The Client

Volvo Aero

The Challenge

A new dimension to the enormous financial risks inherent in developing high-technology products for the aerospace industry is risk sharing. With OEMs mandating suppliers, who may already be paying a huge entry fee, to contribute financially to development costs, risk is no longer the concern only of the OEM but of everyone in the supply chain.

Product cost is shared between suppliers, and payment and rewards are received when the product is adopted by customers. But, even in successful products, the first sale may be up to 7 years after the initial investment, and payback not until year 15. Additional risks arise if one of the suppliers in the chain proves to be unreliable or expensive.

Because joining one OEM's supply chain is likely to preclude participation with another, the initial complex investment decision, with all of its risks around supply chain performance, is compounded by whether or not the end customer (eg an airline) likes and purchases the product made by that supply chain.

So, absorbing these new risks means that the outcome of an investment decision will be determined by purchase decisions made by the OEM's customers in 5, 10 or even 20 years time.

Because Volvo Aero is a supply chain partner, managers at Volvo Aero have significant experience of making this type of investment decision, but they have constantly been disappointed by the capability of the existing spreadsheet-based decision tools to accurately support this area, and test their assumptions.

Standard, top-down modelling cannot be successfully applied to the problem because the decisions are too complex, and the system too large, for prescriptive modelling to be accurate.

Volvo Aero engaged dseConsulting to work with senior managers and board representatives to develop more accurate, evidence-led investment decision making.

dseConsulting Solution

dseConsulting employed Agent Based Modelling & Simulation to explore this problem without losing any of the system complexity resulting from the interactions and evolution of agents.

Using the natural boundaries of the system, dseConsulting built models of 3 OEMs and simulated their decisions about when to replace technology and when to launch new products, essentially both future and current airframes.

We then built models of a population of 1200 airlines, loading actual base data to model the real-life informed, financially-based decisions about which of the 3 OEMs' products to purchase as the airlines' current fleets of aircraft aged and replacement decisions were reviewed.

The model was integrated into the scenario planning process and Volvo Aero managers were keen to see how the scenarios they were developing, in this separate project, could impact the company and its future performance. Ultimately, decisions were refined in light of the findings from the modeling work.

The Business Benefit

A new, enhanced understanding was acquired by all members of the decision making team with acceptance and agreement from all stakeholders.

dseConsulting delivered a detailed decision support document covering the following elements:

• An overview of when and why airlines would choose to replace existing fleet
• Expected investment performance based on the 4 scenarios identified by Volvo Aero during the scenario planning exercise
• The results mapped against the company’s balance scorecard to ensure that the effects on company performance were clearly illustrated and understood
• Recommendations about how to apply the technique across the business

This tool proved to be the ideal method for interpreting and feeding back into the investment decision-making process and the model continues to be in use internally.

"The value [of simulation] can easily be seen by how it has altered our decision making. The models by dseConsulting improve our understanding of our business, and the tool facilitates management discussion beyond what we had previously. It creates an interactive environment for serious debate. We are now working hard to ensure that modelling is included at each step in the strategic planning process"
Anders Nilsson, VP Business Strategies, Volvo Aero

"The aerospace industry is very complex, with long time scales for payback and huge investment requirements. For us, it is very important we understand how decisions we make, or those of our competitors and partners, may affect the future. That is why we are really excited about the potential of this approach."
Lotta Oloffosson, Marketing Management, Volvo Aero

View a simplified, airframe competition model demonstration.