Inventory management can be boiled down to a simple concept: it's all about having the right part, at the right place, at the right time, in the right quantity and at the right price.

While the five Rs of inventory management apply to all industries, they are critical to overhaul and maintenance operations. No one wants to have an aircraft sitting on the ground because a “no-go” component is sitting in a warehouse in London when it's needed in Miami. For that reason, operations managers would like nothing more than store rooms bursting with just-in-case inventory.

At the same time, no financial officer wants to tie up more cash than is necessary to have inventory available when it's needed.

Balancing those opposing goals has led fleet operators to rethink their inventory management strategies. Those strategies include interest in pooling and exchanges among North American airlines. “The carrying cost of inventory runs us about 20% of the value of the part per year,” says Terry Inglis, director of materials at JetBlue. “If you think about it just in those terms, you have to ask if it isn't smarter to let someone else own your inventory.”

“Airlines have known for a long time that no one can carry all the parts they need,” adds Ed Wodarski, vice president of solutions for Servigistics, a provider of supply chain software solutions for managing service parts. “Now, we're seeing the emergence of these various ways that inventory can be owned, brokered, pooled or exchanged to meet service level requirements without one airline owning all of it,” he says.

An Evolving Market

In some respects, this is not new. Inventory sharing and pooling arrangements have been embraced by European and Asian airlines for decades. The ATLAS and KSSU parts consortiums were formed in Europe in the mid-1970s to support the introduction of widebody jets. While those pools ceased operating about 20 years ago, Air France Industries KLM Engineering & Maintenance have major pools supporting three geographic regions, with locations in Miami, Kuala Lumpur, Singapore, Paris and Amsterdam. Those are supplemented by smaller local pools at various strategic locations around the world.

Those early pools served a strategic purpose for European and Asian airlines. “Back then, it was harder to get parts to those geographic areas than in North America,” says Josh Abelson, senior vice president of supply chain solutions for AeroTurbine. “In some instances, you had to wait three days to get a part delivered.”

North American airlines, on the other hand, have traditionally been reluctant to operate in pools. For one, it could take several days to get a part from one of the European or Asian pools shipped to the United States on short notice. Meanwhile, U.S. airlines had tremendous experience managing their parts and servicing their aircraft.

Another inhibitor is the genealogy of the parts being contributed to the pool by the various participants. “If I'm managing my own spares, I know the history of the parts that have been on my aircraft,” explains Al Kosarek, president and CEO of Aeroxchange. “I don't know what modifications have been done to the part I am getting back or how well it has been maintained. That ambiguity put a wet blanket over the use of pools.”

There are several reasons why industry experts say some airlines are rethinking their reluctance.

The first is financial. “In the airline industry, there's always a need for cash and that is especially true today as results are under pressure,” says Martijn de Vries, director of product and market management, component services for AFI KLM E&M. By sharing parts in a pool, an airline reduces its investment in parts and has an opportunity to sell excess inventory, freeing up cash.

A second is predictability. In a power by the hour (PBH) program, for instance, an airline pays a fixed cost for parts and repairs based on the number of hours a fleet is flying. “A PBH program provides the operator with known component repair costs and ensures that a reliable quality supply is on hand when it's needed,” says Lee Robinson, customer support manager for Aclas Global, which supports aircraft on a global basis.

A third, thanks to mergers and fleet renewals, is that airlines are often supporting multiple aircraft types and even multiple configurations of the same aircraft model. “Even if you fly all 737s, there are different families of 737s and they all have to be supported,” says Wodarski. “In a large fleet with 400 or 500 aircraft, those variations are significant.”

Finally, the introduction of new models, such as the Boeing 787 and the Airbus A350 and A320NEO, present an opportunity for airlines to rethink how they want to provision and support these new aircraft. “Airlines in both Latin and North America are looking at the A320NEO and the A350s and wondering whether they want to make those investments in parts,” says Chris Reamy, director of services and strategy for Airbus Americas. “It's a slow process, but there is an evolution in thinking going on out there.”

