CAVU Café: Royboy’s Prose & Cons, Page 12 of 17

OEM ANTI-COMPETITIVE, MONOPOLISTIC 

PRACTICES IN THE AFTERMARKET?

By Roy Resto

What’s going on in the aftermarket?

I read an article in the Wall Street Journal titled “Promised Monopoly Crackdown Fizzles.”1 The article highlighted the US Government’s acknowledgement that there needs to be more enforcement of laws against monopolistic practices. The aviation industry was not mentioned in the article, yet it triggered some thoughts: are there any such practices in the aviation industry?

To the point: Nearly every part flying on an aircraft is from an OEM supplier that has been awarded exclusive, sole-source rights. Are there classic monopolistic practices at play here?

The competition to settle that award was decided before the aircraft or engine went into full production; so there was competition, initially. Further detracting from the inference that these OEM’s are engaged in any sort of monopolistic practices in their manufacturing operations is the very nature of the Type-Certification process. It is meant to be vigorous and thorough in order to ensure the highest levels of safety. The process is so demanding that, although we card-carrying capitalists intuitively chaff at any hint of monopolies, we can be forgiven if we don’t apply the monopolistic standard here, in the interest of safety. Such vigor in the certification process necessarily implies high investment costs in research, development, and tooling. Of course the OEM’s have a fundamental right to recoup their investment costs and to protect their intellectual property. That is for manufacturing, but what about the aftermarket?

The manufacturing arena (you’re building it to fill a ‘hole’ on the aircraft/engine production line), and the aftermarket arena (spares, logistics, maintenance, repair, and overhaul) are two separate and distinct environments, each with their own set of players, business models, and regulatory challenges. Is it possible that in the aftermarket, OEM behaviors are contributing to a rising feeling that anti-competitive practices are in play? The European Commission (EC) is investigating just that prospect.

The EC, as published in an Aviation Week & Space Technology article titled “Under Review: EC investigates ‘alleged anti-competitive behavior’ in commercial aircraft maintenance”2, confirmed that it is taking a close look at the competitive atmosphere amongst MRO services in the European Union, as first reported in the Financial Times. More specifically, it is looking into alleged anti-competitive behavior. The article starts by sharing that “At industry trade shows, airlines perennially gripe about original equipment manufacturers (OEM) holding too much sway over the commercial aftermarket – and pricing their products accordingly”. An example which seems to quantify such assertions came from the International Air Transport Association (IATA) which stated that “…MRO represents 10-13% of airline costs, and those costs are rising beyond inflation despite efforts to rein them in.” 

Not holding back on articulating what is certainly reflective of their constituency, IATA Director General and CEO Tony Tyler said “Unfortunately, certain OEM Business practices drive up costs by blocking entry into the market for (MRO) services.” Further, “IATA is examining commercial, legal, and economic options where we may be able to contribute to efforts to rein in runaway aftermarket-related costs.” Pretty strong stuff indeed.

If the gloves have come off in regards to calling out alleged OEM behaviors, then perhaps we should be more specific about what the practices seem to be, which are contributing to the perceived anti-competitive assessments. How about these and their variations:

By the way, regarding those maintenance manuals, in an article titled “State-Level Proprietary Rights Do Not Trump Aviation Safety”3, we’re told that “…we established that the FAA has rules that require design approval applicants to create ICAs. Those rules establish minimum standards for what needs to be in the ICAs.  And those ICA’s are required to be shared with certain parties, like properly rated repair stations.” So…where’s the enforcement of that?

Is it just the Airlines and independent Repair Stations affected by this? With a certainty, there is a trickle-down collateral effect upon the aftermarket distributor and broker community as well.

A famous line from a Godfather movie said “Don’t take it personally, it’s just business.” But are these activities just business, really? I suspect the EC investigation is going to open the door to increasing scrutiny as to whether any lines have been crossed.

On the other hand, make no mistake, our free market systems will respond to these OEM activities, actions which should not be underestimated. A few things that come to mind:

An economist would insist that the best solution is to increase competition among the OEM’s and let the market decide…

Let’s see where all this goes. As always, you’re invited to leave a comment.

