IT'S EASY TO UNDERSTAND WHY procurement at one of Latin America's premier carriers is so dispersed. Grupo TACA is an airborne amalgam of six airlines: Guatemala's Aviateca, Costa Rica's Lacsa, Nicaragua's NICA, El Salvador's TACA International, Honduras's TACA de Honduras and newcomer TACA Peru.
Even though the airlines fly similar aircraft--A320 series and Embraer 190s--and even though there's corporate continuity at the top, "looking at the different departments within TACA, I would say there is a large fragmentation of the purchasing activity," says Tito Campos, the carrier's component repair and warranty manager. Inflight services buys catering, the finance group purchases fuel and other departments procure their own items.
As with all carriers, some of the most sophisticated purchasing takes place in the maintenance precincts. If a three-year project to consolidate TACA procurement under finance comes to fruition, maintenance will remain virtually the only unit charged with handling its own acquisitions. "Maintenance is specific and complex," says Jose Max Granillo, maintenance purchasing manager. "We handle that. The rest of purchasing is getting consolidated [under] one department."
Granillo says TACA sees "a large potential for savings." He won't say how much. Grupo TACA is privately held and things like projected savings, budgets and such are off-limits to media. Pushed a bit, he concedes that the carrier's very structure invites substantial savings. "You need to understand that TACA is a combination of different airlines that have come together," he says. "So right now there is a really large potential savings."
And consolidated procurement is likely to render coordinated effort and control. He explains that when the system is up and running (TACA is a third of the way there), "everything will be controlled through a Web page. Everything," he's quick to add, "that is not maintenance."
Pressured by fuel prices, Campos says management is "looking very, very closely where pennies are being spent . . . We need to make sure we spend [maintenance] money where we need it, and exactly at the moment we need it." That, of course, means leasing out inventory, a fact of life "that's going to create more challenging lead times for purchasing managers," says Granillo. It also means rethinking past practices.
If Grupo TACA as a whole is consolidating procurement, Maintenance and Engineering is consolidating spend--apportioning expenditures among fewer players so as to maximize leverage. Case in point: The recent acquisition of 11 E-190s. The carrier has options for 15 more. "In the initial provisioning [of the 190s] we got the five biggest companies that provide components for us," says Granillo. "We started individual negotiations . . . That gave us the advantage of leverage in order to have really significant savings."
He says TACA will be saving between 10% and 25% off list prices on avionics, engine components and other equipment. The key was negotiating long-term agreements. That's a technique increasingly employed among purchasing managers that allows carriers to drive better bargains.
As a side benefit, "you also get more warranty for the components," he says. And more warranty protection, and in-house execution of that warranty work. "That's really important when you're putting a new fleet into service. You really need to be protected when provisioning components," both in the initial acquisition and in the maintenance follow-through.
Another initiative involves Grupo TACA's mainstay, its fleet of A319s, A320s and A321s. In 2007 it renegotiated the maintenance contract for the fleet. At the time there was a five-year power-by-the-hour pact for a large slice of components. All told, some 60% of the equipment was covered. Campos says the carrier hired a consulting company and put out a request for proposal that was significantly more sweeping in scope than the one it replaced. "We offered even a larger portion of components under one and the same contract," he says. "Now [the contract] covers close to 80% of the components on the A320" and covers them under the aegis of one company.
While consolidation will shrink the number of vendors that provide particular products or services, Campos contrasts the approach TACA employed with its current crop of A320s with that it used to cover the influx of new Embraers. In the case of the Airbuses, the contract length was doubled from five to 10 years. The philosophy boils down to one word: Certainty. He says a long-term pact will provide more certainty in the future "so that you can see what is to come." Not just that, he asserts, "you also get better offerings from the supplier."
Of course you've got to find the right supplier, one that can offer both breadth of product and surety that the expanded product you entrust to it will be taken care of comprehensively. "In the component repair business you have a larger pallet of service providers that can give you support," he notes.
TACA began the culling process with a basket of 25 potential providers to which it extended RFPs. These encompassed the gamut of gear used by A320s--avionics, hydraulics, pneumatics, even engine components. By the time the last round rolled around, the field had been winnowed to four strong competitors. From these, two finalists emerged before the winner was named. Campos says Grupo TACA saved a bundle doing it this way: "[It's] in the range of two digits."
Spurring that savings was the fact that the roster of A320 support contestants had risen considerably since the carrier last negotiated a component repair deal some five years ago because "the A320 fleet has grown significantly" during that time, he says. "The offerings presented to TACA were larger and more sophisticated, and we confirmed that there was a significant opportunity for savings."
When you put 80% of your work in one basket, the weave of that basket had better be strong and resilient. In the case of the A320 package, Campos says the vendor provides just half of the component support in-house. The rest is outsourced by the vendor. "They have to go to other providers in order to get the coverage we agreed on," he says. That means increased contract oversight on the part of the airline. "You have to emphasize the control of that contract," he says. "You need to assign resources to do that." He declines to say how many people work in maintenance procurement but insists that better oversight doesn't necessarily mean boosting purchasing headcount within the Maintenance and Engineering Purchasing Department, just "dedicating resources" to optimize the agreement.
SWEAT THE LITTLE STUFF
Aircraft and the panoply of equipment that enables them to fly are big-ticket items. Get the contract right, oversee it assiduously and the returns can be solid. But Granillo says it's important not to dismiss the little things. "I can tell you that it's important to take care of the penny," he asserts. "To not always look at the big picture. Take your time to analyze the small figures, the small transactions, because there are areas where you can get good savings for the company," especially in the procurement of ground support equipment. In TACA's scheme of things, potential savings come from machines that putter about the tarmac too.
"Here in El Salvador [TACA's base] we were able to find parts for tractors, for equipment supporting the aircraft," Granillo says, "because a spark plug is a spark plug and a tire a tire." The less sophisticated the product, the wider the potential vendor base. In this case, that base was local. "We were able to negotiate with only one supplier," he says, "and we got a special discount." Along with that discount came better lead time, good parts forecasting and, of course, a bundle of savings.
In contrast to the multiyear contracts the carrier inked for aircraft support, the GSE pacts are year-to-year. That's where the leverage comes in at this level--the ability to negotiate among lots of local providers eager to sign a deal with one of the country's highest-profile companies, its national airline. There's a general principle here too: The more sophisticated the component, the better to go with long-term contracts; the less sophisticated the item, the better to re-bid annually. In either instance, the principle of spend consolidation holds. "You can find savings there," says Granillo. "That's what we find works for us."
On the procurement side of the house, lots seems to be working for Grupo TACA. The days of fragmented spend are numbered at this Latin American airline and the age of consolidation is executing a nicely timed takeoff roll.