The promised e-commerce revolution has been a long time coming. So is the dream of online collaboration on parts sourcing for airline maintenance still alive?
From boom to bust in just three years? On one level the story of e-commerce in the field of airline maintenance repair and overhaul seems like just another story of dotcom mania. As the online boom reached its peak in 2000, around a dozen online exchanges sprang up, promising to change the whole way that airline parts were sourced. Airlines would collaborate to win big savings from suppliers. Better supply chain visibility would lead to lower inventory. The exchanges even had ambitions to expand from maintenance into fuel, catering and other airport services. However, like most dotcom-era start-ups, all the exchanges apart from one are now gone.
Founded by 13 airlines in 2000, Aeroxchange now claims 33 carrier users and to have signed up 400 parts vendors in 30 countries. Its last rival, Cordiem, a merger of airline-led AirNewCo and manufacturer-led MyAircraft.com, threw in the towel in March this year, after its backers refused to put in any more money.
Where does this leave the great dotcom dream? In some ways, perhaps, in less poor health than at first appears. Wise pundits always said only one or two exchanges would survive, and Aeroxchange president and chief executive Terry Rendleman says his is on track to break even in the first quarter of 2004. "Revenues are rising," he says. "We were funded with sufficient money to get us through the first three years of development, but we trimmed costs and still have a fifth of that in the bank."
For its part, Cordiem had some bad breaks. "We had a lot of US players, which seemed an advantage at the time," says Paul Alexander, head of supply management at British Airways, who worked at Cordiem for 18 months. After the 11 September attacks, however, having United, Delta, American Airlines and UPS as carrier backers "became something of an albatross - United went into Chapter 11, Swissair disappeared, and we lost a lot of investment," Alexander says.
The woes of the industry resulted in fewer aircraft cycles, which also meant that its carriers did not use the exchange as much as they might have. "It's a shame, as we had a wonderful product," Alexander says. "At BA, we had achieved a lot and we were heading in the right direction. If everyone else had used Cordiem as much as we did, it would have blossomed."
Nimble moves
On the other side of the fence, Aeroxchange's proponents say the reason it survived was that it was nimbler. "They got the product up and running earlier, and cut costs quickly after 9/11", says Dr Thomas Papke, senior vice-president for strategic purchasing at Lufthansa Technik. Rendleman indeed confirms that the organisation went from 60 employees before 11 September 2001 to 40 afterwards. He also points to some "very active" airline members - Lufthansa, FedEx, Cathay Pacific and Northwest Airlines.
KLM, another Aeroxchange member, also sees it as an advantage that Aeroxchange is solely owned by airlines - a contrast to Cordiem with its supplier involvement. "That is a big strength," says Ton Veltman, the Dutch carrier's director of component management. "You have to have the vendors in the game, but in a different position to the airlines. Vendors have different needs, and that can create conflicts of interest." Rendleman says that from the first, Aeroxchange has focused on what airlines wanted. Veltman agrees: "We have a voice. We say what functionality we want, and they listen to that."
Surviving is one thing, but whether Aeroxchange has sparked the promised revolution is still debatable. The then-vice-president of sales at Cordiem hinted in 2001 that it may be more a case of evolution when he remarked that "this is a marathon, not a sprint". Talking to users of Aeroxchange, it is evident that rolling out its usage has been a steady rather than a rapid process. The dream remains alive - but in the far distance.
The function that seems most popular is AeroAOG, where airlines can search the inventory of other members for a crucial part in an aircraft-on-ground situation. "It is this function that gets us through the door at airlines," Rendleman says. To search, airlines also have to have their inventory loaded on the system too - 14 airlines and three suppliers have taken this step so far. The function includes a system to keep track of parts loaned to or borrowed from other airlines, and show the cost per day.
