THE MACH INITIATIVE:A TOOL FOR ENHANCING QUÉBEC'S

SUPPLY CHAIN COMPETITIVENESS

Aerospace Innovation Forum 2011

Workshop #6: Harmonization of innovation initiatives

December 6th, 2011

The Quebec Aerospace ClusterThe heart of the Canadian aerospace industry

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• Revenues of $11 billion in 2010 (12,4 B$ in 2009)

• Ranked sixth in the world in sales

One of the top 3 aerospace centres in the world

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Other European Countries 5%

Brazil 2%

Spain 2%Italy 2%

Rest of Canada 2%

Québec 3%

Japan 4%

U.K. 8%

Germany 8%

France 13%

United States 51%

Aerospace sector world revenue in 2008

Source: MDEIE 2009

Aerospace centres in the world

ToulouseSeattle

Montréal

Source: Secor 2010

• 234 companies

• Third biggest manufacturing industry in Québec• Accounts for 8% of sales in the manufacturing sector

• 80% of Quebec aerospace products are exported• The sector is the number one exporter of manufactured products in Quebec

(13,7 % of $58 billion);• The U.S is the number one export destination with 65% of sales ($ 5.3 billion).

The heart of the Canadian aerospace industry

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Source: MDEIE 2010

• 39,500 jobs, and 9,000 engineers• One of the highest employment densities in the world

• 1/200 in Quebec• 1/95 in the Greater Montreal region

• 55 % of total Canadian aerospace production in 2010

• 50 % of the Canadian workforce

• 70 % of Canadian aerospace R&D spending

• One of the only places in the world where all the components of an aircraft are made within a 30 km radius

The heart of the Canadian aerospace industry

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Sources: MDEIE, Institut de la statistique du Québec 2009 etCanadian’s Perceptions of the Aeronautical/Aerospace Sector, November, 2010, NATIONAL and Harrisdecima.

Aéro Montréal: Québec's aerospace cluster

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• A strategic think tank which brings together all the major decision makers in Quebec’s aerospace sector to unite them around shared objectives and concerted actions in order to:

• enhance cohesion

• optimize competitiveness and growth

• Strategic Committees

Quebec’s aerospace sector challenge

The need to evolve towards a world class supply chain

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• Access to markets becomes key

• Competition from developing countries is stronger then ever

• Supply chain globalization OEMs reduce their supplier base by selecting those who:

• Offer integrated solutions• Can manage the complexity of the supply chain• Accept to share technical and financial risks

• Many foreign governments support the development of their aerospace industry with non-refundable grants (i.e. Poland, Italy, France, etc.)

Industry trends and context

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The global aerospace supply chain is shifting in favour of performing Tier 1 integrators responsible for design, manufacturing and assembly of complete systems

• The Embraer ERJ-170/190 illustrates the adoption of a product development strategy based on  :• Risk-sharing partners (16 partners taking 36 % of total value of contracts)

• Reduction of total number of supplierso From 400 suppliers (ERJ-145) to 40 suppliers (ERJ 170/190), 98 %

based outside of Brazil

• Stunning results :• Reduced development cycle : 4 years (1998 to 2002)

o Same cycle length than the ERJ 145 but with a much greater technological complexity

• Development costs contained : 900 M$

• Commercial success :• 1 540 orders (861 firm orders & 679 options) - 625 planes delivered in March 2010

Tier 1 integrators are key in the development of all new platforms: the ERJ-170/190 business case

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Source: Transfer Technology for Successful Integration into the Global Economy, A case study of Embraer in Brazil, United Nations, 2002; SECOR Analysis

Tier 1 integrators are key in the development of all new platforms: the Boeing 787 business case

10Source: McKinsey & Company

These trends affect the Quebec aerospace sector performance

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• Industry turnover has progressed in the last 20 years but has stagnated since 2000

Quebec aerospace sector turnoverIn billions$; 1990-2008

8,0

6,0

4,0

2,0

12,0

10,0

0,0

Aerospace industry annual employment and gross output growth in current dollars*Quebec and G7 countries, %, 2000 - 2006

Québec

-1,7%Great-

Britain**

0,6%

Italy

2,3%

USA

3,1%

Germany

5,2%

France

5,3%

Japan

9,8%

4,8%

0,3% 0,5%

-0,8%

0,9%

-0,4%

Production

EmploymentCAGR 2000 – 08

+1%

CAGR1990 – 00+15%

Sources: MDEIE, Institut de la statistique du Québec, Stats Canada *NAICS codes 3364 and SIC 353, **Employment info unavailable

Between 2002 and 2009, exports and trade balance have slipped

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Relative decrease in Quebec’s content input over the last 10 years

Since 2000, Quebec opportunity cost is an

estimated $11.3 billion**

Source: Institut de la statistique du Québec

20062005 2007 2008 20092002 2003 2004

Aerospace industry exports and trade balance (NAICS 3364)Quebec, 2002 – 2009, millions current $

