Inventory Control Strategy Study For Airlines

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1 Inventory Control Strategy Study For Airlines Supanee Arthasartsri and He Ren, School of Aerospace, Mechanical Manufacturing Engineering RMIT University (Australia) The airline industry, as a whole, sits on billions of dollars of excess capacity in parts. Excess inventory and materials costs significantly increase the annual maintenance budgets of most airline companies today. However it is also crucial for airlines to keep enough stocks in the system in order to maximize availability of aircraft and minimize maintenance turn-around-time. A well planned supply chain management strategy therefore is significant in every airlines maintenance management system. This paper discusses the inventory control process and some examples of inventory control strategies for an airline. INTRODUCTION It has been proven that for industries characterized by high hardware costs, and where high utilization is vital for those industry s sustainability, inventory management plays a pivotal role in the overall life-cycle cost program through its significant impact on capital cost as well as capital velocity (such as turnover). For each airline to achieve the optimal costs for spare part management, maintenance strategy and system availability play major roles. In recent years, organizations have focused on reducing levels of unplanned maintenance through preventive and predictive maintenance. It is well known that the unavailability of spare parts may result in loss of revenue which is associated with an increase in system downtime. On the other hand, having excess number of spares will lead to an increase in capital investment and holding cost. This is shown in Figure 1. Increasing levels of competition in the market creates an urgent need to reduce capital cost and increase capital velocity (turnover) by carefully selecting assets and improving utilization. Higgins and Morrow (1993) divide maintenance cost into: cost of maintenance operations, the cost of ownership of maintenance equipment and spares, and the cost associated with unexpected system downtime. The cost of acquiring spares and that associated with unexpected delays are particularly high in the airline industry. It is essential for a successful airline to balance the cost of aircraft availability on one hand with the cost associated with providing a certain level of support on the other. Improving management of the supply chain involves improving performance of contradictory objectives. The inventory level should be at a minimum while at the same time improving availability (hence high service level). It is important that airlines find the right balance between the two contradictory objectives. The cost of potential lost sales should balance with the cost of carrying inventory as much as possible. To achieve the goal, the performance tracking must involve delivery performance, order-fulfillment lead time and overall costs. Figure 1: Optimal Spares Cost 20th ANNIVERSARY YEAR

2 Inventory Control Strategy For Airlines 59 This paper describes the process of inventory control management which includes the provisioning and the initial state of creating a model for simulation in order to achieve the optimum spare parts. Several inventory control strategies for airline includes material management and supply chain synchronization and outsourcing component management will also be discussed. INVENTORY CONTROL FRAMEWORK Inventory control is responsible for ensuring that all the necessary parts and supplies are on hand and available at selected locations throughout M&E (maintenance and engineering). Its purpose is to support all maintenance activities by maintaining proper stock levels in stores and by initiating reorders at appropriate times. They are also responsible for adjusting the stock levels as changes in usage and fleet makeup dictate. (Kinnison, 2005) Prior to the start of a new project, airline will set up an initial provisioning process which sets initial stocks of repairable spares and repair entry into service. Manufacturer, e.g. Airbus or Boeing, provide a Recommended Spares Parts List (RSPL) to the airline. Airline then creates an inventory strategy based on the provided RSPL. Examples of data required in designing the strategy include; Fleet size Average flight hours per aircraft day Average flight hours per flight leg Line-station to main base return time (days) Repair turnaround in days by shop code, for major and minor repairs (days) To provide material support for maintenance and overhaul for such a variety of a whole inventory system, the items are classified into 3 categories Class A, Rotable parts: serialized items which could be tracked for life control. Class B, Repairable Parts: items that are reconditioned back to original state by using parts and known repair processed. Class C, Expendable Parts: items which are discarded and replaced as recommend by manufacturers. Figure 2: Continuous Review Inventory System Two basic questions for every organization in inventory matters are when the optimal order point (R) is and how much the economic order quantity (EOQ) is. Figure 2 illustrates the relationship between EOQ, R, and inventory level moving through time. The graph shows that the system releases an order for Q units each time inventory position falls to a specified quantity R. The order cycle length is the time interval between successive order releases. The inventory position line moving through time follows the shape of saw-tooth curve. INVENTORY CONTROL PROCESS The distribution of the supplies is divided into two main channels for meeting airlines demand. A majority of parts are maintained in inventory at its own distribution centre and supplied to the maintenance base on demand. The second channel is based on vendor-managed inventories with the vendor shipping the products to the distribution centre on the orders communicated to them through the organization. Figure 3 shows the order through to delivery process flow of the supply chain. Vol 21 No 4

