Morten Olsen, vice president of business and product development at Leki Aviation, speaks with Aviation Week about how the parts market has evolved recently in response to supply chain challenges, new technologies and the aftermath of the AOG Technics scandal.
How have you seen MRO supply chain needs and challenges evolve over the last year or so?
After the pandemic and as traffic grows back in different regions and different speeds, you’re definitely seeing a lot of movement and confusion in the supply chain. A lot of companies cut down significantly on production capacity and personnel when COVID hit because this business was hard hit, and then the ramp-up has been equally steep, which really presents an issue. Lead times are expanded, you have shortages of raw materials and you have fewer skilled people to produce, but you also have fewer skilled people in the area of supply chain, inventory and so on at the OEMs, suppliers and airlines, so it’s a very toxic cocktail. There’s been a lot of panic buying in the market and we have struggled to get the parts on the shelf. The ones we had on the shelves went out very quickly and we couldn’t replace them quickly enough. We have tried to place significant orders to boost inventory, but there have been shortages, long lead times and a lot of buying.
The next step is to see if there has been too much buying and if there will be a drought suddenly because people have filled up the inventory in panic and are now waiting for that to burn out before they start to rebuy again. I think we will see some peaks and valleys in demand going forward that we have not been used to in the past.
What strategies are you deploying to help reduce lead times? Are any types of parts creating more challenges for lead times?
One key area for us is to have as high of an off-the-shelf delivery as possible, meaning you have a production lead time which was maybe 90 days but now is 180 or 200-plus days. We keep those parts, invest enough in stock and we keep it in stock according to the new lead time so operators and MROs can get the parts off the shelf within a couple days instead of waiting. The strategy is a hefty investment in available inventory of the high running part numbers, but also of the long tail of part numbers that are not used that frequently but still are needed in the market. It’s been a little difficult to execute because of the long lead times but we are slowly getting there and we can see our inventory is building up. When we get orders from operators, more and more parts are coming from stock. That means the operators can reduce their stock and the dependency on the lead time, and they don’t have to stock for the entire duration of the manufacturing time but can rely on us delivering within one week or a couple of weeks.
You have certain raw material issues that come and go for whatever reason, where suddenly there are parts that you simply cannot supply. We have examples of things like that for measuring equipment and so on where a subcontractor to one of our OEMs says, “After COVID there’s not enough demand so I will exit this market.” Then the OEM has to find a second source or solution for that particular product. Some of the subcontractors maybe only deliver a few part numbers in smaller quantities to this particular area of the industry and they would rather go to the industrial side [of their business] where they don’t experience all those ups and downs in terms of the supply chain or where they have much more steady demand.
There seems to be growing interest in alternative solutions, such as used serviceable material and PMA parts. Are you noticing any trends in this area?
There’s definitely a demand, particularly when you get into higher value components. When you go into areas where it makes sense you can use surplus material if you have it available. A lot of aircraft are being brought back into service so there’s not so much available and the price for the available surplus material is also increasing. Plus, you have tightened requirements for documentation and things of that nature. But from a sustainability perspective it also makes a lot of sense to do it. Leki Aviation is slightly active in this area, but a lot of the products we handle are of such a value that it doesn’t make sense to do it. They are used and they cannot be reused, so they have to be replaced.
I don’t see a particular movement to get more PMAs in the market. The ones that are there are active. I would rather say that the OEMs are really trying to get the supply chain up and running again. It’s also difficult in a market that is fluid to invest in PMA development. You should have a really good business case and be sure. I would say there are alternatives out there, but there is no alternative to getting the existing supply chain to work better.
What trends are you seeing when it comes to inventory planning? Can we expect more use of digital solutions to optimize and predict inventory?
[Our customers] are putting more demand on off-shelf delivery and performance. You need to have a pretty high on-time delivery according to the orders that they forecast. You need to be able to deliver and measure that, and you could also be penalized as per the contract if you are not delivering. We are seeing much more emphasis on this and we are putting a lot of activities around strengthening our supply chain to make sure that we can deliver on time. Customers are also looking for a longer period of time to have a contract in place so they don’t really have to worry about the product for a duration. They have a forecasted demand that we plan for and follow. We follow up to make sure that they also use it or in case there are changes so we can adjust. And then we see some trends around the long-term validity of the conditions around this, such as how we could deliver and commercial conditions like price.
We have automated a lot of our transactions and we’re using the data we get from automation because you simply get more produced. You make more quotes, you get more orders and you handle more things if you’re automated. We’re trying to convert this data into better inventory planning and to better see trends. I’m very convinced that we will see artificial intelligence tools and things like this help the planning process quite a bit. I think we’re still in a business where transactions are, relatively speaking, low—you can almost count them on a part number level at or SKU [stock keeping unit] level in the market globally, and you need a certain expertise to look at the past to say, “There is a technical upgrade or there’s something happening in the market with this particular part that we need to be aware of.” You need to put some human efforts into it, but you will get a lot of benefits from simply seeing trends and movements from the data which we cannot see or that we have not been used to really looking at in detail.
Do you expect any impacts to regulation in the parts market moving forward after the recent AOG Technics scandal?
Having been in this business for almost 40 years, the issue has always been there. At this point in time we have the best control mechanisms that we have ever had. They got caught, but there’s always a possibility. The profit margins are the same in spare parts for aircraft if you buy bogus parts or produce from unauthorized material. It does attract people that just don’t have the conscience, so for sure we need to be aware. I don’t think there will be many more regulatory issues. We have approvals in place, and a lot of customers, before they approve a supplier, need to come and physically visit offices and check procedures and things of this nature. We have a very diligent “know your customer” process so we are sure we are not selling to anybody that we shouldn’t sell to, and likewise we have a “know your supplier” [process] from the customer side. With all these things that are put in place, I think we’ll manage this in the best possible way. I have a hard time seeing what we could further do without completely hindering the flow of material.
