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Material requirement planning and the supply chain at Alenia Aircraft
European Journal of Purchasing & Supply Management Vol. 3, No. 1, pp. 43-51, 1997 © 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0969-7012/97 $17.00 + 0.00
Pergamon PlhS0969-7012(96)00004-4
Case Study Material requirement planning and the supply chain at Alenia Aircraft Emilio Esposito ODISSEO (Centre for Organization and Technological Innovation), DIS (Department of Computer Science and Systems), University of Naples 'Federico H" Via Diocleziano 328, 80124 - Naples, Italy
Renato Passaro IRA T (Research Institute on Service Activities), CNR (National Research Council), Naples and Faculty of Engineering, University of Naples 'Federico H', Via M. Schipa 115, 80122 - Naples, Italy
This case study analyses how the adoption of material requirement planning (MRP) at Alenia Aircraft has brought about organizational and logistic changes in the firm's supply chain. The impact of the MRP system on the supply chain is investigated by analysing the relationship between Alenia Aircraft and the firm Alfa, one of its more significant subcontractors. The case study highlights the current trends within Alenia Aircraft's supply chain. A tiering of the subcontracting firms is taking place through a selection process, leading some traditional subcontractors to become main subcontractors while only some of them become main verticalized subcontractors. In this selection and tiering process of the supply chain, a crucial role is played by the subcontractors' managerial, organizational and logistic capabilities. © 1997 Elsevier Science Ltd Keywords: supply chain, c u s t o m e r - s u b c o n t r a c t o r relationship, material requirement planning
Many studies have highlighted the development of new organizational patterns in recent years based upon inter-firm production relationships (Cusumano, 1985, 1994; Hakansson, 1987; Contractor and Lorange, 1988; De Bresson and Amesse, 1991; Thoburn and Takashima, 1992). In these new organizational patterns, coordination amongst the various firms of the same procurement-production-delivery cycle is the prerequisite to build an efficient supply chain (Lamming, 1993). For this coordination to be successful, firms have to develo p an organizational and logistic integration involving rules, procedures, languages, targets, etc. Changes at the top of the supply chain are transferred also to the other member firms. This case study analyses how the adoption by a large firm of material requirement planning (MRP), a tool that allows the firm to plan the material requirements to meet the demand for products expected to be manufactured in a given time, brings about organizational and logistic changes in the supply chain. Although MRP and Just-in-Time share the same logic and goals (the right item at the right time and in the right place) (Lee, 1993), this paper does not discuss Just-in-Time and its adoption as part of the MRP process, because the use of Just-in-Time is unusual for
the aircraft industry, which is characterized by small series and quasi-craft production, high quality standards and a long time-to-market. The large firm under investigation is Alenia Aircraft, the Italian leading firm in the aircraft industry, which manages about 10 000 different parts and components by means of the M R P system. The impact of MRP adoption on subcontractors was analysed through the case of a firm (which we called 'Alfa') that, in terms of size, production activities and technological skills, represents Alenia Aircraft's subcontracting system. Both Alenia and Alfa belong to the group of firms that ODISSEO has been investigating for over ten years to analyse the technological and organizational changes in the Italian subcontracting system. The two firms were visited frequently to interview many middle and top managers from the different business areas. In particular, to carry out the present case study, the following were interviewed at Alenia: the purchasing director and the quality director; two middle managers of the information systems and purchasing departments; and several employees in charge of quality control, information systems, purchasing and subcontracting. At Alfa, the entrepreneur (managing director) and the quality and 43
E Esposito and R Passaro
I ALENIA
I
I
ALENIA AIRCRAFT
I
I
I
ALENIA DEFENCE
ALENIA SPACE
]
I
ALENIA CIVIL SYSTEMS
I I DEFENCE DIVISION
I
[
I
COMMUTERS TRANSPORT AND [ COMPONENTS DIVISION TRANSFORMATION DIVISION DIVISION
Figure 1. Organization structure of Alenia Aircraft
planning director were interviewed. The interviews were carried out by means of a semi-structured questionnaire aimed to identify the technological, manufacturing and management changes taking place in the two firms. On analysing the relationship between Alenia and Alfa, some trends in Alenia Aircraft's subcontracting system can be outlined. These trends highlight a tiering process in the supply chain that can be found in other industrial sectors as well (Asanuma, 1989; Sako, 1992; Lamming, 1993; Nishiguchi, 1994).
Aienia Aircraft Alenia is the leading firm in the Italian aircraft industry, and is one of the state-owned enterprises within Finmeccanica. Alenia was formed from the merger of Societh Aerospaziale Aeritalia and Selenia with the aim of rationalizing the activities of the two firms in four sectors characterized by technology and market complementarities (Figure 1). Alenia's turnover is about US$2.8 billion, over half of which is accounted for by the aircraft area, while defence accounts for about a quarter. It has 25 500 employees, 42% in the aircraft area and 19% in the defence area. Alenia's aircraft area (Alenia Aircraft) takes part, albeit by playing different roles, in several international programmes (both for transport and combat aircraft) together with the major European firms (British Aerospace, Aerospatiale, Dasa) and US firms (Boeing, McDonnell Douglas). Participation in these programmes implies managing the wide range of material flows (parts, components, semi-finished items, etc) that the logistics system has to handle. To highlight the specificity of this logistics system and the reasons that made Alenia Aircraft implement an MRP system, the main characteristics of the production organization of the aircraft programmes and the programmes in which Alenia Aircraft is involved will be briefly illustrated in the next two sections. 44
Organizational structure of the aircraft programmes The aircraft industry has an oligopolistic market structure characterized by high technological, financial and market entry barriers (Tyson, 1992; EEC, 1991). To lower these barriers the aircraft firms implement a production organization characterized by a pyramid-shaped hierarchic structure including an assembly area and three different production levels (Esposito et al, 1996). At the top of the production pyramid there is a leading firm (McDonnell Douglas, Boeing, BAe, Aerospatiale, Dasa) carrying out aircraft assembly and responsible for the whole aircraft programme. The firms of the first production level have the technological, financial and market skills needed to implement the programme (McDonnell Douglas, Boeing, Pratt and Whitney, General Electric, etc). The firms of the second production level manufacture complex parts and components of the aircraft (Alenia, CASA, Alfa Avio, etc). These firms manage a very complex network of relationships. They are at the core of the vertical flows system of material and information that characterizes the production pyramid. They receive information on parts and components to be produced from the leading firm, buy the raw materials (special alloy) from suppliers certified by the leading firm, and select the third-level firms to which part of the production process has to be contracted out. The third production level consists of small and medium-sized subcontracting firms. From the secondlevel firms they receive the information on the production process, the manufacturing specifications, the technical service and the 'free-issued' special alloy to be processed (that is, they are not responsible for procuring all the materials they require for production) (Sako, 1992). When the manufacturing process is over, they transfer to the second-level customers the components ordered and the relevant information.
Material requirement planning Table 1 Alenia's main aircraft production activities Firm responsible for programme
Programme
Parts produced by Alenia
Type of relation
Civil transport aircraft Consorzio AIRBUS Boeing
A 321 Boeing 747
Subcontracting Subcontracting
Boeing
Boeing 767
McDonnell Douglas McDonnell Douglas McDonnell Douglas Alenia-Aerospatiale
MD 80 DC 10 MD 11 ATR42/72
Fuselage section Turbine thrust reverses, Inspar wings ribs, machining of aluminium forgings, tank ends, machined parts Tail fin, rudder, inner and outer spoilers, inner and outer ailerons, inner and outer trailing edge flaps, elevator, wing leading edges Fuselage belt, carbon-fibre control surface Vertical tail surface, top fuselage belt Vertical stabilizer, winglet Fuselage, tailplane
Subcontracting Subcontracting Risk sharing Cooperation
Military transport aircraft Alenia
G 222
Design, development and production responsibility
Alenia programme
Combat aircraft Alenia, Bae, DASA
Tornado MRCA
Responsibility: for development and production; for variable-geometry wing; for avionic equipment; for final assembly of aircraft supplied to the Italian Air Force Design, development and production responsibility
Cooperation
Alenia (as prime contractor), Aermacchi, Embraer
AMX
Risk sharing
Cooperation (leader)
Source: Jane's (1993, 1994) DMS (1993)
This well-developed system of cooperative relationships is then established amongst a large number of firms participating in different ways in manufacturing the end product. This system of relationships is developed internationally, and is an important and crucial characteristic of the aircraft industry. In fact this broad inter-firm cooperation allows: •
• •
technology-focused strategies to be implemented and technology-based cooperation to be started with the firms that have specialized skills; the product market to be enlarged; funds to be raised for the new aircraft development programme.
