Do you purchase your aircraft material based on price? Of course you do. It seems logical. Many purchasing departments do. The better your price the happier you’ll be.
But it doesn’t end up that way.
Price and cost are different. Price is the money coming in, or your direct cost. Cost is the money going out, through your aircraft materials life cycle.
As a purchasing professional, it’s important to purchase for total cost of ownership (TCO). It’ll help drive down operational cost, make you and your team more efficient, and give you the opportunity to make good decisions.
Here are 5 tips to help you develop an aircraft part total cost mindset.
Use the four elements of cost to identify the impact on TCO
The four elements of cost are Quality, Service, Delivery, and Price (QSDP).
Each element represented in QSDP has an impact on your TCO. The importance of each element varies based on the aircraft material and solution you’re buying. The initial step is to identify what’s most important to you and start there. In the article, The Single Most Important Principle in Supply Chain Management, they go in depth on each section and what it means for you.
From my purchasing experience, I always start with service. When the service is great you’ll have little issues with quality or delivery. So, let’s rearrange this for the aviation community. For us it’s SQDP.
Talk with your preferred material supplier about how important each element is to you and which one deserves the most attention.
$ave big by consolidating
Whether you need 10 or 500 parts, having a mindset of efficiency and cost reduction is important.
Processing costs are real. You spend between $50 and $200 every time you cut a PO and all the other associated costs of getting material to you. Imagine how much you spend when you cut 100 POs a week. Now imagine the opportunity to cut these costs if you focus your attention on efficiency. Could you cut these costs by 50%? I like to think so.
When you need a lot of items, especially a mix of rotables and expendables, $ave by Consolidating will help you dramatically reduce your processing and shipping costs.
First work with a supplier who has a nice mix of support capabilities. They should be able to quote and deliver 10 - 500 parts in a realistic time frame. Build a relationship with this supplier. And remember, not anyone will quote you 500 parts. It costs time and money. Start small. If it’s a new relationship send a 20 item RFQ. Order and then repeat. Build the relationship. And test them.
The end result is to consolidate as many items on one PO as possible. Or opt for an auto replenishment solution. Either option works well.
Reduce your AOGs
Having the knowledge of how much an AOG costs your operation is a figure you must be comfortable with. They're expensive. They suck time and money and deplete your department of critical resources.
When an AOG occurs everything stops. People panic and productivity takes a nosedive.
In order to compensate for your AOG costs you must know how much an AOG costs and plan appropriately. Not all AOGs are worth the same effort. Base stations and outstation should be equipped with the right high consumption expendables and consumables and no-go rotables. This doesn’t mean tying up millions of dollars worth of capital in inventory. You can take advantage of pools, PBH and VMIs to help equip your operation without a hefty investment.
The main goal is to know how much your AOG really cost you and to plan on reducing their occurrence.
Plan and stock less
Planning will help you process less orders and stock less. Every time you cut a PO you spend $50 - $200 in processing costs. Now add that to your cost of inventory and it's a real financial burden. Most airlines pay 20% a year in inventory holding costs. So if you have a $10,000 unit, you spend $2,000 a year in inventory related costs.
Imagine the savings your operation would benefit from if you planned and reduced your processing and inventory costs.
In order to plan, begin looking at the big picture. What are you trying to achieve? What's your biggest issue or expense? Begin there. Don’t try and do everything at once. You’ll get burned out. Trust me…I’ve been there.
A great idea is to bring on a material partner to help you with this. There’s no need to do it alone. If they drive savings, it’s a win / win.
Shipping is a real expense
It still amazes me how much money is spent on unproductive shipping. Shipping is a real expense and overnighting routine orders is wasteful.
Every time you order an aircraft component, think about when you need the unit in stores or on the aircraft. Shipping can cost an average 3 - 5% of the direct material costs. So is it really an AOG? You’d be surprised at who classifies what.
Can you reduce this expense by consolidating orders and shipments? If your supplier has 5 rotables and 15 expendables it makes sense to combine them into one shipment. We call this $ave by Consolidating. It will cut you’re processing and shipping costs dramatically.
The key is to begin thinking about your purchasing activities as a total cost, not just the direct price. Once you alter the way you think you'll see huge results to your operating expenses.
Do you have trouble with total cost procurement? Comment below and tell us your story.