TransDigm: Value-Based Pricing Strategy | In Practise

TransDigm: Value-Based Pricing Strategy

Former President at TransDigm

Learning outcomes

  • Why TransDigm's culture is unique
  • How TransDigm streamline inventory of acquired assets to increase capital efficiency
  • Two-tiered OE pricing strategy and how OEMs view TransDigm
  • Aftermarket pricing and value-based pricing logic
  • How OEMs suck margin from the supply chain
  • Risks for TransDigm's pricing and M&A strategy
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Executive Bio

Yusuf Muhammad

Former President at TransDigm

Yusuf is the Former President of CEF Industries, an operating group of TransDigm where he had full P&L responsibility leading over 200 employees. He joined TransDigm in 2000 as a Senior Design Engineer before moving into product marketing in the ADS/Transicoil division. Yusuf became a vital employee within TransDigm as someone who would lead integrations of acquired businesses. From 2017-19, Yusuf spent 2 years as VP at Triumph Group where he competed with TransDigm on various platforms. Read more

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Yusuf, a pleasure to have you with us. Could you just provide some context to when you first joined TransDigm and the responsibilities that you had?

I joined TransDigm back in 2000. Prior to that, I worked with DuPont, in their aerospace division, the Vespel group and I worked with General Electrics, so I’ve had experience with large organizations, prior to joining TransDigm. I was just finishing my master’s degree, when the opportunity to join TransDigm, as a senior design engineer, came up. I was actually a part of the AeroControlex group and as TransDigm went from being a privately held organization, going into their IPO, it was around the 9/11 time frame and just after those years, there were a lot of consolidations and things. It afforded me the opportunity to move from the engineering role into a product management marketing role.

From that point, my career expanded, going from product line management to director of sales and marketing of some of the most recent and early acquisitions. Then, ultimately, to president of one of their operating groups, CEF Industries. It really afforded me an opportunity to grow with the culture and to be one of the ambassadors of the TransDigm culture and bringing that into new acquisitions. It was a very interesting time and I’m really grateful for the opportunity that I had, to work with that team.

So you were part of this integration team, SWAT team, that goes in and embeds the culture on these new acquisitions?

That’s correct. One of the first things that people aren’t really aware of when you think about TransDigm and their culture and their acquisition strategy and model, that all starts before they actually purchase the company. When companies are fed into that acquisition funnel, meeting certain criteria around particular markets, meeting certain criteria around financials and intellectual property or technology, those fall into the funnel. But then there’s other aspects of the business, where doing that initial due diligence and interaction with either bankers or some other executive team of those potential acquisitions, we’d start to determine and develop an understanding of whether or not that company really could fit within TransDigm’s overall culture.

It’s really interesting. They almost have this strategy of a private equity team, building out various portfolios and various platforms. You will hear that a lot, in private equity and at TransDigm, probably one of their keys to success is that they behave in a very disciplined and almost, I would say, unemotional way, in a lot of their acquisition.

Can we walk through the process, from start to finish then? Assume that we’ve acquired a business. How exactly does TransDigm approach introducing the culture to the new acquisition?

Two things. Number one, they do a very thorough review of the incumbent leadership. There are product line acquisitions and there are company acquisitions. On a product line acquisition side, they will identify an internal team that will, subsequently, absorb that product line. That product line may come with an operating location, that was part of another organization and they identify people, within that operating location, such as shop supervisors, people that are in materials or inventory, those sorts of things that they view as key to helping to usher the culture within that product line.

In an organization, they will do a very similar thing. They will review the operations manager, engineering manager, the accounting team or financial controller, HR, and they will look at that team and say, okay, does this team buy into our kind of vision, which is pretty simple. They really have a very simple vision for how they want their companies to operate. They want companies that are very customer-centric, in terms of understanding the needs of their customers. They want people that are going to, basically, act as owners. The third thing is, they want people will take risk, but measured risk. They’re going to take risks, in terms of technology, new market share and those sorts of things. If people who are on the existing team exhibit or seem to be aligned with those sorts of operating modes, then they will keep them on.

One of the key things about TransDigm culture is that it’s really more about decentralized leadership, versus centralized leadership. As I said, I’ve worked with DuPont, GE and even, more recently, working with Triumph Group and that’s one thing that became very noticeable about the difference in culture. TransDigm will have an operating company president or a site leader, that has a lot more authority than in other organizations, like GE or DuPont or United Technologies, where they understand the concept of a reversible decision, versus an irreversible decision. They make it pretty clear that, if you’re doing something that’s going to damage the intellectual property ownership of the company, if you’re doing something that is going to change the overall contractual relationship with a major customer like Boeing or Airbus or General Electric, those things need to be discussed up the chain, all the way, sometimes, to the CEO level.