Alenia Aircraft is an integral part of this productive relationships system, as it is involved in several aircraft programmes; within each of them it establishes its own cooperative relationships network both with the firstlevel firms and with the third-level subcontractors of the production pyramid. A l e n i a Aircraft's p r o g r a m m e s
The aircraft programmes in which Alenia Aircraft is involved are listed in Table 1, together with the contractual relationships established. Currently, Alenia Aircraft takes part in ten programmes. It is programme leader only for the military transport aircraft G222, while in the combat aircraft programmes it works as a member of equity cooperation. In civil transport programmes, except for ATR, it works under minority cooperation (subcontracting, risk-sharing).
The production cycle of the aircraft industry is typified by the wide range and number of components needed to manufacture an aircraft (over 1 million). These components have different and often very long lead times. The production cycle of the aircraft industry, and of Alenia Aircraft as well, is also typified by a high percentage of activities contracted out to firms manufacturing parts and components. In many cases this percentage amounts to 70% of the aircraft value. Table 2 exhibits the data concerning the various components purchased by Alenia Aircraft from other firms. Over 50% of these components are manufactured by subcontractors. This demands a high organizational and logistic integration between Alenia and its subcontractors, resulting in a complex exchange of information, organizational rules/procedures and professional skills (Esposito and Raffa, 1994). These two characteristics, together with the wide range of programmes in which Alenia Aircraft is involved, require both effective planning of the production cycle and effective technological and manufacturing coordination amongst the firms of the supply chain.
Table 2 Breakdowns of Alenia material requirements (percentage of gross industrial purchasing)
Raw materials Standards Subcontracting
30 15 55
of which:
Structural assembly Parts Equipment
40 50 10
45
E Esposito and R Passaro It is thus hardly surprising that the innovations in the production process implemented by Alenia Aircraft, part of a larger business reorganization plan aimed to increase efficiency and competitiveness, strongly affect its relationships with subcontractors. The next sections illustrate the impact of the adoption of an MRP system on the production relationships between Alenia Aircraft and its subcontractors.
Adoption of the MRP system: results at Alenia Aircraft Material requirement planning systems MRP systems consist of computer-based techniques to plan the requirement of dependent-demand materials to meet the business production plan. Using information on the end-product demand, the MRP system identifies the requirement of materials, calculates the amount needed, and communicates to the subcontractors, or to the in-firm workshops, the material schedule in order to have the end-product available at the planned time. To exploit MRP's potential fully, a large quantity of accurate and updated data is necessary. This highlights two necessary conditions for an MRP system to be implemented: the need for a widespread in-firm use of information technology tools (Bowersox et al, 1986; Coyle et al, 1988); the need for organizational changes within both the adopter firm and its subcontractors. This involves a redefinition of the relationships between the several actors of the supply chain. Many authors have emphasized the crucial importance of dynamic planning that can be implemented through MRP systems in industries where the production process is very complex (that is, a wide range of materials to be purchased, product differentiation, wide range of customers, large number of partners and subcontractors) and the demand is uncertain. In these industries MRP implementation is a strategic factor; it allows reductions in stock and considerable reductions in fixed asset cost, improvements in customer service and an increase in the firm's production efficiency (Bowersox et al, 1986; Schmenner, 1981; Chase and Aquilano, 1989).
M R P adoption at Alenia Aircraft At Alenia Aircraft the production process planning is affected by the fact that the components division works for various customers and partners (mainly Boeing, McDonnell Douglas, Airbus, and ATR), and that for each customer it is involved in more than one programme. 46
Alenia's aggregate production plan starts by developing a customer's requirement five-year plan, which is periodically updated (every 15 days) according to the changes taking place: the customers' commercial plans; new programme forecasts; data on backlogs. Based upon the information from the budget plan, the master production schedule (MPS) is developed. Using the information processed by it, the information from the bill of materials (BOM) of the various aircraft and those concerning the inventories, Alenia Aircraft's MRP system sets the material requirement flow. A procurement order plan and a material manufacturing/purchasing order plan are then developed. The manufacturing orders are transmitted to the in-firm shops, while the purchasing orders are transmitted to the subcontractors through the firm's buyers. Results from the adoption of the M R P system The MRP system is a tool from which Alenia Aircraft draws economic and strategic benefits. In practice, thanks to this system, Alenia Aircraft has: •
•
reduced the costs of work in process, raw material and component stocks, thus improving its cost efficiency; achieved greater flexibility, responding more effectively to the changes required by demand and technological innovations.
Specifically, the MRP system adoption remarkably improved time and cost performance through: •
•
•
a great increase in the supply frequency rate (from six-month to monthly or, in some cases, weekly supply); a reduction in the working capital related both to work in process and to raw material and component inventory-as a whole, the inventory reduction is" estimated to be around 30%; a greater flexibility in managing the changes introduced by the leading firms. On average, the response time decreased from 200 to 100 days, thus allowing greater productivity and cost efficiency.
These results were also achieved thanks to the considerable involvement of the subcontractors that were required to meet Alenia Aircraft's requirements. The large increase in the supply frequency rate resulted into a massive reduction (about 80%) of production lot size; consequently, the subcontractors' production organization underwent considerable changes. In the next section the impact of Alenia Aircraft's MRP system on the subcontracting firms' evolution is analysed through the case of the subcontractor Alfa.
Material requirement planning M R P system adoption and its impact on subcontractors: the case of Alfa
The activities carried out for Alenia Aircraft have developed over time in terms of both quality and quantity (Figure 2), shifting from tooling to more complex processing activities in which Alfa also plays management roles by taking on all responsibility for the manufacture of parts and sub-assemblies (building of large components assembly equipment, aircraft assembly, manufacture of fuselage panels and window belts for DC9). Currently, Alfa manufactures 60 different parts and components (codes) for Alenia Aircraft. Implementing this evolution process required major efforts to be undertaken by Alfa:
The subcontractor Alfa The company Alfa was established in 1925 and was initially involved in the timber industry. Since 1967 it has worked in the aircraft industry, supplying Alenia with containers to transfer its products to US firms (Boeing and McDonnell Douglas). In a few years it has become one of Alenia's most important subcontractors (80% of its turnover). In 1994 it had 60 employees. Alfa is included in a group of 14 subcontractors involved, since the 1990s, in the training cycle through which'Alenia has been transmitting the quality philosophy of the aircraft industry world leaders (Boeing, McDonnell Douglas). The technicians of these subcontractors have been involved in training programmes including exchange visits, quality control courses, and technical updating courses to implement new machines or procedures. The firm Alfa is representative of the subcontracting firms in the aircraft industry in the following ways:
• • •
•
It shares some of its characteristics (size, machine endowment, organization structure, quality management) with Alenia Aircraft's main subcontractors; Alfa's organizational and logistic growth path is similar to Alenia's main subcontractors. Like many other subcontractors, Alfa is based near Alenia Aircraft; Alenia Aircraft invested material, professional and financial resources in its more important subcontractors (Alfa included) to improve the supply chain through: training and certification of employees; certification of specific machines and tools; endowment of equipment (e.g. jigs); visits by its technicians to the subcontractors; supply of dedicated machines under a free loan system; quality management courses.
