1. 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

2. The Quebec Aerospace Cluster The heart of the Canadian aerospace industry 2

3. 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 3 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 Toulouse Seattle Montréal Source:Secor 2010

4. 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 4 Source:MDEIE 2010 4 Primes 15 Tier 1 215 Tier 2-4

5. 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 5 Sources: MDEIE, Institut de la statistique du Québec 2009 et Canadian’s Perceptions of the Aeronautical/Aerospace Sector, November, 2010, NATIONAL and Harrisdecima.

6. Aéro Montréal: Québec's aerospace cluster 6 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

7. Quebec’s aerospace sector challenge The need to evolve towards a world class supply chain 7

8. 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 8 The global aerospace supply chain is shifting in favour of performing Tier 1 integrators responsible for design, manufacturing and assembly of complete systems

9. 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 suppliers o 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 9 Source:Transfer Technology for Successful Integration into the Global Economy, A case study of Embraer in Brazil, United Nations, 2002; SECOR Analysis

10. Tier 1 integrators are key in the development of all new platforms: the Boeing 787 business case 10 Source:McKinsey & Company

11. These trends affect the Quebec aerospace sector performance 11 Industry turnover has progressed in the last 20 years but has stagnated since 2000 Quebec aerospace sector turnover In 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 Employment CAGR 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

12. Between 2002 and 2009, exports and trade balance have slipped 12 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 20062005200720082009200220032004 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

13. Québec’s industry structure is in inadequacy with the emerging trends 13 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 1 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

14. 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 ChainQuebec Suppliers 14

15. Aerospace suppliers challenges 15 Aerospace Supplier Competition from emerging markets: pressure on prices Access to markets Traditional customer has moved Capabilities improvement in : design manufacturing systems assembly Costs reductions Financing Demand fluctuation 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

16. The MACH initiative An important step in Quebec’s path towards a world class aerospace supply chain 16

17. 17 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

18. 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 18 The MACH Initiative:

19. 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. 19 Better alignment between customer & supplier = Higher performance of the supply chain The MACH Initiative is centered on tight collaborative relations to foster innovation

20. 20 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

21. 21 5 maturity levels The MACH Excellence Framework

22. 22 Formal engagement (Supplier and client) MACH framework of excellence processes maturity evaluation (audit) Identification of performance gaps MACH performance certification attribution or revision Elaboration of personalized improvement plan linked with identified performance gaps Improvement plan and projects approval Elaboration of a personalized training program linked to the approved improvement projects Execution of improvement projects and training program 12 to 14 Months cycle The process:

23. 23 The suppliers and mentors of the first cohort

24. 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