Analysis
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Spare parts inventory management

The spare parts inventory management business is central to the operational efficiency of an airline. Numerous solutions are now available to help reduce lead times and cost, but with more competition than before and airlines wanting smaller inventories, how does the sector remain off ground? Hannah Davies looks at supply and demand, parts locator services, and assesses the future outlook for the sector.

Preventing an aircraft-on-ground (AOG) situation is a priority for airlines, as every minute that an aircraft is not flying it loses money. Therefore, adopting the most efficient spare parts inventory management and support programme is fundamental to a carrier's success. "In the aviation business the most critical strategy is to have the right part at the right time, as well as competitiveness," says Deepak Sharma, director of technical, A J Walter Aviation (AJW), adding that, "knowing the demand patterns and planning inventory accordingly" is crucial to meeting customer needs and remaining successful as a business.

Although the demand for spare parts is constant, a trend of airlines wanting smaller inventories has become apparent. "Airlines in recent times do not want to invest large capital in inventory," says Sharma. "Tying up capital on equipment gives very little return on investment".

However, "such patterns seem to be quite normal" and as expected with such a change in demand, a level of "unprecedented competition in the market place" has been found. Competition "encourages suppliers to deliver better quality equipment and an overall improved service", says Sharma. Dan Komnenovich, president and CEO of Aviall, agrees, commenting that "we can never sit back and relax, assuming our market share is safe and our current offering is sufficient... as nearly every company is striving to differentiate their product or service in order to take away business".

So, as airlines downsize on inventory investment the competition for spare parts providers gets fiercer, with each company offering tailored services to help operators forecast what stock they may need, as well as ensuring that those parts are readily available.

"Many airlines have significantly reduced their investments in on-hand inventory to help control costs," comments Komnenovich. "Lead times for many aircraft parts can be weeks, months or even longer, but airlines cannot afford for aircraft to be grounded for long periods of time while they wait on a needed part. Therefore it's critical that we stock as many of those parts as possible so we can support our customers." Aviall currently stocks more than $2bn in available inventory and lists more than two million part numbers in its system.

Regardless of individual airline demands, the priority across the sector is to get spare parts out to customers as quickly as possible, at the lowest cost. "The biggest thing is, you want the parts as close to the point of demand as possible," says John Holmes, group VP, aviation supply chain at AAR. Sharma explains that there are two main challenges with regard to ensuring reduced lead time, which are: logistics and inventory, "ensuring that you have a very good logistical arrangement and serviceable equipment on shelves".

Inventory management solutions

Companies such as AAR, AJW and Aviall all offer numerous solutions to help airlines improve their spare parts inventory management, including full support programmes, power-by-the-hour (PBH) agreements, cost-by-flight-hour programmes, forecasting, web tools and managed repairs. Parts locator services (PLS) are also on hand to further assist the supply of spare parts to airlines through their databases and by developing new technologies. 

Tailored packages are offered to airlines to help reduce costs depending on operation type; anything from a single part to millions of dollars' worth of packages, consignment, managed repairs and cost plan programmes are available to AJW customers, with cost-by-flight-hour proving popular as it "streamlines cash out", resulting in less pressure on cash flow for airlines, says Sharma. Favouring newer, more fuel efficient models has also helped airlines control costs as they require less maintenance.

In October 2011, AAR acquired Airinmar, a specialist in repair management services which in total manages about $600m of component spend per annum, offering a "suite of systems and processes that optimise the repair loop", says Holmes. By expediting parts, Airinmar can "reduce turnaround times from about 30-40 per cent", ultimately reducing individual costs. In addition, it has developed an SPT (shop processing time) management system that allows customers to quickly accept solutions offered by repair vendors against higher turnaround time parts in order to meet demand.

Another inventory management solution that is "exceptionally reliable" for customers to adopt is pooling - unless the fleet is very large. "Pooling is the most effective for rotable assets and most airlines maintain their own pools of rotables," comments Komnenovich. However, as airlines fight to cut costs the options of shared pools or outsourcing rotable programmes become favourable inventory management solutions. Aviall offers a rotable pool and repair management service to its customers, allowing them to access parts when needed, minus the costs of maintaining an inventory.

