By: Ravi Bhatnagar, Sr. Consultant - Digital Consulting & Advisory Practice, LTI

Military doctrines of nations, and the desire for air, land and sea supremacy over rivals have juggled the fortunes of the global defense industry. The aerospace and defense industry are now looking up, with a twofold increase in revenues over last year. Revenues may be the first dimension that comes to mind when evaluating a sector’s performance. However, the winds of disruption have blown through the corridors of military-industrial complexes, sparking transformation in processes. Traditionally technology-centric in terms of product design and development, the sector was surprisingly rooted to time-consuming processes, which is now changing.

Amidst the downturns, contractions and stabilization in the global defense industry, the top 15 entities have maintained status quo. The industry is closing ranks with big ticket acquisitions-Lockheed’s multi-billion-dollar acquisition of Sikorsky Aircraft, Northrop’s planned stake in Orbital ATK and Norwegian company Nammo’s deal with Berger Bullets are indications of intent to build scale and consolidate revenue streams.

Despite the wave of consolidation, the industry seems to be hamstrung. For instance, as much as 15 big ticket projects in Germany are plagued by multiple issues. Regarded as the biggest supplier in Europe, these German projects have experienced cost overruns and are way behind schedule.The Tiger Helicopter, Eurofighter, Puma combat vehicle and A 400M transport aircraft are some of the prestigious projects in jeopardy. This more or less echoes the ground reality elsewhere, as projects are dogged by technical issues.

So, what exactly can Defense companies do? A lot, actually.

Digitize before you digitalize

Handwritten receipts – outmoded practices in defense organizations are operational dinosaurs.
Managing inventories and paper-based checklists are just some of a long list of inefficient data management practices. These can be tedious and prone to errors. Without digitization, equipment visibility is impacted across departments, affecting planning and procurement.

Active and/or passive RFID technologies offers better awareness of equipment location and status, dramatically slashing costs towards inventory recon, improving planning, procurement and optimizing manpower utilization.

Asset light vs asset right

Most Defense entities are asset heavy, with gross fixed assets ratio ranging between 20% and 30% of revenues. The top companies intend to offload sections of business to become asset-light. Airbus divested its Defense Electronics mega business to KKR & Co., iRobot offloaded its Defense & Security business to Arlington Capital and Esterline Corporation’s sold off its UK based Defense business to Chemring group for better bottom lines.

To consistently generate higher returns, the companies need to be Asset-Right, not Asset-Light.

For instance, an aircraft manufacturer should typically have products designed in one location, with different parts manufactured at different facilities and assembled. Unlike regular factories, the baseline plan shall be a 12-24-month plan for assembling anywhere between 50-65 aircraft.

This brings the narrative to Industrial IoT. Can processes be institutionalized wherein systems, machines and equipment provide real-time data to a centralized Command & Control center to provide information on critical equipment? Can this data be collected, analyzed and fed into a predictive asset model? And, can this intelligent system be automated?

Data-led value creation

Organizations need to monetize digital initiatives. Diversification of businesses are one of the areas. New revenue channels driven by data streams not available before may be monetized by proper packaging of information. The key is not to design products as incremental improvements but to work backward from the customer’s point of view and fulfil a latent need.

For instance, the Indian Government allocated several billion dollars to the Ministry of Defence in 2017. If companies provided the government with data of assets procured during the last budgetary allocation, would the analysis help the Defence Ministry in fund allocation? Would the Defence Ministry pay for this information and, more importantly, how much?

Overall, Defense contractors have witnessed a slowdown due to declined US Department of Defense spending, shifting focus on non-American markets. Markets like India have a pressing need for combat aircraft, submarines, and artillery etc.

Technology will continue to disrupt. The question is – will Defense companies ride disruption and survive, or wait for technologically superior and digital Tier 1 suppliers to forward integrate?

References:
https://people.defensenews.com/top-100/
http://australianaviation.com.au/2015/07/lockheed-martin-acquires-sikorsky-in-us9-billion-deal/
http://fortune.com/2017/09/18/northrop-grumman-missile-rocket-maker-orbital-atk/
https://www.ssusa.org/articles/2016/10/12/berger-bullets-joins-nammo-group/
https://iot.knowledge-bytes.com/value-creation-digital-aerospace-and-defense-network