Even the most tried and tested of operations assume a fair amount of risk. Planning for unforeseen events, or for troublesome recurrences such as snowstorms, inventory shortages and labor strikes, is never a failsafe panacea for setback. For airlines and manufacturers with highly outsourced supply chains, managing disruptions and delays calls for visibility across elaborate networks, contingency planning and resiliency.
"Airlines, more than most industries, have to negotiate a very complex system of operations," says Lucio Petroccione Jr., a former executive at Pan American World Airways and Delta Air Lines. "You've got ground handlers, fuelers, mechanics, caterers, cleaners, gate personnel and other operations that you're outsourcing. Building flexibility into your schedule, network and processes can help you control things more efficiently when they don't go as planned."
But how much control over unintended and adverse events can airlines really have? "There's no such thing as mitigating anything 100%," admits Petroccione. "You'll take a hit in terms of costs, revenue, reliability or whatever you're measuring, but hopefully you'll quickly get back up and running. Some airlines might take four days to recover; some might take a day. Those that recover quickly have designed what they can control as efficiently as possible."
At JetBlue Airways, outsourcing is mostly about achieving the best value. Strategies are customized to the needs and efficiencies of each region of operation. What works well in one city may not be as successful in another.
"One process doesn't fit all," explains Materials Director Terry Inglis, who coordinates the LCC's supply chain. "We have our own maintenance operations in 11 of our 55 cities but we contract maintenance for the majority. We do the same thing with ground operations. We usually outsource based on what makes the best sense financially."
At New York LaGuardia, for instance, JetBlue outsources catering services because it has a relatively low number of flights per day. "We provide them with product but we don't cater the aircraft," Inglis explains. At other airports he says the airline prefers to cater the nonperishable items it can ship from its warehouse. "We have certain touchpoints with our crews. In this way, our internal crewmembers are touching our internal inflight crewmembers."
Over the years, JetBlue has proven that it is not afraid to take risks intended to optimize operational efficiency. Boasting premier rates of utilization and dispatch reliability, it has changed its outlook on flight-hour deals. "Three years ago our philosophy was that we could save more money by doing it ourselves," says Inglis. "But the market has changed and we now have our engines on a flight hour agreement, we have our APUs on a flight hour agreement and we have the majority of our components on a flight hour agreement."
According to Petroccione, airlines need to merge interests with suppliers to ensure reliable visibility across procurement, delivery and fulfillment channels. "Suppliers and airlines need to work together to create common processes to help each other," he says. "I see them as being on the same team and functioning almost as a single company. If I have a supplier who uses other suppliers for materials, part of my due diligence is to investigate that supplier's practices and credibility. Our relationship needs to be based on a certain level of trust, and I need to know that I'll get information quickly if there's a problem because maybe we can solve it together."
Although such partnerships and interdependencies can bolster services and value, JetBlue also understands the importance of situational awareness and the need to plan for future scenarios. During an ice storm last year, its management structure failed to respond in ways that might have prevented hundreds of passengers from being stuck on planes for up to 9 hr. at New York JFK. "We did a thorough investigation of our operations, looking at where we fell and why we fell," recalls Inglis. "As a young airline, we always seemed to be able to muscle things over the top of the hill, believing that we were doing the right things for the customers in trying to get them places."
Now that attitude is more refined and the carrier isn't as young anymore. "The reality is, as you grow, you need to have processes in place, you need to be on time and you need to look forward to these events and take a proactive approach in the beginning, prior to the event, so it doesn't drag on for several days after it happens," he says. After some leadership enhancements, including the hiring of COO Russell Chew and the help of a consulting company, Jet Blue has put into place a robust management system based on contingency protocols and pre-cancellations to deal with IROP events.
Sometimes you have to take a few steps back before you can leap forward. Implementing enhanced IT capabilities often means merging existing software into new platforms. Compatibility issues are always a concern. Last year, WestJet suffered a C$31.9 million ($30.6 million) loss from a failed attempt to implement the open-architecture reservations system aiRES.
Developed by Trivandrum, the technology promised the Canadian LCC improved functionality and flexibility and would have replaced its aging OpenSkies platform and allowed it to interline. But problems with negotiating the complexities of existing systems and accommodating an expansive business model led to tensions between WestJet and aiRES vendor Travelport. Implementation was suspended and in July the carrier decided to cancel the project.