Roy ‘Royboy” Resto

www.AimSolutionsConsulting.com

1 Promised Monopoly Crackdown Fizzles; The Wall Street Journal; November 9, 2015; Page A4.

2 Under Review: EC investigates ‘alleged anti-competitive behavior’ in commercial aircraft maintenance; Aviation Week & Space Technology; October 26-November 8, 2015; Page 30

3 State-Level Proprietary Rights Do Not Trump Aviation Safety; Aviation Maintenance; October/November 2015; Page 48.

What potentially, do all of the following have in common, which may occur in flight or while taxiing? A Pax dies of natural causes, lightning strikes, hale damage, bird strikes, FOD damage, hard landings, tail strikes, or bent metal caused by impacts with ground equipment or other aircraft. Answer: Depending on varying broad definitions, these, and many other scenarios all have the potential to be categorized as accidents or incidents. In fact it has been my experience that given a mature aircraft, it would be difficult to find any serial number that has not experienced some sort of accident or incident. Perhaps it’s that realization which causes purchasers of aircraft, engines, and components to continue to ask for Non Incident/accident Statement (NIS) or Incident/accident Clearance Statements (ICS).

Before I get into NIS/ICS’s I’m wont to address the neglected issue of the rather portly pachyderm reposing in the parlor. We need to clearly establish that NIS/ICS’s are not regulatorily required! So why the continuing requirement as if it added some sort of value to the transaction? Assuming the transaction requires the asset be in airworthy condition, you will get the applicable documentation attesting to such airworthiness. Any past history of accidents or incidents does not detract an iota from the stated status of airworthiness! And ‘so-what’ if that part flew on a military platform? Are all the now civilian airworthiness documents in order? I continue to shake my head at practices that add cost but not value, and this is one of them.

ME:     “So Joe, why your need for an NIS?”

JOE:    “Royboy, because it’s a requirement.”

ME:     “Really? Why, what reg’ is that?”

JOE:    “Hmm, I’ll have to get back to you on that”

ME:     “So… why?”

JOE:    “Because it’s on my checklist.”

ME:     “Why?”

JOE:    “Because it’s in my manual to do so.”

ME:     “Why?”

JOE:    “Because we have always done it that way.”

And there you have it: the root cause within 5 ‘whys’.

Alas, I suspect many of you will agree with the aforementioned, but posit that the practice is too entrenched, and that the right people don’t get it…which will bring me back to NIS and ICS’s.

At the last ASA conference, during the QA Committee meeting, Tom Kolesar gave an introduction to a project that the Aviation Working Group has accomplished. According to their web site, AWG is a

“not-for-profit legal entity comprised of major aviation manufacturers, leasing companies and financial institutions that contribute to the development of policies, laws, and regulations that facilitate advanced international aviation financing and leasing”.

It seems they have put forth a neat, standardized set of ICS’s. Some feedback I’m getting from various sources seems to indicate the ‘form’ is gaining popularity. Friends, I’m all for standardization.

By the way, AWG has coined the term ICS to replace NIS.

Aiding in the AWG’s rollout of the ICS, it seems that IATA, the International Air Transport Association, has embraced the ICS, typically in a Document titled “Guidance Material and Best Practices for Aircraft Leases.”

According to the AWG’s Guidelines document for the ICS,

“The purpose of this incident/accident clearance statement is to remove the focus from whether or not an aircraft/engine/part has been subjected to an accident or incident and instead declare that the aircraft/engine/part has been deemed acceptable for continued use.”

Bravo.

There are two formats; one for Aircraft and one for Engines. The one for Engines can be formatted for components. Interestingly, the Guidelines suggest that if desired, the language can be added to the traditional ATA Spec 106.

Neat.

Although you can google the documents, I’m going to post below the fundamental elements of the ICS for your perusal:

To Whom It May Concern:

Engine serial number [insert ESN], details of which are specified below, has been operated by [insert company name] during the period from [insert delivery date] to [insert redelivery date].

