How Vertical Integration is Evolving, Allowing Suppliers to Support Multiple Stages of Production, Reduce Costs, and Increase Quality
For a number of years now, the aerospace industry has been shifting away from a specialized manufacturing model and toward a vertically-integrated one. But more recently, a hybrid of the two approaches – strategic integration – is giving OEMs, contractors, Tier 1 suppliers, and buyers a “best of both worlds” manufacturing solution.
High Specialization Manufacturing Can Mean High Fragmentation
A specialized manufacturing approach involves multiple suppliers that are responsible for individual steps along the supply chain, such as machining a component, heat treating or finishing that component, and even component assembly and testing.
OEMs and contractors can benefit from a specialized model in a number of ways:
- Lower costs by avoiding an investment in specialized machinery and factory space for each component
- Access to specialized technology for a single component
- Shared financial burden if the aircraft program is delayed or fails
- Ability to switch or add suppliers if a partner fails to meet their needs
- Optimize their own factory floor space and labor for high-value final assembly and testing
However, as aerospace supply chains grow more complex, a specialized approach has been seen as less practical, particularly after the COVID-19 pandemic crippled the outsourced manufacturing model.
Every time a component moves from one specialized manufacturer to another, there is potential for:
- Scheduling delays
- Workforce shortages
- Communication gaps
- Documentation errors
- Quality discrepancies
- Damage or handling issues
- Transportation costs
- Misalignment between manufacturing processes
Additionally, geopolitical uncertainties, production demands, and increasing quality control regulations increase the risks of using outside suppliers operating at the behest of market shifts. And purchasing individual components and services from different specialized manufacturers can cost more over time.
Dive Deeper: Mitigating Supply Chain Risks
The fragmentation of using multiple suppliers and processes for different stages of component production can put pressure on already-strained supply chains and create uncertainties that can be untenable for mission-critical programs.
The Financial Risks of Vertical Integration
Housing every manufacturing process under one roof was a natural alternative to a specialized approach. The entire supply chain, from raw materials to finished product, is controlled in-house, and manufacturers can invest in the latest technology and develop expertise across aircraft development.
This system often works well for buyers:
- Faster speed-to-market by avoiding the potential holdups of working with different independent suppliers
- Lower costs from fewer supplier handoffs, reducing transportation, procurement, administrative, and coordination costs
- Strict quality and safety control with tracking, building, and testing under single manufacturer’s QMS
- Consistent production despite any supply chain disruptions by reducing dependence on multiple external suppliers and transportation routes
- Clear communication from a shared understanding of the component and its complexities among engineering, manufacturing, quality, and program teams
- Assurance of long-term maintenance, upgrades, and support
At Primus, our capabilities extend beyond precision machining to include engineering support, fabrication, assembly, integration, testing, and program management, creating an end-to-end manufacturing approach for aerospace and defense customers.
However, vertical integration does have its risks. If demand drops, or if there are internal bottlenecks that delay or stall a project, a vertically-integrated model can result in serious financial implications.
Building and maintaining every capability along the supply chain requires substantial financial investment in equipment, facilities, technology, certifications, personnel, and process expertise – and capacity issues can throw an aerospace or defense program off course.
Specialization and Vertical Integration: The Rise of Strategic Integration
Neither a specialization nor a vertically-integrated approach is inherently “better”, but there are elements of each that are more ideal depending on the particular component, production volume, program complexity, technology requirements, available expertise, and risk profile.
Hence, the rise of strategic integration.
This “hybrid” model of manufacturing doesn’t limit a program to a single supplier capable of doing everything; rather, it leverages integration to create greater value by involving strategic partners that can own multiple connected processes.
Dive Deeper: Making the Most of Your Supplier Partnership
For example, let’s consider a component that requires precision machining, secondary processing, assembly, and testing.
The same four processes, coordinated two very different ways.
- Under a specialized model, there is the potential that four different suppliers could manage each process, and the OEM, contractor, Tier 1 supplier, or buyer must manage and coordinate the entire supply chain.
- Under a strategically-integrated model, a single manufacturing partner could manage multiple stages while also outsourcing to qualified suppliers for specialized processes that fall outside their core expertise.
In this way, specialization and integration combine to offer the best of both worlds.
In an Aerospace Innovations article, Daniel Adamski, Executive Vice President – Distribution with Kellstrom Commercial Aerospace notes that prior to the COVID-19 pandemic, there was a push in the aerospace industry away from vertical integration and toward offshore manufacturing in low-cost regions.
Following COVID-19, supply chain disruptions created massive challenges for the outsourced manufacturing model – and since, vertical integration has been a more favorably-viewed approach in the aerospace and OEM supply chain.