Stages Relationship activity
This technological and organizational development enabled Alfa to be ranked, in 1993, as AQAP-4 (ISO 9002) by Alenia Aircraft, and to act as main subcontractor within the supply chain. This means that it is responsible for the manufacturing and management of a complex component also by coordinating a small number of its own subcontractors.
The impact of the MRP system on Alfa production organization The adoption of the MRP system at Alenia Aircraft involved remarkable changes in the organization and management of Alfa's procurement-production-delivery cycle. The scheduling of the production plan developed by MRP required smaller lots of the components and parts to be produced, and a resulting increase in
Technology
Traditional Machines (stand alone)
Stage 2 Responsibility for complex items "Free issued" materials 1980-1990 Improvement in Quality Function Numerical Control Machines, CAD/CAM
Logistics
Local Inventories
Central Inventory
Period Organization
Stage I Subcontracting of single production phase "Free issued" materials Before 1980s Production focused
For many years Alfa's capital investment exceeded 20% of its turnover; The quality control manual was introduced, and updated twice; The production, procurement and organization procedures were modified so as to meet Alenia Aircraft, Boeing and McDonnell Douglas specifications; A management and recording system of the manufacturing process was developed to track faulty components.
Stage 3 Responsibility for complex items Trend:material acquisition After 1990 Introduction of a Production Planning activity Numerical Control Machines CAD/CAM Trend: CAE Trend: procurement-productiondelivery integration
Figure 2. Main stages of the customer-subcontractor relationship in Alenia Aircraft's supply chain 47
E Esposito and R Passaro the number of lots. In fact, Alfa was required to break lots down, reducing average lot sizes of 30 units to sizes ranging from 2 to 10 units, keeping the number of codes unchanged. This entailed an intensification of Alfa's management activities related to incoming raw materials and outgoing end-products, a higher frequency rate in deliveries, and an increase in production planning activities and in machine set-up operations: the level of Alfa's service to its customer Alenia Aircraft has thus increased. Changes at Alfa resulting from the MRP implementation by Alenia mainly concerned organization, but areas relating to ,professional skills and information were involved as well.
Organization. A production planning function was introduced, entrusted with drawing up the production plans according to the order and delivery scheduling supplied by Alenia's MRP. Two specifically trained employees perform these activities. Planning is an activity that will be developed in the future by purchasing dedicated and more sophisticated equipment. The planning and production activities were integrated. The planning manager, together with the production manager, controls and updates the production plan every day according to the work carried out by the shops and to the MRP scheduling. This requires greater integration between the planning activity and the shop foreman. There was an increase in the number of management operations in the procurement-production-delivery cycle (receipts, records, tests, work cycle issue, controls, deliveries, etc). On average, the number of operations to manage the orders has increased sixfold. There was an increase in the service time devoted to planning, lot changing and setting up numerical control (NC) machines. With units produced being equal, the service time has increased sixfold. This increase is not paid by the customer, who, as per contract, considers service time as a percentage of the manufacturing time. Consequently, a lot consisting of 30 units is paid as six lots of 5 units, even though in the latter case service time is six times greater. There was an increase in quality control procedures, proportional to the decrease in the production lot size. The firm Alfa carries out quality control of the first and last unit of the lot manufactured by means of NC machines. The lot-size decrease has resulted in an average increase of 500% in quality control procedures. An industrial accounting system was gradually implemented, able to facilitate in-firm controls and those controls carried out by Alenia Aircraft, to be integrated with Alenia's accounting management system. Professional skills. There was an increase in the number of indirect workers (20%). The resulting share of indirect workers shifted from 25% to 29%. 48
There were quantitative and qualitative changes in the firm's professional skills. Currently, for instance, the shop foreman manages and controls not only the manufacturing process, but also coordinates his own activities with those performed by the planning manager. Together, they have to check daily the work already carried out and/or to be carried out. This change results from the higher management effort demanded by the new organization of the procurement-production-delivery cycle, which, being more complex, requires a higher service level from the subcontractors to Alenia Aircraft. Information. There was an increase in the number of documents exchanged with Alenia and in those exchanged within the firm resulting from the breakdown of the production cycle. This process involved 11 out of the 12 operations of the procurement-production--delivery cycle that are currently documented or recorded. While the previous cycle envisaged the issue of 12 documents for each production lot, in the new organization (which envisages six unit-sized lots), 67 documents are issued (an increase of 458%), the number of produced units being equal. This is also part of the increased management workload and of the higher customer service level performed for Alenia Aircraft. A computer-based inventory system was introduced (from a local to a centralized management system). It must be underlined that the changes involving the areas of organization, professional skills and information did not entail any innovation in machine endowment. Use is made of the same machinery and equipment as that used before MRP implementation. Accordingly, the MRP impact on Alfa has mainly been an organizational impact demanding an incremental effort to manage and disseminate information and to re-train the firm's skilled employees.
MRP strategic and economic impact on the supply chain MRP adoption by Alenia Aircraft greatly modified the customer-subcontractor relationship system and generated economic and strategic advantages and disadvantages. As regards Alenia Aircraft, the economic advantages of MRP adoption are immediate (reduction in costs related to inventories and work in process). The higher cost efficiency provided by Alenia Aircraft for its US customers plays a strategic role because of the crisis that is afflicting the aircraft industry. Aircraft firms are currently carrying out reorganization processes, also by reviewing their alliance system, to cope with future competition. Such processes require a high recovery of cost efficiency as aircraft price is becoming a key factor in the competitiveness of firms. Strategic advantages result in greater flexibility, which allows Alenia Aircraft to improve its capability
Material requirement planning to respond to market changes and to the dynamics of the technological innovation processes. For example, the reduction in production lot size allows the firm to reduce remarkably both the cost and the time needed to carry out modifications of components and parts resulting from aircraft innovations. The MRP system adoption causes economic disadvantages to subcontractors. The case of the firm Alfa showed that MRP adoption entails an increase in management and service activities not paid by the customer. Moreover, the subcontractors had to accept a reduction of about 30% in their own remunerations because of the cost efficiency strategy pursued by Alenia Aircraft. The main subcontractors can overcome such economic disadvantages by improving their strategic position within Alenia Aircraft's supply chain, namely through reducing costs both by considerable changes in organization and management and by establishing their own subcontractors' network, onto which they shift a share of the cost increase. This aspect clearly shows that the adoption of an MRP system at Alenia Aircraft has two implications on the supply chain: •
•
It imposes more stress in the supply chain. Subcontractors have to both reduce costs and meet Alenia's new requirements; It is actually supportive of relations between customers And subcontractors. Through changes in
professional skills and information, subcontractors establish a strengthened relationship with the customer.
Developmentof AleniaAircraft'ssupplychain From the case study investigated, some remarks on the evolution of Alenia Aircraft's subcontracting system can be made. An evolution process is taking place that is fundamentally changing Alenia Aircraft's supply chain. In the past the subcontractor selection process was carried out through some mechanisms aimed to rank subcontractors mainly according to their technological skills. Over the last few years, new selection criteria have been developed based not only upon the subcontractors' technological performance, but also upon their management, logistic and organization skills. These firms are required to adjust their own service level to the new, leaner business production organization, thus becoming functional to Alenia Aircraft's strategy. The selection of the supply chain subcontractors is carried out through a process in which some traditional subcontractors become main subcontractors while only some of them become main verticalized subcontractors (Figure 3). The traditional subcontractors are the firms that are able to execute only specific manufacturing (processing, deformation, welding, machining, subassembly,
EVOLUTIONARY ELEMENTS
PRODUCTION ACTIVITIES
I StageI-Externalization of single operations. -Machining -Manufacturing -"Free issued" materials -Manufacturing and Sub-Assembly -Sub-Assembly
-Responsibility for the entire end-item -"Free issued" materials.