Configuration details as of date of this statement;

Description  Type/Part No.       Serial No.      TSN    CSN

I hereby certify that, to the best of my knowledge, during the period stated above:

1. Neither the engine, nor any part installed have been

a. damaged during, or identified as the root cause of, a reportable incident or accident as defined by Annex 13 to the  Chicago Convention, or

b. subjected to severe stress or heat (such as in a major engine failure, accident, or fire) or has been submersed in salt water, 

unless its airworthiness status was re-established by an approved maintenance organisation in accordance with the instructions of the type certificate holder and/or OEM of the part, and supported by an authorized airworthiness release certificate.

2. No part has been installed on the engine which was obtained from a military source or was previously fitted to a state aircraft as deemed by Article 3 of the Chicago Convention.

Again, this can be modified for use on components.

Lastly, I’d like to address another neglected issue; that is, the use of the words “…to the best of my knowledge.” I have heard some make disparaging remarks about the choice of these words as if it diluted the sincerity or validity of the attestation: it does not. I prefer to think that the person is being honest, and that between the lines the meaning is: …at the moment I signed this, presented with all the information available at the time, I attest that…

It’s my opinion that in order to bring a modicum of stability and clarity to the issue of Non Incident Statements, we should encourage the use of the AWG’s ICS.

Over ‘n out

Roy “Royboy” Resto

www.AimSolutionsConsulting.com

You bump into a friend you have not spoken with in a while. The friend asks “so…are you still with Jane?” What should be a simple yes or no answer turns into a slightly awkward and delayed answer from you; “it’s complicated”. Use of the “it’s complicated” strategy  means that in order to be truthful with your friend, a quick answer will not do, and that the choice to give any additional details is optional (due to time limits or level of trust), and further, that if you don’t give any additional details it would be socially acceptable to move on. Of course, in the absence of additional details, your friend’s imagination would immediately and quietly embark upon a fit of creativity, which may find expression in the presence of other friends, maybe. So, what about standard parts? I would like to give a common, simple answer, but guess what? It’s complicated.

I’m wont to write this blog because in my consulting business I continue to run across confusion and misinformation about this topic in the industry, especially a lack of practical advice (herein bolded for ease of locating it), so I hope to impart some here. I’m going to cover the following topics:

·      Definition

·      Trace for standard parts

·      Lesser known standard parts

·      Standard parts that are only standard within the purview of the OEM

·      Documentation for standard parts

DEFINTION:

From FAA AC 20-62E titled “Eligibility, Quality, and Identification of Aeronautical Replacement Parts”:

·      Standard Part. Is a part manufactured in complete compliance with an established U.S. Government or industry-accepted specification, which includes design, manufacturing, and uniform identification requirements. The specification must include all information necessary to produce and conform to the part. The specification must be published so that any party may manufacture the part. Examples include, but are not limited to, National Aerospace Standard (NAS), Air Force/Navy (AN) Aeronautical Standard, Society of Automotive Engineers (SAE), Aerospace Standard (AS), Military Standard (MS), etc.

From EASA AMC M.A.501 (c):

·      Standard parts are:(a) parts manufactured in complete compliance with an established industry, Agency, competent authority or other Government specification which includes design, manufacturing, test and acceptance criteria, and uniform identification requirements. The specification should include all information necessary to produce and verify conformity of the part. It should be published so that any party may manufacture the part. Examples of specifications are National Aerospace Standards (NAS), Army-Navy Aeronautical Standard (AN), Society of Automotive Engineers (SAE), SAE Sematec, Joint Electron Device Engineering Council, Joint Electron Tube Engineering Council, and American National Standards Institute (ANSI), EN Specifications etc…

In these and other definitions I’d like to point out the important common denominator which is the standard part was manufactured in compliance with a Government, or industry accepted specification. For example, commonly cited part numbers such as may start with NAS, MS, or AN, are parts whose blueprints (specifications) were crafted by the Government.

Before going any further, here’s my first bit of practical advice: Write down this web site and put it in your favorites: http://quicksearch.dla.mil/. Go there. On the Document ID line, type in a common standard washer AN960 and Submit. The result will have a link to the actual drawing (and whoopee, it’s free), and you’ll notice a note saying it’s been S/S (superceded) by NAS1149. In fact the link to the AN960 drawing will also take you to the official cancellation notice (a quick flutter of the eyebrows please). Neat huh?  We wish it were all so simple, right?

