Every business has its dark corners. Secret fiefdoms or forgotten Cinderellas, where planning is a black art and true costs difficult to pin down. By tradition, maintenance has been one such corner of the airline industry. The label may be an exaggeration, but the boardroom drive to get a stronger grip on costs is real enough. And maintenance departments are under pressure to deliver.
Close to the heart of the problem, and possibly the solution, lies systems technology. Consultants argue that the myriad of ageing and often incompatible legacy systems used in the typical maintenance operation are holding back the necessary step change in productivity and performance. But the promise is that the latest breed of Enterprise Resource Planning (ERP)systems are at last ready to unlock that potential through a mix of sharper planning, reduced inventory and better controls.
The benefits of replacing legacy mainframes with a single integrated system are well rehearsed in manufacturing industry. ERP's early ancestor, Materials Resource Planning(MRP), has been around since computers first found their way into factories in the 1960s. A couple of decades later, MRPII systems arrived. Now it is ERP that is capturing the imagination, providing a framework on which to hang all business processes, from order booking through to shipment.
The ERP vendors, led by the likes of Europe's Baan and SAP, or US software giant Oracle, have already signed up the world's major aerospace suppliers - Boeing, most of the Airbus partners and engine makers included. The potential efficiency gains are mouthwatering, with the promise of more than 20% in annual cost savings. Even allowing for a little over-enthusiasm, such numbers are substantial.
The question is whether ERP can work similar magic for the maintenance department. An increasing number of airlines appear convinced that it might. What is probably the first full implementation of ERP in airline maintenance is now going live at Air New Zealand Engineering Services (ANZES). The solution is based on an SAPplatform, adapted for the maintenance repair and overhaul (MRO)environment by consultants Ernst &Young.
Other such projects are in train. SR Technics, Swissair's sister maintenance company, is in the middle of implementing a full SAP system with consultants Price Waterhouse Coopers. MRO departments at Swissair partners Austrian, Sabena and Crossair are already SAP customers, as are Lufthansa Technik and others.
Many more carriers, including USmajors like American, Delta and Northwest, have begun to investigate ERP, says Don Elliot, the Ernst &Young partner who led the New Zealand project. The consultancy, for one, believes that this is only the start. Elliot is co-ordinating the consultancy's newly established MRO Academy, a mix of consultants with industry and ERP backgrounds designed to take the ANZES experience further afield.
"There is some caution among the airlines in being the first movers," says Martyn Wileman, a managing consultant at Ernst &Young and part of the MRO team. "Some are still waiting to see what standards emerge." Senior maintenance managers do privately echo concerns about being in the vanguard, but few deny that the technology is on its way.
Wileman concedes that the millennium bug issue is soaking up information technology (IT) resources and may hold back ERP implementations, but he believes once that hurdle is cleared, installations will begin in earnest. Although the first projects are likely be among the major players, it seems inevitable that the technology will filter down to smaller operations as cheaper off-the-shelf packages emerge.
"There is a genuine desire to move away from the existing systems," says Elliot, especially those hoping to cut it in an increasingly international third-party market. Without IT upgrades it will be tough, he says. ANZES had a world-class engineering project running for two years. It highlighted 11 key initiatives of which only three could be realised without IT enhancements.
The business case
At first sight, the business case for upgrading maintenance IT looks relatively straightforward. Maintenance costs still make up 12-15% of airline expenditure and they have been growing annually at rate of around 7-10% for the international carriers - too high to avoid scrutiny.
Based on ERP projects to date, Wileman believes MRO operations should be targeting about 20% in straight cost reductions. He outlines typical gains from:
* a 15-20% reduction in inventory costs;
* a 5-10% gain in labour efficiency;
* a 5-10% growth in sales through improved service;
* a 10% reduction in operational costs.
There are massive gains to be made from inventory alone. Spares holdings across the world airline supply chain are estimated at above $50 billion. Ernst &Young reckons that eliminating the slack in the system could shave $3-5 billion off the holding. It would also cut the annual carrying cost of inventory (roughly 20% per year) by up to $1 billion.
Wileman also points to less direct gains to be made from improving the predictability of maintenance costs or reducing aircraft downtimes. Both may be crucial as airlines have to make decisions about the future of in-house maintenance departments - whether to slim down and outsource or to make a bid to create a full-scale third-party business. "The big are getting bigger and the small are getting out," says Elliot.
Air New Zealand's decision (ANZ)to turn ANZES into a standalone profit centre is a case in point. Like Lufthansa and Swissair in Europe, the airline had a strong reputation for engineering and it saw an opportunity to build on that position as an Asian third-party provider. It has since raised its volume of third-party work to above 55%. At the same time, ANZ's acquisition of a stake in Ansett has provided a platform for a pooled maintenance operation, while the Singapore Airlines (SIA)partnership and possibly the Star Alliance may open further options.
There are already doubts over whether the ageing systems of the 1970s can continue to take the strain of new commercial pressures. "Maintenance divisions in the past have left to go their own way," says Elliot. "Only now are airlines beginning to look at the cost of operating the legacy systems." Cost is likely to prove high.