That evolution was confirmed by a survey of customers for these new aircraft models conducted by AeroStrategy for Moog Aircraft Group. The survey asked how the airlines intend to maintain the new models. “Our flight actuation components are very reliable but expensive,” says Kate Schaefer, Moog's general manager of commercial aircraft. “They're a 'no go/go if' item and the recommended investment in parts is $2 million.”

According to Schaefer, the survey results indicated that the airlines are taking a serious look at outsourcing the inventory management and component maintenance. “What we heard is that a lot of these airlines are focused on their return on capital,” she says. “They don't want to hold inventory and that's leading to a paradigm shift in interest in support packages.”

That, in turn, is leading to programs from OEMs to support their customers on a global basis.

Airbus, for instance, rolled out its Flight Hour Services program in Asia about four years ago. “We can provide everything from line maintenance, component repairs and engineering,” says Reamy. “We have a pool where we can provide on-site stock for the exclusive use of an airline and a pool to supplement the on-site stock and manage the repairs associated with those components.”

Similarly, Moog recently entered into a five-year agreement with AeroTurbine as part of its global support offering. Moog will manage a pool of parts for Boeing 787 and Airbus A350 customers on a power-by-the-hour basis at seven pooling locations around the world. The program guarantees availability to a part anywhere in the world within four hours at a price that Schaefer says is less than the cost of buying the recommended parts.

AeroTurbine will provide the logistics services behind the pool to ensure that airlines get the parts according to their service level agreement. “We and other OEMs need to step up and align ourselves with the needs of the airlines,” says Schaefer. “It's a shift in component maintenance.”

With those shifts as backdrop, there are at least three approaches to inventory availability in the market today.

Managing No-Go

While some very large airlines still manage all of their parts, the most common parts to be owned by an airline are the 500 to 600 that make up a main base kit of “no go/go if” items that are essential to line maintenance. These are parts with very high rates of removal that can't be deferred until a later flight. These are also parts that require a 90% availability, meaning the part is available at the right location 90% of the time.

However, few carriers can afford to put every one of these rotable parts in every location capable of replacing them. Instead, the airlines must determine how many parts are needed to meet anticipated demand plus some safety stock.

That's where service parts management software programs can play a role. “The software has an optimization engine that analyze how many parts you might need to meet demand, and how that number changes based on where you stock them,” says Wodarski of Servigistics. The software, for instance, can take into consideration variables such as changes in flight patterns and utilization rates. It also can make adjustments for an airline flying into a network with a proximate density of airports, such as Newark, Nw York JFK and Philadelphia. “The safety stock in one location that's close enough to the others may satisfy reasonable demand because I can get a part there in time if I need to,” says Wodarski.

Although main base kits are the parts most likely to be owned and managed by an airline, those too can be managed by a pool operator. “We have models to determine how many spare components you should have and determine where to put them to optimize the uptime of the aircraft,” says de Vries. “If they own the main base kit, or lease it from us, we can manage that forward deployed stock and replenish it as soon as they use a component.”

Parts Pooling

Parts pooling is used to balance the price of components against the availability of those parts. For instance, while owned parts are generally available 90% of the time, pooled parts are typically available at a 60-70% service level. For that reason, pools are often used for parts and repairs that can be deferred until the next line station. Typically, those are parts that cost $1,000 or more.

The price paid for the pooled part can be adjusted for different service levels, with an airline paying less for parts that are available 50% of the time or more to have parts available 80% of the time.

However, there are other strategic reasons to participate in a pool.

Pool operators like AFI KLM E&M, AeroTurbine and Aclas Global will evaluate and purchase some of the inventory that an airline is holding in its warehouses, which frees up cash. The airline may sell the remainder on the open market. “Rather than have stock sit on an airline's shelf for two or three years, we'll purchase it and move it around to other airlines,” says Aclas Global's Robinson. “It's not dead money.”

