Small Biz and the Aerospace & Defense Supply Chain

Yesterday I was a guest of the AIAA Management Technical Committee [oxymoron?] for their meeting at the University of Texas at Arlington where the topic was Integrating the Small Supplier into the Aerospace & Defense Supply Chain.

It was a very interesting and enjoyable meeting with a great exchange of information and discussion in the spirit of sharing (rather than finger-pointing up and down the supply chain). The committee was very welcoming and seemed to appreciate my participation.

I won’t name names but the TC’s membership includes high level people from all types of aerospace organizations, from contractors to government agencies and everything in between.

What’s a Small Business?

Small is a qualitative term. The Small Business Administration (SBA) defines small as fewer than 500 employees. To me that’s large.

For some purposes, 1,000 employees can still be considered “small.” To me that’s very large.

You can be a division of a publicly-traded company and still be considered small. I don’t get that.

Sometimes the definition of SME or SMB (small and medium sized enterprises or businesses) leaks into the discussion and I don’t know how high the head count goes for a medium sized biz.

To me, 50 or fewer employees is small.

While it’s hard to quantify exactly what a small business is, we agreed that we could classify businesses as small by certain behaviors that they exhibit and the challenges those behaviors represent.

In all fairness to both parties, large organizations exhibit some of these problems too. And small businesses problems are often caused by (benign) ignorance. [And then there’s not knowing what you don’t know.]

The Significance of Small Businesses

It’s important to integrate small businesses with large organizations for many reasons.

  • Small businesses hold more patents than all universities and large corporations combined.
  • They create 2/3 of all private sector jobs.
  • They employ half of all working Americans.
  • Since 1995, they have created 64% of all new jobs.
  • Since 1995, they have paid 44% of all private payroll.

From the standpoint of the A&D supply chain, small businesses are advantageous in many ways.

  • Prices are lower (probably due to the lack of overhead)
  • They are responsive and flexible (to a degree)
  • They have fewer issues with contract terms and conditions (although this is a double-edged sword)

So What’s The Problem?

In my opinion (and echoed by some of the committee’s members), the challenges that arise when small companies work with large organizations are due to three factors:

  • incomplete communication
  • lack of knowledge
  • limited capacity

View From The Top

Large organizations cited these problems when dealing with small companies. (There is no ranking implied by the order of listing below.)

  • Products don’t meet published specifications (e.g. just copied the spec of a competing product)
  • Unrigid, non-urgent delivery schedules (e.g. commercial customers, often with larger orders, take priority)
  • Changes to the product are not documented (e.g. change vendors on a component)
  • The origin of products or components (e.g. parts made in China)
  • You sometimes get the B-Team (e.g. because their A-Team is busy working with another customer)
  • Inadequate staffing and procedures, esp. outside of engineering (e.g. proposals and billing are haphazard)
  • Trust issues (e.g. don’t want to share info, even under an NDA)
  • Lack of facilities (e.g. can’t test everything to verify the product’s performance envelope)
  • Lack of expertise (e.g. unable to perform FEA)
  • Don’t analyze the root cause of failures (e.g. just replace parts on fail)
  • Cannot survive a break in production (e.g. need continuous cash flow)
  • No failure reporting or documentation (e.g. fixes during testing don’t make their way into production parts)
  • Lack of consistent repeatable processes (e.g. changes in personnel often result in changes in product performance and delivery)
  • Unable to rapidly scale up (e.g. cannot meet a surge in orders)
  • Dependency on key personnel (e.g. when “Bill” leaves, all is lost)

View from the Bottom

The reason they invited me was to hear directly from a small business owner about the challenges we face when working with large organizations. [They found me via AIAA headquarters who knew that Pointwise was an AIAA corporate member.]

I opened with one of my favorite quotes: “Owning a small business is like agreeing to be punched in the face for a living.” I don’t recall the origin of that quote, but when I share it with other small business owners I get nods and wry smiles in return.

My presentation was then split into three parts: working with the U.S. Government specifically, working with large organizations in general, and just some miscellaneous feedback.

The Challenges of Working for Uncle Sam

When it comes to doing R&D contracting, we find that the 4-letter government agencies that administer and manage contracts are not well suited for dealing with either small organizations or R&D (as opposed to manufacturing).  The same procedures apply to the top airframe manufacturer and the small business. That’s incredibly inefficient for the latter. Also, you can be certain the top airframe manufacturer gets all their attention meaning we get very little, even when just a little attention is all  we need to get things moving.  Here you should note that this is the flip side of the complaint that small businesses don’t have the labor capacity to respond to surges. It appears Uncle Sam lacks that capability too.

I don’t think anyone would disagree when I say that having to wait four years to get the final payment on an R&D contract is an undue financial burden. Nor do I think anyone will disagree how disruptive it is when an auditor keeps all our financial statements in the trunk of her car for months during tax season.

One of our observations is that there don’t appear to be any rules, just the opinion of the last person who looked at your paperwork. You’ll notice that this echoes the observation that small businesses are dependent on key personnel. The same appears to be true for Uncle Sam.

The Challenges of Working with Any Large Organization

Purchasing portals and third party purchasing agencies are especially troublesome for small businesses. While I don’t doubt they simplify things for the large organization, they are mostly undecipherable, undocumented, and unsupported labyrinths of online pain for the small business. There is rarely anyone who a) you can contact and b) can give you a definitive answer.

As a software business in particular, we are faced with terms and conditions in purchase orders that only apply to the purchase of tangible objects (e.g. “Do you use any toxic chemicals in your manufacturing process?”) and have nothing to do with licensing software for which there are no tangible deliverables. Having to read lengthy Ts and Cs is not the best use of our time, let alone the delays caused by asking to have some of them struck.

So why do we bother to read Ts and Cs in the first place? Because they contain onerous tidbits like these that we will NEVER agree to.

  • Identify all your employees who used to work for us.
  • Give us your financial statements for the four prior years.
  • Agree to abide by our ethics policy.

And here’s the flip side of negotiating a purchase order. We (the small business) have rights and responsibilities too and in our case we want the large organization to agree to the Right to Use License for our software. Their often adamant refusal to do so is problematic to say the least.

Of course, it’s because they fear having to get LEGAL involved in the purchase. [Cue Darth Vader music.]

Other Issues

Without going into the details, the issue of ITAR-controlled articles was discussed (i.e. International Traffic in Arms Regulations). Unfortunately, some engineers at large organizations don’t know what’s ITAR-controlled and what’s not. When they share that data with us, the small business, how are we supposed to know and take the appropriate action?

Summarizing the Challenges

Business transactions between organizations of (vastly) different size pose several challenges, that are often two sides of the same coin.

  • Incomplete Communication: Large organizations fail to make their expectations clear to small businesses. And small businesses often fail to disclose important information to their large business customers.
  • Lack of Education: Small businesses lack certain skills or expertise that are often necessary for completing transactions with large businesses. But large businesses often fail to provide the small business with the necessary guidance or platforms tailored to the small supplier.
  • Limited Capacity: Small businesses often lack the personnel, systems, skills, or cash flow to work with large businesses in the manner they’re used to being worked with. And large businesses lack the personnel, systems, and skills to accommodate the needs of small businesses.
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One Response to Small Biz and the Aerospace & Defense Supply Chain

  1. [blockquote]there don’t appear to be any rules, just the opinion of the last person who looked at your paperwork.[/blockquote]

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