i
! r~
-Responsibility for the entire end-item -Responsibility for raw-material purchasing and management. 0ob-order verticalization)
-Machining -Manufacturing -Manufacturing and Sub-Assembly, -Sub-Assembly -Assembly
-Machining -Manufacturing -Manufacturing and Sub-Assembly -Sub-Assembly -Assembly Requirements Planning, Management and Purchasing
-Material
Figure 3. Evolution of the sub-contracting firms in Alenia Aircraft's supply chain 49
E Esposito and R Passaro etc.) of 'free issue' materials received from Alenia Aircraft. The main subcontractors are the firms that manufacture complex parts, and coordinate their own network of traditional subcontractors responsible for manufacturing specific components or manufacturing stages of low complexity. Main subcontractors process 'free issue' materials received from Alenia Aircraft. As to the relationship between Alenia Aircraft and the main subcontractors, the latter are required to arrange their inventory, planning system, professional skills and industrial accounting system according to Alenia Aircraft r~quirements so as to facilitate the control and coordination of the material flow. By so doing, an initial logistic and organizational integration process with Alenia Aircraft is started. The verticalized main subcontractors are the firms that, in addition to the main subcontractors' skills, are able to manage the material procurement cycle autonomously. In this manner the verticalized main subcontractors make Alenia Aircraft's logistic cycle leaner. Of course they must have a procurement planning system that can be integrated with Alenia's MRP system. These firms encounter other economic disadvantages, in addition to those already illustrated in the previous section, resulting both from their diminished bargaining power (as single firms) with the large US special alloy suppliers and from the inventory and raw material management costs. Also, in this case the higher level of service supplied to the customer does not correspond to any additional remuneration. However, verticalized main subcontractors also gain some crucial strategic advantage from a higher learning potential as a result of the direct relationship with the leader firm of the pyramid and with its special alloy suppliers. At present, Alen.ia Aircraft's subcontracting system consists of 80 traditional subcontractors. Less than ten firms have become or are about to become main subcontractors. In the near future, traditional subcontractors will not have direct relationships with Alenia Aircraft, but they will carry out subcontracting for the main subcontractors, some of which, in their turn, will become verticalized main subcontractors. Currently five firms at the most have the characteristics to become verticalized main subcontractors. Only one subcontractor has already established commercial relationships with a large special alloy supplier in the US on behalf of Alenia Aircraft. Many empirical surveys (Asanuma, 1989; Sako, 1992; Lamming, 1993; Nishiguchi, 1994) showed that this tiering process within Alenia Aircraft's subcontracting system is taking place in other industrial sectors as well.
Conclusions This case study has analysed how the adoption of an MRP at Alenia Aircraft has brought about organizational 50
and logistic changes in the firm's supply chain. The impact of the MRP on the supply chain was investigated by analysing the relationship between Alenia Aircraft and one of its more significant subcontractors (the firm Alga). The first result of this paper shows that to exploit fully all MRP potentials within both the adopter firm and its subcontractors, organizational changes are needed. This involves a redefinition of the relationships between the several actors of the supply chain. The second result shows that MRP may entail economic and strategic advantages and disadvantages among the different firms of the supply chain. As to Alenia Aircraft, the economic and strategic advantages gained from MRP adoption are immediate reduction in costs related to inventories and work in process; and greater flexibility, which improves the firm's capability to respond to market changes and to the dynamics of technological innovation processes. MRP system adoption entails economic disadvantages for the firm Alga: an increase in management and customer service costs not paid by the customer itself. The firm Alga overcomes these economic disadvantages by improving its strategic position within Alenia Aircraft's supply chain, reducing costs by both organizational and management changes, and by establishing its own subcontractors' network, onto which it shifts part of the cost increase. From these two results two main conclusions can be drawn. The first is a general one, regarding the MRP impact on the supply chain; the second is a specific conclusion, regarding the redefinition of vertical relationships in the aircraft industry. First, MRP has two implications for the supply chain. It imposes more stress in the supply chain, because subcontractors have to both reduce costs and meet the customer's new requirements. It is actually supportive of relationships between customer and subcontractor, because subcontractors, through changes in organization, professional skills and information, may achieve greater integration with the customer. Second, the future trends of Alenia's subcontracting system indicate a complex scenario, where an evolution and tiering process of the subcontractors is taking place. This evolution is taking place through a selection process, different from that seen in the past, in which the subcontractors' managerial and organizational skills are increasingly important. In the course of this development, some traditional subcontractors become main subcontractors and only some of them become main verticalized subcontractors. This tiering of the aircraft subcontracting system, in line with the trends of other industrial sectors, envisages a structure in which the firms at the top of the supply chain improve their efficiency by shifting, according to hierarchical criteria, their inconsistencies onto the firms at the bottom of the supply chain that have less bargaining power.
Material requirement planning
Acknowledgements This work has been carried out within the CNR Strategic Project 'Transfer of the Technologies of Targeted Project' and within the CNR Targeted Project 'Transportation 2' by IRAT-CNR and ODISSEO-DIS Research Units. We thank R Lamming (University of Bath), M Raffa, G Zollo (University of Naples, Federico II) and the EJPSM anonymous referees for their helpful comments. We also gratefully acknowledge Alenia and Alfa managers and engineers who graciously provided data and suggestions. Although the work is a joint product, the sections entitled 'Alenia Aircraft', 'Alenia Aircraft's programmes', 'Adoption of the MRP system: results at Alenia Aircraft', 'MRP strategic and economic impact on the supply chain', were written by E Esposito, and the sections 'Organizational structure of the aircraft programmes', 'MRP system adoption and its impact on subcontractors: the case of Alfa', 'Development of Alenia Aircraft's supply chain' by R Passaro. References Asanuma, B (1989) 'Manufacturer-supply relationships in Japan and the concept of relation-specific skill' Journal of the Japanese and International Economies 3(3) 1-30 Boeing (1993) Current Market Outlook Washington. Bowersox, D J, Clos's, D J and Helferich, O K (1986) Logistical Management, Macmillan, New York Chase, R B and Aquilano, J N (1989) Production and Operations Management. A Life Cycle Approach 5th edn. Irwin, Homewood, IL. Contractor, F J and Lorange, P (1988) Cooperative Strategies in International Business Lexington Books, Lexington, MA Coyle, J J, Bardi, E J and Langley, C J Jr (1988) The Management of Business Logistics West Publishing Company, St Paul, MN Cusumano, M A (1985) The Japanese Automobile Industry. Technology and Management at Nissan and Toyota Harvard University Press, Cambridge, MA Cusumano, M A (1994) 'The limits of "Lean"' Sloan Management Review Summer Da Villa, F (1991) Logistica Manifatturiera. Organizzazione e Gestione dei Sistemi Produttivi EtasLibri, Milano
