Reducing Commercial Risk in High Performance Metals.

A Pathway to Enhanced Return on Capital and EBITDA

According to McKinsey and Co. The global aerospace and defense (A&D) sector is booming. The return of air travel to pre-pandemic levels is one factor behind soaring demand. Another is greater geopolitical instability, which has led to growing national defense spending (in Europe, for example) and rising demand for ammunition. Order volumes across products have increased significantly, and a burst of talent recruiting is under way in the sector

Growth is welcome, instability is commonplace and change is a constant.

In an industry, where the stakes are high and margins can be slim for distributors, managing commercial risks is crucial for maximizing return on capital. Factors such as payment reliability, warranty obligations, indemnification clauses, performance metrics, and price fluctuations play a significant role in shaping the financial landscape of distributors and their clients.

By strategically mitigating these risks, companies can improve their financial performance, enhance customer relationships, and ultimately achieve a more favorable return on capital. The COVID-19 pandemic further highlighted the importance of these strategies, providing valuable lessons for navigating future uncertainties and avoiding the significant risk posed by increased inventory and decreased business.

Understanding the Risks

The aerospace sector is particularly susceptible to a variety of commercial risks. Global economic fluctuations can impact demand to flight passengers and as such the demand for aircraft and aerospace components can immediately be impacted, leading to unpredictable pricing and supply challenges. Additionally, the increased incidence of litigation surrounding breaches of contract or poor performance exacerbates the need for robust risk management strategies. Distributors , processors and tier 1 manufacturers must navigate these complexities while ensuring compliance with stringent regulatory requirements and maintaining the trust of their clients. A wise man once said to me " A De-risked business is a profitable business".

Payment Risks

Delayed or defaulted payments can severely impact cash flow, limiting a distributor's ability to reinvest in inventory, technology, and workforce. The pandemic exacerbated these challenges as many manufacturers faced disruptions and reduced orders, leading to longer payment cycles. To reduce payment risks, companies can implement more rigorous credit assessments and establish clear payment terms with clients, enhancing financial predictability.? With all customers pushing payments terms out, at what point are our financial services as valuable to our customers as our products, while that day may never come, finance and lending are a significant cost to our business.? Managing payment terms to reduce the cash conversion cycle is critical when considering negotiated risk.

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Warranty and Indemnification

In an industry where product failure can have catastrophic consequences, warranty and indemnification clauses must be clearly defined. The pandemic's supply chain disruptions underscored the importance of robust contractual agreements that specify liabilities, as companies faced unexpected challenges in fulfilling orders. By minimizing the financial burden associated with warranties and clarifying terms during crises, distributors can allocate more capital to growth initiatives.? I’ve been known to alike warranty conditions to buying a television, but when you don’t know if your product is an APU mount or part of a landing gear, it can be challenging to understand and manage risk in this area, while remaining competitive and equitable.

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Performance Metrics

Performance risk is often tied to the reliability, meaning a product being delivered in time and in full quantity and the continuous provision of quality of products. The pandemic revealed vulnerabilities in supply chains, emphasizing the need for distributors to establish performance metrics and regularly assess supplier capabilities. By ensuring that suppliers meet contractual obligations—even in challenging conditions—distributors can reduce the risk of litigation and bolster their reputation, leading to repeat business and enhanced customer loyalty.? It’s a prerequisite that companies perform and distributors and service providers add tremendous value to the supply chain in this area, it is however an area of risk which has gained prevalence over the past number of years.

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Price Fluctuations

The market is subject to volatility influenced by global supply chain disruptions, geopolitical tensions, and raw material price changes, today more so that ever before.? With various conflicts around the globe leading to embargoes and shortages of raw materials how do we gauge the pricing for the next year, 3 years or even 10 years? The pandemic led to significant price fluctuations due to increased demand for certain metals and supply constraints. Implementing hedging strategies or fixed-price contracts can stabilize costs, providing more predictable financial planning. This allows TW Metals to allocate capital more efficiently, ultimately boosting returns.

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Economic Considerations

In the current global economic climate, characterized by inflationary pressures and supply chain uncertainties exacerbated by the recent pandemic, industry must adapt swiftly. Companies like TW Metals must effectively manage commercial risks and create a competitive advantage. Being able to guarantee stable pricing and reliable delivery schedules—particularly in the aftermath of recent disruptions and strike action, may capture larger market shares, as manufacturers prioritize partnerships that mitigate their own operational risks.

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Legal and Regulatory Landscape

The rising tide of litigation in the aerospace sector necessitates that distributors adopt comprehensive risk management strategies. Recent legal proceedings involving major aircraft manufacturers underscore the critical need for robust contractual agreements. For instance, aircraft manufacturers have faced lawsuits related to incidents, where issues around safety and performance led to extensive litigation from airlines and suppliers alike. These cases not only highlight the legal vulnerabilities in aerospace contracts but also serve as cautionary tales for distributors. The increased scrutiny on compliance and accountability means that robust indemnification clauses and well-defined warranties are more essential than ever.

Additionally, other manufacturers encountered legal challenges over delays and performance failures, further complicating the industry landscape. The pandemic intensified these challenges, with many contracts being scrutinized due to delays attributed to supply chain disruptions. By investing in legal expertise and crafting well-defined contracts, distributors can protect themselves from litigation costs while fostering trust with clients. A reputation for reliability and accountability can lead to long-term contracts, further enhancing returns on capital.

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Leveraging AI in Contract Review

In response to the complexities of risk management, many companies in the industry are increasingly turning to artificial intelligence (AI) to streamline the contract review process. AI-powered tools can analyze large volumes of contracts, identify potential risks, and highlight unusual clauses that may warrant further scrutiny. By automating routine tasks such as document comparison and clause analysis, AI can significantly reduce the time and labor involved in contract reviews, allowing legal teams to focus on higher-level strategic decisions.

However, while AI can enhance efficiency and accuracy, the nuanced understanding of industry professionals remains irreplaceable. The development and experience of seasoned professionals are critical in interpreting complex contracts, assessing contextual factors, recognizing and applying commercial conditions and making informed judgments about the associated risk. AI lacks the ability to fully grasp the subtleties of human interactions and the dynamic nature of negotiations. Thus, while AI can support the contract review process, it cannot replace the strategic insights and expertise that industry professionals bring to the table.

It could be argued that the industry is at a crossroads, faced with challenges that demand innovative solutions. Companies must invest in their most crucial asset, their people.? While the recent port strikes reminded us that there is a fear of AI technology and automation, successful companies will leverage those technologies and all our people to do the tasks that are critical and cannot be automated.? The ability to develop and retain talent will continue to be a differentiator , if companies can manage personnel, retention, training and commercial risks effectively , they will not only protect capital but also enable them to seize opportunities for growth. Ultimately, those who prioritize risk management and personnel development will likely see enhanced returns on capital, paving the way for sustained success in a competitive marketplace.