Strategic integration is simply a new iteration that allows for even greater flexibility for complex part and assembly manufacturing.
How Strategic Integration is Improving Aerospace and Defense Manufacturing
Quality: A Core Argument for Strategic Integration
Modern aerospace and defense projects must meet extremely tight tolerances, mission-critical performance requirements, and be designed using complex geometries and exotic materials.
Every manufacturing process affects a component’s final performance, and decisions made during one stage can influence every subsequent stage.
Dive Deeper: Digital Thread in Manufacturing Aerospace Parts and Assemblies
When each process is managed within an integrated manufacturing environment, engineering, production, quality, and program management teams can collaborate and problem-solve effectively – resulting in fast problem identification and corrective action.
Cost: The Sum of the Integrated Parts
Costs in aerospace manufacturing are not represented by the lowest component price. The total cost of ownership is accounted for across the supply chain.
The quote you compare is the part above the waterline.
- Transportation between suppliers
- The total number of purchase orders
- Supplier management
- Inspection fees
- Inventory carrying costs
- Delays or longer lead times
- Expedited shipping needs
- Scrap or rework
- Errors, defects, or non-comformities
- Scheduling disruptions
- Engineering coordination
- Documentation and administrative requirements or delays
In a strategically-integrated model, the individual process price may be higher, but the total cost of producing and managing the finished component is typically lower after the program is complete.
When seeking a manufacturing partner, it’s important to consider the total cost of production, management, inspection, transportation, and delivery rather than the per-operation fee.
Accountability: An End-to-End Advantage of Strategic Integration
A strategically-integrated model provides clear ownership, rather than the more disparate delineation of responsibilities often present in a specialized manufacturing model.
Instead of coordinating with multiple vendors and connecting their schedules, quality systems, engineering teams, and documentation, OEMs, contractors, Tier 1 suppliers, and buyers can work with one strategic manufacturing partner that takes on management of a larger portion of the production process.
You manage fewer suppliers, and your manufacturing partner takes greater responsibility for the program’s outcome across multiple stages.
Boeing and Airbus: A Transition to Vertical Integration
Ahead of the 2024 Farnborough Airshow, Aviation Week published an article detailing the dissolution and reintegration of Spirit Aerosystems by Boeing and Airbus, which when finalized in 2025, ended two decades of outsourced manufacturing.
Not a swing back to one model — a decision made component by component.
The move was in response to supply chain challenges – and signified an increasing shift toward vertical integration in the aerospace industry.
However, Aviation Week asserts there are tradeoffs when transitioning to vertical integration from a specialization model:
- Developing components in-house allows for specific aircraft optimizations and better control over integration, resulting in a higher-performing finished product.
- Relying on outside aerospace suppliers delivers a leaner business model with lower capital investment costs and lower certification risks, ultimately paving a quicker path-to-market.
Ultimately, the move underscores a broader argument about what can happen when aerospace outsourcing goes “too far”, but does not signify a pendulum shift one way or another. Aerospace manufacturing leaders assert that it will come down to the best business strategy – not a trend.
How Does Primus Fit into a Strategically-Integrated Model?
Primus Aerospace is a strategically-integrated manufacturer that combines deep expertise in complex and precision aerospace and defense manufacturing with adjacent services, allowing our customers to consolidate meaningful portions of their production requirements.
We offer extensive design, engineering, and manufacturing capabilities, and value-added services that support finished assemblies and turnkey manufacturing components. We proudly provide a supplier model designed to reduce disconnected manufacturing processes and increase quality, value, and mission-critical precision.
Aerospace Supplier Relationships Are Value-Driven
Aerospace manufacturing will (very unlikely) ever be completely specialized or completely vertically integrated. The Aerospace Innovations article points out that there will always be parts of the overall aerospace supply chain – down to the nuts and bolts – that require critical steps a single company simply can’t integrate in-house. Some limitations to fully-integrated manufacturing can include:
- Evolving environmental regulations
- Legacy companies that already “own” specific aerospace manufacturing processes
- The cost of upgrading technology and equipment to perform additional services
Rather, successful supply chains will adopt the more hybrid, strategically-integrated model, and it should be seen as a value-driven approach – which manufacturing processes must be handled in which ways in order to produce the best outcome for the aerospace or defense program?
OEMs, contractors, Tier 1 suppliers, and buyers need to think beyond the component itself to consider the best manufacturing strategy to meet the exacting, mission-critical requirements of the entire program.
Talk to us to learn more about our in-house capabilities and value-added services designed to produce the highest-quality parts and assemblies that meet your needs.
