Case Study:

Aviation Spare Parts Supply

Chain Management Optimisation at
Cathay Pacific Airways Limited
Group 3
Billy Leung
Corina Ng
Joel Crompton
Kelvin Tun
Queenie Leung

Market Fact Sheet

Buyer’s Market Supplier’s Market

• Total industry spending
>US$10b/yr
• Inventory patterns – 30%
active; 30% slow & 40% dead
• Total major airlines’ spare
engines >US$11b
• 80% of spare parts owned by
airline operators
• Primary target for inventory
value reduction
• Tight aviation regulations
• Constrained in supplier
selection
• Limited choice and high
concentration of OEMs
• Weak negotiation power for
airline operators
• High switching costs
• Regulated joint purchasing
activities
 CX Fact Sheet
• Founded in Hong Kong on 24 Sep 1946
• Acquired by the Swire Group in 1948
• 2006 turnover >US$7.77b with profits >US523m
• >25K staff worldwide
• CX’s fleet of > 117 planes with 11 models as of 2007
• Average age of 11 years
• 46 new planes with 3 new models to be delivered in the
next 5 years
• Serviced 43 destinations and carried >16.7m
passengers in 2006

Key Figures to Know

>80K repair
US$350 m
orders /
Total
year
inventory
value

>2300
3% dead & suppliers
inactive
stock

>380 k parts
on database

US$12 m /
engine
US$60 / min for >1m spare
runway usage parts
 CX SCM Structure

CX Spare Parts Categorization

Criticality

Non-
criticality
Inventory Control Process
 Flow for Creation of a New Parts

Question 1
• What are the supply chain management issues for spare parts
operations that Robert and Paul need to consider in their
recommendation proposal?

– High level of inventory and its total value US$350

– Compliance with required statutory regulations (FAA (US),
EASA (EU) and CAD (HK) )
– Maintenance of adequate inventory level to minimize
inventory holding cost by keeping right, active stock
– Reduction of shortage of spare parts in order to enhance
service level
– High level of demand variability
 Question 2a

• What is Cathay Pacific purchasing power in aviation spare

parts procurement?

– For critical parts

• Limited purchasing power due to very few choices of
suppliers, high switching cost, sole OEM for some
critical parts and lack of joint purchase

– For non-critical parts

• Greater purchasing power due to more choices of
suppliers

Discussion 2b
• What are the possible alternatives for improvements in the
procurement process?

– For critical parts

• Reinforce cooperation with suppliers by information
sharing, e.g., forecast, inventory
• Implement VMI

– For non-critical parts

• Form JV with selected key suppliers
• Maximize the PMA program
• Conduct supplier assessment using well-defined KPIs
• Launch tenders by product categories
 Question 3
• How does Cathay Pacific handle Shortage Management?
What are the problems in each option?

Methods Issues
Aircraft-on-ground High transportation cost
Long lead time
Borrowing from another Uncertain stock availability
airline High premium cost
Pool Loan Agreement Timely to source
Unequal benefits
Lack of trust
Problematic cost allocation
Borrowing from its other Unavailable aircraft
aircraft Unavailable parts
Disruptive operations

Question 4
• Which type of aviation spare part(s) is (are) suitable for
procurement outsourcing? Why? What are the criteria for spare
parts outsourcing?

– Parts with criticality codes 3, 4 and Consumable parts are

suitable for procurement outsourcing because:

• These parts do not affect the normal operation and

service of aircraft.
• They are relatively easy to manage.
 Discussion 5a
• What are the advantages and disadvantages for Cathay Pacific
to use third party logistics (3PL) partners for her repair
management and logistics management?
– Advantages:
• Focus on core strengths, like hubs & destinations
development, air fleet development, passenger services
• Greater Leverage on 3pl partners’ expertise, network and
technology
• Cost savings on infrastructure resources
• Efficiency improvement, like service level and ground
arrangement

– Disadvantages:
• Loss of control over 3pl partners, like QA control, priority
issues
• Loss of core competency

Discussion 5b
• What are the criteria for Cathay Pacific to choose her 3PL
partners for repair management and logistics management?

3PL CRITERIA
 Summary of Issues
• Comply with different statutory regulations
• Manage the right inventory level
• Minimize inventory holding costs
• Enhance quality level and component performance
• Develop strong partnership with critical and non-critical
suppliers, repair shops and outsourced 3PLs
• Cope with the large amount of repair orders
• Deliver spare parts to designated more cost effectively

Recommendations
• Tackle high demand variability
– Alignment of maintenance plan and forecast
• High inventory and slow stock turnover
– Negotiation of return to supplier and form tender requirement
– Clearance on dead stock to other airlines or maintenance companies
– No stock keeping for slow moving and non-critical items
• Cut down the number of suppliers by tendering and open
bidding
• Build up long term cooperation relationship with suppliers
– PMA and consignment
– Vendor-managed inventory (VMI)
– Shared system for information flow with suppliers
• Form a maintenance company to support more airlines to
achieve economies of scale and better forecast