3 60 Inventory Control Strategy For Airlines The process flow in figure 3 is the tool to ensure the validity of the order as well as the availability of the parts to meet the demand. There are several ways to control the orders from airline to distribution centre and suppliers: Distribution centre have enough inventory available which is required from airline, the nearest centre then supplies straight to the airline maintenance base. Distribution centre does not have enough inventories available, the order will be place on the backorder list and request for replacement is sent to the planning division. If the parts in backorder list are under the existing contract, planning division then creates a purchase order and forwards it to the supplier. If there is no contract existing in the backorder list, a request is sent to the procurement department to set up a new contract then forward to the supplier and make a purchase order. INVENTORY MANAGEMENT TECHNIQUES There are several different techniques that have been developed and proposed to improve the availability of spare parts when necessary. For the aviation industry, the most common and efficient techniques include reorder point evaluation (ROP) and Material Requirement Process (MRP). Failure to replenish spare parts on time for an airline can cause the loss of revenue, violate regulatory requirements and compromise the safety of workers. Moncrief (2005) mentioned that the concept of using an order point, or reorder point, is the point in the replenishment process that should trigger the normal ordering of a replacement stock keeping unit (SKU). Availability of equipment and spare parts to sustain the production process is protected when airlines have the proper ROP level. The key for ROP inputs are criticality of the parts, lead time to replenish, issued in sets of and usage demand. Concept of material requirement process (MRP) is based on the determination of the future time-phased requirements for material and taking the necessary actions to insure the material is on-hand when required. Critical path scheduling is often used to keep the project on schedule. The key to successful MRP is the scheduling process, which determines when certain activities are going to happen. (Moncrief, 2005) The airline industry combines four unique market characteristics include global need for parts, demand unpredictability, traceability of parts for safety reasons, and high cost of not having a part. Most of the airlines at present are using ROP techniques in their inventory control management. According to the survey from Ghobbar and Friend, many airlines are now pursuing the MRP techniques since MRP gives the possibility for accurately controlling inventory and for reducing stock for schedule airline maintenance. The optimum strategy for airline to select the inventory management technique is to combine ROP and MRP techniques depending on the typr of inventory. ROP can be applied to the active inventories which are regularly used and the future expected demand can be predicted with good accuracy. On the other hand, expendable or class C inventory could be managed with MRP technique as it determines the quantity and timing of the acquisition of dependent demand items needed to satisfy master schedule requirements. INVENTORY CONTROL OPTIMIZATION MODEL The nature of airline systems does not involve a single but multi echelon and multi indenture. For repairable items, it is more complicated than other types as the question is not only how many spares are needed at the operating base but also how many are needed at the supporting depot. The following topics describe the multi-echelon and multi indenture optimization model. MULTI ECHELON OPTIMIZATION MODEL The typical multi-echelon model is a two-level system composed of a number of bases being served by a central depot, or depots. The bases are referred to as first echelon and the depots as second echelon. Airlines are considered to be a multi-echelon supply system as they have line maintenance 20th ANNIVERSARY YEAR

4 Inventory Control Strategy For Airlines 61 Airlines Orders Order Arrival Shipment Received Airline Order Validation No Place On Backorder Material Availability Release Backorder Yes No Existing Contract? Procurement: Set Up Contract Yes Material Receipt Notification Send Shipment Request Planning: Send Replenishment Requests Distribution Centres Materials Suppliers Figure 3: Airline Order to Delivery Process Flow bases at various locations as their first echelon, they also could have a major hub that is providing some spare parts to the region as their second echelon, and finally the home base where they receive stocks from major suppliers and vendors as the third etc. The demand for units occur when there are failures of operating units at the base level. The failed unit will be placed into repair at the repair base. In the event of sufficient stock not being available at the base-level, a backorder occurs and demand must be satisfied from units at the depot-level, either from existing stock or from units completing the repair process. (Guide, 1997) The problem, in the simplest form, is the setting of repairable inventory levels at each of the bases such that a pre-specified level of service is achieved, given repair rates and transportation times and budget constraints. MULTI INDENTURE OPTIMIZATION MODEL As echelons describe how the supply system is organized, the indenture structure describes the engineering parts hierarchy. A first-indenture item that is removed from the aircraft is called a lone-replaceable unit (LRU). When the first-indenture item is taken apart in the maintenance shop, second-indenture items are replaced and these are called shop-replaceable units (SRUs). There could be more indentures levels and a good inventory policy should be concerned with the optimal stock level of all these levels as well. Vol 21 No 4