The problem arises with those pesky other standard part numbers that do not begin with NAS, MS, or AN, and indeed there are many. For example, you may be on the market for a certain part number, and a supplier informs you that the part number is a standard part number, really? This is the first illustration of the complicated issue. I have seen too many suppliers purport to have standard parts but can’t prove it in light of the aforementioned definitions. More practical advice: Ask to see the blueprint or specification for the part. If you are shown a typical manufacturer’s print with those tiny notes in the legend that say its proprietary, or any other equivalent language indicating its IP (Intellectual Property), then it’s not a standard part, period. But, you ask, Royboy, why would anyone want to claim a part is standard?

TRACE FOR STANDARD PARTS:

For new-condition aircraft parts you want to be able to demonstrate you have trace documentation to the PAH/DAH (Production Approval Holder or Design Approval Holder), in other words, trace to someone who typically possesses a TC, PMA, or TSOA. An exception to this requirement is that standard parts generally do not require trace to a PAH/DAH; you can obtain them from any source as long as you are provided the documentation I’ll review in the last section. So, here’s a practical example of how this comes into play: You’re on the market for a new-condition, certain part. A supplier informs you she has the part. You dutifully ask if they are a PAH/DAH? The reply: ‘that is not necessary, this is a standard part’. At this point your head bends down towards the table to be supported at the forehead by one of the palms of your hands as you realize things just got complicated. If the supplier cannot produce proof that the part is indeed standard (as is the case for many such suppliers), your head is now seen to bend down towards the table with the forehead supported by two palms; body language for a troublesome position indeed. Move on to another supplier. Royboy’s practical advice: If no supplier can prove it’s a standard part, go up the Next Higher Assembly (NHA) chain until you get the PAH/DAH and order the part from them.

…standard parts generally do not require trace to a PAH/DAH

LESSER KNOWN STANDARD PARTS:

A friend recently approached me who is on the market for an aircraft light bulb, part number 767. She said that a supplier told her the part was a standard part. It took some research, but my friends in the aircraft lighting industry told me to look at SAE Aerospace ARP881 titled “Lamps for Aircraft Lighting” and guess what? There it is. Many other part numbers are listed.

First we need to recall that both definitions I cited earlier included examples of Government or Industry accepted specifications. SAE is but one of those industry groups, and ARP881 is a perfect example. If you go to SAE’s web site and search on ‘Aerospace Lighting’, you’re going to get a lot of results. The challenge is that each standard has a price, so I can’t tell you that all those search results at the SAE web site will yield a listing of part numbers as did the ARP881. If any one of you has that information, please share it as a comment on this blog.

Of course there’s more. I have a pretty good avionics background so I know the electronics industry has a lot of standard part numbers. For example, 2N2222 is a common transistor (anything starting with 2N is a transistor), and anything that starts with a 1N is a diode. RL is similarly used for resistors. By the way, more practical advice; go back to the Assistdocs.com web site. In the “Word in Title” line, type in 2N2222, enter Submit. Uh-huh, more neat info. An ‘A’ awaits any college student willing to spend the time to research all those government and standards organizations to create an exhaustive list of standard part numbers cross referenced to the respective standard. Oh, yes, be sure to share it with Royboy

STANDARD PARTS THAT ARE ONLY STANDARD WITHIN THE PURVIEW OF THE OEM:

How about part numbers that start with BAC, ABS, or NSA? Are those standard parts as we established earlier? The answer is a stern no! BAC part numbers are only ‘standard’ within the purview of Boeing aircraft, and ABS and NSA within the purview of Airbus. Their drawings are IP, and so were not made by a government or industry group. As you can see, the problem is the industry loosely uses the term ‘standard part’ for both BAC/NSA/ABS, and AN/MS/NAS parts, but as you now know, there are critical distinctions between the two. Failure to make that distinction has resulted in reports of Suspected Unapproved Parts.

Let’s amplify this with some simple practical advice: When purchasing new BAC, NSA, or ABS parts ask the question: Is the supplier a PAH/DAH (do they have for example, PMA or TSOA for the parts? If the answer is no, get the parts from Boeing or Airbus, period. Just because a manufacturer is on some Boeing approved supplier list does not entitle them to sell BAC parts directly to end users (unless they have PMA or TSOA), and in fact such selling (AKA Direct Shipping) is a clear, reportable SUP. ‘Nuff said.