Alternatively, very expensive parts with high reliability and low turnover, such as those from Moog, are targeted for pools to reduce the cost of accessing them.

Some airlines will use a pool for their safety stock on an existing fleet, or to reduce the cost of initial provisioning of new aircraft. “An airline may determine that it needs three units of a part and put one in the main base kit and two in a pool,” says Abelson. “On a new aircraft, they may buy 60% of what they need for initial provisioning and put the other 40% in a pool.” Similarly, an airline may put inventory into a pool that supports a fleet that is being phased out. “You don't want to own two years of inventory for a mature fleet,” Abelson says. “We'll take it, depreciate it and move it off the balance sheet so it's not a problem at the end.”

Pools today may be operated by a consortium of cooperating airlines. Other pools are operated by a third party, like Aclas Global, AeroTurbine or AFI KLM E&M, or by an OEM such as Boeing, Airbus or Moog.

In either case, the parts in the pool are available at a guaranteed service level and maintained to a guaranteed standard. The latter is designed to insure that an airline is receiving the same quality of part that it is contributing to the pool. “We determine the optimal pool standard for each component,” says de Vries. “If a part goes into our pool, it has to adhere to the pool standard or be modified to meet the pool standard.”

There are two pricing models for participating in a pool: In a power by the hour model, a fleet operator pays a fixed price for availability and maintenance based on the number of flight hours flown.

In a managed repair, or time and repair model, the fleet operator pays the cost of repair for the part plus a fixed price to lease a replacement part from the pool on a monthly basis during the repair.

Both have their pros and cons. “A power by the hour strategy provides a fixed predictable cost, ensures the quality of the components and reduces the airline's overhead,” says Robinson. “A time and repair model may be appropriate for operators with excellent repair data and a great organization behind them who want to control their own repairs.”

Parts Exchanges

There are a variety of strategies for exchange programs. What they share in common is that in an exchange, an operator removes an unserviceable part from its aircraft and exchanges it for a serviceable part.

Airlines like JetBlue have been exchanging parts with other airlines through an industry-based loans and spares program for years. Many will use a platform such as Aeroxchange to manage the logistics and paperwork associated with scheduling an exchange and repair of a part.

Other exchange pools are managed by third-party providers that offer fixed pricing for an exchange: An operator is charged a fixed price every time it uses a part.

In a third party pool, an airline may make a complete exchange, swapping an unserviceable part for a serviceable part from the pool. In that instance, the part will be repaired or modified to the standard maintained by the pool. Or, the airline may choose a temporary loan/lease arrangement: The airline will use the exchange part until its own part is repaired and returned. In a loan/lease arrangement, the part can be repaired or modified to a different standard.

Parts in an exchange are accessed on an ad hoc basis, based on availability of the part.

“In a pooled arrangement, we guarantee that we will always have a part in stock,” says de Vries of AFI KLM E&M. “If we don't have one, we will source it in the market. In an exchange arrangement, we can say no if we don't have the part available.”

In those instances, prices are likely to be less predictable than in a power-by-the-hour pool arrangement or a fixed-price exchange. Similarly, the business arrangements and the repair standards may be more flexible in an exchange model than in a pool model. “The parts in an exchange model are generally common denominators that are easy to find when you need one,” says Abelson. “But instead of everything being overhauled to a certain standard, the part is serviceable or better. And, there is typically no contractual obligation to have it repaired by a certain shop or repair service.”

The advantage to using an exchange program, Abelson adds, is that “the price is less than the cost of a pooled part with a 60-70% availability agreement.”

Each of the different models has advantages and disadvantages. No airline today is likely to use just one of the three strategies to ensure that it has inventory available when it's needed.

Rather, they will look for the right formula and most effective way to meet the five Rs of inventory management. “There will always be a balance between the criticality of the component, the removal rate and the cost of the component,” says AFI KLM E&M's de Vries. “If it's very cheap, you'll put it on the shelf and own it. If it's very expensive or is removed infrequently, you might participate in a pool or find it on an exchange in the market.”