Component Maintenance As A Part of An Inventory
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1. ITM solution overview
2. Benefits of an ITM solution
3. Structuring an ITM solution
4. Areas to focus
5. Roll of the OEMs
6. Summary
Agenda
This presentation focuses on a complex topic and is intended as an
overview rather than a detailed description of all segments of an ITM
Q
Airplane Airline Airline Owned Supplier Owned Expendables + ConsumablesQ
Airplane Airline• ITM = Inventory Technical Management…. by this we mean the supply, management
and repair of rotable/repairable inventory (Components), but can include
expendables/consumables
What is an ITM solution?
Traditional Model
ITM Model
F
Repair Facility Expendables +
Consumables Inventory Consignment Inventory Serviceable Components Unserviceable Components ITM Supplier
The main difference is that the Supplier owns and manages the float Components
Airline Owned Supplier Owned Serviceable Components Unserviceable Components
F
Repair Facility(may or may not be part of ITM Supplier)
ITM solutions can have a number of different attributes but they typically have 2 key
elements:
1. Provision of float/spare components
2. Provision of repair services
Key elements of an ITM solution
Repair
Solution
TAT Guarantee Fixed
Price
Repair by Hour
Spares
Solution
Buy Lease
All elements can be part of an ITM solution…. there are no fixed ‘rules’
Integrated
ITM
Solution
Pooling
Advance Exchange
• Why bother…. Seems more complicated….
Consider the following case study….
Why enter into an ITM deal?
• Fleet Parameters
• New fleet, first of type for airline • 4 aircraft
Case Study 1: Inventory acquisition costs
The benefits can be significant – particularly for a small fleet
•OEM(s) RSPL provisioning recommendations:
•Rotables: US$16.7m •Repairables: US$1.4m •Expendables: US$0.6m
US18.7m
Buy
Sell
ITM Solution 1:
• Lease Consignment Stock • Pool Access for
Rotables/Repairables
• Buy Expendables Buy
Sell Cash flow Benefit Buy Sell Cash flow Benefit NPV=US$15.4m NPV=US$8.3m NPV=US$8.5m
ITM Solution 2:
• Buy Consignment Stock • Pool Access for
Rotables/Repairables • Buy Expendables
ITM Solution
Traditional Solution
• As with most business decisions the answer is…. ‘it depends’
• For inventory driven solutions the key driver is the quantity of aircraft in the fleet
When does it no longer make sense?
• Repair cost reduction may further benefit the airline
• Leverage on scale of MRO to reduce repair costs • Simplify the airlines supply chain
• If repair cost reduction is a significant driver then can extend the ‘break even’ to 40-60+ aircraft
• Another question to ask: is component management a core competency?
10-20 aircraft is a
typical ‘breakeven’ point relative benefit is smaller As the fleet grows the Significant benefits
• Before considering an ITM solution, the airline should consider:
R
/
Q
Its fleet size and how long will it operate the type
R
/
Q
Impact of mixing of components (new v old)
R
/
Q
Lease return issues (110%, records etc)
R
/
Q
Loss of control, ie: what happens if the supplier doesn’t deliver?
• The airline hands over a significant portion of its technical reliability management to
the Supplier
• If there is doubt about a Suppliers ability to deliver or its quality:
DON’T GO THERE!
• For a ITM solution to work there is a key element required:
So is it all good news?
This will be a ‘marriage’ rather than a ‘relationship’
TRUST !
KPIs
• 4 key elements into account when structuring the solution
Structuring an ITM Solution
Scope
Price Service
Level
• Its important to take a balanced view when assessing an ITM solution
….the airline will have to accept some risk
Service Attributes Supplier Acceptance
1. Logistics to/from airline or an agreed handover point High
2. Repair repair of u/s components for qualified events High
• When structuring the service scope its important to look at both
• Supply Chain inclusions, and • Maintenance inclusions
• Typical ITM service inclusions (in fixed rate) are:
Scope: Services
3. Modifications
- Supplier initiated mods reliability improvement mods with financial payback High
Low/Nil
- Airline initiated mods often not beneficial to Supplier (weight reductions etc)
- ADs/Mandatory mods ‘forced’ on Supplier and may not have a $ payback Moderate
5. Obsolescence
- Parts in component the items within a component become obsolete High
- The component the component itself becomes obsolete Low
• A second element to consider relating to scope is the content of covered parts
• Consignment stock • Pooled components
• Content of consignment stock
• ‘No go’ / ‘Go if’ items • MEL A/B items
• ETOPS items
• Content of pooled parts
• Use the rotables/repairable identified in the RSPL as a guide • Plus added others not in RSPL
• Consider which items are truly ‘repairable’
• Consider if items that are normally damaged via ‘excluded events’ should be included (eg: radome)
Scope: Covered Parts
Ensuring the correct parts are ‘covered’ in either the pool or consignment stock
reduces risk
Defined
by
Airline
Higher levels =
Low Operational risk = higher cost
Dispatch guarantee (ok) Supplier commits to availability and store ‘pick time’ High
Supplier Acceptance Attributes
Type
• A key element of the an ITM solution is how quickly the airline will receive the
component once a requirement arises
• Consider….
