-over, profit (earnings before interest and taxes, EBIT), research and develop-ment (R&D) expenditures and finally the number of employees. The EBITor operating income is taken to eliminate effects on different local tax regimes.The variables found expressing value-leverage for an aerospace OEM-companyare:

OEM Value Network Position (VL-NP)- The Profit per Capita: the P/C gives an outlook on a company’s abilityfor business continuity. A high P/C reflects that a company is able to addmore customer value. The P/C is based upon the EBIT.

Figure 4: Preliminary Design of the Value-Leverage Model for Aerospace OEM Product


208

- The Research and Development expenditures per Capita (RD/C): theRD/C provides information about the focus on technology. The RD/C isan indicator of the ability to leverage on its value system in order to de-velop new products.

- The Turnover per Capita (T/C): the T/C is the variable indicating theability of an OEM-company to leverage value on the supply chain andnetwork.

Variables found were applied to seven aircraft OEM companies: EADS, Boe-ing, Lockheed Martin, Embraer, Bombardier, Northrop Grumman, GeneralDynamics, to determine the value-leverage network position. The variableshave relations through time and form the preliminary value-leverage modelon aerospace OEM-company level (figure 5). By taking the average R-valueof the combined variables per aerospace OEM (sub section aircraft OEM), thevalue-leverage network position of the specific aerospace OEM is measured(figure 6). Boeing has a score of VL-NP=0,80 which suggests the value-lever-age position reflects a more stable value flow compared to Embraer, with avalue-leverage position of VL-NP=0,56. EADS scores the lowest from thegroup with VL-NP=0,41.

Preliminary value-leverage model for aerospace OEM-company To pre-design the value-leverage model on company level, data from 23 aero-space OEM companies covering a period of 12 years, are analyzed to know ifthe variables were statistically significant. The variables are preliminary testedin comparison with 12 automotive OEM companies. What stands out fromthe preliminary test that was performed in order to investigate the historicalcorrelation of the value-leverage variables, as derived T/C, P/C, and RD/C,was that correlation for both samples, automotive and aerospace persisted.

Figure 5: Preliminary Design of the Value-Leverage Network Position Model for Aerospace

OEM Company Level

Summery

209

Research contributionThe research and development of the value-leverage models on product andcompany level give insights about how value-leverage by aerospace OEM com-panies can be measured, by the new variables found. On product level the newvariables IMP and PMP are complementary to the already existing variablesMS, BEQ, BET and TTM. With the new variable IMP the value time-curve isuseful to show the effects of value-leverage by co creating value with suppliers.

On aerospace OEM-company level, the variables, with the capita as denomi-nator, refer to value adding and non-value adding activities by the employeesand disclose of economic waste in the value system. The three variables P/C,RD/C and T/C refer to stability of continuous flow by just in-time suppliesfrom the supply base and delivering value according to customer demand.Theory regarding lean manufacturing, supply chain, open innovation andvalue chain are now connected by the phenomenon of value-leverage. Value-leverage performance can be determined by expressing and comparing thevalue-leverage network position of an aerospace OEM-company.

New PhD research projects departing from value-leverage thinking have beenstarted, to create further insight in the supply base and the tier structure froman airline company perspective.

Managerial contributionThe aircraft industry has difficulties to judge R&D efforts, and to turn theavailable R&D efforts into beneficial development of aircraft, matching suf-ficient demand. It seems there is an unbalance in some cases between R&Defforts and benefit for aircraft manufacturers as sub group of the aerospace in-dustry. Aerospace OEM companies allocating a fixed percentage of the turn-over for R&D are possibly over-processing technology development.

The variable IMP is of interest to express the level of suppliers sharing invest-ment in engineering-development. This research contributes to decision ma-king on the investment to be done for new aircraft development.

Figure 6: Preliminary Value-Leverage Model for Aerospace OEMs


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New research on “Value levers” (Fokker 2010) showed that the IMP variableis one of the value levers to take into account with estimating the value formovables, sub systems of aircraft wings for customers such as Airbus.

Societal contributionOEMs and suppliers working more closely together can encounter up’s anddown’s in business, this probably reduces the government’s expenditure on so-cial security, reducing waste in the economic system. Further research is pre-ferable to understand the mechanism of these economic systems.

