Aerospace and defense organizations focus on R&D innovation, systems and data integration, supply chain, says KPMG

NEW YORK, 11 July 2014. Aerospace and defense (A&D) organizations are set to significantly increase their investment in research and development (R&D) and are looking to create partnerships with suppliers and customers to make the most of their hard-earned capital, according to KPMG International's 2014 Global Aerospace & Defense Outlook.

Three-quarters of A&D respondents say they will spend between 2 to 3 percent of revenues on R&D over the next two years, while 16 percent say they will spend between 4 to 5 percent. This trend represents a stark increase in investment given that more than half admitted to spending just 1 percent or less of revenues on R&D over the past two years.

A&D organizations expect to achieve much of their future innovation through partnerships and collaboration rather than in-house efforts, KPMG’s latest report explains. Three-quarters of A&D respondents also said they would be primarily focused on enhancing their existing product lines rather than investing in breakthrough technologies.

"With budgets for A&D spending coming under increasing pressure, many organizations are looking for opportunities to shore up their revenues, either by establishing a stronger presence in new markets or by adapting their current product and service lines to adjacent industry sectors," notes Doug Gates, KPMG's global head of aerospace & defense. "As this report clearly illustrates, A&D organizations are more focused than ever on entering into partnerships and creating more collaborative business models to help them achieve these objectives."

Key figures include:

-- 90 percent say that partnerships will be the 'future of innovation'

-- 92 percent say they will spend between 2-5 percent of revenues on R&D over the next 2 years

-- 51 percent acknowledge having limited visibility across the supply chain

-- Only 12 percent say they are 'very effective' at determining profitability

Supply chain visibility has once again emerged as a challenge for A&D organizations, with almost half of all respondents citing this as one of their two biggest supply-chain challenges. Fifty-one percent said they had only 'some visibility' into their Tier 1 suppliers and no visibility into their Tier 2 suppliers; more than a third claimed 'enhanced visibility' reaching only as far as their Tier 2 suppliers.

In part, A&D executives suggest that technology is creating barriers to achieving greater supply chain visibility. Twenty-nine percent said that their IT systems were inadequate for their supply-chain visibility, planning, and execution needs; 43 percent said that a lack of mature technology was creating obstacles to communicating data across the supply chain.

"As A&D organizations become more global and extend their reach into other sectors, they will likely experience increasing pressure to enhance their supply chain visibility," Gates adds. "Many will need to consider how they will fulfill offset agreements while ensuring high standards within new markets; others will need to consolidate their multiple procurement platforms to ensure they have better visibility into the demands and expectations they are placing on their local suppliers."

According to the report, A&D organizations will also need to improve visibility into their profitability and costs as they grow into new markets and segments. However, the survey suggests that A&D organizations may have some hard work ahead; almost half of all respondents admitted that they are only 'somewhat effective' at determining their profitability and just 12 percent categorized themselves as being 'very effective.'

Many suggest this is the result of unreliable data: More than a third of all A&D respondents said they couldn't rely on their pricing data, their product and service line profitability data, their customer profitability data, or the data they use to underpin their channel or market analysis. As a result, 70 percent said they would be placing either moderate or significant investment into their systems and processes related to forecasting and planning, pricing, and profitability systems and processes.

"The 2014 Global Aerospace & Defense Outlook suggests that the next few years will usher in an era of collaboration - around products, R&D and access to markets - that will fundamentally change the way A&D organizations operate," Gates summarizes. "But adapting operating models to meet the resulting 'disruptive complexity' will be no easy task for A&D executives and may take upwards of five years to achieve; A&D organizations would be well advised to start their planning now."

This Global Aerospace & Defense Outlook is part of KPMG International's 2014 Global Manufacturing Survey. Data was collected by Forbes on behalf of KPMG International in early 2014 and accompanying analysis was provided by senior KPMG Aerospace & Defense leaders from A&D practices in KPMG firms around the globe. A total of 460 senior manufacturing executives participated in the survey, of which 11 percent came from the A&D sector. Forty-seven percent of the A&D respondents identified themselves as being based in the Americas, 29 percent in Europe and 24 percent in Asia. Sixty-one percent of all A&D respondents held C-Level positions within their respective organizations with a further 39 percent representing SVP/VP/Director or Head of department roles.

Supply-chain management images and R&D images courtesy of Shutterstock.

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