These days, there is a renewed focus on increasing cash flow in the aerospace industry. The industry is emphasizing better cash flow to address key issues like paying shareholders and vendors as well as having enough cash to invest.
Whether it involves manufacturing a new commercial aircraft or delivering defense contracts on time, the availability of cash is important. The aerospace industry also has several opportunities for realizing growth like increased sales of commercial airplanes in the future. There is also a greater focus on research and development for improved aircraft performance and features. All of these activities require cash.
How Free Cash Can Increase Profits
Paying attention to cash flow may improve profitability. Instead of spending enormous amounts of cash on massive quantities of slow-moving inventory, it is better to have optimal inventory levels so that more free cash is available. Available cash can be spent on research and development along with other viable initiatives. Free cash can also be invested in secure bonds to earn interest and drive revenue. The reduction of inventory levels, on the other hand, will bring its own benefits that will ultimately increase profit margins. Lower inventory means lower expenditure. Reducing expenses will thus increase the net profit. The aerospace sector can realize much higher profits this way since it holds more inventory than average as compared to other industries. Supply chain also poses challenges of its own since the lead time can often extend to months and even years.
Here are the problems that can lead to cash flow problems.
Visibility over inventory is imperative since it allows for better management and lower costs. If there is lack of visibility then the inventory management suffers and costs will therefore rise. Companies that give higher priority to other key issues often lose sight of inventory across business units, sites and programs. Therefore, inventory management may not be optimal.
Unreliable Lead Time Data
Quite frequently, lead times provided by vendors often do not match with actual lead times.
The aerospace industry already faces a key challenge in the shape of long lead times and high volumes. These issues further compound by inaccurate lead time estimates.
This uncertainty can lead to an inventory management predicament. Since managers realize that parts often take longer to deliver as compared to the lead time estimate, they get around this issue by stocking up on high inventory levels. With buffer amounts of inventory, cash flow will be restricted.
Work in Process Inventory
Tracking Work in Process inventory is often inadequate. Determining the WIP level occurs early in a program life cycle. When streamlining operations, revisiting and improving the WIP level is does not take place.
For increasing cash flow in the aerospace industry, companies can realize several benefits including higher profits by addressing issues created by restricted cash flows. Managers should hence focus on the root cause to alleviate cash flow problems.