However, subsidies to the aircraft industry occur frequently, as found in casesof A380 and B787. Governments should perform further research on how tosupport advanced high tech companies in commercial aerospace industry, froman all stakeholders benefit perspective, and less focused on the OEM-companyin particular.

Nederlandse samenvatting

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OnderzoeksmotivatieIn de vliegtuigindustrie deed zich gedurende de periode 2000 – 2008 een in-teressante trend voor met de ontwikkeling van nieuwe vliegtuigtypes: de Boe-ing B787, de Airbus A380, de Embraer 170/190 en de Dassault 7X en deinschakeling daarbij van toeleveranciers. De vliegtuigbouwers, ook wel aero-space original equipment manufacturers of aerospace OEMs genoemd, betrok-ken de keten van toeleveranciers al bij de productie van onderdelen. Deverandering is dat aerospace OEMs nu ook toeleveranciers hebben betrokkenbij de ontwikkeling van complete sub systemen zoals vleugels en rompsecties.De rol van de aerospace OEM is dus aan het veranderen. Van een bouwer vanvliegtuigen naar een creator en integrator van systemen.

Om een nieuw vliegtuig te ontwikkelen zoals een Boeing B787 of een AirbusA380 is er 12 tot 15 miljard dollar nodig. Om dit te kunnen financieren be-trekken de aerospace OEMs de toeleveranciers daarbij. De aerospace OEM in-vesteert zelf een beperkt gedeelte, de toeleveranciers nemen ook een risicodragend deel, op basis van de verwachte vraag naar het nieuwe type vliegtuig.In feite genereert de aerospace OEM middels een hefboom effect het beno-digde kapitaal. De vraag is nu hoe dat hefboom effect te meten is, zowel in tijdals in waarde, vanuit de aerospace OEM gezien zowel op product als bedrijfs-niveau. Het beantwoorden van deze hoofdvraag is het onderwerp van deze dis-sertatie.

Onderzoek van theorie en naar de praktijk vormt de basis van deze dissertatie.Door analyse van literatuur betreffende lean manufacturing, supply chain,open innovatie en de OEM als organisatie in relatie tot “waarde in de keten”,zijn de volgende drivers gevonden: 1) marktvraag 2) co-ontwikkeling en 3)co-productie. De variabelen die zijn gevonden, hebben betrekking op twee ni-veaus: A) productniveau, met toepassing van de variabelen op ontwikkelingen productie van vliegtuig typen, en B) variabelen toegepast op aerospaceOEM bedrijven. Met de gevonden variabelen is het hefboomeffect gemeten.

A. Onderzoeksresultaten: productniveauVariabelen op productniveau zijn toegepast op vier cases: Embraer E170/190,Dassault 7X, Airbus A380 en Boeing B787. Om te onderzoeken of de varia-



212

belen een relatie met de factor tijd hebben is er een waarde-tijd grafiek ge-maakt. De cases en de waarde-tijd grafiek hebben onderbouwd dat de varia-belen onderling gerelateerd zijn en een eerste model vormen. De gevondenvariabelen zijn volgens de value drivers als volgt gegroepeerd:

Marktvraag

- Market Share (MS) is het percentage van de totale markt dat door eenbepaald vliegtuig type wordt ingenomen,

- Time to Market (TTM) is de tijd die nodig is om het eerste vliegtuig datnieuw ontwikkeld is, aan de klant te leveren,

- Break-Even Quantity (BEQ) is het aantal vliegtuigen dat nodig is om deinvesteringen in ontwikkeling te recupereren en

- Break-Even Time (BET), is de tijd die nodig is om investeringen in pro-duct ontwikkeling te recupereren.

Co-ontwikkeling

- Investering multiplier (IMP), dat is het quotiënt van de totale investeringin het vliegtuig en de investering door de aerospace OEM.

Co-productie

- Productie multiplier (PMP), dat is het quotiënt van de totale productie-waarde van het vliegtuig gedeeld door het eigen productie aandeel om hetvliegtuig te bouwen.

Case studie onderzoekUit de analyse van de vier case; Embraer E-170/190, Dassault 7X, Airbus A380en Boeing B787 blijkt dat alle variabelen van toepassing zijn op de aerospacecases. De uitkomsten zijn weergegeven in tabel 1.