Other decisions around pricing, around particular business programs or particular aircraft programs, those are reversible decisions, so the local people have a lot of autonomy, in terms of the ability to decide what new business they are going to take on and what new business they aren’t. It’s interesting, because that even plays a role in how TransDigm operating companies do work with each other. There isn’t a corporate mandate to say, we have an electric motor company, so all of our companies that need electric motors will buy from our own internal suppliers. You may buy from a competitor, to one of the other TransDigm divisions, because that competitor has a technology or a solution that doesn’t exist, internally. Or maybe the two align, where an internal group wants to enter into a particular technology and the other group has an enabling program that allows that to happen. Those things happen organically and naturally and it’s not a forced sort of decision making. That’s really the underlying culture.

Is that how you look at it, internally, between product line acquisitions and whole business acquisitions? For example, the Esterline is a complete acquisition. They also acquired Kirkhill, from Esterline, a few years back, so that would have been more like a product line acquisition?

For instance, I think with Tactair, they acquired a product line which was the cargo automation and handling systems that are utilized in the cargo aircraft, the rollers and the electromechanical system that provides that cargo handling, within FedEx, UPS, those sort of customers. Well, that was a product line acquisition. They identified a candidate, an internally existing TransDigm business that could absorb that. Yes, those are some of the decisions that they make, when they’re looking at various businesses, whether it’s a product line or an entire business. If you think about the McKechnie acquisition, where they bought a number of companies, that was one of the first very large, broad acquisitions that they did. The McKechnie Group also had a number of fastener businesses in the UK and Europe that really didn’t fit within TransDigm’s portfolio. So they quickly acquired it and then divested that fastener business to Alcoa.

Again, they’re very aware of what businesses their model can add value to and what businesses they can’t. They’re very pragmatic about that.

You’ve bought a business, you’ve gone in, you’ve changed the culture, you’ve introduced this new operating structure, what are the changes in the cost structure you make? Take a product line acquisition. What do you cut out?

Often, when you look at a product line, or you look at a business, some of the things around efficiency that are quickly able to be realized, are around inventory. A lot of businesses run very fat, in terms of inventory. Inventory is usually tied up in work in process. You have bits of unfinished goods, sitting in one location, then three processes forward, there’s another lot of inventory, of the same actual product, in a different state of completeness. What they do is, they quickly come in and when they look at those sorts of things and they rationalize what kind of finished goods they want to have. Most of the companies that you see, in aerospace, they don’t spend as much time as TransDigm does thinking about where finished goods should be stored, in order to be more flexible.

Let’s just take an example of a pump. You’ve got a pump that you’ve designed. You’re going to have castings and housings that go into it. You’re going to have gear or gerotor pumping elements that go into it. Then you’re going to have electronics that go into it. You can either store the casting level in the total raw material side or you can store it at the final pump assembly. The way that that thought process works is, going back to that customer focus and customer facing philosophy, if you need to sell finished pumps directly to airline customers, there’s value in having finished goods at the highest inventory value, which is a finished, tested pump, which is ready to be installed on an aircraft. There may not be as much value in keeping sensors, switches and castings, because no airline shop can do a repair of your unit, to that inventory level. A lot of times, you go into businesses and they keep inventory at these very low levels thinking, okay, when I receive an order, then I’m going to do all the necessary steps to make that into the final part. That’s unnecessary costs; both variable and fixed costs are driven up by that business philosophy for how you run your shop.

By having it at the highest level, you feel that your inventory value went up from $5 million to now, after I’ve put the labor and everything else into it, these finished goods are at $15 million. But that $15 million, that inventory will turn much faster than that $5 million, where you need to add in all that work anyway. That’s just a simple example but there are other examples where they will say, okay, there are a lot of shops that do repairs on these units, so having finished units is not the best place to hold inventory. We need to supply sensors and castings and other material, to the marketplace, to the airlines, to the MRO facilities. Therefore, keeping the inventory at that other level is actually higher value. Again, it increases inventory turnover. That’s a very simple example of what they do, in terms of working capital.

Don’t these companies understand that or what do they do wrong?

It’s really been interesting, because you would think that most of that type of thought would happen at a mom-and-pop shop, right? But no; you go into the big places, like the Esterlines and the McKechnies and even the Eatons and the Goodrichs of the world, and you find that they haven’t rationalized their inventories. They haven’t rationalized their inventories, in terms of aligning them to how the market procures the product. You think about GE aerospace and then, it was Rockwell, which was Collins, which was UTAS, all that stuff, they were all similar to TransDigm, made up of many various acquisitions, over years and years and years. Everyone that took that acquisition on, thought that the prior management must have figured out and that it’s as efficient as it needs to be. The larger your organization gets, the further away from the value stream, decisions are being made. That’s the real goldmine of how TransDigm culture allows and operates so efficiently, is that by being decentralized, they move decisions to the closest point of the value stream.

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TransDigm: Value-Based Pricing Strategy

June 2, 2020

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