Online tendering
Step two seems to be AeroSourcing, which enables airlines to put commodity parts such as gaskets, clamps and brackets out to tender. KLM, which currently only uses the AOG functionality on Aeroxchange, nevertheless says it is carrying out pilot projects with AeroSourcing and the other functions. Lufthansa Technik is already a user of Aerosourcing. Papke says it conducted five planned online tendering events last year and seven this year, and has achieved savings of 10-30% as a result.
Lufthansa Technik has learned over time to be more disciplined in its use of AeroSourcing. Early events it tried started with as many as 5,000 part numbers and became too complex. "Now we just start with 200 - and in one case only seven - but we are still producing significant savings," Papke says.
The savings come not just from lower prices, but also process efficiency. "It speeds up the negotiating process, so that it takes hours, not weeks," Papke says. "You can also benchmark against your peer group - Aeroxchange give you management infomation showing how successful your event was against similar events." He says it has also opened Lufthansa Technik's eyes to new suppliers. "When you have established purchasing relationships, you become blind after a while. AeroSourcing has brought to our attention suppliers we did not recognise before."
Online sourcing also imposes a certain discipline, and this is something that Veltman thinks both a challenge and a possible limitation of the concept. "It forces you to think harder up front about your specifications. You have to be very clear about what you want. Traditionally you talk to the supplier and make a lot of assessments that way, but in e-sourcing, you have to define all the criteria before you start."
For this reason, he is unsure about how far e-sourcing can extend from standard commodity products to more complex parts. "It might make it more difficult for repairs to make use of e-sourcing," he says. "There are areas where I doubt e-sourcing will ever become effective, but in a large number of areas it will have a lot of benefits."
Easy duplication
One problem, perhaps, with Aero-xchange's sourcing function is that it is something that could easily be duplicated elsewhere. Now that Cordiem is no longer around, Alexander says BA has invested in Ariba, which is being used as an airline-wide procurement platform. "It helps us structure bids and gives us information on supplier performance, but it does it right through the business, not just in engineering," he says. "In theory, it is good to do that through an exchange, but it is probably better to have it in your control, within your four walls. Not to rubbish the exchange model, but why not do business the same way other industries do, using the best solution available?"
So what of the higher level functions on Aeroxchange, the more integrated levels which are supposed to transform the whole way maintenance departments source parts? AeroBuy is a platform giving carriers access to manufacturer, supplier and PMA (parts manufacturer authorised) databases, while AeroRepair offers the same service for rotable parts. These functions are designed not just to be a handy source of information, but to bring process advantages to both operations - speeding up sourcing, issuing shipping orders, checking online documentation.
This, however, requires systems integration. The parts manufacturer has to give Aeroxchange access to its database, and although airlines can access these functions via a browser, they make much more sense if interlinked to their IT systems. Rendleman admits that to date these functions are less popular than the other two, although he says Air Canada, FedEx, Northwest and Lufthansa are now fully integrated. Air New Zealand, Cathay Pacific, KLM, SAS, Singapore Airlines and United Airlines are also partly integrated.
Progress in this area has been slower than it might have been, however, due to the bad investment climate in the last two years (integration costs $35-75,000); the fact that Aeroxchange has a small sales force and that it takes a long time to make the pitch. It also takes airlines time to evaluate making the change. "All of the buyers have to be retrained, and that is a slow process," Rendleman says, adding that SAS had to retrain 100 people.
Despite this, he insists that apart from expensive items made by only one manufacturer, or simple parts on automatic purchase orders, Aeroxchange is suitable for sourcing all other types of airline parts. "The aim is very definitely to still to be a one-stop shop for airlines," he says.
Carriers seem to hold to that dream in theory, but suggest it will be a long process. Veltman describes Aeroxchange as a "very slow and silent" revolution. "It is not going very fast, but it is making progress in a variety of areas," he says. Alexander agrees. Regarding systems integration with enterprise-wide ERP systems, he jokes: "It will happen one day, but maybe not in my lifetime."
