Last week, I had a chance to attend EVM World 2012 in Naples, FL, the party place-to-be for project performance and earned value professionals.  http://evmworld.org/conference-program/conference-overview/.  We chose this setting to make the formal announcement of the launch of SAP's new Program Performance Analysis for Aerospace and Defense analytic application http://bit.ly/JZHsVA. This happens to be SAP's first industry-specific solution to be built in HANA, so the A&D team is kind of proud of that distinction. Over the last couple of years, after we had spent several workshops with some of the industry's leading companies gathering requirements on what would constitute a best-in-class set of KPIs and user experience and then repeated this process with mockups and further iterations, the development team took a look at the magnitude of the implications of the resulting data model, dashboard design, scorecarding approach and fundamental volume of data. The numbers indicated a classic "Big Data" problem scenario, and we made the decision to move off of disk and into memory with HANA. In fact, it shouldn't have been much of a surprise. When we looked at the competitive landscape for Program Performance Analysis at the outset, we were initially surprised that we didn't find anything occurpying this market niche. But clearly, if you are going to provide hundreds of metrics with live aggregations of tiers of dashboards across many dimensions and have ultra-fast performance in an enterprise environment with hundreds if not thousands of programs, projects, contracts, work packages, products, etc., there is no other choice than to build on the power of an in-memory database like HANA.

 

At the EVM World conference, I made a presentation on "Obtaining 360 Degree View of Aerospace and Defense Program Performance" which featured the new application.  While being the last session on the last day of any conference is not the ideal spot, we had representatives in the audience from several large A&D companies and DOD agencies.  The response from the audience at the end was very receptive, including a number of questions about this new thing they had just learned about called an in-memory database. One of the conversations I had afterwards was very telling. One group of representatives from a large defense contractor said that the value proposition of Program Performance Analysis was fantastic and exactly what their company needed. Interestingly, however, they expressed concern that their organization wouldn't know what to do with such an application. They said people on the business side, like program managers and line of business executives, are used to IT systems being imposed as mechanisms to achieve compliance and keep the lights on, as opposed to actually providing enabling business value. I took this as a huge compliment for PPA (and possibly a barb at their enterprise ERP vendor, which is conspicuously not SAP). I also took it as a warning sign of how we need to position this new solution. This is a challenge I am excited to take on. The people who will truly appreciate what an application like PPA can do are those business leaders who want a new kind of business software application - one that is purpose built for them and their most pressing needs, designed by them to be incredibly useful and easy to consume, and under the covers has the horsepower to solve the biggest problems in real time with very little IT support required. In the typical A&D organization, this will be the COO-type individual who leads a large portfolio of strategically important line of business engineering and manufacturing programs that wants a best practices approach to be the standard approach across his organization.

 

Our partner Dassian was a conference sponsor and made a great presentation on keeping projects on track while operating in an SAP ERP environment. Having caught a ton of fish in their pre-conference deep sea fishing expedition, they were also kind enough to treat me to a feast of their fresh catch at a restaurant that prepares what you bring in a cooler. So while PPA is without any real competition in the market, we will take advantage of the fishing while the weather is good!

Today, SAP launches a new analytic application called Program Performance Analysis for Aerospace and Defense. The application brings over 300 metrics and KPIs across 30 dimensions from any number of enterprise source systems to program managers in a set of intuitive dashboards. We designed this new application through a series of co-innovation sessions with some of the industry’s leading companies and their top program managers, in which we acquired the “best of the best” from industry in their requirements. The application is designed to give program managers, line of business executives, and operations leaders a best practices approach to quickly achieve insight into program performance and predictive indicators of potential risks. We built the solution on an in-memory database for real-time data insight even for environments with thousands of contracts and complex program structures.

 

The Lean Program Management Working Group (http://www.lean-program-management.org/) declared Firefighting (i.e., focusing resources on fixing problems instead of preventing them) as the number one challenge for programs with a key theme being “Improper Metrics, Metric Systems and KPIs”.  For enablers to best address programs staying on cost and schedule targets, the group derived a set of enablers, one of which is “Use of effective metrics: Leading indicators, transparency regarding status on all levels, clear line-of-sight to strategic goals”. Give me a shout to discuss the quickest way to deploy one of the key enablers from the Lean Program Management initiative.

As SAP's representative to the AIA's (Aerospace Industries Assocation) Supplier Management Council, I had the priviledge of attending their winter meeting recently, hosted by Boeing in St. Louis. There were 450 attendees across as many companies. The Supplier Management Council is a unique forum where prime-contractor company representatives and suppliers (of all sizes) come together to discuss supply-chain issues and to develop solutions. It was no surprise that the main theme of this year's event was the impending U.S. budget sequestration and the potential impact to the industry if not averted by further legislative agreements. The AIA acts as the industry's lobbying arm to the U.S. government and there were plenty of requests for all industry companies to take a very active role in soliciting their representatives for a resolution. The budget agreement last September called for a $487B reduction in U.S. defense spending over the next 10 years, and the sequestration effect would another $600B of cuts, which the AIA (and the DOD) is on the record characterizing as "catastrophic" for the U.S. A&D industry.

 

All of this budgetary uncertainty is likely to impact the decisions of A&D companies around technology investment and business model transformation. In some cases, the impact will be to delay, and in others we will see acceleration in order to use the technology to meet the challenges. SAP is focused on understanding the market condition these companies are in so that we can deliver on the value drivers they will be focused on. The AIA SMC meeting was useful in developing a better understanding of what some of these value drivers are.