As you can see, the problem is the industry loosely uses the term ‘standard part’ for both BAC/NSA/ABS, and AN/MS/NAS  parts, but as you now know, there are critical distinctions between the two

DOCUMENTATION FOR STANDARD PARTS:

For all standard parts, the expected documentation is some sort of Certificate of Conformity. BTW, see my blog titled ‘C of C’s, BEWARE THE DIFFERENCES’ at http://www.aviationsuppliers.org/index.asp?bid=222&BlogEntryID=172&FormID=300

Airbus recently sent out a message that it will start to issue EASA Form 1’s for its NSA and ABS standard parts, very welcomed.

Over ‘n out

Roy ‘Royboy’ Resto

www.AimSolutionsConsulting.com

As the title infers, this is part II. If you have not read Part I, please look back at the previous blog by the same title.

The data which triggered my thought process was this graph, created by our friends at ICF International:

Let’s understand the basis for this data; from ICF:

“Alternatives to new OEM parts are therefore a big

deal. PMA parts are the best known, yet have achieved a modest 2% market share

after decades of effort. A less glamorous, but fast-growing alternative is

surplus parts, which have emerged as the key threat to the OEM service parts

revenue stream. My firm has studied the surplus parts market extensively and

estimates annual consumption is $3.5 billion – about six times as large as PMA

parts and a 12% market share. Moreover, the use of surplus parts is poised to

grow significantly over the next decade. ICF’s nominal scenario is for surplus

parts usage to reach $6.2 billion by 2023 (constant dollars) – a 5.6% annual

growth rate.”¹

So, according to this forecast, there will be 5.6% annual growth through 2023, to a $6.2 billion Surplus Market. What data is available to support this?

Let’s take a look at Boeing forecast data:

Source: Boeing Current Market Outlook 2014-2033

I like this chart because it’s simple, yet reflects critical data:

• Gross Domestic Product (GDP) is a reliable indicator of commercial aviation activity. If you want to forecast global, regional, or a country’s aviation activity, you should start by looking at the applicable GDP forecast. There are many sources for GDP forecasts including the IMF and World Bank among others. This GDP forecast above supports the Surplus Market growth forecast.
  
• Number of Airline Passengers: Growth in this area suggests that more aircraft will be needed to fly them – no argument there. This forecast above supports the Surplus Market growth forecast.
• Airline Traffic, Revenue Passenger Kilometers (RPK):
• 1 paying passenger flying 500 kilometers is 500 RPK’s.
• 1 ton of cargo flying 500 kilometers is similarly 500 RTK’s.
• RPK’s and RTK’s are among the most basic measures of airline productivity.
• BTW, the overall Load Factor formula then, is Available Seat Kilometers divided by RPK’s.
• Another BTW: For a given market, low Load Factors suggest overcapacity – a profit killer.
• This forecast above supports the Surplus Market growth forecast.

Now let’s look at the forecast for the total number of aircraft:

Source: Boeing Current Market Outlook 2014-2033

You don’t need to be a ‘Poindexter’ to understand that more aircraft equates to a bigger Surplus Market. This data suggests that the total number of aircraft will more than double in twenty years – astounding! Yep, this data too supports the Surplus Market Forecast.

Next, the forecast of the number of aircraft being retired per year:

Source: ICFI: The Surplus Parts Market, Richard Brown, Washington DC, 16 June 2014

A significant contributor to the amount of parts on the surplus market is the annual amount of aircraft retirements; the amount of parts is directly proportional to the aircraft being retired. According to the graph above, by 2023 the amount of aircraft being retired per year will surpass 1000, and this data too strongly supports the Surplus forecast.

