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Scm at Cathay Pacific
“AVIATION SPARE PART SUPPLY CHAIN MANAGEMENT OPTIMISATION AT CATHAY PASIFIC AIRWAYS LIMITED” CASE STUDY GLOBAL LOGISTIC COURSE ASSIGNMENT Prof. Hiroshi Hoshino Umurbek Osorkhan 2EC12056R QBS 10th 5 November 2012 1 Company Overview Cathay Pacific Airways is an airline company founded on September 24th, 1946 by Roy Farrell and Sydney de Kantzow. Starting with a very limited schedule service, the company grew larger through multiple product innovations, technological investments such as the computerized reservation system and successful acquisitions.
In 1986, Cathay Pacific went public and further expanded in Europe, North America, and China. The company employed over 25000 people worldwide, serviced over 43 destinations throughout Asia, Europe and North America, and carried more than 16. 7 million passengers in 2006. 1. Why is good supply chain management of spare parts so critical for an airline? Supply chain management has become one of the crucial competitive advantage in today`s organizations. Finding opportunities in supply chain can make companies unique and different from competition.
Today more and more companies are trying to manage their supply chain in an effective and efficient manner in order to provide better services at lower cost. Unlike other industries, the aviation industry known as highly regulated1 industry and the aviation spare parts 2 are very complex3, large amounts of money are invested in spare parts inventory and this has increased over the years. Because of these large amounts of money involved, there is great interest in cost savings, and even savings of a few percents only constitute large cost savings in absolute terms.
This case study shows us how Cathay Pacific Airways successfully manage their supply chain in an optimal manner, despite some circumstances. According to the case study there were several points that good supply chain management of spare parts so critical for commercial airline operators. We can briefly describe them as stringent industry regulations, turnaround time and lead time, large number and expensive parts. Firstly, managing supply chain in aviation industry was so complex and challenging for all operators, and
Cathay Pacific is no exception as reflected in the huge inventory carrying costs of US$350 million as of December 2005. In addition, dead and inactive stock made up 20% of Cathay Pacific’s annual supply chain expenses of US$250 million. Moreover, substantial resources are consumed with over 100 personnel in the inventory management department overseeing over 230,000 line items of aviation spare parts and over 600 supplier relationships. As I mentioned earlier aviation spare parts themselves were very complex and expensive.
For instance in a single airplane there are over 1 million parts and components and the average cost of engine was $12 million. Another critical issue for the supply chain management in aviation industry was the tight regulation of the aviation industry, which is regulated by international and local authorities such as the US Federal Aviation Administration (FAA), the European Aviation Safety Agency (EASA) and the Civil Aviation Department of the Government of the Hong Kong (CAD). Airlines operators have to comply with different statutory regulations.
For instance, they have to complete the deferrable repairs within the stipulated timeframe, suppliers of aeroplane spare parts are required to possess special legal certifications and formal protocols, as well as issues of reliability and safety. 1 Because of safety issues the Aviation industry was regulated by international and local authorities such as FAA, EASA or some local regulatory bodies. 2 Spare parts are defined as components, assemblies, and equipment that are completely interchangeable with like items installed or in use, which are used, or can be used, to replace items removed during maintenance and overhaul. Joseph D. Patton, 1984) 3 There were over 1,000,000 parts in a single airplane. 2 Initially safety issues are crucial for all operators and supplier. It`s true that strict rules and tight regulations are necessary-they protect consumers, customer safety, environment and other things. However sometimes it causes some burdens on businesses. It always increases the cost of operations. Also turnaround time for repairs was highly critical and cost for flight delay was extremely huge. Customers might be upset or even shift to other airlines if delays caused them lose the connecting flights.
Thus, the cost of aircraft delays was crucial element in engineering. Bargaining power of supplier, difficulty to forecast demand and harsh competitions were other important issues in aviation industry. As a result of tight aviation regulations airline companies, as a customer, were constrained in supplier selection. Spare parts solely supplied by only single dominated supplier as called OEM (original equipment supplier). The limited choice and high concentration of OEM`s limited airline operators` negotiation power.
According to the M. Porter`s five force analysis aviation industry has low entrance barrier and it cause very intensive competition between airlines operators. A few decades ago flying with airline was very expensive for ordinary people but today everyone can benefit from this because airline ticket prices have constantly and significantly fallen. Finally, demand forecasting was very difficult. The forecast for spare parts is made based on maintenance information, scheduled maintenance plans and past usage patterns.
Even so, the usage pattern of spare parts remained highly unpredictable because of the irregular behavior and the high level of demand variability of airplane spare parts for aircraft maintenance repair parts, which make the demand forecasting very challenging and tough to deal with. 2. Explain the financial impact of having higher inventory level of spare parts. It`s obvious successful supply chain management is focuses in an inventory and inventory control management.
A common perception and experience is that supply chain management leads to cost savings, largely through minimizing inventory holding costs. As I mentioned before certain risks (delaying aircraft can lead huge cost) airline operators was needed to hold certain level of spare parts that could satisfy all possible demand of its aircraft. However, this was both financially and operationally impossible. Thus, managing balance between most effective inventory levels to hold onto relative to the responding service level is very important.
According to the case study spare parts constituted a significant expense (total inventory value was $350 million in BS) in Cathay Pacific`s financial statement. Followings are several financial drawbacks of having higher inventory level of spare parts. ? It could increase the carrying inventory cost. High inventory increases the warehousing cost (facility, handling, etc. ), the investment cost (borrowing and opportunity, etc. ) and holding cost (insurance, tax, obsolescence, etc. ) directly linked to the increase of inventory. It could also increase the labor cost.