De Bresson, C and Amesse, F (1991) 'Network of innovators: a review and introduction to the issue' Research Policy (20)5 363-379 Del Monte, A and Passaro, R (1992) 'Incertezza, differenziazione del prodotto e integrazione verticale: una analisi dell'industria dei personal computer' L'industria 13(4) 649-683 DMS (1993) Market Intelligence Reports DMS Inc, Greenwich, CT EEC, Commission of European Community (1991) Motor Vehicle Parts and Accessories. Nace 353 Office for Official Publications of the EC, 11/18-24, Luxemburg Esposito, E and Raffa, M (1994) 'The evolution of Italian subcontracting firms: empirical evidence' European Journal of Purchasing and Supply Management 1(2) 67-76 Esposito, E, Passaro, R, Raffa, M and Zollo, G (1996) 'Firms' cooperative strategies: evidence from transport aircraft industry' in Cox, A (ed) Innovation in Procurement Management Earlsgate Press, Boston, 33-62 H~kansson, H (ed) (1987) Industrial Technological Development: A Network Approach Croom Helm Ltd, London Interavia Data (1992) World Aircraft Production Interavia SA, Geneva Jane's (1993, 1994) Jane's All the World Aircraft Jane's Publishing, London Lamming, R (1993) Beyond Partnership. Strategies for Innovation and Lean Supply Prentice-Hall, London Lee, C Y (1993) 'A recent development of the integrated manufacturing system. A hybrid of MRP and Jit' International Journal of Operations & Production Management 13(4) 3-17 Mariotti, S (1994) 'Rapporti verticali tra imprese, mercati organizzati ed economia della cooperazione: una rassegna critica' in Dioguardi, G (ed) Sistemi di imprese Etas Libri, Milano, pp 67-97 Nishiguchi, T (1994) Strategic Industrial Sourcing. The Japanese Advantage Oxford University Press, New York OECD (1991) Science and Technology Indicators Paris Passaro, R (1994) 'Inter-firm organizational aspects o the adoption of an MRP system: a case study' in Proceedings of lOth Computer Aided Production Engineering Conference Palermo, 7-9 June, pp 719-727 Sako, M (1992) Quality and Trust, Inter-firm Relations in Britain and Japan Cambridge University Press, Cambridge Schmenner, R W (1981) Production~Operations Management. Concepts and Situations Science Research Associates, Chicago Schonberger, R J (1982) Japanese Manufacturing Techniques The Free Press, New York Schroeder, R G (1981) Operations Management McGraw-Hill, New York Thoburn, J T and Takashima, M (1992) Industrial Subcontracting in the UK and Japan Avebury, Aldershot Tyson, L (1992) Who's Bashing Whom? Trade Conflict in High Technology Industries Institute for International Economics, Washington DC Wight, O W (1984) Manufacturing Resources Planning: MRP 11. Unlocking America's Productivity Potential Limited Publication Inc, Essex Junction, VT
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Pergamon PlhS0969-7012(96)00004-4
Case Study Material requirement planning and the supply chain at Alenia Aircraft Emilio Esposito ODISSEO (Centre for Organization and Technological Innovation), DIS (Department of Computer Science and Systems), University of Naples 'Federico H" Via Diocleziano 328, 80124 - Naples, Italy
Renato Passaro IRA T (Research Institute on Service Activities), CNR (National Research Council), Naples and Faculty of Engineering, University of Naples 'Federico H', Via M. Schipa 115, 80122 - Naples, Italy
This case study analyses how the adoption of material requirement planning (MRP) at Alenia Aircraft has brought about organizational and logistic changes in the firm's supply chain. The impact of the MRP system on the supply chain is investigated by analysing the relationship between Alenia Aircraft and the firm Alfa, one of its more significant subcontractors. The case study highlights the current trends within Alenia Aircraft's supply chain. A tiering of the subcontracting firms is taking place through a selection process, leading some traditional subcontractors to become main subcontractors while only some of them become main verticalized subcontractors. In this selection and tiering process of the supply chain, a crucial role is played by the subcontractors' managerial, organizational and logistic capabilities. © 1997 Elsevier Science Ltd Keywords: supply chain, c u s t o m e r - s u b c o n t r a c t o r relationship, material requirement planning
Many studies have highlighted the development of new organizational patterns in recent years based upon inter-firm production relationships (Cusumano, 1985, 1994; Hakansson, 1987; Contractor and Lorange, 1988; De Bresson and Amesse, 1991; Thoburn and Takashima, 1992). In these new organizational patterns, coordination amongst the various firms of the same procurement-production-delivery cycle is the prerequisite to build an efficient supply chain (Lamming, 1993). For this coordination to be successful, firms have to develo p an organizational and logistic integration involving rules, procedures, languages, targets, etc. Changes at the top of the supply chain are transferred also to the other member firms. This case study analyses how the adoption by a large firm of material requirement planning (MRP), a tool that allows the firm to plan the material requirements to meet the demand for products expected to be manufactured in a given time, brings about organizational and logistic changes in the supply chain. Although MRP and Just-in-Time share the same logic and goals (the right item at the right time and in the right place) (Lee, 1993), this paper does not discuss Just-in-Time and its adoption as part of the MRP process, because the use of Just-in-Time is unusual for
the aircraft industry, which is characterized by small series and quasi-craft production, high quality standards and a long time-to-market. The large firm under investigation is Alenia Aircraft, the Italian leading firm in the aircraft industry, which manages about 10 000 different parts and components by means of the M R P system. The impact of MRP adoption on subcontractors was analysed through the case of a firm (which we called 'Alfa') that, in terms of size, production activities and technological skills, represents Alenia Aircraft's subcontracting system. Both Alenia and Alfa belong to the group of firms that ODISSEO has been investigating for over ten years to analyse the technological and organizational changes in the Italian subcontracting system. The two firms were visited frequently to interview many middle and top managers from the different business areas. In particular, to carry out the present case study, the following were interviewed at Alenia: the purchasing director and the quality director; two middle managers of the information systems and purchasing departments; and several employees in charge of quality control, information systems, purchasing and subcontracting. At Alfa, the entrepreneur (managing director) and the quality and 43
E Esposito and R Passaro
I ALENIA
I
I
ALENIA AIRCRAFT
I
I
I
ALENIA DEFENCE
ALENIA SPACE
]
I
ALENIA CIVIL SYSTEMS
I I DEFENCE DIVISION
I
[
I
COMMUTERS TRANSPORT AND [ COMPONENTS DIVISION TRANSFORMATION DIVISION DIVISION
Figure 1. Organization structure of Alenia Aircraft
planning director were interviewed. The interviews were carried out by means of a semi-structured questionnaire aimed to identify the technological, manufacturing and management changes taking place in the two firms. On analysing the relationship between Alenia and Alfa, some trends in Alenia Aircraft's subcontracting system can be outlined. These trends highlight a tiering process in the supply chain that can be found in other industrial sectors as well (Asanuma, 1989; Sako, 1992; Lamming, 1993; Nishiguchi, 1994).
Aienia Aircraft Alenia is the leading firm in the Italian aircraft industry, and is one of the state-owned enterprises within Finmeccanica. Alenia was formed from the merger of Societh Aerospaziale Aeritalia and Selenia with the aim of rationalizing the activities of the two firms in four sectors characterized by technology and market complementarities (Figure 1). Alenia's turnover is about US$2.8 billion, over half of which is accounted for by the aircraft area, while defence accounts for about a quarter. It has 25 500 employees, 42% in the aircraft area and 19% in the defence area. Alenia's aircraft area (Alenia Aircraft) takes part, albeit by playing different roles, in several international programmes (both for transport and combat aircraft) together with the major European firms (British Aerospace, Aerospatiale, Dasa) and US firms (Boeing, McDonnell Douglas). Participation in these programmes implies managing the wide range of material flows (parts, components, semi-finished items, etc) that the logistics system has to handle. To highlight the specificity of this logistics system and the reasons that made Alenia Aircraft implement an MRP system, the main characteristics of the production organization of the aircraft programmes and the programmes in which Alenia Aircraft is involved will be briefly illustrated in the next two sections. 44
Organizational structure of the aircraft programmes The aircraft industry has an oligopolistic market structure characterized by high technological, financial and market entry barriers (Tyson, 1992; EEC, 1991). To lower these barriers the aircraft firms implement a production organization characterized by a pyramid-shaped hierarchic structure including an assembly area and three different production levels (Esposito et al, 1996). At the top of the production pyramid there is a leading firm (McDonnell Douglas, Boeing, BAe, Aerospatiale, Dasa) carrying out aircraft assembly and responsible for the whole aircraft programme. The firms of the first production level have the technological, financial and market skills needed to implement the programme (McDonnell Douglas, Boeing, Pratt and Whitney, General Electric, etc). The firms of the second production level manufacture complex parts and components of the aircraft (Alenia, CASA, Alfa Avio, etc). These firms manage a very complex network of relationships. They are at the core of the vertical flows system of material and information that characterizes the production pyramid. They receive information on parts and components to be produced from the leading firm, buy the raw materials (special alloy) from suppliers certified by the leading firm, and select the third-level firms to which part of the production process has to be contracted out. The third production level consists of small and medium-sized subcontracting firms. From the secondlevel firms they receive the information on the production process, the manufacturing specifications, the technical service and the 'free-issued' special alloy to be processed (that is, they are not responsible for procuring all the materials they require for production) (Sako, 1992). When the manufacturing process is over, they transfer to the second-level customers the components ordered and the relevant information.