Exports, CAGR: -3%

Trade balance, CAGR: -7%

40,4

42%

100%

Manufacturing value-added

Intermediate consumption

75,7

52%

11,3 billions $

Aerospace industry sales and local value-added percentage (NAICS 3364)Quebec, 1990-1999 / 2000 - 2008, billions $

Sources: Stats Canada, A/AC **Hypothesis : Québec value-added remained at 58% from 2000 to 2008

Québec’s industry structure is in inadequacy with the emerging trends

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• The Quebec’s aerospace sector is characterized by a large number of small firms• Only 38 companies have a staff exceeding 100 employees

Source: Statistics Canada

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14

11

62

54

78

11

8

19

64

57

431 to 4

employees

100 to 199 employees

5 to 19 employees

20 to 99 employees

500 + employees

200 to 499 employees

2003 – TOTAL : 233

2009 – TOTAL : 202

Number of companies from the aerospace sector by number of employees*Québec, 2003 - 2009

*NAICS 3364, 3315, 3336 as defined by the ISQ. From a field study, the MDEIE counted 234 active companies in the Aerospace industry in 2009

Findings about the Quebec aerospace industry

• Sub-systems procurement in other countries by the local OEMs is negatively impacting the amount of build-to-print parts procured in Quebec

• The Quebec industrial base is fragmented

• Very few local integrators

CONSEQUENTLY:

• Local suppliers are too small when compared to international competition

• Performance gaps in terms of vision, leadership, management succession plans and marketing

• Sub-optimal productivity• Products offering sometimes

inadequate when taking into account core and non-core competencies

• Too dependent on local market (very few customers)

• Financial, innovation and design capabilities are limited

• High risk aversion

Quebec Supply Chain Quebec Suppliers

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Aerospace suppliers challenges

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AerospaceSupplier

Competition from emerging markets:pressure on prices

Access tomarkets

Traditional customer has moved

Capabilitiesimprovement in :• design• manufacturing• systems assembly

Costsreductions

Financing

Demandfluctuation

Losses &inefficiciencies

Design and manufacturing delays

Mandatory to revisit the business strategy and capabilities to improve productivity, innovation and increase exports

COMPETITIVENESS MUST BE IMPROVED

The MACH initiative

An important step in Quebec’s path towards a world class aerospace supply chain

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1. Create an improved business culture for more openness, collaboration and innovation

2. Improve the supply chain competitiveness, one company at a time

3. Develop new local integration capabilities

• It is a change program for accelerating the aerospace supply chain competitiveness and performance.

• An output of Aero Montréal’s Supply Chain working group which mobilized more than 100 industry professionals over 3 years.

• Strategic goals:

The MACH Initiative : a unifying model to accelerate Quebec’s supply chain transformation

• 5 years $15 million collaborative private-public program

• support a total of 70 suppliers in strengthening their competitiveness. These suppliers will join the program in 5 yearly cohorts.

• provides SMEs with a common framework of methodologies, tools and techniques and an educational program to improve their capability across key processes and areas.

• provides mentoring from a prime contractor

• provides a recognized certification process

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The MACH Initiative:

• Supply chains are never static; they continually transform and evolve with regards to customer's requirements efficient collaboration is mandatory

• Therefore, the MACH initiative will encourage the establishment of tight collaborative relations between customer and supplier through mentoring for a more proactive supply chain.

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Better alignment between customer &

supplier=

Higher performance of the supply chain

The MACH Initiative is centered on tight collaborative relations to foster innovation

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• The MACH excellence framework is a management system developed by Aéro Montréal to help suppliers assess their performance, identify gaps and determine the actions necessary to improve and better position themselves within the supply chain.

• It prioritizes three fundamental levers to improve a supplier’s competitiveness:

• excellence in leadership;• operational excellence;• excellence in workforce planning and development.

• The MACH excellence framework has a five-level maturity scale, MACH 1 to MACH 5, that evaluates a supplier’s maturity level for 15 key business processes.

• The MACH excellence framework also includes a performance certification program for supplier visibility.

The MACH Excellence Framework : a tool for becoming a world class supplier

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5 maturity levels

PROCESSES MACH 1 MACH 2 MACH 3 MACH 4 MACH 51.1 - Strategic Planning & Positioning

1.2 - Performance & Management systems

1.3 - Project & Risk Management systems

1.4 - Innovation

1.5 - Corporate Social Responsibility

2.1 - Workforce Planning

2.2 - Hiring, Workforce Mobilization & Retention

2.3 - Workforce Training

2.4 - Individual Performance Evaluation

3.1 - Supply Chain Management

3.2 - Customer Relationship Management

3.3 - Manufacturing Control & Management

3.4 - Continual Improvement

3.5 - Engineering, Methods & New product/program introduction

3.6 - Quality Management

The MACH Excellence Framework

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12 to 14Months cycle

The process:

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The suppliers and mentors of the first cohort

THANK YOU!

Philippe Hoste

President of the Supply Chain Working Group

Aéro Montréal

380 St. Antoine West, Suite 8000

Montréal (Québec) Canada H2Y 3X7

Telephone: 514-987-9332

www.aeromontreal.ca

Photos: courtoisie de Bombardier Inc. et Pratt & Whitney Canada