5 62 Inventory Control Strategy For Airlines Since an item at a particular indenture is composed of several lower indenture items, the cost of each lower indenture item is less than that of its parent. Therefore it is a reasonable strategy to stock the lower indenture items rather than the higher one. On the other hand, when an item fails, it takes time and expertise to diagnose and replace the items that are responsible and this could affect the downtime, for this reason, it is better to stock the higher-indenture items. The analysis of the optimum level of indenture spares and allocation is best to be done by using a computer model which will not be mentioned in this paper. INVENTORY CONTROL MANAGEMENT STRATEGIES MATERIAL MANAGEMENT AND SUPPLY CHAIN SYNCHRONIZATION A key element in effectively managing airline maintenance operations is integrated supply chain synchronization. In determining optimal maintenance plans and location schedules, proper synchronization across the material management, warehousing and procurement organizations is a must. The process includes: Spare Parts Demand Forecasting for example the core availability, return, repair and rework of a rotable is forecast to generate a repair versus buy (RVB) plan. The RVB plan achieves a balance of inventory by considering two-way interchange ability substitution logic. It also uses advanced statistical and probabilistic forecasting techniques. (Kinnison, 2005) Chaining and Superceding Parts in planning the purchase of component parts, variables such as parts improvements and mandated safety changes must be forecast. The ability to recognize parts chains reduces excess inventory and scrap. Network Inventory Distribution Planning develops time-phased, network-wide inventory plans that allow dynamic redeployment of parts based on predicted maintenance requirements and failure rates. This minimizes unnecessary inventory. Supply Chain Event Management and Visibility applies time-phased event management and critical path resolution to potential supply problems, before the problem occurs. Maintenance personnel are alerted to capacity, parts, tools and materials demand and supply imbalances while also being provided with options for resolving the problem. Business-To-Business Marketplace Integration the leveraging of the transactional efficiencies and supply chain information resident in the electronic marketplaces (emarketplaces) of the future. In order to implement this strategy to airline inventory system, the optimization models assist the planning manager in making the required decisions for optimum value for inventory and lead to proper synchronization across the management system. This strategy could be applied to all types of airline as it protects the best benefit within the organization. OUTSOURCING COMPONENT MANAGEMENT It is logical for an airline to outsource the management of components when dealing with a small fleet of aircraft. As an example for the Airbus A380, given the relatively small number of the giant aircraft airline each had to their feet or at the beginning of the EIS. The inventory holding cost for carrying the work-in-process (wip) inventory for airline includes the opportunity cost for the money tied up in the inventory, plus storage costs, insurance, spoilage, and obsolescence costs. Usually, this cost is computed as the product of the inventory value and an inventory carrying rate, which includes at least the opportunity cost for money. Consider the airline with small A380 fleet; it would not be worth holding and stocking the spare parts as the inventory costs will affect the capital cost for the company. It may also be impossible for the airline to order a small amount of spare parts just for the fleet that they have as there may be minimum order amounts. With the outsourcing strategy, small fleets, as well as major carriers with type-specific fleet segments, gain enormous economies of scale when participating in fully-integrated A380 component support and parts pooling system. Such cost benefits are normally only achievable by large fleets of the same aircraft type. Figure 4 shows the economics of scale for component associated cost per flight hours versus number of fleet. To be a standalone airline, it faces the high figure of inventory 20th ANNIVERSARY YEAR

6 Inventory Control Strategy For Airlines 63 costs and the cost decreases as the number in the fleet increases. Therefore, with the airline like UAE airline, it is not necessary for them to outsource their spare part management but vice versa, they could follow the component inventory service and being the supplier in their components or within their alliance. CONCLUSION This paper presents the fundamental study for airline inventory control management. The main objective of supply management is to achieve the optimum amount of inventory at the right time. There are several techniques that help accomplishing the goal. Reorder Point (ROP) and Material Requirement Process (MRP) are two main techniques airline employed to their management process to deal with different types of inventories. For repairable items, the approach to the best results is the use of the multi-echelon and multi-indenture optimization models. Finally, two of the possible inventory management strategies for airlines were discussed. This depends on several factors including their fleet number, capitals and service types etc. REFERENCES Figure 4: Number of fleet versus Inventory costs (Spairliner) Anderson, J., Schroeder, R., Tupy S., White E. (1982), Materials Requirements Planning Systems: The State-of-Art, Production and Inventory Management Journal 23, Blanchard, B.S (1986), Logistic Engineering and Management, New Jersy, Prentice-Hall. Inc. He Ren, Aircraft Maintenance Management, School of Aerospace Engineering, RMIT University Friend, C.H., 1992, Aircraft Maintenance Management, Harlow, Essex, England Gallimore, K. and R. Penlesky (1998), A Framework for Developing Maintenance Strategies, Production and Inventory Management Journal, First Quarter: Ghobbar Adel A., Friend C.H. (2004), The Material Requirements Planning System for Aircraft Maintenance and Inventory Control: A Note, Journal of Air Transport Management. Harry A. Kinnison, PhD.,2004, Aviation Maintenance Management, McGraw-Hill, New York Higgins, L.R. and L.C. Morrow (1993), Maintenance Engineering Handbook, New York, McGraw Hill Jain Sanjay (2004), Supply Chain Management Tradeoff Analysis, Proceeding of 2005 Winter Simulation Conference John T. Mentzer, Matthew B. Myers, Theodore P. Stank (2007), Global Sypply Chain Management, Sage Publication Inc. Moncrief E.C., Schroder R.M. (2005), Production Spare Part, Industrial Press, Inc., New York Muckstadt John A. (2004), Analysis and Algorithms for Service Parts Supply Chain, Springer, New York Sherbrooke Craig C., PhD, (2004), Optimal Inventory Modeling Of Systems, 2nd Edition, Kluwer s International Series Vol 21 No 4

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