Process changes
Papke points to the process changes e-sourcing requires: "You have to change people's behaviour, which is very difficult. In the beginning we all thought it would be easy: you would just plug in your systems and go. In fact, it has taken much longer. It has been profitable for us overall, but it was not an easy process." Alexander adds an analogy with military hardware. "The machine gun was invented in 1865, but they were still carrying it on horseback to the battlefront in the First World War," he says.
There are also areas where some doubt e-sourcing will ever work. AirLiance Materials, the Chicago-based company that pools and markets the inventory of Lufthansa, Air Canada and United, says a lot of physical inspection of products is still essential in the surplus market. "E-commerce is all right for parts where there is a recognised part number in place, but on the surplus side there are so many variables and you need manual processes to gauge the background of parts," says Roscoe Musselwhite, AirLiance Materials executive vice-president responsible for sourcing, marketing and sales. "You are still going to need a lot of phoning, faxing and manual transactions."
Given such remarks, it seems almost impertinent to ask about the really big prize that the online exchanges were supposed to deliver: true collaborative working between airlines and suppliers that would reduce inventory and so save costs. Paul Alexander still thinks this was the real benefit that Cordiem offered, and says talking about online auctions and parts searching rather misses the point. "It is useful, but it doesn't save the world," he says. "To get 10% off the price is one thing, but if you don't need to stock the part in the first place, that is a much bigger saving."
To deliver this dream, an exchange would need to bring greater visibility to the parts process, allowing airlines to see clearly what parts were available, and suppliers to better predict demand. "But the software is not yet ready to deliver that dream," Alexander says. "The reason is that airline supply chains are hideously complicated and it is very hard to predict demand."
Aeroxchange is moving in this direction. One step was a partnership announced in April with b2b-aero of Hamburg, to make the latter's MRO-Tracker product available as part of the AeroRepair product. "Better tracking and monitoring and quicker reponse times will mean lowering of lead times, and so lowering of inventories," says Veltman.
"At the start of this process it was thought that the benefits would come from market research - selecting a vendor more quickly. But I suspect that in 10 years the biggest benefit will come from the track and trace and operational phase - sending in components, and getting management information on the performance of a vendor or logistics services," he adds.
One challenge to Aeroxchange, however, is that manufacturers are already moving into this space. Alexander points to the "power by the hour" model of engine manufacturers such as Rolls Royce, and Boeing says its key thrust is now integration into airline supply chain systems, tapping airline information directly, in order to better predict demand.
"It's interesting to watch portals, but the value they offer has not been well defined," says Stephen Neason, manager of information systems for spares for Boeing Commercial Aviation Services. "We have customers that use Aeroxchange to do business with us, but as a supplier, we don't garner a huge benefit. It is just replacing the electronic data interchange (EDI) that has always been in place."
Predicting demand
More interesting, Neason says, is the way Boeing is working with carriers such as Japan Airlines and KLM to better predict demand, position inventory near their repair shops, and own it - as vendor-managed inventory - until the carrier needs it. "Given the results we have seen, that has to be the future," he says. "The goal is to get airlines out of inventory management altogether and give them the supply chain confidence that we can get the part to them when they need it."
Alexander at BA thinks this model only pushes cost back down the supply chain, rather than eliminating it altogether. Ultimately, he thinks collaborative working will need some kind of cooperation between carriers, and that might well involve an online exchange. "We had just started working that way with Air France over Concorde through Cordiem," he says. "We had achieved a lot, and we were heading in the right direction, but it was just not generating revenue fast enough, so it had to end."
Aeroxchange for its part insists there is a lot more to come - invoicing systems for electronic payment and purchase order lifecycle systems will both be rolled out soon - but says it can only go as fast as its members can handle. "We could build a lot more modules: we have an 18-month development list," Rendleman says. "But if we build too fast, airlines will not be able to cope."
REPORT BY PETER CONWAY IN LONDON
Source: Airline Business
