Changes in fleet composition generate significant workload for an airline’s technical department. Not only does it procure and accept aircraft, but it must also prepare for operations. During this preparation, engineering and procurement teams should undergo initial provisioning (IP), a fundamental process aimed at securing the availability of spares.
Yet, many operators underestimate its complexity. They fail to realize that IP goes beyond the mere orders for spares or contracts for component support. IP involves complex technical and commercial evaluations with dramatic consequences for the airline’s operation and profitability. Here, we share our insights into successful IP for new aircraft.
Keep OEMs at arm’s length
A producer may be most suited to advise on its products, but this is not always the case with aircraft manufacturers. They rely mainly on original equipment manufacturers (OEMs) for the design and supply of aircraft systems. These OEMs often face exacting conditions for them to be selected as suppliers, forcing them to recoup their product development expenditure largely through aftermarket sales of spares. Consequently, their IP recommendations are generally exaggerated, leading to manifestly poor stocking decisions made by airlines.
Many OEMs also lack the operational experience of an airline. They do not possess the savoir-faire in aircraft maintenance in a commercial milieu or disregard the financial limitations of an operator. Therefore, OEMs’ or aircraft manufacturers’ advice must be evaluated and adapted to the requirements of the operator. They are never to be trusted blindly.
IP as a stepping stone to professional supply management
Supply managers should employ IP to efficiently manage the availability of spares during the first nine to 15 months of operation. It helps an airline tackle the uncertainties during this inceptive period, relying on assumed or expected values. However, after operation has commenced, supply managers ought to switch to continuous supply strategies to monitor and guarantee the availability of spares according to operational data.
The trap of IP discounts and over-stocking
Discounts and credit offers are customary during IP. Although they seemingly allow for an efficient use of the airline’s financial resources, they can make procurement organizations spend more than they actually need. Still, if cleverly employed, discounts and credits are beneficial for both seller and purchaser.
Over-stocking spares leads to an increased total cost of ownership. Therefore, managers in charge of IP must set strict limits on the acceptable stock coverage by evaluating the capital, stock holding and depreciation costs. Additionally, the possibility of buy-back and re-marketing of the spares to be purchased must be contemplated. One may not be able to liquidate the investment in over-purchased parts, resulting in considerable depreciation and scrap costs.
Know and execute your contractual clauses
A profound understanding of contractual clauses and the ability to execute them are essential. Typically, offers made by OEMs during IP do not get the attention they deserve from the operator as these are merely seen as add-on services to the aircraft. OEMs are almost always aware of this and package the offers accordingly. Operators need to look beyond the face value of initial offers and instead focus on long-term relationships and joint value creation.
Often, contracts will have incentives that are triggered by various milestones, such as spend volumes. Unless the operator keeps track of and curbs these triggers, the value of the agreement can be jeopardised. To monitor these events is not always easy in today’s complex supply chain structures, but it is key to unlocking the true value for the operator.
The bottom line: successful IP requires multi-disciplinary experience
Bearing in mind the aforementioned, successful IP will only be accomplished by those with deep and thorough understanding of aircraft maintenance. They must have a firm grasp of the operational, technical and commercial aspects. Such a holistic approach will help steer management decisions through the course of IP, thereby delivering levels of material availability while keeping the financial performance of the fleet robust.
Alex Duran is a founding partner of Nexspares and former inventory planning manager, now advising airlines on supply chain optimization.
Jasin Kolar is a founding partner of Nexspares and former strategic procurement manager, now advising airlines on supply strategies and negotiations.