 

Managing risk in the A&D supply chain was the top headline as a value driver throughout the meeting. Jack House, VP Supplier Management for Boeing Defense, Space and Security manages $15B of annual procurement. He called out the top inflection points for the industry as 1) Globalization, 2) Headwinds and tailwinds in the market (Defense reductions vs Commercial growth), and 3) Supply chain risk management. Globalization is being driven by the need to tap new markets, to develop new capacity, and to access new technology and innovation. It presents the challenges of adding much more complexity to the supply chain and introducing more shocks or disruptions to the supply chain. The Headwinds of defense budget reductions are combining with an increasing regulatory burden to make the defense business much more challenging. We will see much more M&A activity (as well as divestitures) as smaller companies are either gobbled up or flee the defense market, which will make future sourcing that much more difficult. Boeing's response is to "double down" on flawless program performance, focus on affordability (taking all un-necessary costs out of the business), eliminate sources of variability, and better manage subtier risk. Even the growth in the commercial sector ($4T or 33,000 new aircraft needed in next 20 years) presents a problem to Boeing as it will suck capacity from their defense supply base. Boeing's Karl Jeppesen, VP Procurement Contracting and Risk Management, called out supply chain risk management as his major focus. Key supplier risks of concern include 1) financial risks due to local economic conditions at a supplier (like access to credit), 2) continuity risk (natural disasters, etc), and 3) strategic risk (like M&A, capital investment, uncertainty). Even the DCMA is starting to question the OEM's knowledge of these risks and how they will percolate up to impact program performance and defense readiness.

 

A Supply Chain Leadership panel, comprising members from Lockheed (Dan Pleshko - VP Global Supply Chain Operations), Boeing (Karl Jeppeson), Alcoa and a couple of smaller suppliers, addressed the response to defense reductions and commercial growth. Lockheed Martin declared that the focus is now on preserving the bottom line, not top line growth. All the money in the past was spent on business development and new program engineering. Not anymore. Boeing  spoke about their focus on process innovation, as opposed to product innovation, and a major focus on supply chain risk management. Counterfeit parts in the A&D supply chain is a major focus of the group, and it has committees dedicated to addressing the issue and potential solutions. Boeing's Jack House called 2012 the year of counterfeit parts and described it as one of the most compelling issues of the day. Counterfeit parts are generally faked or remanufactured electronic or fastener commodity products produced in China, then sold on the gray market and then bought by lower tier suppliers from unauthorized distributers. These components find their way into mission critical weapon systems and commercial aircraft and present significant quality issues. Distributers are seeing counterfeits every day and (the good ones) are resorting to extensive testing programs for the parts they sell (time+cost). Raytheon's Greg Bradfield (Corp Director for Mission Assurance & Supplier Quality) said they used a risk based approach to address counterfeit parts, calling attention to the need to better manage brokers, distributers and other sources of supply. "Conflict minerals" is another focus, as the regulations to enforce reporting are very onerous. The regulation prohibits use of certain key minerals mined from countries (like Congo) associated with conflict and human rights abuses. Reporting by suppliers and OEMs is required by 1Q2013.

 

Booz & Company presented a detailed financial analysis of industry futures. Their conclusion is that procurement investment will be hit very hard under sequestration with a potential reduction of 45-55% between 2012 and 2017. But on the commercial side, they forecasted 37,000 new aircraft deliveries through 2030. For managing the supply base, they observed that efficiency at reduced volumes is the most critical for defense, and controlling cost growth while scaling is most critical for commercial. Their analysis also showed that suppliers are capturing more value and profit than the OEMs, which generated quite a groan from the audience. In their research of value streams, they discovered that OEMs and Tier 1s have lost awareness of supplier "should-costs". In other words, they are way over-paying for purchased material based on the actual costs incurred by suppliers in production. While 30% of Prime's cost is indirect, they found that actually 55% of the total value chain costs are indirect, and pointed out several cost reduction levers to focus on, saying Primes were managing overhead well but were letting suppliers "off the hook". Again, more groans from the suppliers in the audience.

 

PriceWaterhouseCoopers had several principals from newly acquired PRTM present a very interesting analysis on supplier issues. At the OEMs we will continue to see transferring of risk down the supply chain, continued uncertainty in demand (including more in-sourcing pressure on services by DOD), increasing compliance requirements (inlcuding the counterfeit issue plus IP protection) and reduced supply chain visibility. From the Tier 2 & 3 suppliers perspective, they will see more risk transfer from their customers, intensified pressure on cost/lead time/performance, limited visbility to major shifts in demand (poor info flow from OEMs systems) and incresed volatility of demand. Commercial drivers will include concerns about rate readiness (must get SC right), productivity and innovation (composites and MRO), competition (from global plus M&A) and R&D (shared risk).

 

Outside of the meeting, I had an opportunity to tour the F-18 factory. It was definitely all about final assembly with nary a machining tool in sight. My tour guide was kind enough to confirm that yes indeed they use SAP's MES system (CAMS) for controlling production and I saw various familiar screens on terminals while walking around. I asked him if the software was a help or hindrance in implementing their lean initiatives (which have been significant lately), and he said it was a major help. He was proud that when MHI from Japan came to tour the factory, they said they wanted to adopt Boeing's systems and processes for their own production, which is a high compliment from a Japanese manufacturer.

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