Before we get too enamored by the forecast of 1000 retirements per year, the significant relationship that exists between the price of fuel and aircraft retirements should not be overlooked as illustrated:

Source: Aircraft Retirement and Storage Trends, Economic Life Analysis Reprised and Expanded, Dick Forsberg, March, 2015, Avolon

The data implies a direct relationship between the price of fuel and aircraft retirements. This relationship should be intuitive since older aircraft tend to be less fuel efficient and when fuel prices are high there’s a corresponding rise in retirements. As of this writing however, fuel prices have come down significantly. This may have a moderating effect on the Surplus Parts market forecast. Royboy’s opinion is that current low fuel prices are a temporary aberration. Note also that according to the cited Avolon data, there is a 1.5 year average lag between changes in fuel prices and resultant corresponding changes in retirements. In economics parlance, that makes fuel prices a Leading Economic Indicator regarding aircraft retirements.

I’d like to re-post the following information from Part 1 of this blog:

CHARACTERISTICS:

• Emphasis on a given fleet type
• Initially (flat horizontal segment), parts are largely under warranty and controlled by the OEM’s, and prices are high
• As the fleet ages, surplus parts start to become available and prices start to come down for the classic reasons previously described as ‘Stage 2’ (see previous blog)
• The OEM steps in to moderate the market and prices
• The OEM enlists the assistance of aftermarket specialists to buy-up and control the spares
• Some spares may be taken off the market to keep prices high and forcing operators to order new parts directly from the OEM
• The spares taken off the market and controlled by the OEM are funneled to the OEM’s MRO affiliate to make them more competitive against non-OEM affiliated MRO providers
• The OEM finds ways to unreasonably restrict independent MRO’s from gaining access to its component maintenance manuals, forcing operators to send MRO work to the OEM affiliated MRO, reducing competition and keeping prices higher for the cost of overhauls and repairs
• Alternative-parts PMA manufacturers may step in to answer the operator’s calls for shorter lead time and lower prices
• Tear-Down specialists start to look for opportunities

I re-posted this information because of its potential to effect the Surplus Parts market forecast. To use words employed by ICF, the last two bullets regarding PMA and Tear-Downs are aftermarket ‘Countermeasures’. I like that term since it is widely used in the field of Electronic Warfare, my original Air Force career field.

CONCLUSIONS AND OBSERVATIONS:

• Overall, there is cause for optimism to embrace the forecast rise in the Surplus Parts Market of 5.6% per year through 2023.
• The basic economic markers of price of fuel and GDP should be monitored for their direct influence to accelerate or tamp the forecast in ways previously discussed.
• OEM’s appear to be getting aggressive regarding their intervention on the parts in circulation in the Surplus Market. If this activity grows and matures among OEM’s, look for the forecast to attenuate.
• Can Royboy speak frankly here? It’s my opinion that if this type of OEM activity continues to grow unchecked, there will be growing alacrity among aircraft operators and aftermarket participants to seek new laws, regulations, or creative inventiveness as countermeasures to seemingly monopolistic and anti-competitive OEM interventions.

PS: Leave us a comment on the ASA blog site.

Over ‘n out

Roy “Royboy” Resto

www.AimSolutionsConsulting.com

In college many of you took Micro and Macro Economics. You likely remember that those classes were characterized by the numbing number of graphs; recall those Supply-Demand curves? I liked those graphs. To a certain extent they were intuitive, and you could derive a great deal of information from them. I hope to do that with this blog. I have not seen these graphs before, so I’m having geeky fun expressing latent talents for academia.

Recently, our friends at ICF International published economic data represented in the following chart:

The release of this data triggered a few articles in industry magazines which offered analysis of the market and the represented data. It occurred to me that the fundamental economic drivers on the surplus aftermarket have not been adequately articulated in the past. Only when these fundamentals are understood, can we judge the quality of analysis and opinion. So, in this Part 1 I hope to articulate those fundamentals, and then with the next blog, Part 2, I’ll combine the fundamentals with current analysis. I hope you’ll find the last two graphs particularly interesting:

• ANALYSIS OF DYNAMIC EFFECT OF SURPLUS AVAILABILITY ON PRICEs
• EFFECTS OF STRONG OEM INTERVENTION ON THE SURPLUS MARKET

If I have done my job right, these will all seem simple and intuitive. For all of these, you will recall your college professors repeatedly saying “All things being equal”, and so it is here, these are generalizations.

CHARACTERISTICS:

• Emphasis is on a given fleet-type of aircraft
• As the fleet ages, more surplus parts become available

Easy right? Let’s build upon this.