Service Delivery
Consignment
Q
AirplaneServiceable Components
• Pool Delivery lead time will influence the content of Consignment Stock
• Long Delivery lead time = more Consignment stock
•
Types of lead times commonly found in ITM solutions:
Replenishmentlead time
Delivery lead time Airline Logistics Handover
Point
Unserviceable Components
Redelivery lead time
Don’t forget Redelivery lead time, this will be important to Supplier
Consignment Stock
Rate Type
• Balance price against Scope and Service Level
• Don’t just compare rates - No two deals are the same
• Consider what level of ‘overhead’ is covered in the rates
•
Who should cover Taxes and Duties?• Don’t forget about warranty, best practice is for the Supplier to:
•
Administer warranty and retain proceeds• Build in warranty claim rebate into rates
• Consider the rate type, structure and adjustment factors:
Price
High
Supplier Acceptance Rate Structure
$/mth based % of CLP
Flight Hour Minimums
N/A
Escalation
Q
Repair $/FH
R
/
Q
R
(Cap) HighPool Access $/FH
R
Q
Moderate• They form a contractual benchmark to determine minimum performance levels
• The airline shouldn’t be scared to sign up to KPIs to manage its obligations
•
an ITM solution is a partnership• At a minimum KPIs should govern direct agreement deliverables
• Delivery/dispatch times of each order
• Ideally KPIs should reflect the airlines operational parameters
•
Dispatch reliability• MEL quantity and clearance rates • Inop levels of T/Rs, APU etc
• What about remedies?
•
If the Supplier does not perform a service for which it has been paid, it seems reasonable for the airline to request a financial remedy• Continual non performance should be a termination event
KPIs
Remember an ITM solution is a partnership – KPIs should be balanced
The Supplier will suggest these are out of their control….
…. These are at least partly effected by component quality
A reasonable Supplier will agree to this but expect caps to their exposure.
• Excluded events should be items outside the control of both the airline and Supplier
• FOD • Misuse
• Incorrect maintenance
• Accident (rather than an incident)
• Be careful when considering No Fault Founds (‘NFF’)
• Most Suppliers will put a limit on NFFs (~15% of removals)
• A removal due to trouble shooting directed by AMM should not be classed as an NFF
• When does title transfer occur, consider the typical solution:
Other important issues items
Q
AirplaneServiceable Component
Unserviceable Component
‘Float’ Components Owned by Supplier
Fitted Components Owned by Airline/Lessor Title
Transfer at fitment
What about the OEMs....
Entry of OEMs is a good thing but BE CAREFUL!
Is there room for OEMs as suppliers of ITM solutions?
• Yes – absolutely
There are a number of benefits:
• OEMs design/sell the component so they should be responsible in-service support
• OEMs can leverage their scale (
to pass on savings to airlines?
)
• Extra competition in the market is a good thing
But what would happen if the OEM leveraged its position to over time build a monopoly?
~ 11% escalation
• In 2011 an airline went to market for repair services as part of a new fleet acquisition
and the OEM offered a repair support solution
Case study 2: OEM repair costs - an extreme case
Later communication with a MRO and OEM:
MRO: “We have capability but due to existing agreements with the OEM we are unable to
repair these items. If you get the OEMs permission we are glad to repair these items”
To OEM: “Are we free to go to another supplier to obtain XYZ services” OEM: “Yes”
Airline: “Can we have this in writing?”
OEM: “No, because you don’t need it in writing!”
~ 11% escalation
~ 10% escalation
-10%
~ 3% escalation
~ 11% escalation
~ 10% escalation
+300%
-10%
Summary
•
When assessing an ITM solution, look at:
• What you get (Scope)
• When you get it (Service Delivery) • And for how much (Price)
• Have contractual performance management (KPIs)
•
ITM solutions are not for everyone - there is no magic formula, consider
• Fleet size
• How long will you keep the aircraft • You geographical location
• Core competency in managing inventory, maintenance and logistics
•
Feel free to customise a solution that works for you
• Outsource areas where you are not competitive • Keep/in source areas where you are competitive • Understand the operational risk profile of the solution
•
OEM have a roll to play but so do MROs/Airlines
TBE
…Capability through people…
For further information please contact:
Tom Bemstein
TBE International Limited
Level 19, Two International Finance Centre. 8 Finance Street,
Central. Hong Kong.
Phone: +852 3101 7286 Fax: +852 3101 7287
Email: [email protected]
or
