Israel, Ukraine aid package to increase pressure on aerospace and defense supply chains

Editor’s note: Vertical focuses on specific verticals within the supply chain, highlighting the latest trends and news. It appears on the fourth Monday of each month. This month, we are looking at the aerospace and defense supply chain.  If you are interested in future topics, you can see a full list of upcoming topics on our Editorial Calendar.

Global conflict is big business for defense manufacturers. And similar to the healthcare supply chain, lives depend on the aerospace and defense supply chain. But, it isn’t immune to the same global challenges as other supply chains—a shortage of talent, volatile raw material prices, shipping delays, and unavailability of materials and parts.

“Since the pandemic, these factors have been causing an increase in material lead times and supplier decommits, resulting in increased volatility in operating, program, and financial performance,” wrote Deloitte in its 2024 Aerospace and Defense Industry Outlook.

Lead times have improved, Deloitte noted in the report, which came out in late 2023, but have yet to reach pre-pandemic levels. As of August 23, production materials delivery times had reached 87 days in the industry, down from 100 at its peak in July 2022.

Now that the U.S. House of Representatives has passed a long-awaited foreign aid bill that includes billions of dollars for Ukraine and Israel for the war efforts, the global defense supply chain may ramp up further. Because the bills fund wartime efforts in friendly nations that utilize U.S. military assets, the bills are expected to be a boost for U.S. manufacturers.

“The majority of these funds stay within our own borders, backfilling U.S. stocks with the newest technology, bolstering our economy, and reinforcing the bedrock of our national security. This is a strategic infusion of resources that will expand our production capacity, support high-quality American jobs, and ensure that the U.S. military remains the most capable and best-equipped force in the world.”

“In an era of escalating global threats, the supplemental funding for Ukraine, Israel, and the Indo-Pacific is not just an investment in global stability, but also the American defense industrial base,” Eric Fanning, president and CEO of the Aerospace Industries Association, said in a statement. “The majority of these funds stay within our own borders, backfilling U.S. stocks with the newest technology, bolstering our economy, and reinforcing the bedrock of our national security. This is a strategic infusion of resources that will expand our production capacity, support high-quality American jobs, and ensure that the U.S. military remains the most capable and best-equipped force in the world.”

However, the aforementioned challenges remain, and Deloitte notes that raw material sourcing of critical minerals offers a unique challenge.

“Current production and reserves of such minerals is minimal in the United States,” Deloitte wrote. “For instance, the United States was 100% reliant on net imports of gallium from countries such as China, the United Kingdom, Germany, and others. At present, China leads in the export of a majority of the 13 major critical minerals, with a market share of 50% to 70% for each, while the United States leads in only one/ Reliance on these minerals may be a complicating factor for A&D companies, as replacing them is most likely unrealistic in the short term.”

Friend-shoring

Defense manufacturing faces particularly challenging sourcing issues as nations don’t wish to share their military secrets with adversaries. But, Deloitte is expecting more “friend-shoring” to occur as firms look to diversify their supply bases to mitigate against disruptions.

“In the United States, production options include cross-border manufacturing and the continued exploration of friendshoring,” Deloitte wrote. “The U.S. government is continuing to work with international partners to develop its defense production capabilities.”

Complexity abounds

Peter Guinto, Resilinc’s president of Government, Defense, and Aerospace, said the aerospace and defense industry is not immune to the same challenges as other supply chains.

“The number one risk is hyper-complexity in the supply chains. Not knowing who your low-tier vendors are prevents companies from fixing low-tier vendor problems,” he said in a blog posting on Resilinc’s website.

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Guinto went on to add that geopolitical change is adding pressure for companies to better assess risk within their sourcing strategies to address concerns about foreign interference.

“To be proactive, companies are looking at China +1 strategies. In particular, they are moving away from single and sole sourcing—which is very common in aerospace—to multi and dual sources to ensure they have more than one source of supply,” he said.

As these challenges are occurring, Guinto said he expects a pickup in the commercial aerospace market which will also drive demand and pressure to the supply chain.

Is technology the solution?

Deloitte noted that digital transformation holds a real key to the future of the aerospace and defense industry.

“The frontrunners in the industry are leading the charge on digital technologies such as model-based enterprise and digital twins. Digitalization can enhance product development, improve operational efficiencies, and help capitalize on growth opportunities,” Deloitte said.

The company went on to point to artificial intelligence and generative AI being deployed across operations. While Deloitte focused on security, regulations and resources, Guinto noted that companies are now using AI to map low-tier vendors.

“AI can rapidly determine where a supply network may be over-reliant on a single node within the supply chain. AI tools can also quickly assess where supply networks are overly concentrated in a specific geographic region,” he said.

The aerospace and defense supply chain is facing many of the same challenges as other supply chains, but it is slower to return to normalcy, Deloitte noted. That may be changing, though, as more companies leverage technology to address these challenges, and it is coming at just the right time as budgets increase and risks expand.

“On the commercial side, travel is likely to continue its upward trajectory. In the defense segment, demand for products is expected to continue to increase as geopolitical instability grows,” Deloitte said.

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