In trying to cater to individual customer needs it is also important for spare parts service providers to maintain the correct balance of having enough parts available to customers while themselves not holding excess stock. "We have seen a lot of our competitors come and go" due to excess parts, says Holmes, adding that AAR's focus has always been on "buying right". He thinks AAR occasionally misses out on certain deals and opportunities to buy aircraft and engines for tear down due to its conservative business model. And being "one of the first" to tear down a 737NG and Rolls-Royce powered A330 allowed AAR to anticipate the maturity curve of various fleets; "we try to anticipate trends... and be the first to market on a new platform".

"Maintaining enough inventory to meet customer demands while not investing too heavily in stock that ultimately becomes obsolete can be challenging," states Komnenovich. Using forecasting technology and intelligence from customers and suppliers, as well as feedback from its 300 sales and marketing professionals, Aviall is able to put parts on shelves when customers need them, minimising an airline's inventory costs.

In addition, Aviall has adopted real-time pricing and availability information through its online portal that allows customers to see which of its 40 global stocking locations has the inventory that they are looking for, also permitting them to choose the location from which they prefer the parts to be shipped.  Similarly, AJW offers real-time online technical and reliability data to contracted customers. Indeed, a good inventory management IT system and expertise in technical inventory management is paramount to improving the cost of holding, storing and recording parts, according to Sharma.

Location is also a prime factor for both buyers and sellers, as is improving warehousing processes to ensure same-day shipping to customers and therefore reducing lead time. "Most of the orders we receive are for same-day shipment and more than 99 per cent of those orders for in-stock parts are shipped the same day," says Komnenovich. AAR can "pretty much get anywhere in the world", according to Holmes, with a main stocking location at Chicago O'Hare Airport as well as facilities in Amsterdam, Abu Dhabi and a warehouse in Singapore. The parts supplier is also looking at facilities in China and Russia. On top of being strategically located, AAR has personnel on site to help support the 600 aircraft that it has on PBH. "We may not have material on site, but we have people to help customers and anticipate the demand and access the worldwide network to get parts," says Holmes.

Whilst the aforementioned solutions serve the industry well, there is an unprecedented hunger for innovative new technologies that provide real-time data and market intelligence. Aviall's electronic inventory management programme, 'estock', is an example of a solution that is available to airlines to help them monitor inventories and generate reports.  The three-level inventory management programme allows a customer to shop online at aviall.com, establish minimum and maximum levels of inventory at specific locations, scan inventory and received automatic shipments when inventory falls below the designated minimum, pricing and volume discounts, plus a fully integrated system using peer-to-peer computer technology for exchange of inventory levels and transactions.

Parts locator services

When a replacement part is needed an airline wants to know where it can find that part and how quickly it can access it; parts locator companies such as PartsBase and Inventory Locator Service (ILS) aim to provide customers - both buyers and sellers - with a database of reliable inventory lines.

"ILS provides the platform for suppliers to list inventories for sale and search criteria", allowing buyers to find what they need, says Jeff Jerge, director of marketing and product at ILS. Similarly, PartsBase, whose current database consists of 135 million lines, features stock lines from "OEM distributors to third party distributors to airlines", according to Brian Tolley, president and CIO, PartsBase. But when companies haven't "the manpower or time" to focus on uploading real-time data, according to Tolley, how far can airlines rely on such services?

In an industry where time is so precious, and costly, providing real-time data would be priceless. However, most companies don't focus on developing the software needed for real-time data. "Aftermarket sales are there but they aren't critical paths, as most big players for the supplier's space classically have 80 per cent of the revenue from 20 per cent of the customers," says Tolley. At the start of a week, data is uploaded onto PartsBase's site "within an hour from the stock coming", but by the end of the week a "high lag" time is expected, meaning it can take "12 hours to get to a live site".

Customers such as AJW and GA Telesis update their inventories in real-time on a daily basis, helping airlines access current and reliable data; currently 50 per cent of PartsBase's inventory is processed on a daily basis. A solution offered by ILS is 'eMarketplace', which provides an "instantaneous display" of data for customers, allowing ILSmart.com to be accessible 24/7, says Jerge. ILS also provides real-time data via web services, enabling customers to push data out and bring it back into their own systems, ultimately saving time.