CHARACTERISTICS:

• Emphasis on a given fleet-type of aircraft with a large production run
• The total number of surplus parts is greater
• Many aftermarket suppliers participate

Next:

CHARACTERISTICS:

• Emphasis on a given fleet-type of aircraft with a small production run
• The total number of surplus parts is smaller
• Small number of aftermarket suppliers participating
• Opportunity for niche aftermarket suppliers to specialize

How about a combined global aircraft types?

CHARACTERISTICS:

• Emphasis on the average age of all combined aircraft types
• The number of surplus parts is directly proportional to age

Here’s an interesting but predictable phenomenon:

CHARACTERISTICS:

• Emphasis on a given fleet type
• Initially (flat horizontal segment), the part number pool consists of parts predicted to have removal histories.
• As the fleet ages, certain parts start to fail which had not been originally provisioned-for.
• Lead-Time to manufacture these parts is as expected, long. The demand may be filled by niche and/or tear-down specialist suppliers

Let’s crank these a little bit:   

CHARACTERISTICS:

• Emphasis on a given fleet
• The price of parts and the number of surplus parts availability are inversely proportional

Now we can break this down: 

CHARACTERISTICS:

• Emphasis on a given fleet
• Stage 1:
  o   Fleet introduction and growth
  o   Parts are largely under warranty and controlled by the OEM’s
  o   The price of new parts are high
• Stage 2:
  o   As the fleet grows, individual airline operators gain experience and adjust inventories – excess inventory starts to enter the market from those airlines
  o   Other airlines with different operational profiles find they are undersparred and order more new parts adding to the total pool
  o   Depending on demand, tear-downs may start to occur to harvest additional spares
  o   As the availability of surplus parts starts to increase, prices start to decrease – this includes that those additional spares are in overhauled or repaired condition rather than new, further eroding prices
  o   The number of aftermarket firms participating in this segment increases
• Stage 3:
  o   The given fleet is in its sunset period and no longer in production
  o   Airlines are starting to park older aircraft further increasing the pool of spare parts
  o   The market is characterized by having too many spares – this drives down prices and dis-incentivizes aftermarket participants

The following phenomenon is emerging and worthy of commentary:

CHARACTERISTICS:

• Emphasis on a given fleet type
• Initially (flat horizontal segment), parts are largely under warranty and controlled by the OEM’s, and prices are high
• As the fleet ages, surplus parts start to become available and prices start to come down for the classic reasons previously described as ‘Stage 2’
• The OEM steps in to moderate the market and prices
  o   The OEM enlists the assistance of aftermarket specialists to buy-up and control the spares
  o   Some spares may be taken off the market to keep prices high and forcing operators to order new parts directly from the OEM
  o   The spares taken off the market and controlled by the OEM are funneled to the OEM’s MRO affiliate to make them more competitive against non-OEM affiliated MRO providers
  o   The OEM finds ways to unreasonably restrict independent MRO’s from gaining access to its component maintenance manuals, forcing operators to send MRO work to the OEM affiliated MRO, reducing competition and keeping prices higher for the cost of overhauls and repairs
  o   Alternative-parts PMA manufacturers may step in to answer the operator’s calls for shorter lead time and lower prices
  o   Tear-Down specialists start to look for opportunities

University students looking for thesis material may want to take these graphs and do the research to quantify the graphs. In the next blog I hope to merge the theory presented here with the forecasts earlier introduced.

Over'n Out - Roy "Royboy" Resto - www.AimSolutionsConsulting.Com... class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal">

Ok, time to stir the pot a bit. I know there is a silent majority of people out there who roll their eyes while simultaneously pressing their lips at the mention of Approved Supplier Lists; they look at it as a necessary evil; a constant source of findings on internal and external audits; a down-right thorn in the side!

On the other hand, many of those same people, when presented the opportunity to get on a major customer’s Approved Supplier List, are heard to herald their unflinching dedication to all aspects of quality, and are seen to conspicuously post their quality pedigrees on their virtual sleeves. We love getting recognized by those major customers with neat trophies or certificates of recognition for on-time or other measured performance, don’t we? No problem with that, right? So, why the ambivalence?