Material requirement planning Table 1 Alenia's main aircraft production activities Firm responsible for programme
Programme
Parts produced by Alenia
Type of relation
Civil transport aircraft Consorzio AIRBUS Boeing
A 321 Boeing 747
Subcontracting Subcontracting
Boeing
Boeing 767
McDonnell Douglas McDonnell Douglas McDonnell Douglas Alenia-Aerospatiale
MD 80 DC 10 MD 11 ATR42/72
Fuselage section Turbine thrust reverses, Inspar wings ribs, machining of aluminium forgings, tank ends, machined parts Tail fin, rudder, inner and outer spoilers, inner and outer ailerons, inner and outer trailing edge flaps, elevator, wing leading edges Fuselage belt, carbon-fibre control surface Vertical tail surface, top fuselage belt Vertical stabilizer, winglet Fuselage, tailplane
Subcontracting Subcontracting Risk sharing Cooperation
Military transport aircraft Alenia
G 222
Design, development and production responsibility
Alenia programme
Combat aircraft Alenia, Bae, DASA
Tornado MRCA
Responsibility: for development and production; for variable-geometry wing; for avionic equipment; for final assembly of aircraft supplied to the Italian Air Force Design, development and production responsibility
Cooperation
Alenia (as prime contractor), Aermacchi, Embraer
AMX
Risk sharing
Cooperation (leader)
Source: Jane's (1993, 1994) DMS (1993)
This well-developed system of cooperative relationships is then established amongst a large number of firms participating in different ways in manufacturing the end product. This system of relationships is developed internationally, and is an important and crucial characteristic of the aircraft industry. In fact this broad inter-firm cooperation allows: •
• •
technology-focused strategies to be implemented and technology-based cooperation to be started with the firms that have specialized skills; the product market to be enlarged; funds to be raised for the new aircraft development programme.
Alenia Aircraft is an integral part of this productive relationships system, as it is involved in several aircraft programmes; within each of them it establishes its own cooperative relationships network both with the firstlevel firms and with the third-level subcontractors of the production pyramid. A l e n i a Aircraft's p r o g r a m m e s
The aircraft programmes in which Alenia Aircraft is involved are listed in Table 1, together with the contractual relationships established. Currently, Alenia Aircraft takes part in ten programmes. It is programme leader only for the military transport aircraft G222, while in the combat aircraft programmes it works as a member of equity cooperation. In civil transport programmes, except for ATR, it works under minority cooperation (subcontracting, risk-sharing).
The production cycle of the aircraft industry is typified by the wide range and number of components needed to manufacture an aircraft (over 1 million). These components have different and often very long lead times. The production cycle of the aircraft industry, and of Alenia Aircraft as well, is also typified by a high percentage of activities contracted out to firms manufacturing parts and components. In many cases this percentage amounts to 70% of the aircraft value. Table 2 exhibits the data concerning the various components purchased by Alenia Aircraft from other firms. Over 50% of these components are manufactured by subcontractors. This demands a high organizational and logistic integration between Alenia and its subcontractors, resulting in a complex exchange of information, organizational rules/procedures and professional skills (Esposito and Raffa, 1994). These two characteristics, together with the wide range of programmes in which Alenia Aircraft is involved, require both effective planning of the production cycle and effective technological and manufacturing coordination amongst the firms of the supply chain.
Table 2 Breakdowns of Alenia material requirements (percentage of gross industrial purchasing)
Raw materials Standards Subcontracting
30 15 55
of which:
Structural assembly Parts Equipment
40 50 10
45
E Esposito and R Passaro It is thus hardly surprising that the innovations in the production process implemented by Alenia Aircraft, part of a larger business reorganization plan aimed to increase efficiency and competitiveness, strongly affect its relationships with subcontractors. The next sections illustrate the impact of the adoption of an MRP system on the production relationships between Alenia Aircraft and its subcontractors.
Adoption of the MRP system: results at Alenia Aircraft Material requirement planning systems MRP systems consist of computer-based techniques to plan the requirement of dependent-demand materials to meet the business production plan. Using information on the end-product demand, the MRP system identifies the requirement of materials, calculates the amount needed, and communicates to the subcontractors, or to the in-firm workshops, the material schedule in order to have the end-product available at the planned time. To exploit MRP's potential fully, a large quantity of accurate and updated data is necessary. This highlights two necessary conditions for an MRP system to be implemented: the need for a widespread in-firm use of information technology tools (Bowersox et al, 1986; Coyle et al, 1988); the need for organizational changes within both the adopter firm and its subcontractors. This involves a redefinition of the relationships between the several actors of the supply chain. Many authors have emphasized the crucial importance of dynamic planning that can be implemented through MRP systems in industries where the production process is very complex (that is, a wide range of materials to be purchased, product differentiation, wide range of customers, large number of partners and subcontractors) and the demand is uncertain. In these industries MRP implementation is a strategic factor; it allows reductions in stock and considerable reductions in fixed asset cost, improvements in customer service and an increase in the firm's production efficiency (Bowersox et al, 1986; Schmenner, 1981; Chase and Aquilano, 1989).
M R P adoption at Alenia Aircraft At Alenia Aircraft the production process planning is affected by the fact that the components division works for various customers and partners (mainly Boeing, McDonnell Douglas, Airbus, and ATR), and that for each customer it is involved in more than one programme. 46
Alenia's aggregate production plan starts by developing a customer's requirement five-year plan, which is periodically updated (every 15 days) according to the changes taking place: the customers' commercial plans; new programme forecasts; data on backlogs. Based upon the information from the budget plan, the master production schedule (MPS) is developed. Using the information processed by it, the information from the bill of materials (BOM) of the various aircraft and those concerning the inventories, Alenia Aircraft's MRP system sets the material requirement flow. A procurement order plan and a material manufacturing/purchasing order plan are then developed. The manufacturing orders are transmitted to the in-firm shops, while the purchasing orders are transmitted to the subcontractors through the firm's buyers. Results from the adoption of the M R P system The MRP system is a tool from which Alenia Aircraft draws economic and strategic benefits. In practice, thanks to this system, Alenia Aircraft has: •
•
reduced the costs of work in process, raw material and component stocks, thus improving its cost efficiency; achieved greater flexibility, responding more effectively to the changes required by demand and technological innovations.
Specifically, the MRP system adoption remarkably improved time and cost performance through: •
•
•
a great increase in the supply frequency rate (from six-month to monthly or, in some cases, weekly supply); a reduction in the working capital related both to work in process and to raw material and component inventory-as a whole, the inventory reduction is" estimated to be around 30%; a greater flexibility in managing the changes introduced by the leading firms. On average, the response time decreased from 200 to 100 days, thus allowing greater productivity and cost efficiency.
These results were also achieved thanks to the considerable involvement of the subcontractors that were required to meet Alenia Aircraft's requirements. The large increase in the supply frequency rate resulted into a massive reduction (about 80%) of production lot size; consequently, the subcontractors' production organization underwent considerable changes. In the next section the impact of Alenia Aircraft's MRP system on the subcontracting firms' evolution is analysed through the case of the subcontractor Alfa.
