STRATEGIC OPERATION, SUPPLY CHAIN, AND MATERIAL MANAGEMENT

Midterm Handouts

APPLICATION OF SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN MANAGEMENT IN THE MRO INDUSTRY

“Supply chain management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion and all logistic management activities.
Importantly it also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third party service providers and customers. In essence, supply chain
management integrates supply and demand management within and across companies.”

Logistics Vs. Supply Chain Management (SCM) Logistics is part of supply chain management
that plans, implements and controls the efficient and effective flow and storage of service goods
and related information from point of origin to the point of consumption in order to fulfill customer
requirements.
After the 9/11 incident, the business environment of Aviation quickly changed due to political
reasons. However, the aviation business is growing rapidly, especially in developing countries.
Aircraft manufacturers such as AirBus and Boeing are improving their technology every day to
provide the industry with the best aircraft. Aircraft suppliers are on the rise, many new airlines
are coming into existence, new airports are coming into existence. Aircraft suppliers are on the
increase, many new airlines are coming into existence, new airports are being developed and
many open Sky agreements are being signed. At the same time, the regulators are applying the
strictest aviation rules in order to be foolproof of the operation of aviation. With such rapid
growth, everyone is curious as to how this aviation system works? There is a system called
supply chain management which helps the whole aviation industry to run its operations
smoothly. In the Aviation industry mainly there are FOUR main entities.

1- Demand entities are the entities that are used directly or indirectly in the air transport system.
Passengers, Travel Agents and other customers are the entities that use the air transport
system.

2- Supply Chain produces air transportation services directly or indirectly. These entities contain
many business forms like Airport, Airlines ground services, maintenance, aircraft manufacturers
and regulators.

3- Inside entities are government and other political organizations that influence the Air transport
system directly.

4- Outside entities have indirect influence on Air transport system. This entity can be very well
controlled if the right technology is implemented. Factors of outside entities are like Climate and
geographical locations.

All of the entities explained above have important rules of their own. They affect or influence
each other. Each entity should cooperate with other entities in order to run the aviation system
smoothly. It is impossible for airlines to operate without the support of any of the above entities.
Therefore, cooperation with airports, regulators and MRO services must be developed for
efficient operations by airlines. Therefore, cooperation with airports, regulators and MRO service
providers must be developed for efficient operations by airlines. From a broad perspective, the
Supply Entity should provide the service required by the demand entity. Supply entity should
provide the entity with the information it needs to request. That's how aviation supply and
demand work.
In the aviation industry, MRO service providers need to work closely with regulators, suppliers,
manufacturers, and airlines to ensure the quality and sustainability of their services. These
relationships are vital for meeting safety and quality standards, ensuring a consistent supply of
necessary resources, satisfying customers, and remaining competitive in the market.

INTER RELATIONSHIP BETWEEN COMPONENTS OF SUPPLY CHAIN

Supply chain relationships involve interactions between different organizations in a supply chain,
extending beyond predefined material flow boundaries. These relationships can be categorized
as upstream (towards suppliers) or downstream (towards buyers) and are crucial for effective
supply chain management, which includes planning, sourcing, and collaboration with various
partners in the supply chain.

Effective supply chain management involves managing demand, establishing clear

communication channels, integrating various components, and fostering collaboration among
supply chain members. These elements collectively contribute to the success, competitiveness,
and efficiency of the supply chain and can lead to increased business opportunities and
customer satisfaction.

1.) Demand Management

Focus on meeting customer needs by motivating partners to improve quality and add value.
2.) Communication
Enhance productivity through efficient communication of demand and operational information
among supply chain members.
3.) Integration
Coordinating various supply chain elements to reduce inventory costs and ensure smooth
operations.
4.) Collaboration
Building relationships and promoting teamwork among supply chain members to create mutually
beneficial opportunities and better serve customers.

WAYS TO IMPROVE THE EFFICIENCY OF SUPPLY CHAIN MANAGEMENT

Ten Strategies for Improving the Efficiency of Supply Chain Management

1. Customer Relationship Management Tailor supply chain management to the unique
needs of different customers, products, and services. This can reduce inventory and
improve on-shelf availability.
2. Collaborative Relationships Foster Win-Win relationships between suppliers and
customers based on shared metrics, benefits, and mutual trust.
3. Integration of Processes Eliminate functional silos within supply chain organizations by
integrating processes, such as purchasing and logistics.
4. Transformational Strategy Implement a multi-layer supply chain strategy to produce
significant results.
5. Information Sharing and Visibility Utilize big data and business analytics to link and
share information from multiple sources, gaining a competitive advantage.
6. Metrics Based on Drivers Enhance supply chain performance by changing goal-setting
systems and performance measurement within the organization.
7. Management of Demand Accurately forecast demand and integrate it throughout the
supply chain process to increase revenue and reduce costs.
8. Virtual Integration Focus on core competencies and outsource non-core functions,
striving for Win-Win deals with service providers.
9. Management of Talent Hire supply chain talent with critical competencies, including
global orientation, business skills, technical expertise, and leadership skills.
10. Management Based on Value Emphasize supply chain excellence to create
shareholder value by controlling inventory, maximizing revenue, and managing a
significant portion of the cost of goods sold.

