Managing risk in the MRO supply chain
There is more to parts management than having the right part at the right place at the right time. The best MROs have contingency plans for Murphy's Law.
Most materials managers focus on how many parts they will need, what they will cost and where they will be deployed when they create inventory.
For Ralf Noether, technical director for European Air Transport in Leipzig, Germany, there is another dimension to parts availability for its olderand and A300-600s. Some rotable parts are no longer manufactured. “With older aircraft, there are some rotables that aren't available for sale and are too expensive to rebuild,” he says. That puts his fleet at risk of being grounded because the right part is not available when it is needed.
European Air Transport has taken several steps to manage that risk. It has bought available spares on the market, established a reliability control board that includes members of the engineering and logistics teams to measure the reliability of parts and meets with suppliers every 4-6 months to see if there are repair and scrap units that may be torn down and mined to keep other parts operable.
These steps are part of a supply-chain risk-management program. That is a different approach to parts management from a conventional inventory management plan, which is typically focused on the four “R”s of inventory: having the right part at the right time at the right place and at the right price.
The four “rights” assume that nothing goes wrong in an MRO provider's supply chain. As we all know from Murphy's Law, however, things happen that may be out of a supplier's control. For example, a supplier may not be able to obtain the raw materials it needs to produce an order or may be unable to access credit to keep its operations going while they fill your order. It may not have the capacity to fill your order and a competitor's order at the same time—and it may favor your competitor over you. Environmental events—such as Hurricane Sandy, eruption of a volcano in Iceland or tsunamis in Southeast Asia and Japan—can bring a supply chain to its knees.
The best fleet operators and MRO organizations have a Plan B for Murphy's Law. FedEx Express, for instance, keeps a few used aircraft at its disposal so that it does not have to worry about not being able to find a specific part when it is needed. The cargo carrier builds contingency plans for large-scale events such as a hailstorm that might damage aircraft at a hub location, and it disperses parts at locations around the world where it can reach them quickly rather than storing them in one location.
“Contingency planning is a given,” says George Silverman, vice president of material management for FedEx Express. “We've been moving shipments around the world for 40 years, and we've learned that it's essential to plan for worst-case scenarios.”
While organizations such as FedEx, European Air Transport and AFIE&M (see page MRO12) have risk-management initiatives in place, that is not the case for the industry as a whole. “These issues have been out there for years, but most commercial airlines and MROs are just beginning to understand the systemic risks in their supply chains,” says Chris Spafford, a partner in the consulting firm Oliver Wyman. “They have looked at inventory management from a cost perspective. Very few people have done it with a risk lens.”
“When you think about supply chain risk management, you're really talking about a risk to your supply,” says Chris Sawchuk, principal for global procurement advisory with The Hackett Group, a Miami-based research and consulting firm.
While there are a number of factors that put a supply chain at risk, depending on the industry, they are all threats to revenue. In the MRO supply chain, revenue is put at risk when an aircraft is grounded because it interrupts supplies.
Several trends are driving the interest in risk management. First, OEMs today are playing a more dominant role in the aftermarket, and so airlines and repair organizations are increasingly single-sourced on parts and services. “To truly de-risk your supply chain, you have to have alternative sources of supply,” Spafford says. “That requires greater competition than we have in the aftermarket today.”
Second, MRO organizations typically have poor visibility into their demand because some repairs are intermittent and variable. Meanwhile, many critical parts and components have long lead times and are expensive—maintaining an inventory ties up resources that could be put to work in other ways; not having them can leave your fleet grounded. “When your demand is intermittent, it's hard to plan,” says Sawchuk. “You have to strike a balance between how many of those large, expensive items you're going to stock against the risk of not having them.”
Third, many of today's supply chains are both long and lean, meaning parts are manufactured or stocked thousands of miles from where they may be needed. “The thing that can be easily and affordably shipped on an ocean freighter is exponentially more expensive as airfreight,” says Sawchuk. “There are also import and export regulatory-compliance factors that can slow down the movement of parts at critical times.”
As the industry looks more deeply at risk management, there are a number of ways to address the issue. “You can't eliminate risk,” says Sawchuk. “So you have to prioritize what it is you want to protect and where to focus your energy.”
For many organizations, the starting point for a risk-management initiative is a cost-versus-risk trade-off assessment. Risk cannot be eliminated, but it can be mitigated. One common approach, says Sawchuk, is to determine how much revenue is at risk as a result of the part or action being assessed.
For example, if a part goes into some but not all aircraft, a percentage of revenue is at risk if that part is not available. “Over time, they may determine that 20% of revenue is at high risk, 30% is at medium risk and 50% is at low risk,” Sawchuk says. “They will then look at strategies to shift the 20% of revenue at high risk to a medium risk.”
There are a variety of steps airlines and MROs can take to mitigate those risks, according to Spafford and Sawchuk. Some of these are:
•Hedge positions on commodities. Many airlines hedge their fuel costs to protect themselves from unexpected price spikes. Few, however, take a position in commodities such as titanium or other alloys that can have a huge impact on the price of components, such as turbine blades and brakes.
“When you consider that an airline might buy $30 million worth of brakes and $100 million worth of turbine blades, hedging might be a wise thing to do,” Spafford says. He also urges organizations to include escalation caps on the prices of important commodities in their contracts. “Create an index of the 18 most important commodities to the parts you are purchasing and put an escalation cap of 2.5 percent a year in the contract,” Spafford says.
•Selectively support the development of alternative sources of supply. Spafford urges clients to pursue several strategies to expand their sources of supply. For instance, a maintenance organization may establish partnerships with surplus or teardown providers, similar to the approach taken by European Air Transport. He also believes carriers and MROs should selectively support manufacturers of approved parts. “I'm not suggesting turbine blades or engines,” he says. “But there are parts where this is a sound strategy.”
Finally, large carriers with leverage can form joint buying consortia as new aircraft types are introduced and require dual sources of supply when possible.
•Do not put all of your eggs in one basket. Just as FedEx is deploying its inventory around the globe, OEMs, airlines and MROs should urge manufacturers with more than one plant to manufacture in at least two locations. “That way, you mitigate the risk of losing supply when a plant goes down,” says Sawchuk. Many organizations forget that parts production tends to be clustered in one region, he adds, which could put it at peril from natural disaster. Auto manufacturers learned that lesson following the 2011 earthquake and tsunami in Japan.
•Bring the risk in-house. If there is only one source of supply, an OEM or MRO may consider investing in or buying that supplier to insure their viability. “I've seen organizations vertically integrate a critical supplier into their business to reduce their risk,” says Sawchuk. “We have also seen instances where a company has invested in a competitor to insure a second source of supply.”
Companies taking such steps will have more smoothly running operations and experience less down time. The key is understanding the risk that is most important to your organization. “A lot of folks start in the middle without understanding what their supply chain is all about,” says Sawchuk. “That's why I urge them to go back to the beginning and understand what is it they are trying to protect. You want to build capabilities that align with your business.”
Tap the icon in the digital edition of AW&ST for a case study in the importance of tracking metrics to supply-chain risk management, or go to AviationWeek.com/mrrisk