Classically, maintenance divisions have built on a swathe of different systems, each handling specific tasks and rarely talking to each other. Ernst &Young's own work reveals 30-50 different systems in play at major carriers like American or SIA.
On top of that are many hundreds of processes, which, given the lack of consistent, real time, data handling or systems transparency, may be duplicated between departments. Line maintenance, airframe, engines and components shops each have their own way of handling data. Information then has to be repeatedly transcribed or, worse, is simply lost to view.
It is in integrating these processes around a single system that ERP solutions begin to score, bringing consistency and real-time accessibility to data throughout the enterprise. "This industry is extremely data heavy and the number of data entries are astronomical," says Elliot.
In fact, the relatively compact ANZES business was less complex than most, with only two main systems and a workforce of 2,000 split between two main bases. Even so, 143 different processes were identified, and 42 duplications eliminated.
Tailoring the ERP solution
Doubts remain within the MRO community over just how well systems borrowed from manufacturing will adapt to their business environment, with its unpredictable workflows, intricate parts histories and the absolute demands imposed by safety regulation.
Elliot accepts that maintenance is a unique case. By its nature, it involves pulling things apart, not putting them together. He concedes that traditional MRP systems, unlike their successors, did not go far enough in accounting for life history of individual components.
Hans Ulrich Beyeler, president of SR Technics, admits to some scepticism over how well past planning tools would cope with the unique characteristics thrown up by maintenance. But he hopes that the latest incarnations of ERP are tackling the problem.
Elliot suggests that complaints about unpredictability can be overdone. The scheduled fleet maintenance patterns are relatively predictable, he argues, even if the work arising is not. And with ERP It should be possible to have an inventory management strategy based on accurately predicted demand rather than held "just in case".
The holy grail of inventory remains a seamless interface between airline and spares manufacturers. Given the idiosyncratic nature of the average aerospace component, most believe that is still a dream. Ernst & Young is nevertheless convinced that it is coming, driven perhaps by the search for integration among the major alliance groupings. It is pushing the concept of a "virtual spare catalogue" linking airlines and suppliers allowing new levels of forecasting, order management and support.
"ERP puts a lot more emphasis on planning and project management," says Elliot. With transparency between the departments and a centrally organised system, it becomes possible to keep track of each aircraft or component as it moves through the shops. Each visit can then be handled "from cradle to grave" as a discrete project, with a dedicated project manager responsible for meeting business targets and customer expectations.
ERP should also pave the way to new levels of flexibility in moving information, people and resources around the organisation in a more orderly, planned fashion.
Ernst &Young estimates that, in the end, the basic SAP package gave an 80% fit with the ANZES maintenance business. But the 20% that did not fit was "critical". Detailed design work by the consultancy team resulted in about 50 enhancements, including those to accommodate regulatory requirements and ANZES' own business case. Elliot estimates that the project pushed SAPabout 18 months ahead of where it otherwise have been in MRO.
The consultancy learned hard lessons too, saying: "One of the mistakes we made early in the project was to make some of the enhancements specific to ANZES." It became clear that this risked the creation of a highly tailored system that would quickly become unsupportable. Instead, Ernst &Young backed away from specifics to create a more adaptable model.
Having acquired the resulting package of enhancements and designs from ANZES, the consultancy now plans to use the model for further MRO installations. The model is being previewed by Ansett and Bombardier - an existing SAP customer. Wileman adds the consultancy is also working to apply the model to Oracle systems.
The exact costs to such ERP implementations remain frustratingly elusive. "No one has definitively put down the cost of ownership of an ERP system," says Elliot. "Most say it is less than the total of individual systems, but nobody knows for sure." As a rough rule, typical software costs run at about $4,500 per seat per year and the initial implementation is around two or three times more expensive. The ANZES project also involved 30 managers from within the maintenance company. "You almost need that number to get the buy-in from across the business," says Elliot.
Another lesson is that it is difficult to justify a gradual implementation of ERP. The cost of running the two systems in parallel over a short transition period at ANZES was about $1 million. Instead, the cash was spent on getting the global roll-out right first time. SR Technics, too, has come to the same conclusion, says Beyeler.
Ernst & Young recognises that there is a point at which a fully tailored ERP implementation becomes uneconomic for the second tier of carriers, with the cut-off probably at the $400-500 million sales mark, but the game is not necessarily restricted to majors. As ERP continues to make its way into the MRO sector, it should become possible for smaller airlines to find a standard, uncustomised, package that makes economic sense.
The ultimate goal is to see maintenance departments join the rest of the world in a new level of systems functionality, offering a range of: comprehensive modelling and business planning tools; historical customer analysis; activity-based costing; active inventory management; visibility and traceability of work in progress; and flexibile deployment of resources.
"If you can put your hand on your heart and say you can already do all these things, then you probably don't need ERP," says Elliot. His guess is that few can.
Source: Airline Business