Steps Involved in Making an Outsourcing Decision for a Company

These steps provide a structured approach to making outsourcing decisions, considering
various factors like cost, risk, and performance, and emphasizing the need for ongoing
monitoring and adaptability.

1. Determine Project Feasibility

Define the objectives of outsourcing, whether it's cost reduction, revenue increase, or
other reasons. Understand the management drivers behind the decision.
2. Prepare a Project Plan
Identify critical success factors and develop a project plan that involves a wide
cross-section of the organization.
3. Estimate Annual Savings
Calculate the costs involved in outsourcing, including both direct product costs and
indirect support costs. Regularly review these costs and the vendor's performance.
 4. Identify Risks or Disruption Costs
Recognize the potential disruptions and risks associated with outsourcing, especially
when offshore outsourcing is involved. Use an expected value analysis to project the
economic impact of disruptions.
5. Estimate the Return on Invested Capital
Assess the return on invested capital using a time value of money approach, considering
initial costs, supplier changes, and potential transitions back to in-house operations.
6. Implement the Offshore Outsourcing Program
If the decision is to outsource, implement the project using a project management
approach. Be prepared to adapt to changes during implementation.
7. Measure Progress
Periodically monitor progress, including nonfinancial metrics such as direct purchase
costs, product quality, and delivery times. Assess the impact on employee morale and
customer perception.
8. Review and Revise
Conduct formal reviews 6 months to a year after implementation. Make necessary
changes to ensure ongoing success or consider reversing or modifying the outsourcing
project if needed.

Delivery Network Facilitators

Delivery Network Facilitators, also known as channel specialists, play a crucial role in the
modern supply chain. They perform specific functions for primary channel entities (like
manufacturers or retailers) for a fee. This outsourcing model allows companies to leverage the
expertise and capabilities of specialists who possess skills beyond the contracting firm's core
competencies. Here are some types of delivery network specialists:

● Financial Institutions
These specialists offer a wide range of financial services, including cash management,
lending, tax services, currency exchange, and payment processing. Some of them also
provide services like insurance, freight rating, and inventory buying and selling.
● Marketing and Advertising Agencies
Small distributors, wholesalers, and retailers often lack the expertise and resources
needed for major marketing, advertising, and promotional campaigns. By contracting
with marketing and advertising agencies, intermediaries in the delivery network can
access advanced marketing analysis and media outlets without having to invest directly
in such resources.
● Technology Services
In the age of the Internet and business-to-business networking, delivery channel
intermediaries require sophisticated technology tools for information transmission.
"On-demand" technology companies offer solutions such as wide-band data, voice,
video, and text information transfer. These services are provided for a fee, sparing
network businesses the need to maintain expensive technology resources in-house.
● Logistics Service Providers (LSPs)
LSPs, often referred to as third-party logistics (3PL) providers, are indispensable in
today's fast-paced distribution channels. They offer a wide range of services in five key
areas:
1. Logistics
This includes global trade services, inbound and outbound delivery, supplier
management, inventory management, and payment processing.
2. Transportation
Services encompass small package delivery, intermodal transportation, ocean,
rail, and bulk transport, tracking and tracing, fleet management, and equipment
and personnel leasing.
3. Warehousing
LSPs provide storage, pick-and-pack operations, assembly, cross-docking,
customer order management, and delivery fulfillment services.
4. Special Services
These include direct delivery to customers (e.g., UPS), import/export and
customs functions, reverse logistics, market and customer management,
consulting, and financial services.
5. Technology
LSPs offer technology solutions such as electronic data interchange (EDI),
satellite/wireless communications, web enablement, and software hosting.
THE AEROSPACE SUPPLY CHAIN
Aerospace supply chain management is a complex and critical component of the aerospace
industry. It involves the coordination of activities, processes, and resources required to design,
manufacture, and deliver aerospace products and services.

