Fighting fit supply chains

Is your defence firm successfully managing supplier performance or simply recording it?

A sense of shared purpose is one of the defence and aerospace sector’s not-so-secret weapons. Companies in the supply chain are proud to deliver for their customers because they are protecting the country.

That goodwill is critical as the UK races to ready itself for potential conflict in this dangerous era. Yet many of our defence and aerospace clients tell us they are stuck in awkward and unproductive supplier relationships just when the nation needs speed.

Here, we explain why dashboards and scorecards alone won’t fix this. Then we outline the four hallmarks of an effective system approach through which defence and aerospace contractors can make excellent supplier performance the default standard for their business.

A successful system approach is characterised by designed-in incentives, early warning architecture, client-side accountability and structured intervention.

Whereas a scorecard tells you a supplier is late, an effective performance management system reveals why latency is structurally likely. It facilitates proactive decision-making and rewards suppliers for working in lockstep with their customers.

For defence and aerospace contractors, this means moving from performance reporting to performance architecture, where an enabling environment and productive customer-supplier relationship make good performance inevitable. The four hallmarks of the approach are:

1. Designed-in incentives

Contracts can do some of the heavy lifting of performance management by rewarding suppliers for desired customer outcomes over the long term, not just outputs on delivery day.

In civil aviation, the use of power-by-the-hour engine contracts is commonplace. It means the engine supplier is continuously incentivised to avoid engine downtime and its customers permanently avoid the financial pain of unscheduled maintenance.

However, we only occasionally see this model in defence, and certainly not down the tiers of the supply chain. While the defence environment has clear differences to civil, this is still a missed opportunity, given the importance of readiness and availability. By making suppliers longstanding partners in operational availability, contractors will be better placed to cope with prolonged demand spikes in a war scenario – building resilience, not just readiness. Whether these models can be utilised in programmes with higher levels of risk-sharing and complexity, without creating unaffordable margins, is another challenge.

2. Early warning architecture

Understanding your dependencies on single sources or regions is just the start of tackling fragility in the supply chain. Indeed, some challenges are collective problems that impact all participants and therefore demand a collective response across supply chain tiers, such as access to critical and exotic raw materials or advanced tooling ability. As part of healthy ongoing Tier 1 relationships, clients need hard evidence that their sub-tier suppliers are not going to buckle due to poor workforce capacity, cash flow, rate readiness and more. A deliberate set of leading indicators agreed at contract award would help them target resources efficiently to pre-empt problems or prevent them escalating, for example on:

• Workforce capacity: Just because your suppliers have the right skills and people at the start of a contract doesn’t mean they have a sustainable skilled workforce. We encourage our clients to ask suppliers to show they have a recruitment and training pipeline in key disciplines, a healthy retention rate or employee net promoter score, and succession plans for critical roles.
• Sub-tier order book health: Thinning order books often show fragility before delivery slips. A simple contract clause could require reporting of any critical sub-tier supplier whose confirmed order book drops below, say, a three- to six-month coverage band, with an escalation plan triggered automatically.
• Cash flow: We’ve found through our work with clients that the most productive conversations about payment terms run both ways. If you’re imposing ‘month of invoice + 30 days’ on a supplier that must pay its own subcontractors within 30 days, that exposes a cash flow risk that could ripple through the supply chain, threatening the very resilience you’re trying to build. Payment schedules should reflect how suppliers incur costs, using staged milestones where appropriate but avoiding unnecessary payment gates for trusted, high-performing partners. This is especially relevant for small businesses whose cash may be tied up for many months while they manufacture complex components for exquisite kit.

Identifying which leading indicators actually predict failure is a data science problem as much as a contracts problem. This is where our evidence-based diagnostic methodology comes in.

The complexity of multi-tiered supply chains can make them challenging to navigate, but it also creates opportunities to uncover interventions that deliver significant value. For 25 years, we have worked shoulder to shoulder with defence and aerospace clients around the world to protect affordability, improve availability and change how teams work in line with strategic national priorities.

We’ll go deep into the detail to tackle your most complex challenges, having the difficult conversations others shy away from and putting 100% of our implementation fees at risk to ensure the right outcome for you and the nation.