PartsBase has recently begun trialling a solution with KLM Engineering and PDQ Airspares that allows them to "drop their spares file directly to PartsBase", says Tolley, making headway for real-time data.

In addition, PartsBase analyses its data to provide customers with options to improve their inventory management and cut costs; if a seller has a vast cache of materials such as commodities, expendables, consumables, as well as airframe parts, it helps the customer to see where demand is coming from and look into the possibility of separating inventory files, allowing the customer to restrict who can see its inventory file by continent, region and corporation. ILS also puts together reports including part numbers, cross references, quantities and average pricing for parts, further assisting manufacturers, suppliers and distributors with pricing, inventory levels and selling of surplus inventory, adds Jerge.

To improve reliability, PartsBase has introduced a rating process that allows customers to rate sellers and give feedback if they are dissatisfied with the service. This solution gives buyers the opportunity to voice concerns, as well as recommend those who are good sellers; it also contacts sellers directly for feedback to help improve its service. ILS provides a preferred vendor feature that airlines can also take advantage of by selecting suppliers that are approved in their own system and restrict search results to those standards.

It is clear that for data to become more accurate PLS companies must "actively engage with customers to enhance the accuracy", says Jerge. All those in the sector highly value customer service and flexibility; for example, when customers asked for flexibility outside the office, ILS developed mobile options such as an iPhone app and its ILSmart website.  The ILS 'AutoQuote' web service was also established to allow suppliers to set pricing for parts, meaning that if they receive a request for quote (RFQ) during non-business hours it will populate the RFQ and respond with pre-set pricing. Another recent enhancement made in response to customer feedback was the ILS and OneAero MRO alliance announced in April 2013. The new partnership offers direct integration of select data between the ILS marketplace (ILSmart) and OneAero MRO websites. "Providing enhanced MRO capability to the airline community is a step in the right direction," says Jerge.

PartsBase and ILS clearly see the value in providing quality data to both buyers and sellers and are investing "heavily" in technology to help customers significantly reduce costs, says Jerge. Improving PLS offerings is one thing but maintaining a standard and having every buyer and seller adopting real-time is a challenge of a far greater scale. However, pushing forward new solutions and developing those that are already in motion is something that both companies are doing. Tolley emphasises that a lot of companies cannot afford to use two PLS providers, so remaining "vigilant" and developing relationships is fundamental.

Future outlook

Since the economic downturn the sector has slowed in growth and with problems such as airlines decreasing investment and looking at short term leases and exchanges as options, spare parts suppliers have had to adapt "business models and offer more programmatic solutions to meet the demand", says Holmes.

Going forward, implementing closed networks is part of PartsBase's plan to "build a solid long-term community". The intention is to give a company the ability to close its network and view only the materials available at its facility; a wider scope can be seen if desired. 

Sharma sees a web tool that gives inventory location and logistics selection in one place as invaluable for the future, to help with the reduction of both lead times and costs. Offering a more complete solution is also what ILS plans to achieve going forward, by "creating a community where supply chain businesses will have more visibility into their own organisations, as well as a venue to collaborate within their own networks", says Jerge.

Komnenovich adds that Aviall "can always get a little better" in regards to its core business functions such as holding, storing and recording parts; commenting that the company plans to "offer some very important new features and services in the near future".

In response to how the inventory management business may change in the future, Holmes notes that "OEMs will continue to play a much larger role in the aftermarket", adding that a big part of AAR's strategy is going to revolve around how it works with OEMs, believing that AAR could help them access parts of the market that they may not be able to independently.

Currently, AAR's programme customers are able to use its web interface to access real-time data about where its inventory is stored. Now the spare parts supplier is developing an app as "it would be great if a buyer from one of our airline customers could find out exactly what is available and buy it or exchange it right there", explains Holmes. It also plans to offer its propriety tools, which help airlines with inventory modelling, allocation and planning, to a wider scope of customers.

It is the opinion of both spare parts inventory management providers and PLS companies that real-time data is what the market needs to improve the accuracy of inventory lines, location and logistics information. According to Tolley, insufficient manpower and time, high staff turnover in the sector and reduced investment from airlines are what slow the sector's progression.

Although there is no quick fix for these weaknesses, new technologies are constantly being developed to help improve the network; there is no denying that the spare parts inventory management business provides the market with an exciting platform for growth and opportunity.

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