Table 1: Vergelijking van cases

Variable E-170/190 Dassault 7X B787 A380

Marketvraag

Market share [Ms] %time to Market [ttM] [y]Bet [y] BeQ [ac]Co-ontwikkeling

leverage on r&d investment[IMP]vlP-Cdleverage on r&d investment[IMP] discounted for loansCo-productie

leverage on production[PMP]vlP-CP

4259

503

1,48

0,68

2,760,36

16,77

12218

1,38

0,73

2,140,47

748?

525

(3,33)

1,76

3,99

6113?

> 470

1,44

1,71

2,48


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Omdat de cases B787 en A380 onderwerp van onderzoek zijn door de WorldTrade Organisation naar overheidssubsidiering wat concurrentievervalsing inde hand kan werken zijn deze cases buiten het vervolgonderzoek naar dewaarde-tijd grafiek gelaten. Voor twee cases, de Embraer E-170/190 en de Das-sault 7X, zijn de value-leverage positie en de waarde-tijd curves onderzochtom na te gaan of de variabelen een relatie naar de factor tijd hebben.

Waarde-leverage positie (VLP)De hefboomwerking is weergeven in de figuren 1 en 2. De neutrale midden-positie heeft waarde [1], er is dan geen sprake van waarde-leverage. De waarde-leverage positie voor de cases E-170/190 and Dassault 7X is bepaald door deinverse van de IMP respectievelijk de PMP te nemen. Hierdoor komt de VLPaan de rechter zijde van het draaipunt met waarde 1 terecht en drukt de gra-datie van waarde-leverage uit bij balans tussen marktvraag en aanbod van toe-leveranciers. Voor het geval van Embraer E-170/190 is de VLP-CD voorco-ontwikkeling bepaald op 1/IMP = 1 / 1,48 = 0,68. Het systeem is in balansdoor marktvraag voor investering in ontwikkeling van een nieuw vliegtuigvan US$926 miljoen. Voor het geval van Dassault 7X is de totale investeringUS$962 miljoen. De VLP-CD voor Dassault 7X is 1 / 1,38 = 0,73 (gestippeldelijn). De co-productie (VLP-CP) voor Embraer E-170/190 is berekend op 1 /PMP = 1 / 2,76 = 0,36. Het systeem is in balans door marktvraag naar het aan-tal van 503 E-170/190 vliegtuigen waarmee break-even gedraaid wordt. Voorde case Dassault 7X (gestippelde lijn), is de VLP-CP = 1 / 2,1 = 0,47. Het sys-teem is in balans met marktvraag naar het aantal van 218 Dassault 7X vlieg-tuigen. Embraer heeft een hogere waarde-leverage waarde voorco-ontwikkeling en co-productie in vergelijking met Dassault.

Figure 1: Waarde-Leverage Positie van E-170/190 voor co-ontwikkeling


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Waarde-tijd grafiek Het effect van waarde-leverage is gevisualiseerd (figuur 3) voor beide gevallenmiddels de waarde / tijd curve op basis van de IMP waarden. Het blijkt dat ereen relatie is tussen de gradatie van waarde-leverage en de waarde die in detijd wordt opgebouwd. De hogere waarde-leverage positie VLP-CD en VLP-CP, afgeleid van de IMP en PMP, laten voor Embraer een snellere waarde op-bouw in de tijd zien (bovenste lijn) in vergelijking met Dassault7X (onderstelijn). De grafiek laat voor Embraer E-170/190 een maximal negatieve waardeuitgedrukt van US$ -/- 465 miljoen zien in combinatie met een Break-EvenTime van 9 jaar, in vergelijking met Dassault7X met een maximaal negatievewaarde van US$ -/-700 miljoen en een Break-Even Time van 12 jaar.

Figure 2: Waarde-leverage Positie van E-170/190 voor co-productie

Figure 3: Waarde-tijd curves van Dassault 7X en Embraer E-170/190 gebaseerd op IMP


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Preliminair waarde-leverage model voor aerospace OEM produkt De gevonden variabelen zijn van toepassing gebleken op de Embraer E-170/190 en de Dassault7X. Alhoewel de gevonden en toegepaste variabelenrelaties hebben is het niet bevestigd is of er een oorzakelijk verband is tussende variabelen. De variabelen MS, BEQ, BET, BEQ, TTM, IMP en PMP vor-men samen een preliminair model wat waarde-leverage op product niveau uit-drukt (figuur 4).