Depending on which regulation or standard you fall under, the requirements regarding the elements of your Approved Supplier/Vendor List may vary, but they all have common threads: Who are you getting your parts or services from?; How are they qualified to get on your list?  

Nearly all findings by internal or external auditors are due to non-compliance with what was said in the firm’s own manual. Here’s a sampling:

• The manual states you won’t issue any Purchase Orders unless the supplier is on your list, but the auditor finds evidence to the contrary.
• In order to facilitate ‘hot’ or ‘AOG’ orders, the manual provides for an initial (Single) Purchase Order while the Approval process takes place, but the auditor finds several PO’s have gone out over a seemingly long period without the necessary approval.
• Your manual states that you will somehow track the quality performance of those suppliers, but in actual practice there’s no evidence of it.

Other problems include:

• The purchasing/sales staff at your firm have silently discovered how to work- around your process. In fact, taming this crew and getting them to follow published procedures is a common theme - There, I said it and I meant it.
• Many firms have purchased ERP systems with built-in capability to control who you issue PO’s to, and to list and report who comprises the Approved Suppliers, but:
• The firm or its employees don’t fully understand or use this capability. Typically, this includes the QA department – Dude, make the software you’ve paid for work for you!
•    The ‘Permissions’ to change things are granted to the wrong, or too many employees, thereby diluting the supposed controls.

Speak of ‘work-around’, another one used frequently in the industry is what I’ll call the ‘Hidden Supplier’. Many firms have active programs to reduce or place a cap on the number of suppliers they use, hence a reduced or capped Approved Suppliers List. This is somewhat understandable since after all, you have to manage all those firms on your list. Suppose you need a part, and the only supplier is not on your Approved, capped Suppliers List. No problem, just issue the PO to someone on the list, and by phone ask them to get the part from the firm not on the list, hence the hidden supplier. You get the part from an approved supplier (who got it from someone else), and everyone is happy, right? The problem is, both the approved supplier and hidden supplier got a price markup; two instead of one. This is one of the reasons why these caps or reduced-supplier-base initiatives seem to come and go.

And how about the data talking to you regarding the Quality History of your suppliers? Too often unfavorable data just sits there, dormant. Maybe it makes its way into an internal report. But how about sharing your information with the offending party; the supplier? The most common excuse is that the supplier is a big name, and you’re just a small fish; that they won’t listen you. Really? Have you even tried? If the extent of such communication is that you issue a ‘speeding ticket’ (a CAR or SCAR), then perhaps I understand why you don’t get any response. Pick up the phone, establish a colleague-to-colleague dialog with the person at the supplier; have your data and examples ready. Most of time you’ll see results and a genuine interest, and usually, thanks. Try it.

Then there are the firms that take their system for Approved Suppliers beyond merely meeting the base-line requirement of the standard or regulation; they want to actively meet the spirit and intent of the requirements. Attributes of such firms might include the following:

• Their ERP system is airtight; NO PO’s can be issued by anyone unless the supplier is already approved.
• They are as proud of their restricted suppliers list as they are of their approved list. Recurring reasons to restrict suppliers include:
  
  • Failure of the supplier to return surveys despite repeated attempts (don’t get me started on that one, it’s inexcusable; there, I said that too, and I meant it).
  • A percentage of the PO’s issued resulted in rejects when the product was received.
  • Financial squabbles.
  • Published ‘issues’ such as FAA Unapproved Parts Notices, DOT IG Reports, GIDEP Alerts, Debarred Lists, CAA Notices or Alerts, etc.
• Creation of periodic reports for management review which may include suppliers with great on-time performance and zero rejects, and of course, those with delivery or quality issues.
• For the household names or fortune 500 firms which have formal recognition rewards for their best performing suppliers – Bravo. For the recipients, we all love seeing those trophies, plaques, and certificates in the Main Lobby; it gets the supplier’s employees pumped.

For those minimalists satisfied with just meeting the standard, I hope you’ll challenge yourself to utilize the requirement as an opportunity to better serve your firm, and to develop meaningful relationships with the suppliers you’ve teamed with.

Leave a comment on this blog – your stories, observations, or best practices.

Over ‘n out

Roy Resto

www.AimSolutionsConsulting.com