Procurement of rotable and consumable parts for aircraft, along with the many nonaviation products airlines need, continues to be a tough game, played now for the highest stakes--carrier survival. New tools help achieve better deals and ensure deals are fulfilled. But better procurement requires a sound strategy and thorough process as well as tools. Choices are getting better, more varied and complex. The procurement process must match this complexity.
BravoSolution offers web-based, on-demand control of procurement in five areas: Analysis of spending, project management, online negotiation (including reverse auctions) and contract and performance management. Thomas Smolko, director-supply management, says there are savings in each area.
"Spend analytics gives you monthly data on spending so you can drill down into categories and get 40 standard reports," he explains. The aim is finding more economic sourcing methods--for example, by combining suppliers or putting bids up for auction. Delta Air Lines used this function to reduce man-hours for spend analysis by more than 90%, which helped reap further major gains.
Online negotiation includes distributing electronic requests for proposals or scheduling reverse online auctions. Airlines do not need software or servers. Managers just log onto BravoSolution, while suppliers are notified by e-mail and have their own passwords. One airline used this method to solicit bids and trim high margins on its champagne purchases. First it specified a quality level and then it set a cap on bids. Would-be suppliers bid, were informed of the rank of their bids, re-bid and took about an hour to reach the minimum bid, which the carrier accepted.
Smolko argues that reverse auctions are workable for standardized aircraft parts, IT infrastructure and items such as hotels for crews. "Hotels are a commodity, they guarantee so many days and nights. This can accelerate negotiation for hotels, with 50 to 60 bids in an hour in a highly competitive environment."
Conducting auctions through platforms such as Aeroxchange can mean sharing suppliers. "With your own tool you focus on your suppliers and do not share names," he stresses. Even when auctions are not conducted, online or "e-sourcing" encourages clarity and consistent execution of a procurement strategy.
The tool coaches and helps procurement clerks follow rules laid down by managers and saves time and effort compared with manual methods. "You save cycle time over phone, fax and e-mails, and an online RFP creates a more competitive environment than e-mails because they are answering structured questions," Smolko notes. Electronic RFPs have nonprice terms, such as warranties and support commitments, embedded in worksheets.
Supplier performance management allows airlines to track daily such variables as service time and accuracy of ground handlers and compile monthly scorecards for each airport and supplier. "Then you can improve the service, collect penalties or simply switch suppliers," Smolko says. Some airlines still have difficulty tracking performance in the detail required, he notes. "They have different systems, especially if they have merged, that are hard to consolidate. You need data by supplier names and cost centers."
BravoSolution is offered as "Software as Service" for a cost based on function utilization. Each function requires 1-2 months to configure and train users. He advises airlines to start with spend analytics, proceed to e-sourcing and add contract and supplier management last. The advantage of the technology is that it is quick, easy to implement and comprehensive.
Most major carriers have automated procurement with one or a combination of systems. To analyze spending on aircraft parts and nonaviation commodities, Lufthansa Technik uses SAP, SAP Business Warehouse, its own spend management application and an Oracle database. LHT does e-sourcing and auctions with SAP, Aeroxchange and other platforms. It manages contracts with customized off-the-shelf software and uses SAP and individual programs to monitor suppliers. Finally, administrative tasks such as purchase orders and invoices are automated with SAP, Aeroxchange, OneAero for MRO-Services and other platforms.
LHT Director-Strategic Purchasing Paul Ruediger credits automation with two kinds of savings: Reducing the cost of purchasing processes and the much bigger savings on cost of purchases. Automation has lowered process costs by about 10%. LHT has set a goal of cutting the actual cost of purchases by a further €100 million ($126.4 million) per year.
GOING ONCE, GOING TWICE . . .
LHT uses reverse auctions only in very specific cases, mostly standard aircraft parts. "It is a very small part of our purchases," Ruediger says. There are several limits on auctions. "The best deals airlines get are usually through the leverage of large purchases," notes Tim Hoyland, a partner at Oliver Wyman. "You don't want to buy at a market price through an open exchange at what the supplier would sell to anyone." Large-volume orders can make the one-airline auctions to selected suppliers offered by BravoSolution attractive.
But he points to another limit on auctions or any transaction-based procurement. "When a large airline buys aircraft, it gets more favorable arrangements and part prices. Most airlines are moving toward complete solutionsall parts, repairs and replacements negotiated at purchase." Suppliers also are emphasizing power-by-hour deals to lock in support business and limit procurement choices in future years. "So e-sourcing is going after a shrinking market. There are fewer and fewer one-off deals."
Hoyland says carriers have several options in procuring common items like hotel stays, including in-house buying and outsourcing the entire procurement process. Carriers are also in a strong bargaining position in dealing with catering firms. Overall, he thinks US airlines have cut procurement costs dramatically since 9/11. "They have gotten much better at initial purchases but are probably not as advanced in tracking performance of contracts." He views auctions as useful for consumable and small commodity purchases.
Sanjay Argawal, a principal with Deloitte Consulting, thinks significant savings are still possible. One carrier bought 30 different types of protective gloves before Deloitte helped standardize on six types. "There are often too many SKUs [stock-keeping units] and too many suppliers," he says. "You can reduce complexity, get your inventory down and achieve double-digit savings." Decentralized purchasing and systems are the major hurdles to standardization.
Online reverse auctions are useful chiefly for nonaircraft parts, but these must be done right to save money. "You have to structure SKUs into the right packages for bidding," Argawal says. "Make them easy for suppliers to understand and for you to compare bids and have all the key criteria well-documented." Suppliers that lose auctions without understanding why are unlikely to bid in the future. And airlines that conduct auctions just to pressure current suppliers to lower prices will quickly lose interest. He believes a minimum of 3-4 suppliers are necessary to make auctions work, but too many can make them inefficient as well. "You might do a request for information before the RFP to narrow the universe to 10 or 15 people you can do business with, instead of 45 suppliers."
EMBRACING THE PROCESS
Like other experts, Argawal stresses that the key to reaping big savings is not procurement tools, which are common now, but having the right procurement processes.
For example, US Airways has nearly two dozen steps in its general procurement process (see box) and all or most of these steps are followed no matter the size or complexity of the purchase. Dollar volume dictates approval levels required, RFPs for rotables typically require more specification of performance than consumables and service RFPs involve deeper looks at supplier capabilities. Consumable procurement generally takes 1-2 months while maintenance awards can take up to eight months. The carrier says reverse auctions are used occasionally and have been effective at reducing prices on commodity purchases.
US Airways makes one big choice, deciding between transaction and fee-per-hour acquisitions, in the second strategic step of procurement. FPH agreements are attractive for components that have well-established baseline costs, high volumes and predictable removal rates, failure modes and corrective actions.
The airline seeks to maximize competition by considering PMA parts and DER repairs and checking both the Internet and trade publications for unfamiliar suppliers when necessary. Suppliers that do not show understanding of RFPs risk exclusion early in the acquisition process, as their credibility and capabilities will be questioned. US urges bidders that are unsure of requirements to ask for clarification at the outset. Bids are scored chiefly on price, lead time, warranty and performance guarantees, while actual performance will be scored on lead or turn time, warranty, quality and customer service.