B. Onderzoeksresultaten bedrijfsniveau Op product niveau is onderbouwd dat samenwerking met de keten door deaerospace OEM een relatie heeft naar waardeopbouw in de tijd. De vraag is ofdat ook gemeten kan worden op aerospace OEM niveau. De verschuiving vanwaarde van de OEM naar de keten ontstaat doordat de productie activiteitenvan de aerospace OEM afnemen en focus ontstaat op creatie van nieuwe pro-ducten en integratie van sub systemen in nauwe samenwerking met toeleve-ranciers in de keten (supply chain). Dat vereist een ander soort organisatiemet een andere bezetting aan mensen. Naarmate een OEM meer de integratorrol op zich neemt zal de eigen productiewaarde dalen en de toegeleverde pro-ductiewaarde stijgen. Het aantal medewerkers zal per saldo dalen omdat deproductie capaciteit naar de keten verschuift, maar de omzet zal gelijk blijven.Dit zorgt ervoor dat de omzet per capita of employee gaat stijgen en kostenkunnen dalen. Dat wordt ondersteund door theorie betreffende lean manu-facturing, supply chain en open innovatie. Vanuit een lean manufacturing per-spectief is de employee verantwoordelijk voor het elimineren vanverspillingen, ook wel “waste” genoemd, om de toegevoegde waarde te latentoenemen. Ook is de employee een maatstaf voor het ontwikkelen van net-werken om waarde mee te genereren. Door inschakeling van de supply chainverschuift waarde naar de keten is er een proces ontstaan om de keten vantoeleveranciers keten te rationaliseren door complexiteit van toeleveringente reduceren middels een “tier”structuur. Hierbij mogen alleen de meest on-derscheidende toeleveranciers nog direct aan de OEM leveren. Door deze“tier” structuur is het mogelijk transactiekosten te laten dalen. Het zou duskunnen zijn dat de OEM die de waarde verschuift naar de keten én de keten

Figure 4: Preliminair Waarde-Leverage Model voor Aerospace OEM Producten (vliegtuig)


216

rationaliseert er meer profijt van heeft dan een OEM die alleen maar waardedoorschuift naar de keten. Vanuit innovatieperspectief is het betrekken vanpartners bij ontwikkeling belangrijk omdat die waarde kunnen toevoegen diede OEM zelf niet heeft en het ontwikkel proces kunnen bekorten. Uit het voorgaande is gebleken dat werknemer als meeteenheid wordt gebruiktom het keteneffect van de OEM te meten. De volgende variabelen zijn ge-vonden die de OEM waarde network positie bepalen.

OEM waarde netwerk positie- winst per capita P/C refererend naar kosten en toegevoegde waarde, hier-voor is de EBIT genomen wat de meest zuivere weergave is van de waardestroom die een OEM genereert, voordat er rekening wordt gehouden metkosten en belastingen.

- research & development per capita RD/C, refererend naar focus op creatievan nieuwe producten / innovatie

- omzet per capita T/C, refererend naar het supply chain en network effect.

De variabelen zijn in eerste instantie toegepast op zeven aerospace OEMs:EADS, Boeing, Lockheed Martin, Embraer, Bombardier, Northrop Grummanen General Dynamics. Door de gemiddelde correlatiewaarde R te nemen, dewaarde-leverage network position (VL-NP) voor een aerospace OEM bere-kend. De gemiddelde R waarde drukt de nauwkeurigheid uit van de score opde variabele. Een hoge correlatie gaat samen met een hoge waarde-leveragenetwork positie in vergelijk met een lage correlatie die een lagere waarde-le-verage heeft. Boeing scoort een VLNP=0,80. Embraer scoort VLNP=0,56 enEADS scoort het laagste van de groep met VLNP=0,41. Een hogere correlatievan de relaties wijzen op een meer stabiele waarde flow in vergelijking meteen lagere waarde-leverage positie. Op basis van de waarde-leverage networkpositie kunnen bedrijven met elkaar vergeleken worden (figuur 5).

