Air Transport World

Too much of a good thing: better inventory management could save the industry millions while improving reliability.(includes related articles on Northwest Airlines and American Airlines)

Better inventory management could save the industry millions while improving reliability

At a time when most industries have adopted just-in-time delivery, lean production and partnering to reduce inventories, improve cycle times and conserve capital, the world's aviation industry still warehouses a massive spareparts buildup valued at $45 billion. High-value rotables make up about $20 billion of this amount, while nonrotables--repairables and expendables --account for $25 billion, sufficient to support four years of operation, according to the Canaan Group, an aviation consultancy headquartered in Park City, Utah.

That is far too much inventory, even for the airline industry, says Bob Gannon, a principal with the firm. "I can't think of any other industry that carries this much protection," he says. Around $33 billion worth of parts are held by and to support jet airlines, including more than 4,000 spare engines, with the remainder dedicated to supporting regionals and corporate and general aviation.

Gannon and Kevin Michaels, also a Canaan principal, have authored a report on better inventory management that outlines four steps to eliminate excess inventory, thereby freeing up capital while improving overall reliability and performance. They point out that assuming a 20% annual carrying cost, the industry is spending nearly $2 billion per year simply to maintain that $45 billion inventory. Furthermore, operators-- who hold nearly 80% of the spares--are tying up money in nonperforming assets at a time when many are strapped for cash.

The spare-parts surplus is traceable to a number of factors. Historically, airlines have spent heavily on spares, rather than risk an expensive aircraft-on-ground situation. They have been slow to introduce inventory-management techniques common to other industries because, owing to a history of regulation, they have not viewed excess inventory as a nonproductive asset, nor as a waste of capital. For as long as fares were regulated on a cost-plus basis, little incentive existed to keep a tight rein on inventory.

"The airline industry is still trying to wake up to being deregulated. There hasn't been a significant focus on cash management within the operator community," says Gannon, adding: "Quite frankly, I don't think many of them have looked at it very carefully."

Michaels cites other factors contributing to the buildup, including the tendency of OEMs to recommend very heavy spares provisioning for new operators. "In the past, operators tended to rely on the manufacturers' estimates and in many cases, these were conservative. …

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