Finance - A Chain Long, Yet Strong

MROs themselves are under huge pressure. Their customers want them to reduce labour costs as well as costs of maintaining parts inventories. An obvious solution, which is to adopt decentralised heavy maintenance in low-wage countries, carries risks of its own.

Any discussion about commercial aviation is bound to be dominated by operational aspects and the concerns of the airlines. But keeping the beautiful machines in flying condition is just as important. This is a product of plenty of grease and sweat and of technicians who work tirelessly but without much recognition. Similarly, aircraft mega deals and the astronomical sums involved get the biggest headlines especially at air shows. Yet expenditure on maintenance, repair and overhaul (MRO) through the life cycle of an aircraft can easily exceed its initial price. The aerospace industry annually spends more on MRO than on development or production. Modern aircraft are produced in weeks or even days, but may remain in service for 30 years. This creates a service supply chain that may span into decades with significant demand for maintenance and spare parts.

The nature of MRO is itself changing. Earlier, original equipment manufacturers (OEMs) focused on producing new aircraft and were content to leave the onerous task of maintenance to third party MRO providers. However, with the world economy in trouble, OEMs are feeling the heat. Aircraft development and manufacturing costs are soaring as materials become more exotic and performance demands more stringent. But the airlines and consumers are getting used to lower airfares, and operators and leasing companies in turn are seeking deep discounts on aircraft list prices, further shrinking the OEM’s margins. Therefore, the manufacturers need to recuperate their costs throughout the aircraft’s life cycle. In the past, aircraft maintenance manuals used to be detailed enough for independent MRO providers to inspect and repair parts without advice from the OEMs. Not any longer. Technical information, or rather the lack of it, has become a way to control who will carry out maintenance and where costly parts may be purchased.

Supply Chain Challenges

About 70 per cent of the global aerospace market is sourced externally, so OEMs as well as MRO providers are at the mercy of the supply chain. It all started in the 1990s, when industries began to focus on “core competencies”. Companies sold off non-core operations and outsourced those functions to other companies, sometimes halfway across the globe. This created extended supply chains well beyond company premises and made supply chain management (SCM) a key requirement for successful business.

Today, for instance, development and production of the Boeing B787 Dreamliner involves collaboration with numerous suppliers and subcontractors. Boeing is entirely dependent on the timely arrival from around the world of about a dozen major B787 structures such as wings, fuselage sections, tail sections, engines, complete and with all systems installed. This approach was intended to create a leaner and simpler assembly line and lower inventory at Boeing. But the Dreamliner suffered three years of delays mainly because the elongated supply system did not deliver. The situation was so bad that Boeing was forced to purchase two of the supplier factories in an effort to persuade the supply chain to work.

MROs themselves are under huge pressure. Their customers want them to reduce labour costs as well as costs of maintaining parts inventories. An obvious solution, which is to adopt decentralised heavy maintenance in low-wage countries, carries risks of its own. It generally creates a more elongated service parts supply chain and increases the possibility of longer aircraft check cycle times.

Inventory Reinvented

Most logistics and maintenance folk are familiar with the nursery rhyme about the kingdom that was lost for want of a simple horseshoe nail. Sometimes an aircraft may be grounded in Goa for several days while a critical part that may get it flying again is easily available in Kolkata. The principle is to always have the right part at the right place at the right time in the right quantity and at the right price. And that just about sums up inventory management.

Spare parts are essential to logistics management and SCM. These often need dedicated spare parts management systems. While an operator would be happy to see a store filled with critical and not-so-critical items “just in case”, a financial officer would take a dim view of such wasteful tendencies. There’s a possibility that the parts might never be used or that they might develop defects due to improper storage. Alternatively, there may be a large number of unique part numbers, most of which have little or no usage. Thus the transport cost of inventory itself could amount to as much as 20 per cent of the value of the stocked parts per year. That is why it seems more reasonable to set up parts pools and parts exchanges shared by several geographically proximate airlines and MROs working with the same type of aircraft. The corollary is that a swift and responsive SCM system is essential to avoid the frustration of having to wait endlessly for a pooled part to arrive.

Spare parts are of various types

Those that cannot be repaired are considered consumable parts, to be scrapped when they fail. Hence consumables tend to be lower cost items and can be stocked at site in numbers commensurate with their mean time between failures (MTBF) without entailing unacceptable carrying cost. However, aviation related inventories are unique. In that a large portion consists of rotables that are more expensive parts and can generally be repaired and reused. It helps to set up rotable pools so that multiple repairs may be accomplished simultaneously and stock-out conditions can be minimised. Stock-out often triggers cannibalisation and that, in turn, impairs operational availability.

Of the four main subdivisions of aviation MRO, line maintenance and heavy maintenance are labour intensive and not too hungry for parts and hence are less concerned about SCM. However, component maintenance that includes repair of parts such as wheels, brakes and interior components and engine maintenance, which includes dismantling, inspecting, assembling and testing aircraft engines, constitutes about 45 per cent of the MRO market. Both depend more than 60 per cent on parts.

SCM relies on the principle that by decreasing inventory and increasing the exchange of information, customers’ demands can be met more efficiently. A well-considered SCM strategy needs good process discipline and systems that support the strategy and processes. But the MRO supply chain is one of the most difficult to forecast. The projected number of aircraft requiring maintenance and the MTBF and failure rates are useful indicators. However, the smaller MROs tend to stock only a few parts. Most parts are expeditiously ordered only after the aircraft has entered the hangar and inspection of parts and systems scheduled for maintenance has been completed. This “inspect, then order” method can cause longer aircraft maintenance cycle times and increased costs for expedited orders. And the shipping costs per order will increase if the MRO is at a remote location.

The Ministry of Civil Aviation expects India’s fledgling MRO industry to triple in size from Rs. 2,250 crore in 2010 to Rs. 7,000 crore by 2020. The reason for this optimism is that labour constitutes around 50 per cent of MRO spending. So India’s relatively inexpensive pool of engineers and technicians are a prime asset. But if cheap manpower is a positive factor, high taxes on imported components could easily drive away business. Air Works, India’s only third-party MRO provider claims to have cornered 30 to 40 per cent of the general aviation MRO business in the country. Set up in 1951, Air Works maintains over 50 aircraft types for over 100 customers at 15 locations across India. The complexity of its supply chain demands strong SCM measures.