Figure 5: Waarde-Leverage Netwerk Positie voor Aerospace OEM bedrijven


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Preliminair waarde-leverage model voor aerospace OEM bedrijfOm tot een preliminair model te komen zijn data afkomstig van een groepvan 23 aerospace bedrijven in een vergelijkende test met een groep van 12automotive bedrijven, genalyseerd met een linear least squares methode overeen periode van 12 jaar (1996-2007), de termijn waarover deze data beschik-baar waren. Het is gebleken dat voor beide groepen de relaties statistisch sig-nificant zijn. Hiermee is onderbouwd dat waarde-leverage gemeten kan wordenvoor aerospace OEMs met de gevonden variabelen en dat de relaties hetwaarde-leverage model op aerospace OEM niveau onderbouwen (figuur 6).

OnderzoeksbijdrageDoor case studie onderzoek naar waarde-leverage op product niveau zijnnieuwe variabelen gevonden, IMP en PMP, die samenwerking met de ketenvan toeleveranciers door aerospace OEMs uitdrukken en deze in relatie bren-gen met bestaande variabelen zoals Market Share, Brean-Even Time / Break-Even Quantity en Time to Market. De mate waarin een aerospace OEMgebruik maakt van waarde-leverage heeft een relatie naar het vermogen vande aerospace OEM om waarde te creëren. De ontwikkeling van het waarde-leverage model is een nieuwe bijdrage aan wetenschappelijk onderzoek omdathet model voor het eerst inzichtelijk maakt hoe aerospace OEMs kunnen pro-fiteren van samenwerking met de keten, maar ook hoe een toeleverancier kanprofiteren van de aerospace OEM bij de co-ontwikkeling en co-productie vanvliegtuigen. Waarde-leverage op de keten verbindt daarmee aspecten uit detheorie van lean manufacturing, supply chain en open innovatie betreffendeco-ontwikkeling en co-productie van vliegtuigen.

Het waarde-leverage effect werkt door op aerospace OEM bedrijfsniveau waar-voor nieuwe variabelen gevonden zijn die waarde-leverage uitdrukken. De va-riabelen stellen de werknemer voor als maatstaf voor het meten vanwaarde-leveage. Aerospace OEMs kunnen nu gemeten worden op het vermo-gen om samen te werken met de keten en waarde toe te voegen. De variabelenverwijzen naar theorie betreffende lean manufacturing vanuit “value-add ver-sus non value-add”, “waste”, “just-in-time supplies” en “continuous flow” en

Figure 6: Preliminair Waarde-Leverage Model for Aerospace OEMs


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naar supply chain als het gaat om rationalisatie van de keten door complexiteitte reduceren en transactiekosten te verlagen waarvan een aerospace OEM kanprofiteren. Vanuit open innovatie is hiermee de onderbouwing gevonden datde IMP en PMP een effect op waarde en factor tijd hebben.

Het uitdrukken van waarde-leverage in een “waarde-leverage netwerk positie”middels gevonden variabelen P/C, RD/C en T/C is een nieuwe methode ont-staan om het vermogen tot samenwerking met de keten van een aerospaceOEM uit te drukken.Met de nieuwe variabelen en de bepaling van de waarde-netwerk positie kun-nen aerospace OEMs met elkaar vergeleken worden op het vermogen om huninvestering in productontwikkeling en productiewaarde te delen met de keten.Nieuw wetenschappelijk onderzoek is gestart om na te gaan hoe waarde-le-verage dieper doorwerkt in de keten van toeleveranciers. Andere onderzoekenzijn gestart naar de doorontwikkeling van de variabelen met toepassing op deautomotive industrie waarbij het doel is om tot een rangorde te komen.

Bijdrage aan managementDe aerospace industrie is zeer kapitaalintensief en risicovol met betrekking totproductontwikkeling. Met de nieuwe variabelen op productniveau kan de ae-rospace OEM bepalen of er genoeg bereidheid in de keten is om een ontwik-keling te starten. De mate waarin de keten bereid is mee te investeren is eennieuwe perspectief wat meegenomen moet worden in de beoordeling van in-vesteringen in een nieuwe vliegtuigontwikkeling.Met de variabelen op OEM bedrijfsniveau kunnen ook toeleveranciers geme-ten worden op het vermogen waarde te delen met de keten.