"I think WestJet was very patient," says Timothy O'Neil-Dunne, a managing partner of T2Impact, a Seattle-based business development, technology and strategic consulting group. "But they reached a point where they simply said, 'sorry, we've had enough.' It was just too risky for the airline to tolerate without key issues being resolved."
Perhaps the biggest challenge of implementation concerned the difficulty of adapting the aiRES system to the various trajectories of WestJet's business operations. Of course the fact that the LCC was supposed to be the launch customer for aiRES also might have contributed to its apprehension.
"The front cabin of this problem is that there is a piece of software that is brand new and has never really been tested," adds Dunne. "In a greenfield environment that's usually not a problem because there isn't any history or anything to convert. But WestJet is a hybrid carrier that handles business travelers, low-cost customers and charter business. There's a lot of data to migrate and a great deal of structural complexity."
Logistical decisions play a big role in the dynamics of supply chain management. Making long-term decisions based on the lowest possible cost or the highest profit margin calls for judicious analysis. "Prescriptive technologies can help airlines optimize supply chain efficiency," LLamasoft Sales VP Toby Brzoznowski says. "Determining the best sourcing options, transportation modes, manufacturing processes, site locations and inventory strategies can be an overwhelming process. But what if you had a modeling system that could do that work for you?"
Llamasoft's Supply Chain Guru network design software boasts various planning capabilities including multi-time-period optimization and production processes, simulation engines, data importation and modeling tools. "Maybe you're considering a new facility for manufacturing or aftermarket parts," Brzoznowski posits. "This software can tell you when you're going to run out of capacity and propose various inventory strategies. Given the cost of fuel, there's a tipping point where holding inventory becomes more profitable or less costly than transporting it from other locations."
In January, shortly after Boeing announced another delay in the delivery of its 787s, Qantas Chief Executive Geoff Dixon admitted that the setback would frustrate the international expansion plans of its budget subsidiary Jetstar Airways. Australia's largest airline would consider, among other options, "revised retirement dates for some . . . aircraft, reallocating existing capacity and potential schedule adjustments," he said. In December 2005, Qantas signed a multibillion-dollar deal with the manufacturer for 45 787s with 20 options and purchase rights for an additional 50.
Dreamliner launch customer All Nippon Airways, which ordered 50 aircraft, said it would have to readjust its training program, originally structured to coincide with a late 2008 delivery. "We are extremely unhappy," remarked ANA spokesperson Kazuyuki Imanishi.
Citing supply chain and logistics difficulties, 787 Program VP and GM Pat Shanahan said the assembly of critical structural traveled work continued to pose challenges and "the process to reconcile the partner's engineering with our production records and processes is very onerous and time-consuming."
Although at the time of this writing Boeing had not yet released a revised forecast for the 109 aircraft it had expected to deliver in 2009, on March 7 Goldman Sachs analyst Richard Safran warned of a possible third delay of at least three more months. "Our sources indicate 787 power-on, scheduled for March end, may be delayed until the end of June," said Safran in a client note. "First flight, expected three months after power-on, may be further delayed. We now think deliveries will start in the third quarter of 2009 versus the current 'early '09' target." Issues associated with wiring, the supply of fasteners and other assembly processes are major factors for the delay, Safran said, drawing links to the internal integration difficulties that plagued the delivery schedule of the A380.
As the launch customer of the Embraer 190, JetBlue also experienced hiccups in bringing aircraft into service. Late deliveries, overscheduling and equipment challenges are some of the issues the LCC had to overcome before it could deploy the medium-range jet into favorable markets. Last year it decided to remove each of its 26 E-190s from service to fix a software glitch that affected a variety of onboard systems. The aircraft were only out of service for a few days, and to avoid delaying or canceling flights JetBlue contracted ExpressJet Airlines to operate four 50-seat E-145s on affected routes.
"Since the E-190 is obviously a new aircraft being entered into service, it's going to have its issues just like any other new airplane," points out Inglis. "We spent two years with Embraer helping to develop it so we know that it's pretty aggressive for their schedule. But we love this plane and it's performed very well. We'd like to have more."
Why, then, in December 2006 did the airline decide to reduce significantly the number of firm E-190s it will take through 2010? "There are a lot of reasons," says Inglis. "What's going on in the industry is one reason. Allowing for a slower process to better mature the airplane is another. Embraer is also dealing with some constraints in developing capacity and plans to level out [production] a