Aviation Spare Parts Supply Chain Management 09/382C Optimisation at Cathay Pacific Airways Limited Spare Parts by Criticality Cathay Pacific further subdivided their spare parts by classifying the above five categories broadly into critical components and non-critical components,which could further be classified by the criticality codes 0,1,2,3 and 4 [see Exhibit 3]. Critical components were parts that were essential to operating an aircraft safely and effectively.They could make the difference between a safe landing and a mid-air catastrophe. These parts were usually very expensive and complex.An example of a critical component was the US$I million Electronic Engine Controller7. Non-critical components encompassed all parts of the plane that were not essential to the effective and safe operation of an aeroplane.There was a diverse range of non-critical components,from in-flight entertainment systems to nuts and bolts.Expendables and consumables qualified as non-critical components in the majority of cases.Nevertheless,there were instances where these types of parts were considered critical components,such as a dowel required to keep a rotable part in operational form. The critical and non-critical dimension could be applied to all five classes of materials [see Exhibit 4].18 Current Practices in Aviation Spare Parts Supply Chain Management The spare parts supply chain operations at Cathay Pacific flowed from procurement and inventory management to repair management and logistics management.Cathay Pacific's internal supply chain strategy had been driven by ensuring quality and service to the aircraft operation in the most cost efficient manner. Procurement The supply chain of spare parts at Cathay Pacific was a very complex,large-scale operation with thousands of suppliers and distributors.Aviation spare parts were handled and directly purchased by Cathay Pacific.The purchasing activities were transaction-orientated,from sourcing and storage to consumption and repurchase.Cathay Pacific's procurement process could be triggered by normal replenishment,initial provisioning or special provisioning [see Exhibit 5].In line with the nature of the business,Cathay Pacific had to ensure that adequate airworthy spare parts were available at all times.In addition to purchasing activities,the procurement process involved Cathay Pacific's cross-functional teams in selecting, monitoring,evaluating and managing relationships with part providers to ensure operational effectiveness.Key performance indicators were set as quantifiable objective measures to assess the quality and the performance of the parts.Some of these measures included average and variance of lead time,quality levels and component performance. The airline industry had very few choices for critical parts component suppliers.Moreover, the sensitive nature of these critical parts limited Cathay Pacific's ability to switch suppliers because of the significant costs associated with switching. There was a greater level of flexibility for non-critical spare parts,with over 200 consumables and expendables suppliers.This,however,had,consumed much of Cathay Pacific's resources in managing supplier relationships. 7An electronicengineoror is used to monitor nd conrol the operation of the engine sCathay Pacific(IMay 206)"Engineering Procedure Manual Inventory Operations Volume 9A",Company Presentations. 6 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Aviation Spare Parts Supply Chain Management 09/382C Optimisation at Cathay Pacific Airways Limited 6 Spare Parts by Criticality Cathay Pacific further subdivided their spare parts by classifying the above five categories broadly into critical components and non-critical components, which could further be classified by the criticality codes 0, 1, 2, 3 and 4 [see Exhibit 3]. Critical components were parts that were essential to operating an aircraft safely and effectively. They could make the difference between a safe landing and a mid-air catastrophe. These parts were usually very expensive and complex. An example of a critical component was the US$1 million Electronic Engine Controller17. Non-critical components encompassed all parts of the plane that were not essential to the effective and safe operation of an aeroplane. There was a diverse range of non-critical components, from in-flight entertainment systems to nuts and bolts. Expendables and consumables qualified as non-critical components in the majority of cases. Nevertheless, there were instances where these types of parts were considered critical components, such as a dowel required to keep a rotable part in operational form. The critical and non-critical dimension could be applied to all five classes of materials [see Exhibit 4].18 Current Practices in Aviation Spare Parts Supply Chain Management The spare parts supply chain operations at Cathay Pacific flowed from procurement and inventory management to repair management and logistics management. Cathay Pacific’s internal supply chain strategy had been driven by ensuring quality and service to the aircraft operation in the most cost efficient manner. Procurement The supply chain of spare parts at Cathay Pacific was a very complex, large-scale operation with thousands of suppliers and distributors. Aviation spare parts were handled and directly purchased by Cathay Pacific. The purchasing activities were transaction-orientated, from sourcing and storage to consumption and repurchase. Cathay Pacific’s procurement process could be triggered by normal replenishment, initial provisioning or special provisioning [see Exhibit 5]. In line with the nature of the business, Cathay Pacific had to ensure that adequate airworthy spare parts were available at all times. In addition to purchasing activities, the procurement process involved Cathay Pacific’s cross-functional teams in selecting, monitoring, evaluating and managing relationships with part providers to ensure operational effectiveness. Key performance indicators were set as quantifiable objective measures to assess the quality and the performance of the parts. Some of these measures included average and variance of lead time, quality levels and component performance. The airline industry had very few choices for critical parts component suppliers. Moreover, the sensitive nature of these critical parts limited Cathay Pacific’s ability to switch suppliers because of the significant costs associated with switching. There was a greater level of flexibility for non-critical spare parts, with over 200 consumables and expendables suppliers. This, however, had, consumed much of Cathay Pacific’s resources in managing supplier relationships. 17 An electronic engine controller is used to monitor and control the operation of the engine 18 Cathay Pacific (1 May 2006) “Engineering Procedure Manual Inventory Operations Volume 9A”, Company Presentations. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Aviation Spare Parts Supply Chain Management 09/382C Optimisation at Cathay Pacific Airways Limited Inventory Management Inventory management for Cathay Pacific is determining the right quantity of spare parts and material at the right time and at the right place to meet anticipated and unanticipated demands to maintain aircraft operations at the desired service level at the optimal costs -Engineering Procedure Manual,Cathay Pacific Monitoring of stock turnover,which was an indicator of the efficiency of stock management, was thus an integral component of Cathay Pacific's inventory management process.Timely stock replenishments were needed once reorder points were reached.An extensive system, Ultramain,was in place for management of components replacements and newly acquired spare parts [see Exhibit 6 and 7]. Cathay Pacific also needed to minimise inventory holding costs.In theory,an exhaustive inventory was needed to reach a service level that could satisfy all the possible demand of its aircraft.Because this was financially and operationally infeasible,Cathay Pacific had to operate in the most economically responsible way and strike a balance between the most effective inventory levels to hold on to relative to the corresponding service level. To guard against the risk and cost of prolonged downtime,Cathay Pacific normally built in a buffer stock and,as a result,additional cost was incurred to engineering operation in general. Despite Cathay Pacific's efforts to manage their spare parts inventory in an optimal manner, they still encountered circumstances where a certain part was needed and no stock was available.Coping with such a situation was referred to as"shortage management".Shortage management was a process of sourcing parts that,for one reason or another,were unavailable to meet the expected demands.When Cathay Pacific required a spare part immediately and none was readily available,they explored several options to meet the urgent need: Aircraft-on-ground("AOG")orders were employed in situations where a Cathay Pacific plane was grounded and could not take off without a certain part.When an AOG order was placed,the part would be shipped via same-day express delivery. Cathay Pacific could retrieve the necessary spare part by borrowing it from another airline. Pool loans were another way Cathay Pacific was able to manage part shortages.By signing a contract with the International Airline Technical Pool,Cathay Pacific was granted access to a network of over 100 airlines with which they could share spare parts when in need without incurring a surcharge. Cathay could also borrow a part from one of its other aircraft. Repair Management On average,Cathay Pacific managed over 80,000 repair orders per year,or over 7,000 repair orders per month.20 After determining whether faulty parts were repairable or not,Cathay Pacific had to determine whether their existing repairers had both the required capability as well as necessary capacity to repair the full range of components installed on its aircraft.To this end,Cathay Pacific compiled a database of over 300 of the world's major aeroplane spare part repair shops.Repair shops were selected based on the types of spare parts the shop specialised in,quality,price and service level. In 2000,Cathay Pacific collaborated with 13 other airlines to develop Aeroxchange,a system designed to facilitate the sharing and exchange of information,such as repairer sourcing, Company interview on 15 December 2006. 2Company interview on 15 December 2006. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Aviation Spare Parts Supply Chain Management 09/382C Optimisation at Cathay Pacific Airways Limited 7 Inventory Management Inventory management for Cathay Pacific is determining the right quantity of spare parts and material at the right time and at the right place to meet anticipated and unanticipated demands to maintain aircraft operations at the desired service level at the optimal costs - Engineering Procedure Manual, Cathay Pacific Monitoring of stock turnover, which was an indicator of the efficiency of stock management, was thus an integral component of Cathay Pacific’s inventory management process. Timely stock replenishments were needed once reorder points were reached. An extensive system, Ultramain, was in place for management of components replacements and newly acquired spare parts [see Exhibit 6 and 7]. Cathay Pacific also needed to minimise inventory holding costs. In theory, an exhaustive inventory was needed to reach a service level that could satisfy all the possible demand of its aircraft. Because this was financially and operationally infeasible, Cathay Pacific had to operate in the most economically responsible way and strike a balance between the most effective inventory levels to hold on to relative to the corresponding service level. To guard against the risk and cost of prolonged downtime, Cathay Pacific normally built in a buffer stock and, as a result, additional cost was incurred to engineering operation in general. Despite Cathay Pacific’s efforts to manage their spare parts inventory in an optimal manner, they still encountered circumstances where a certain part was needed and no stock was available. Coping with such a situation was referred to as “shortage management”. Shortage management was a process of sourcing parts that, for one reason or another, were unavailable to meet the expected demands.19 When Cathay Pacific required a spare part immediately and none was readily available, they explored several options to meet the urgent need: • Aircraft-on-ground (“AOG”) orders were employed in situations where a Cathay Pacific plane was grounded and could not take off without a certain part. When an AOG order was placed, the part would be shipped via same-day express delivery. • Cathay Pacific could retrieve the necessary spare part by borrowing it from another airline. • Pool loans were another way Cathay Pacific was able to manage part shortages. By signing a contract with the International Airline Technical Pool, Cathay Pacific was granted access to a network of over 100 airlines with which they could share spare parts when in need without incurring a surcharge. • Cathay could also borrow a part from one of its other aircraft. Repair Management On average, Cathay Pacific managed over 80,000 repair orders per year, or over 7,000 repair orders per month.20 After determining whether faulty parts were repairable or not, Cathay Pacific had to determine whether their existing repairers had both the required capability as well as necessary capacity to repair the full range of components installed on its aircraft. To this end, Cathay Pacific compiled a database of over 300 of the world’s major aeroplane spare part repair shops. Repair shops were selected based on the types of spare parts the shop specialised in, quality, price and service level. In 2000, Cathay Pacific collaborated with 13 other airlines to develop Aeroxchange, a system designed to facilitate the sharing and exchange of information, such as repairer sourcing, 19 Company interview on 15 December 2006. 20 Company interview on 15 December 2006. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012