Material requirement planning M R P system adoption and its impact on subcontractors: the case of Alfa
The activities carried out for Alenia Aircraft have developed over time in terms of both quality and quantity (Figure 2), shifting from tooling to more complex processing activities in which Alfa also plays management roles by taking on all responsibility for the manufacture of parts and sub-assemblies (building of large components assembly equipment, aircraft assembly, manufacture of fuselage panels and window belts for DC9). Currently, Alfa manufactures 60 different parts and components (codes) for Alenia Aircraft. Implementing this evolution process required major efforts to be undertaken by Alfa:
The subcontractor Alfa The company Alfa was established in 1925 and was initially involved in the timber industry. Since 1967 it has worked in the aircraft industry, supplying Alenia with containers to transfer its products to US firms (Boeing and McDonnell Douglas). In a few years it has become one of Alenia's most important subcontractors (80% of its turnover). In 1994 it had 60 employees. Alfa is included in a group of 14 subcontractors involved, since the 1990s, in the training cycle through which'Alenia has been transmitting the quality philosophy of the aircraft industry world leaders (Boeing, McDonnell Douglas). The technicians of these subcontractors have been involved in training programmes including exchange visits, quality control courses, and technical updating courses to implement new machines or procedures. The firm Alfa is representative of the subcontracting firms in the aircraft industry in the following ways:
• • •
•
It shares some of its characteristics (size, machine endowment, organization structure, quality management) with Alenia Aircraft's main subcontractors; Alfa's organizational and logistic growth path is similar to Alenia's main subcontractors. Like many other subcontractors, Alfa is based near Alenia Aircraft; Alenia Aircraft invested material, professional and financial resources in its more important subcontractors (Alfa included) to improve the supply chain through: training and certification of employees; certification of specific machines and tools; endowment of equipment (e.g. jigs); visits by its technicians to the subcontractors; supply of dedicated machines under a free loan system; quality management courses.
Stages Relationship activity
This technological and organizational development enabled Alfa to be ranked, in 1993, as AQAP-4 (ISO 9002) by Alenia Aircraft, and to act as main subcontractor within the supply chain. This means that it is responsible for the manufacturing and management of a complex component also by coordinating a small number of its own subcontractors.
The impact of the MRP system on Alfa production organization The adoption of the MRP system at Alenia Aircraft involved remarkable changes in the organization and management of Alfa's procurement-production-delivery cycle. The scheduling of the production plan developed by MRP required smaller lots of the components and parts to be produced, and a resulting increase in
Technology
Traditional Machines (stand alone)
Stage 2 Responsibility for complex items "Free issued" materials 1980-1990 Improvement in Quality Function Numerical Control Machines, CAD/CAM
Logistics
Local Inventories
Central Inventory
Period Organization
Stage I Subcontracting of single production phase "Free issued" materials Before 1980s Production focused
For many years Alfa's capital investment exceeded 20% of its turnover; The quality control manual was introduced, and updated twice; The production, procurement and organization procedures were modified so as to meet Alenia Aircraft, Boeing and McDonnell Douglas specifications; A management and recording system of the manufacturing process was developed to track faulty components.
Stage 3 Responsibility for complex items Trend:material acquisition After 1990 Introduction of a Production Planning activity Numerical Control Machines CAD/CAM Trend: CAE Trend: procurement-productiondelivery integration
Figure 2. Main stages of the customer-subcontractor relationship in Alenia Aircraft's supply chain 47
E Esposito and R Passaro the number of lots. In fact, Alfa was required to break lots down, reducing average lot sizes of 30 units to sizes ranging from 2 to 10 units, keeping the number of codes unchanged. This entailed an intensification of Alfa's management activities related to incoming raw materials and outgoing end-products, a higher frequency rate in deliveries, and an increase in production planning activities and in machine set-up operations: the level of Alfa's service to its customer Alenia Aircraft has thus increased. Changes at Alfa resulting from the MRP implementation by Alenia mainly concerned organization, but areas relating to ,professional skills and information were involved as well.
Organization. A production planning function was introduced, entrusted with drawing up the production plans according to the order and delivery scheduling supplied by Alenia's MRP. Two specifically trained employees perform these activities. Planning is an activity that will be developed in the future by purchasing dedicated and more sophisticated equipment. The planning and production activities were integrated. The planning manager, together with the production manager, controls and updates the production plan every day according to the work carried out by the shops and to the MRP scheduling. This requires greater integration between the planning activity and the shop foreman. There was an increase in the number of management operations in the procurement-production-delivery cycle (receipts, records, tests, work cycle issue, controls, deliveries, etc). On average, the number of operations to manage the orders has increased sixfold. There was an increase in the service time devoted to planning, lot changing and setting up numerical control (NC) machines. With units produced being equal, the service time has increased sixfold. This increase is not paid by the customer, who, as per contract, considers service time as a percentage of the manufacturing time. Consequently, a lot consisting of 30 units is paid as six lots of 5 units, even though in the latter case service time is six times greater. There was an increase in quality control procedures, proportional to the decrease in the production lot size. The firm Alfa carries out quality control of the first and last unit of the lot manufactured by means of NC machines. The lot-size decrease has resulted in an average increase of 500% in quality control procedures. An industrial accounting system was gradually implemented, able to facilitate in-firm controls and those controls carried out by Alenia Aircraft, to be integrated with Alenia's accounting management system. Professional skills. There was an increase in the number of indirect workers (20%). The resulting share of indirect workers shifted from 25% to 29%. 48
There were quantitative and qualitative changes in the firm's professional skills. Currently, for instance, the shop foreman manages and controls not only the manufacturing process, but also coordinates his own activities with those performed by the planning manager. Together, they have to check daily the work already carried out and/or to be carried out. This change results from the higher management effort demanded by the new organization of the procurement-production-delivery cycle, which, being more complex, requires a higher service level from the subcontractors to Alenia Aircraft. Information. There was an increase in the number of documents exchanged with Alenia and in those exchanged within the firm resulting from the breakdown of the production cycle. This process involved 11 out of the 12 operations of the procurement-production--delivery cycle that are currently documented or recorded. While the previous cycle envisaged the issue of 12 documents for each production lot, in the new organization (which envisages six unit-sized lots), 67 documents are issued (an increase of 458%), the number of produced units being equal. This is also part of the increased management workload and of the higher customer service level performed for Alenia Aircraft. A computer-based inventory system was introduced (from a local to a centralized management system). It must be underlined that the changes involving the areas of organization, professional skills and information did not entail any innovation in machine endowment. Use is made of the same machinery and equipment as that used before MRP implementation. Accordingly, the MRP impact on Alfa has mainly been an organizational impact demanding an incremental effort to manage and disseminate information and to re-train the firm's skilled employees.
MRP strategic and economic impact on the supply chain MRP adoption by Alenia Aircraft greatly modified the customer-subcontractor relationship system and generated economic and strategic advantages and disadvantages. As regards Alenia Aircraft, the economic advantages of MRP adoption are immediate (reduction in costs related to inventories and work in process). The higher cost efficiency provided by Alenia Aircraft for its US customers plays a strategic role because of the crisis that is afflicting the aircraft industry. Aircraft firms are currently carrying out reorganization processes, also by reviewing their alliance system, to cope with future competition. Such processes require a high recovery of cost efficiency as aircraft price is becoming a key factor in the competitiveness of firms. Strategic advantages result in greater flexibility, which allows Alenia Aircraft to improve its capability
Material requirement planning to respond to market changes and to the dynamics of the technological innovation processes. For example, the reduction in production lot size allows the firm to reduce remarkably both the cost and the time needed to carry out modifications of components and parts resulting from aircraft innovations. The MRP system adoption causes economic disadvantages to subcontractors. The case of the firm Alfa showed that MRP adoption entails an increase in management and service activities not paid by the customer. Moreover, the subcontractors had to accept a reduction of about 30% in their own remunerations because of the cost efficiency strategy pursued by Alenia Aircraft. The main subcontractors can overcome such economic disadvantages by improving their strategic position within Alenia Aircraft's supply chain, namely through reducing costs both by considerable changes in organization and management and by establishing their own subcontractors' network, onto which they shift a share of the cost increase. This aspect clearly shows that the adoption of an MRP system at Alenia Aircraft has two implications on the supply chain: •
•
It imposes more stress in the supply chain. Subcontractors have to both reduce costs and meet Alenia's new requirements; It is actually supportive of relations between customers And subcontractors. Through changes in
professional skills and information, subcontractors establish a strengthened relationship with the customer.