Nieuw onderzoek in samenwerking met Fokker (2010) naar “Value Levers”heeft aangetoond dat “investment sharing” een belangrijke value driver is omde waarde van een nieuwe propositie voor vleugelsubsystemen te bepalen.

Op aerospace OEM niveau is het belangrijk te weten of R&D wel efficiënt eneffectief besteed wordt. Door te waarde te delen met de keten kan het R&Dbudget van de OEM lager worden en fluctueren op basis van markt vraag, inplaats van een vast budget elk jaar.

Bijdrage aan de samenlevingAls bedrijven meer in integrale ketens gaan werken en waarde delen, kan ersneller en beter worden gereageerd op economische open neergang wat voor-delig kan werken voor de overheid die minder hoeft in te grijpen als het foutgaat. Daarnaast zouden overheden en Europese commissie verder onderzoekmoeten doen naar het nut van subsidiëren van technologieprojecten van groteOEMs.

Curriculum Vitae

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W.W.A.Beelaerts van Blokland (Apeldoorn, February 1957) completed hisstudies at the Hogere Technische School section Business Administration forEngineers in Eindhoven, The Netherlands in 1982. During research for gra-duation, orientation Industrial Marketing was created with the companyWeld-Equip. Misalignments between products, markets and production wereanalyzed and support was found by analysis to develop a new product marketfocus, to reduce costs and regain profit. After a short stay at a banking com-pany, he decided to work as area sales engineer in one of the high tech com-panies in the Netherlands, MIFA Aluminum. The task was to co-design withOEM companies high precision aluminum semi finished products applied atcapital goods. He started applying industrial marketing theory regarding de-velopment of market niches to penetrate new applications. Application forthe products were body scanners in medical applications, pick & place ma-chines for semiconductor industry, satellites for aerospace, semi-conductor andmeasurement devices for optoelectronics. In 1986, he decided to change tothe capital goods industry with Mannesmann Rexroth, famous for their driveand control technology, to become Area sales engineer for Northern Europeand later Area sales manager for Western Europe, Branch manager for Mate-rials Handling and Mining and Marketing manager for developing a globalproduct strategy and market introduction of innovative actuators. One of theother projects initiated to improve the performance of the company was stan-dardization for specific applications, so called Application Bases Standard pro-ducts. Standardization in combination with innovation were the pillars ofsuccess. In addition to applying theories on Industrial Marketing, he introdu-ced the theory of Constraints to solve lead-time and bottleneck issues. Thebook by Goldrath “The Goal” was an inspiring avenue matching theory withpractice. The company could grow and double the production value with al-most the same machine capacity, however different routed. Most challengingprojects were undertaken such as drive and control systems for the ChannelTunnel Boring Machines. He started the platform “Future Underground” asan inter company platform for sharing the worldwide expertise with stakehol-ders with the goal to become market leader in this segment. After leaving in1999, he decided to become member of the management team for SP aero-space and vehicle systems, specialist in landing gears, with the responsibilityfor commerce with market introduction of composites used in landing gears,

Curriculum Vitae


220

reduction of noise by the project “silent landing gear” and the assignment toimprove the financial side of commercial operations. The company regainedfinancial stability and was repositioned as an innovative niche player in themarket for landing gears. Major contracts for Liebherr Aerospace and NH90were obtained to secure continuity of the company. However, the companyshowed a solid performance, it was destined to be broken up in two parts; de-fense and aerospace activities. This process started in 2003, which was themoment to leave the company and revitalize his educational basis. This becamereality with taking the opportunity to join an educational project as lecturer atthe Delft University of Technology, faculty of Aerospace Engineering in 2004.The first assignment was to develop and coordinate a new Master of Sciencecourse profile on Aerospace Management and Operations under direction ofprofessor Santema. After organizing the chair a new course on Entrepreneuringwas developed, which finally delivered five new start-ups. A second course“Lean Enterprise and Manufacturing” was developed and started in 2005. Thecourse involves actively the air transport industry with the lecture program. Atthe same time, he started his PhD project in 2005 value leverage by AerospaceOEM Companies. Regarding education, around 40 students have been coachedfor their final thesis projects.

Value -l aerospace original equipment manufacturers

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