On paper, one would think that integrating the supply chains for two maintenance organizations would be easy. Just look for areas where there is duplicated effort and inventory, rationalize those operations and realize the savings.
But in practice, it’s a very different matter. Such was the case with the merger of Air France and KLM Royal Dutch Airlines. Between them, the two airlines operated advanced logistics platforms in Singapore and Kuala Lumpur, which would have seemed a natural for consolidation. “On paper, you ask why you don’t do all of the warehousing and maintenance in one facility,” says Harmen Lanser, AFI KLM Engineering & Maintenance’s components group product development & logistics director. “In reality, merging those two warehouses is not the highest priority because we service different customers and different fleet compositions.” In fact, Lanser adds, from a components standpoint, “it’s not uncommon to have big warehouses that are only a one-hour flight from one another. Service to the customer is more important than the cost savings of consolidating the two locations.”
At the same time, AFI KLM E&M is looking to integrate the consumables used for repairs in Miami, where the Aero Maintenance Group (AMG) and Barfield both have operations. “We are looking for opportunities to reduce our safety stock because inventory could be moved from one facility to the other,” says Lanser. “In addition, you can reach minimum order quantities more easily if you stock for two facilities, which allows you to minimize overstock positions and potentially do a better job at procurement.”
Rationalizing two supply chains is an important component of any merger or acquisition. In fact, the potential synergies from bringing two networks together is often a major part of the rationale for a merger, says Dirk de Waart, a partner in PwC’s transportation and logistics practice and a veteran of several airline mergers. “Before any merger, there has to be a business case, because the acquirer may be paying a premium price that they expect to make up in synergies,” de Waart says. “On the MRO side of an airline, those synergies are driven by the supply chain, since that drives 50-60% of an airline’s costs.”
The reality, de Waart adds, is not unlike that experienced by AFI KLM E&M in Southeast Asia. Initial savings are estimated based on high-level benchmarks and assumptions about routes and the composition of the fleet. Meanwhile, the actual work of merging two organizations takes time, during which both routes and fleet compositions often change, rendering the initial assumptions moot. “Over time, people start scratching their heads, wondering how they are going to achieve those targets,” de Waart says.
His advice to clients: The supply chain strategy should be driven by the long-term maintenance strategy of the newly formed organization. “The supply chain will follow maintenance,” he says. Typically, there are three opportunities for savings:
Hub consolidation: While it is not always possible to consolidate hubs, savings can be realized by closing some hubs and concentrating work at a smaller network of facilities.
Component capabilities: Look for opportunities for one airline to bring in-house processes to its new partner that it might now outsource to a third party, like component repair. “An airline like American has a lot of component capability that an airline like US Airways may not have had in-house,” de Waart says. If both partners have component shops, de Waart advises clients to benchmark their internal capabilities to determine which shops or facilities are the most competitive.
Maximize utilization: What if both airlines have the same capabilities? In that case, de Waart advises clients to look for opportunities to consolidate as much work as possible in a facility in a way that will maximize utilization. “If the facilities are below full utilization, they may not be competitive but by bringing them together, you get a different level of performance,” he says.
The real issue, he adds, typically is not the nuts and bolts of who does what. The bigger challenge is organizational (see sidebar).
While consolidating the warehouses may not be the highest priority for AFI KLM E&M, the MRO does have a number of ongoing projects in the works to generate savings across its supply chain network as it continues to make acquisitions, according to Lanser.
In one initiative, AFI KLM E&M is working with a logistics provider to develop a support organization that will consolidate transportation wherever possible. In this model, parts and consumables will be delivered by suppliers to one central hub in the middle of the network for redistribution to support warehouses. That will enable more efficient and cost-effective deliveries.
In another, AFI KLM E&M is working on a project to create a logistics control tower to gain real-time visibility into the status of inventory, orders and shipments across the supply chain. In a control-tower model, a company communicates with its facilities, suppliers, customers and third-party logistics providers through a collaboration platform. The software monitors the performance of the supply chain and alerts managers when something is amiss, such as a late shipment or incomplete order.
Finally, Lanser is overseeing an effort to reduce the number of suppliers of rotable repair services. “We’re trying to combine as much volume as we can with a limited number of high-quality suppliers,” Lanser says. “That allows us to lower transportation costs by shipments and influence the quality of the repair because we are a more important customer to them.”
Lanser is personally working with the MRO provider’s top 10 suppliers to develop supply chain and support plans. “It is the most challenging part of merging supply chains and something that is rarely discussed at conferences,” he says. “But it is also one of the biggest opportunities to improve your supply chain.”