The aerospace supply chain is typically characterized by a multi-tiered structure consisting of

various stakeholders:

● Original Equipment Manufacturers (OEMs)

These are the major aerospace companies responsible for designing and assembling
aircraft, spacecraft, and related systems. Examples include Boeing, Airbus, Lockheed
Martin, and Northrop Grumman.

● Tier 1 Suppliers
Tier 1 suppliers are key partners of OEMs and provide major components, systems, or
services. They often have long-term contracts with OEMs and include companies like
Pratt & Whitney (engines), Honeywell (avionics), and Raytheon (defense systems).

● Tier 2 and Sub-Tier Suppliers

These suppliers provide sub-components, parts, and materials to Tier 1 suppliers. The
supply chain can extend to multiple tiers, with specialized suppliers contributing to
specific components.

● Logistics and Transportation Providers

Companies specializing in logistics, warehousing, and transportation play a vital role in
ensuring the timely delivery of components and products to assembly lines.

● Regulatory Bodies
Organizations such as the Federal Aviation Administration (FAA) in the United States
and the European Union Aviation Safety Agency (EASA) enforce regulations and
standards to ensure safety and quality in aerospace manufacturing.

Challenges in Aerospace Supply Chain

Managing the aerospace supply chain comes with several unique challenges:

● Regulatory Compliance
The aerospace industry is highly regulated, with stringent quality and safety standards.
Ensuring compliance with regulations such as AS9100, ITAR, and FAA requirements is
paramount.

● Globalization
Supply chains often span multiple countries, leading to complexities related to
international trade, logistics, and geopolitical factors.
 ● Technology Integration
Keeping up with rapidly evolving technologies, such as additive manufacturing and
digital twin systems, is essential for competitiveness.

● Supply Chain Resilience

Aerospace companies must prepare for disruptions caused by natural disasters,
geopolitical tensions, or global crises like the COVID-19 pandemic.

● Environmental Sustainability
There is growing pressure on the aerospace industry to reduce its environmental
footprint by adopting sustainable practices, materials, and technologies.

Aerospace Supplier Selection and Evaluation

Choosing and evaluating suppliers is an important part of supply chain management, especially
in the aerospace sector where high product quality, dependability, and cost-effectiveness are
priorities.

Criteria for Supplier Selection:

● Quality
Quality is a top priority in aerospace. Suppliers must meet stringent quality standards
and certifications, to ensure that components and materials meet safety and reliability
requirements.
● Reliability
Aerospace manufacturers depend on suppliers to deliver components on time and
consistently. Reliability in terms of delivery schedules and product performance is
crucial.
● Technical Expertise
Suppliers should possess the technical expertise required to meet the specific design
and engineering requirements of aerospace products. This includes advanced
manufacturing capabilities and adherence to aerospace materials and processes.
● Financial Stability
Suppliers' financial health and stability are critical. Aerospace projects often involve
long-term contracts, and manufacturers need assurance that suppliers will remain
financially viable throughout the contract duration.
● Regulatory Compliance
Suppliers must adhere to aerospace industry regulations and standards.
● Cost Competitiveness
While quality is paramount, suppliers must also offer cost-competitive solutions.
Aerospace manufacturers need to balance quality and cost-effectiveness to remain
competitive.
Supplier Evaluation Process

● Initial Screening
Aerospace companies typically start by conducting an initial screening of potential
suppliers. This involves assessing basic qualifications, certifications, and financial
stability.

● Request for Proposal (RFP)

Qualified suppliers are invited to respond to a detailed RFP. This document outlines
project specifications, quality requirements, delivery schedules, and pricing expectations.

● Technical Evaluation
Suppliers' technical capabilities are evaluated to ensure they can meet the project's
technical requirements. This includes examining manufacturing processes, equipment,
and engineering expertise.

● Quality Assessment
The supplier's quality management system is assessed, including its adherence to
industry standards and certifications. On-site audits may be conducted to verify
compliance.

● Financial Due Diligence

Aerospace manufacturers perform a financial analysis of potential suppliers to assess
their financial stability, creditworthiness, and ability to meet contractual obligations.

● Reference Checks
References from other customers and industry partners are obtained to gain insights into
the supplier's performance, reliability, and reputation.

● Cost Analysis
Detailed cost analyses are conducted to evaluate the supplier's pricing competitiveness
while considering the overall value proposition.

● Selection and Contracting

Based on the evaluations, suppliers are selected, and contracts are negotiated and
finalized. Contracts typically outline quality requirements, delivery schedules, pricing,
and performance metrics.

● Continuous Performance Monitoring

Once a supplier is onboarded, aerospace companies continually monitor their
performance. Key performance indicators (KPIs) are tracked, and regular reviews are
conducted to ensure ongoing compliance and improvement.