Have you ever noticed that in some firms the sales person
with the biggest numbers is also the biggest violator of processes, procedures,
and attention to detail? It seems this gets winked-at or conveniently
overlooked since, after all, they are making the firm the most money.
Typically, QA people are seen to roll their eyes at the mention of their names.
On the other hand I have seen many firms where the biggest sales person follows
procedures and details just like everyone else – the difference? You guessed
it, the tone established by the Chief Executive, but don’t get me started! One
type of transaction that demands
everyone follow exact procedures and attention to details are for exchanges.
In this blog we’ll discuss:
Outlining a simple exchange program.
Issues for Accredited companies regarding trace.
The most common types of Exchange Programs.
Best and Common practices to protect yourselves.
Commonly cited problems with exchange programs.
The central focus of what makes exchange programs attractive
for airlines can be summed up in one word: spares (parts readily available to
fix and maintain aircraft). The issue of
spares - the right amounts, locations, cost, inventory turnover, return on
assets, and opportunity costs (for not having the parts), are among the most
continually evolving policy issues at any airline. Airlines with policies to
keep inventory levels as low as possible (spares) are typically the ones who
find that exchange programs are effective ways to mitigate the costs of delays,
cancellations, and AOG’s (Aircraft On the Ground; the plane can’t fly and is
out of service until it’s fixed with the part) due to a lack of adequate
spares. So how does a typical exchange program work?
OUTLINING A SIMPLE EXCHANGE PROGRAM:
An airline identifies an urgent need for a component. A new
one costs $30,000 from the OEM, and to buy one on the aftermarket in overhauled
condition would cost $8000. The lead time from the OEM is 3 months, and the
lead time for the overhauled component is 4 weeks (while it is sent out to be
overhauled). On the other hand, the airline has entered into an exchange
program with a distributor. The lead time is one day, and the distributor
immediately ships the component (which was already overhauled). The
distributor’s shipped component then becomes the property of the airline, so it
is shipped by the distributor with all the routine trace, Non-Incident
Statement (NIS) Certification, and airworthiness documents. The airline then
owes the distributor the unserviceable component that was removed from the
aircraft, which is commonly called the ‘core’. The core then becomes the property of the distributor, so it must be
accompanied by satisfactory trace and NIS documents. The distributor
charges $800 plus the costs to have the core overhauled.
The advantage to the airline is that it got the component at
a fraction of the cost, got it immediately, and managed to meet their target of
keeping inventory low. In the absence of the exchange program, the airline
would have to endure higher costs, longer lead time, or stock higher numbers of
Although it sounds favorable all around, the math models for
a given airline do not always work out to favor exchange programs for certain
components. This may be due to market conditions for the commodity, OEM
influences, inventory strategies, aircraft/engine lease restrictions, or the
peculiar operations the airline engages in.
ISSUES FOR ACCREDITED COMPANIES REGARDING TRACE
For accredited distributors, the expectation is that trace
is always solid. But what about that core that is now the property of the
distributor? The distributor must assure that it has standard trace and NIS
documents from the airline. For some distributors this has been a
weakness, and many times the issue is getting the airline to produce the
documents. In this case, a good solution is that the distributor creates the
documents for the airline and upon review the airline signs and returns the
documents. I know more than a few airline employees which value that sort of
THE MOST COMMON TYPES OF EXCHANGE PROGRAMS
Cost-Plus: The arrangement I outlined in
the simple example is a Cost-Plus model; that is, there is a basic exchange fee plus
the ensuing fee to have the core overhauled. A common rule of thumb for the
basic fee is that it’s 10% of the market rate of the airworthy component. In my
previous example notice the market cost of an overhauled part is $8000, and the
basic exchange fee is $800.
Flat Rate Exchange: In a flat rate
exchange program, there is just one fee, and the cost of overhaul is
calculated-in to that fee. This demands some experience on behalf of the
distributor. Manufacturers and repair stations may be the biggest practitioners
of the Flat Rate exchange since they are so intimately familiar with the
product and parts pricing.
BEST AND COMMON PRACTICES TO PROTECT YOURSELVES
A written agreement between the parties for each exchange
transaction is commonly practiced and for good reasons. It should address at a
minimum the following issues:
Establish a unique Purchase Order or Repair
The basic fee is spelled out.
The Serial Number and Part Number of the core
that is to be returned.
The condition of the part is repairable.
The deadline for the return of the core.
Who is responsible for all the shipping costs?
Contingencies should be clearly addressed such
as, but not limited to:
Penalties if the core is not returned by the
agreed upon date, such as additional fee’s or conversion to an outright
purchase (of the component that was initially provided) at the agreed upon
price cited in the agreement.
Who pays for ‘over and above’ issues associated
with overhauling the core component? For example what to do if the core was
returned in repairable condition but the repair station declares the part BER
(Beyond Economical Repair) for whatever reason.
Who pays for ‘uneven’ exchanges? For example,
the part provided by the distributor had all the required service bulletins (and
Airworthiness Directives, AD’s, in some cases) incorporated in the component,
but the received core does not have these incorporated.
The content and type of documentation that
should accompany the returned core.
COMMONLY CITED PROBLEMS WITH EXCHANGE PROGRAMS
Commonly cited problems with exchange programs include the
The airline or customer does not return the
core. Most of the time the simple root cause is that the airline or
customer failed to apply the required ‘attention to detail’. Depending on the
level of procedural bureaucracy and computer automation at the airline, for
example, not pressing the right buttons or following their processes and
procedures will affect this. Regardless of the root cause, getting that core back may depend wholly on the follow-up system the
distributor has in place; is it robust and does it provide conspicuous
indicators of approaching deadlines?
The distributor does not follow-up on the
details. Lack of attention to details could potentially include the
Tracking the due date for return of the core.
Tracking receiving inspection discrepancies, for
example, the core was returned, but without the expected documentation.
For Cost-Plus exchanges, tracking the cost of
the overhaul of the core and charging it back to the airline or customer.
If any of the agreement contingency issues
previously mentioned kicks in, are these being tracked?
By now it should be obvious that exchanges are not simple
buy or sell transactions. A single
exchange may incur several invoices and costs which must also be carefully
tracked. Add to this, common considerations such as Lines of Credit with the
airline or customer and how to track and address those, and the accounting
process could indeed get complicated really fast. How about inventory dedicated
to exchange programs, how do you list and value it? Hmmm…
Over ‘n out
Roy “Royboy” Resto