Armac Aviation Financial Reporting

Aviation Spare Parts Planning – 5 KPI’s for the Airline C-Level Executives

In the first of our series on Opening the Black Box on Aviation Spare Parts Planning we look at 5 key KPIs that every airline should track.

Airlines have traditionally relied on expert Inventory Planners to drive their investment decisions in spare parts for maintenance engineering.  However, a ‘just-in-case’ engineering mindset coupled with emotional buying behaviour driven by the most recent AOG experience can result in costs spiralling, while having the right inventory availability to address the next, unplanned AOG still remains an issue.  Management thinker Peter Drucker is often quoted as saying “if it can’t be measured, it can’t be managed”, so how can an airline objectively measure the effectiveness of their inventory planning approach and the value for money it achieves?

This article suggests 5 KPIs to provide an objective measurement of an airline’s inventory planning capability.  The uncertain, complex and dynamic nature of an airline’s operation makes results difficult to interpret and compare, as there are always ongoing changes in fleets, routes, aircraft configurations, component sourcing strategies, maintenance plans etc.  However, these factors need to be considered when tracking KPIs over time, rather than used as an excuse to perpetuate a subjective, expert-centric, ‘best educated guess’ approach.

KPI #1: Inventory Turn
This is defined as the value of the stock being issued divided by the overall inventory value. Expect this to be low, as most component parts fail very infrequently.  Parts should be subcategorized in terms of their usage rate and operational impact; a higher Inventory Turn would be expected for high usage / low essentiality parts and visa versa.  However, if it is very low, it could indicate a change in sourcing strategy is prudent. Airlines should look to pool, exchange or source certain categories of very slow moving component parts on the market when needed rather than hold them in inventory.

KPI #2: Inventory Per Tail
This metric provides a mechanism to compare versus peer carriers, though what is “good” versus “bad” can depend on the overall scale, aircraft type and mix.  Surveys of commercial airlines in recent years have shown a range from as low as $700,000 in spare parts per aircraft to over $14,000,000!

KPI #3: Inventory investment – Actual V’s Target
The budget needs to include all operational and capital spend, including repair cost, holding costs, logistics, exchange costs etc. Setting a realistic budget needs to consider both planned and unplanned demand.  Forecasting inventory requirements is difficult given the highly stochastic nature of the demand for aviation spare parts.  Airlines need to provision to recognise the variability inherent within the forecast.  The real drivers of demand need to be understood e.g. flight hours, upcoming checks etc. rather than depend on the assumption that past usage is indicative of future need.

KPI #4: Inventory Service Level – Actual V’s Budget
Service level represents the percent of time a part is available where and when required.  Again, the challenge is setting a realistic overall target service level for each category of part.  Typically, improving service level becomes incrementally more expensive to the point where the cost becomes prohibitive.  Hence, the airline needs to determine the optimum trade off between investment and service level in order to set sensible target values.

KPI #5: Inventory Cost Per Flight Hour
Again, a metric that can be used to compare versus peer airlines. Also, it can  be used to compare and evaluate third party outsourcing options offered by Providers who often charge on a per-flight-hour basis.

To ‘open the black box’ on our inventory planning we need a communicated inventory policy in place within our organizations.  Then we need the process, organizational set-up and systems & data to be in place to execute against this policy.  Finally, we need to have the KPIs to track, calibrate and measure performance against our budgets and targets.  We’ll address these topics in future posts.


Bridging the Inventory Planning Gap

Typically, in MRO and airline inventory planning, the response to this gap is to develop manual workarounds, which usually give less than optimal results. People work outside the ERP using spreadsheets, tribal and tacit knowledge, and their best subjective judgement, unsupported by any analytical system

Armac Aviation Inventory Planning

The Inventory Planning Gap

Inventory management for airline and MRO differs from standard manufacturing techniques and is much more complex. We are repairing and keeping serviceable highly engineered, mission-critical assets, as opposed to manufacturing from raw materials and distributing.

Forecasting Aviation Spare Parts Inventory

Forecasting for Aviation Spares Inventory – Part 2

Our objective is to provision against forecast uncertainty to deliver a level of service. We are spending to mitigate uncertainty, in an economically efficient manner. Obviously, it does not make economic sense to make these risk-mitigating decisions on a part by part basis in isolation. This myopic approach opens the door to inefficiency and waste.