High inventory level conducts to inventory discrepancies, so lots of counting and recounting, tracking and tracing costs associated. It had negative impact on cash flow. More buy spare parts, components and assembles or any goods mean more consume cash only holding inventory. Moreover, holding high inventory levels always hide process inefficacies where inventory is made to cover malfunctions such as breakdowns, quality issue, long die exchange time even risks of mistakes. ? ? ? 3 3. How do you evaluate Cathay Pacific’s logistics management?
I was very impressed and fascinated with Cathay Pacific’s logistics management. Despite of existing challenges such as heavy regulations, dependence on OEM`s, large numbers and complexity of spare parts and supplier relations and so on Cathay Pacific was successfully manage their supply chain and made themselves different other airlines. As a result she has become a leading airline company in the world. Cathay Pacific handles all procurement and inventory management in-house whilst third party logistics service providers are employed for repair and logistics management.
Through following successful procurement, inventory management, repair management, and logistics management Cathay Pacific could optimize their supply chain management of spare parts operation. ? Despite large scale of operations with thousands of suppliers and distributors cross functional teams at Cathay Pacific helped in gaining leverage on purchasing by applying a systematic process of reducing the cost of spare parts purchased from different vendors. The procurement process gave an edge to Cathay Pacific in monitoring, evaluating and managing relationships with suppliers to ensure operational effectiveness.
With its implementation, the airline was able to leverage purchasing power across different divisions and negotiate favorable prices with the suppliers. Strategic sourcing also focused to consolidate the supplier’s database and chose the preferred ones. Through the finding following options Cathay Pacific successfully was handled the shortage. – Express Shipping: This situation happens when aircraft is grounded and could not take off due to the nonavailability of certain part. The system at Cathay Pacific generates an urgent AOG (Aircraft on Ground) order request and the parts are expressed shipped for same day delivery.
The express shipping situation clearly shows the shortcomings of current purchasing practices and inventory management of Cathay Pacific. – Borrowing: The other method Cathay Pacific uses is of borrowing form other Airlines. Borrowing seems to be a good idea however Cathay Pacific cannot depend on this method as it cannot ensure the availability of parts as the parts required might not be available with other airline. Also borrowing might even be not possible as different airlines uses different aircraft models. Again it will be costly option for Cathay Pacific because other airline might charge a premium. Airline Technical Pool: The third option Cathay Pacific has for meeting shortage is by pool loan, Cathay Pacific has signed a contract with International technical pool which maintain network of 100 Airlines. With this use of this network Cathay Pacific can share spare parts when in need without a surcharge. Collaborating through this network is a good option for Cathay Pacific, however still it cannot ensure the availability of required parts. Cathay Pacific cannot rely completely on this option. Also it might me time consuming and costly to ship the part form different regions.
Being part of this network Cathay Pacific also need to share their inventory with other Airlines which could create instability in their own system. – Internal Borrowing: The final option Cathay Pacific has is of internal procurement, whenever a part is needed Cathay Pacific can borrow it form their Aircraft. This solution might make the part available in short term but it does not necessary solve the actual problem as they will still be requiring the part in future. Similar to the other options Cathay Pacific cannot rely on this option because it does not ensure the part availability when needed.
In addition improving and introducing Ultramain information system, which enables Cathay Pacific`s technical log process and support the maintenance management afterwards was clearly helped to optimize their supply chain management of spare parts. Another successful supply chain optimization at Cathay Pacific was implementation of Aerochange system Development of a collaborated supply chain system to expand the sharing and exchange of information (Spare parts availability and suppliers list) with different airlines gave an advantage to Cathay Pacific to select a supplier from the huge database.
After its launch in 2000, technological advancement in Aeroxhange made this system capable of doing numerous tasks which helped the airlines to be more effective in their procurement. ? ? ? 4 ? E. g. : In 2001, Aeroxchange launched its e-procurement platform to integrate the partners for quote management and also it incorporated the service order management in 2005. Finally, Cathay Pacific was successfully outsourced to third-party logistics (3PL) companies to transport their parts to various repair houses across the globe.
This outsourcing approach allowed Cathay Pacific to save costs and hence reduce financial risks. Assets required establish distribution centers and networks normally need a huge amount of money that encompasses financial risks and hence by outsourcing, this risk can be spread to 3PL partners. Also the perform of repair and logistics management activities Cathay Pacific pays millions of dollars. However outsourcing these activities will result in saving the capital which can be spent on further expansion of the airline. . Any suggestion for the company to reduce the inventory cost while maintaining safe operation of aircrafts? Although Cathay pacific invested a lot of time and money to improve their procurement, there are still many rooms for the advancement in their processes. The history of Cathay pacific says that they have always tried to lock the deals with the airlines and individual suppliers to enhance their procurement process.
On the other hand, one point that should have been taken into account was establishing strategic alliances with the suppliers or manufacturers (Boeing and Airbus) for the procurement activities. (According to the case study Cathay Pacific ) An alliance where manufacturers should focus on the materials management and help Cathay pacific to focus on core business activities. The integrated alliance with Boeing and airbus services will help to achieve greater transparency and efficiency in the resource operations.
These services are acquired by most of the big players in the market like Delta airlines and Singapore airlines where they succeeded in generating good revenues by focusing on their core activities. The other alternative for improvement is to reward the suppliers to suggest the cost saving ideas. This will help the airline to develop a sense of competition among suppliers for developing a sustainable and cost effective model for procurement which will eventually result in increasing the productivity of the fleet.
Despite the Cathay Pacific`s efforts to manage their spare parts inventory in an optimal manner, they still encountered several circumstances. Dealing with spare part shortage they have offered express shipping. Definitely express shipping is a very costly option for Cathay Pacific and should be avoided by keeping the AOG parts in inventory. Finally outsourcing whole engineering division can be another suggestion to improve inventory cost. By this it could save enormous costs and risks. 5