Pegging Demand

OEM Product Services Institute Principal Ron Giuntini spoke with Airline Procurement about how airlines can enhance their maintenance processes by configuring a parts-based and performance-priced program with their suppliers. (Edited for clarity and length.)

AP: Do you think airlines are rethinking their parts programs given the current climate of the global economy?

Giuntini: I feel a bit ambivalent about that. During the last recession in 2001, I assumed it would be an opportunity for airline executives to think more outside the box and work more aggressively to come up with creative solutions. But most of them seemed to retreat into their bunkers and wait until the crisis passed. The mentality seemed to be, 'let's not rock the boat or change the way we do things but try to cut costs by squeezing the resources out of the processes we have.' You saw some improvements, but they went back to their old ways.

I think what's really changing the whole concept of managing parts for maintenance processes is that OEMs are starting to become more aggressive in leveraging themselves as outsourcing groups that can help airlines manage their parts more effectively. To do that, you have to have some kind of performance-based agreement between the airlines and the OEMs. Almost every OEM nowadays has bought a supply chain management organization. So they all recognize that this is an opportunity for them to move forward in the space, and it can be a very profitable space if properly taken. Most of the startup airlines have outsourced their parts management activities.

AP: To what degree does the influence of this pattern manifest itself at the OEM Product Services Institute?

Giuntini: We do performance-based programs and spend a lot of time working with the leadership of companies on strategic issues. We do education, a lot of executive training, market research and management consulting. We help software companies identify market segments in this area. It's a huge space. Our estimation is that the entire US parts market is about $250 billion a year. What we typically do with our clients is develop a high level of granularity on all the different permutations and then offer a pick-and-choose platform that can help them figure out what makes the best sense for their situation. It may be that 80% of the management of a part will be done by an outside organization. Others want to do everything in-house. So why not outsource commodity items? Most executives don't want to spend their valuable planning time on stuff that's not that material. Talk to an accountant about the airline parts arena and he'll say it's immaterial, that in the big picture if you screw up 20% to 30% it's no big deal and won't have a huge impact on the bottom line of the corporation. So that's the mentality we see. We found that only about 5% of 180 publicly held OEMs actually have parts listed on their balance sheets.

AP: How urgent is the need for software technologies that can improve parts processes and visibility across the supply chain?

Giuntini: There are a few good application software systems out there, but there are very few supply chain management programs that have seen success. People have tried to bring manufacturing software applications into the maintenance abode and that doesn't seem to work. Basically, there are really two types of planning. There's independent demand planning, which comes down to saying what happened in the past will happen in the future, which you know won't always happen. And then there's dependent demand, where you're looking at flight hours, schedule changes and so forth. The problem is that there really aren't too many big players out there. SAP has tried and Oracle has tried time and time again without success. A lot these enormous systems have considerable shortcomings.

AP: What do you think makes the parts planning process so complex?

Giuntini: When you look at a part, you have to consider its configuration, its condition and its ownership. There are many types of ownerships in the supply chain. You have to look at the transaction. Is it a straight sale where you don't expect any return? Is it a repairable sale, where you have an exchange transaction? Is it a loaner? Is it a remove, fix and return transaction? Each one of these has different costs. Each one requires different planning. Most airlines tend to be overwhelmed by the dysfunctional nature of the parts area. And let's not forget that the level of granularity required to effectively manage supply chains and inventory at a major airline is remarkably challenging and sophisticated. More often than not, airlines just react to the problem by throwing money at it, regardless of how much it costs them. In the end, they just want to get their planes back up in the air.

AP: How can airlines plan better?

Giuntini: What does better planning do? It frees up your balance sheet, it frees up cash. Instead of having $100 million worth of parts, you can maintain a lower level that sustains your equipment so you might only need $70 million. That doesn't cut costs, but it frees up cash and that $30 million can be used in other areas. So that's one part of the equation. But how does it reduce costs? If you want to plan better, you work with your suppliers to negotiate better prices because you can ensure a better stream of business. Where demand is really important is in regard to the kind of condition and configuration you use in your distribution channel or a specific maintenance task. And this is significant because the savings are tremendous. Instead of going out and buying a new part, maybe you can overhaul the part, or if you can't use an overhauled part, maybe you can get it repaired, or if you can't use a repaired part, maybe you can implement a used but serviceable part.

AP: What kinds of partnerships do you see OEMs pursuing in the future?

Giuntini: OEMs are realizing they can't sustain their business over the long term solely through their traditional build-and-sell model. The money is in sustaining the parts and quality of the aircraft, in the equipment, and they basically see most aircraft as platforms nowadays. A lot of aircraft have 20- to 30-year lives but they're not the same aircraft that was delivered to the first customer. An aircraft gets avionics upgrades, engine upgrades, a whole bunch of airframe upgrades over its life. Interiors are constantly being upgraded. This is a very lucrative business and OEMs see this as a recurring revenue stream.

The problem with the aircraft manufacturers is that their margins are being squeezed by the leasing companies. The percentage of aircraft being delivered today that are actually owned is relatively low. OEMs are looking for opportunities to develop really tight relationships with the airlines. Once they create these relationships, especially through power-by-the-hour or supply chain management contracts, the reliability and data sets required to manage the maintenance process get very touchy in regards to intellectual property. It becomes the foundation in managing the process.

AP: How concerned do you think OEMs are about PMA parts?

Giuntini: It's a classic story. What you see Pratt doing to GE, I think GE will do to Pratt. And then Rolls-Royce will come into the picture because it will be open warfare. But the attitude of the OEMs in the past has been 'I'm the OEM and I'm the smartest guy in the room and I don't care what you do because my customers know better.' Well, a lot of customers are laughing at this because FAA is approving PMA parts. They're basically saying they're good--go ahead and buy them. I don't know if HEICO can stay independent forever. I wouldn't want to bet on it. They're a very large player. But I think OEMs are going to be much more aggressive in the future and this is going to be very critical to the power-by-the-hour model. There will certainly be incentives to reduce costs as much as possible to improve profitability.