The next supply chain challenge for A&D. By Diana Dimitrova, Pelayo Losada and Marine Baudin-Sarlet
In the past five years, companies across industries have accelerated their journeys toward carbon neutrality. Why now? As climate change awareness grows, customers and investors are pushing companies to become greener. Significant economic opportunities are awarded to trailblazers, while industry laggards are more and more challenged.
Aerospace and Defense (A&D) is a telling example. The industry represents four to five percent of worldwide CO2 emissions today and could grow to 25 percent or more by 2050 if it doesn’t accelerate its efforts to match the decarbonization pace of trailblazer industries. Of course, climate is not a new concern in A&D, and leading companies have started to invest in cleaner technologies years ago; however, several factors are intensifying the race towards greener skies and battlefields. First, corporate customers are increasingly aware of the industry’s carbon footprint and are starting to include environmental criteria in their procurement policies. For instance, both the UK MoD and the US DoD have announced that climate performance will be considered in upcoming Defense tenders. Investors follow customers: shareholders are more and more likely to disengage from ‘climate sin stocks’ for both reputational and financial considerations.
And regulators are adding to the pressure, aiming to provide clear economic incentives to decarbonize by imposing quotas, taxes, and control measures to limit emissions. As a result, A&D companies need to transform faster than ever to preserve their order book, stock value and cost competitiveness.
Faced with these constraints, most A&D companies have committed to reduce CO2 emissions coming from their manufacturing processes (scope 1 and scope 2) and launched initiatives to that effect. The most common measures include adjusting manufacturing processes to reduce waste, rework, and energy usage, shifting to renewable energy sources or green on-site generation, and electrifying heating. These efforts are already yielding results: ~75 percent of large European and American A&D companies have seen a decrease in their carbon intensity over the past five years, excluding impact from Covid.
But there is a catch: in A&D, as in many end-product manufacturing industries, over three quarters of emissions are in the supply chain, outside the direct control of A&D companies. Hence, decarbonizing the industry cannot be achieved by the A&D giants alone: they need to work with their suppliers, customers, and partners if they want to reach net-zero.
The first step is to understand where supply chain emissions come from. To do so, companies need to create an emission baseline, balancing the trade-off between speed and accuracy. For instance, when assessing the emissions coming from the materials used to manufacture their products, A&D companies can use supplier-material hotspot matrixes which can pinpoint the focus areas. A&D companies should partner with their highest emitting suppliers to support them in their development of a detailed, SKU level, emissions reporting. For the remaining suppliers, emission estimation can be done through a volume- or spend-based methodology. Similarly, when analyzing the emissions coming from customers using the products, companies should understand their most polluting products in detail, while less carbon-intensive offerings (e.g., solutions & services) can be assessed at a higher level. By using these shortcuts, A&D companies can build a solid understanding of their baseline in three to six months.
Once the baseline is clear, A&D companies should set their ambition. Most nations have pledged to contribute to the Paris Agreement’s ambition to cap temperature increase to 1.5-2C by 2050, and companies are expected to align to this end goal. Defining intermediary milestones, for instance 2030 and 2040 targets, will help to set the right pace.
A&D companies must then define the roadmap towards their targets. An abatement curve is a useful tool to prioritize actions: it maps climate levers based on their efficiency (how much CO2 emissions can these measures avoid) and their cost. Based on such a curve, a successful roadmap can be built with business case positive activities being launched right away (e.g. source raw materials coming from more carbon-efficient processes and/or suppliers, switch transport modes to decarbonize logistics, retrofit selected parts on the fleet in service to reduce emissions) while laying out the foundations for longer-term initiatives (e.g. design the next generation of products that emits less during the lifecycle).
Then comes the time for execution. Leading companies in more environmentally mature industries have launched successful climate transformation programs, with a strong central team to steer the efforts and accountability in the business units. Most A&D companies are still in the early phases of substantiating their roadmaps, but such programs will become the industry norm in the coming years.
It is worth noting that successful climate programs often require collaboration across the industry supply chain, in three main areas. First, A&D companies should work with key customers, peers, and partners to agree on industry-wide standards and milestones. Second, A&D companies can create buying groups to coordinate demands to suppliers (e.g., certifications, climate targets), amplify demand-side commitments, and support the supply base through expertise or technology sharing. Third, companies can choose to collaborate on selected R&D efforts which require scale, for instance to develop alternative fuels or propulsion systems.
Reaching net-zero is a multi-decade journey for most industries. However, starting now is essential to reach the targets set by the Paris agreement. Aerospace & Defense companies need to turbo-charge their current efforts and launch climate initiatives across the supply chain. Those who successfully collaborate with their suppliers, peers, and customers to transform into greener businesses will reinforce and grow their market position, while contributing positively to the race to zero.
Boston Consulting Group (BCG)
Diana Dimitrova is managing director and partner, Pelayo Losada is managing director and partner and Marine Baudin-Sarlet is principal at Boston Consulting Group (BCG). BCG partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, it works closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures.