Companies that have been focusing on other priorities, such as cost, are not set up to easily manage inventory across programs, sites, or business units. What isn’t tracked likely isn’t managed, and this lack of visibility is often the first indicator of a significant cash improvement opportunity. You don’t have visibility into inventory turns by program.Where A&D companies have achieved inventory reductions of 20, 30, or even 50 percent, what were the indicators of significant opportunity? Recognizing that benchmarks are only ever directional at best, executives should look for a few common patterns in their organization. Given inventory has typically been even less of a focus in defense, we find companies that choose to tackle it often achieve reductions of 50 percent or more (exhibit). Building the capabilities to better manage inventory results in shorter lead times, more proactive risk management, and increased supply chain flexibility-all important factors in enabling profitable growth. While the cash opportunity alone is often still compelling, the full value of physical inventory becomes even more critical when considering the opportunities associated with a streamlined supply chain. Due to progress payments, the “financial” inventory number on the books may be an order of magnitude less than what companies have “in the warehouse.” In this case, the financial versus physical distinction typically masks underlying inefficiencies in the supply chain. ![]() In defense, the unique nature of government contracting adds complexity to managing and tracking inventory. Despite these challenges we have consistently found opportunities to reduce inventory by 20 to 30 percent. A&D players do face unique supply chain challenges, such as long lead times (many months or even years) and a relatively high percentage of sole source suppliers (reducing the amount of negotiating leverage for the primes). Compared with industrial peers, commercial aerospace players tend to carry more than twice as much inventory. In commercial aerospace, the numbers tell a compelling story. While the overall objectives are the same across the sector, there are critical nuances in commercial versus defense environments. Changing behaviors and mind-sets typically starts with developing a compelling case for change. So how can companies address these misconceptions and create a “cash culture”? Aggressive targets, visible leadership commitment, and a focus on capability building are all critical elements of a comprehensive program. If I can’t ship, I can’t book the revenue.” When executed properly, a successful cash transformation program will reduce inventory while maintaining or often even improving internal performance and customer service. If I don’t have products on hand, I can’t ship. An oft-repeated sentiment from supply chain leaders: “I get fired if the product is delivered late, but no one gets fired for too much inventory.” Similarly, most sales leads would agree: “I get fired if I don’t hit my quarter sales numbers. ![]() These behaviors and mind-sets span functions. Otherwise, cash efforts become “another corporate initiative” and are ignored. Only companies that make the culture change to see cash as a measure of world-class performance and run a tight ship make progress. ![]() The quality and on-time delivery focus of executives and managers (especially on the front line) almost always trumps cash concerns. We have never seen cash metrics or incentives alone work to structurally increase cash flow in A&D companies. Most companies have historically viewed profit as king and cash as “free.” Cash is often controlled by a fragmented group of midlevel managers, almost none of whom have the incentive to maximize cash. Making the shift to prioritize cash is not easy. Many aerospace and defense (A&D) companies have the potential to unlock significant amounts of cash the key will be knowing where to look and the measures to take to free it up. All of these cases demand greater investments in development, capital expenditures, and inorganic growth opportunities-and that requires cash.
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