Developmentof AleniaAircraft'ssupplychain From the case study investigated, some remarks on the evolution of Alenia Aircraft's subcontracting system can be made. An evolution process is taking place that is fundamentally changing Alenia Aircraft's supply chain. In the past the subcontractor selection process was carried out through some mechanisms aimed to rank subcontractors mainly according to their technological skills. Over the last few years, new selection criteria have been developed based not only upon the subcontractors' technological performance, but also upon their management, logistic and organization skills. These firms are required to adjust their own service level to the new, leaner business production organization, thus becoming functional to Alenia Aircraft's strategy. The selection of the supply chain subcontractors is carried out through a process in which some traditional subcontractors become main subcontractors while only some of them become main verticalized subcontractors (Figure 3). The traditional subcontractors are the firms that are able to execute only specific manufacturing (processing, deformation, welding, machining, subassembly,
EVOLUTIONARY ELEMENTS
PRODUCTION ACTIVITIES
I StageI-Externalization of single operations. -Machining -Manufacturing -"Free issued" materials -Manufacturing and Sub-Assembly -Sub-Assembly
-Responsibility for the entire end-item -"Free issued" materials.
i
! r~
-Responsibility for the entire end-item -Responsibility for raw-material purchasing and management. 0ob-order verticalization)
-Machining -Manufacturing -Manufacturing and Sub-Assembly, -Sub-Assembly -Assembly
-Machining -Manufacturing -Manufacturing and Sub-Assembly -Sub-Assembly -Assembly Requirements Planning, Management and Purchasing
-Material
Figure 3. Evolution of the sub-contracting firms in Alenia Aircraft's supply chain 49
E Esposito and R Passaro etc.) of 'free issue' materials received from Alenia Aircraft. The main subcontractors are the firms that manufacture complex parts, and coordinate their own network of traditional subcontractors responsible for manufacturing specific components or manufacturing stages of low complexity. Main subcontractors process 'free issue' materials received from Alenia Aircraft. As to the relationship between Alenia Aircraft and the main subcontractors, the latter are required to arrange their inventory, planning system, professional skills and industrial accounting system according to Alenia Aircraft r~quirements so as to facilitate the control and coordination of the material flow. By so doing, an initial logistic and organizational integration process with Alenia Aircraft is started. The verticalized main subcontractors are the firms that, in addition to the main subcontractors' skills, are able to manage the material procurement cycle autonomously. In this manner the verticalized main subcontractors make Alenia Aircraft's logistic cycle leaner. Of course they must have a procurement planning system that can be integrated with Alenia's MRP system. These firms encounter other economic disadvantages, in addition to those already illustrated in the previous section, resulting both from their diminished bargaining power (as single firms) with the large US special alloy suppliers and from the inventory and raw material management costs. Also, in this case the higher level of service supplied to the customer does not correspond to any additional remuneration. However, verticalized main subcontractors also gain some crucial strategic advantage from a higher learning potential as a result of the direct relationship with the leader firm of the pyramid and with its special alloy suppliers. At present, Alen.ia Aircraft's subcontracting system consists of 80 traditional subcontractors. Less than ten firms have become or are about to become main subcontractors. In the near future, traditional subcontractors will not have direct relationships with Alenia Aircraft, but they will carry out subcontracting for the main subcontractors, some of which, in their turn, will become verticalized main subcontractors. Currently five firms at the most have the characteristics to become verticalized main subcontractors. Only one subcontractor has already established commercial relationships with a large special alloy supplier in the US on behalf of Alenia Aircraft. Many empirical surveys (Asanuma, 1989; Sako, 1992; Lamming, 1993; Nishiguchi, 1994) showed that this tiering process within Alenia Aircraft's subcontracting system is taking place in other industrial sectors as well.
Conclusions This case study has analysed how the adoption of an MRP at Alenia Aircraft has brought about organizational 50
and logistic changes in the firm's supply chain. The impact of the MRP on the supply chain was investigated by analysing the relationship between Alenia Aircraft and one of its more significant subcontractors (the firm Alga). The first result of this paper shows that to exploit fully all MRP potentials within both the adopter firm and its subcontractors, organizational changes are needed. This involves a redefinition of the relationships between the several actors of the supply chain. The second result shows that MRP may entail economic and strategic advantages and disadvantages among the different firms of the supply chain. As to Alenia Aircraft, the economic and strategic advantages gained from MRP adoption are immediate reduction in costs related to inventories and work in process; and greater flexibility, which improves the firm's capability to respond to market changes and to the dynamics of technological innovation processes. MRP system adoption entails economic disadvantages for the firm Alga: an increase in management and customer service costs not paid by the customer itself. The firm Alga overcomes these economic disadvantages by improving its strategic position within Alenia Aircraft's supply chain, reducing costs by both organizational and management changes, and by establishing its own subcontractors' network, onto which it shifts part of the cost increase. From these two results two main conclusions can be drawn. The first is a general one, regarding the MRP impact on the supply chain; the second is a specific conclusion, regarding the redefinition of vertical relationships in the aircraft industry. First, MRP has two implications for the supply chain. It imposes more stress in the supply chain, because subcontractors have to both reduce costs and meet the customer's new requirements. It is actually supportive of relationships between customer and subcontractor, because subcontractors, through changes in organization, professional skills and information, may achieve greater integration with the customer. Second, the future trends of Alenia's subcontracting system indicate a complex scenario, where an evolution and tiering process of the subcontractors is taking place. This evolution is taking place through a selection process, different from that seen in the past, in which the subcontractors' managerial and organizational skills are increasingly important. In the course of this development, some traditional subcontractors become main subcontractors and only some of them become main verticalized subcontractors. This tiering of the aircraft subcontracting system, in line with the trends of other industrial sectors, envisages a structure in which the firms at the top of the supply chain improve their efficiency by shifting, according to hierarchical criteria, their inconsistencies onto the firms at the bottom of the supply chain that have less bargaining power.
Material requirement planning
Acknowledgements This work has been carried out within the CNR Strategic Project 'Transfer of the Technologies of Targeted Project' and within the CNR Targeted Project 'Transportation 2' by IRAT-CNR and ODISSEO-DIS Research Units. We thank R Lamming (University of Bath), M Raffa, G Zollo (University of Naples, Federico II) and the EJPSM anonymous referees for their helpful comments. We also gratefully acknowledge Alenia and Alfa managers and engineers who graciously provided data and suggestions. Although the work is a joint product, the sections entitled 'Alenia Aircraft', 'Alenia Aircraft's programmes', 'Adoption of the MRP system: results at Alenia Aircraft', 'MRP strategic and economic impact on the supply chain', were written by E Esposito, and the sections 'Organizational structure of the aircraft programmes', 'MRP system adoption and its impact on subcontractors: the case of Alfa', 'Development of Alenia Aircraft's supply chain' by R Passaro. References Asanuma, B (1989) 'Manufacturer-supply relationships in Japan and the concept of relation-specific skill' Journal of the Japanese and International Economies 3(3) 1-30 Boeing (1993) Current Market Outlook Washington. Bowersox, D J, Clos's, D J and Helferich, O K (1986) Logistical Management, Macmillan, New York Chase, R B and Aquilano, J N (1989) Production and Operations Management. A Life Cycle Approach 5th edn. Irwin, Homewood, IL. Contractor, F J and Lorange, P (1988) Cooperative Strategies in International Business Lexington Books, Lexington, MA Coyle, J J, Bardi, E J and Langley, C J Jr (1988) The Management of Business Logistics West Publishing Company, St Paul, MN Cusumano, M A (1985) The Japanese Automobile Industry. Technology and Management at Nissan and Toyota Harvard University Press, Cambridge, MA Cusumano, M A (1994) 'The limits of "Lean"' Sloan Management Review Summer Da Villa, F (1991) Logistica Manifatturiera. Organizzazione e Gestione dei Sistemi Produttivi EtasLibri, Milano
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