The aviation industry is experiencing tough market conditions. Many Official Equipment Manufacturers (OEMs) are finding themselves in a position where their gross margins have plateaued while suppliers are experiencing the opposite: gross margin increase.
3 Ways to Reduce Purchasing Costs of Aircraft Maintenance Materials
This imbalance creates risk and disruption in the supply chain and organizations are now looking at best-practice solutions in reducing their aircraft line maintenance purchasing costs.
Initial suggestions by Airbus and Boeing, back in 2012, saw them recommend large suppliers outright purchase smaller businesses, or collaborate with them, to de-risk their supply chain operations.
With increasing order requirements, and a subsequent need to drive down supply chain costs, consolidation will no doubt be an ongoing discussion within the industry.
But where this is not possible, companies will need to find other ways to reduce purchasing expenses.
Here we look at three ways that companies can achieve this, getting the best product for the best price.
1. Review Internal Purchasing Processes
The first hurdle many businesses experience in their ability to cut costs is internal. Standardized procurement processes are surprisingly rare and too often focused on short-term gains, hitting quarterly KPIs over bigger business efficiencies. This method failures to provide long-term continuity and is often a barrier to effective lean management.
There can often be internal issues over the access to appropriate information, designed to improve upstream/downstream performance. Discussed in depth in our Part 1/Part 2 blog, there are a series of reasons why data is key to effective supply chain management. If staff are restricted in what they can see they are restricted in what they can achieve.
From experience, there is frequently a lack of training and expertise in procurement teams. This can translate to ineffective or unsuitable use of checklists and tools to help purchasing decisions. It can also often lead to continued use of below-standard suppliers as performance reviews are not undertaken. The creation of category manager roles is seen to positively redress this imbalance.
2. Improve Supplier Knowledge and Supplier Negotiations
Entrenched and long-term relationships offer stability but they also restrict opportunity. In the process of planning aircraft line maintenance, many companies feel bound or obliged to the prices they are quoted, failing to exploit the strength of their business or the confidence they should have in tackling ‘standard’ increases in cost.
Taking time to understand the cost behind the pricing of a unit can be time well spent. By identifying production costs, and how increased volumes affects decreased pricing, you can work out what you should be charged versus what you are being quoted. Another way to identify anticipated cost is to look at components with similar specifications and use this as a baseline for expected expenses.
Finally, you should look to identify the supplier’s business model to find leverage points. By understanding the way they operate you can look at strengthening relationships through future tender opportunities or amending your payment terms to be more favourable. Whatever happens, make sure you aim high, argue on facts, understand your supplier, and be willing to walk away.
3. Long-Term Strategy Planning
Linked to the first point around internal barriers, long-term planning needs to focus on the business of the future, not of today. Around the world we are witnessing an increase in the number of multinational companies going in to administration, or liquidation, as a result of failing to adapt to changing, and future, market priorities. Aircraft line maintenance is not exempt from this risk.
Opening new opportunities for suppliers can be an effective way to collaborate on joint-cost reduction initiatives. Alternatively, as mentioned above, a high-risk strategy of threatening to switch suppliers could yield results but must be balanced against the adversarial approach that suppliers take in return. Long term strategies should prepare you for this if it is a path you are considering.
One final option to consider is the development and implementation of innovative supply chain investments. Potential outcomes include moving to new designs, removing, the need for assembly or integrating the assembly function into bigger systems managed internally. While initial investment is high, greater control over long-term costs will be reflected over time.
There are a series of challenges preventing the reduction of purchasing costs in aircraft line maintenance. Although we discuss three potential solutions the reality is that the list can grow exponentially on a business-by-business case.
Organizations should look to identify the best options for them and ensure that they integrate with each other to provide strategic, long-term cost-reduction plans. Trying to implement a series of solutions that conflict with each other will ultimately lead to disruption within the supply chain, damaging efficiency, harming relationships, and driving costs up, rather than driving them down.