Taking A Strategic Approach To Inventory Segmentation
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Authored by Konstantinos Varsos, Salena Hess and Dimitris Kostamis.

COVID-19 has created significant challenges for airline inventory managers. Financial constraints, combined with significant changes to flight schedules, fleet mixes and demand patterns, have made the efficient management of aircraft spare parts increasingly difficult. This situation is exacerbated by the recent disruptions to the supply chain followed by a relatively rapid recovery, as recent years’ usage data (a key forecasting input) is no longer indicative of future demand.

Prior to COVID-19 airline parts management already faced challenges

In addition to the present challenges, a fundamental difficulty facing managers is that there are few inventory management solutions customized to the aviation industry. Most airlines use their own home-grown inventory management solution, heavily invest in configuring third-party retail-based solutions, or default to those offered within their MRO IT package. In consequence, there is enormous variety in how airlines manage and optimize their inventory. Many of these inventory management approaches are inappropriate, as they are borrowed from retail and manufacturing, where solutions are ill-fitted for the airline industry. As a result, carriers can find themselves understocked in critical parts while being simultaneously overinvested in inventory.

Suboptimal inventory management has a direct operational impact on airline performance. One carrier identified that 20% of its inventory provided no value to the airline and could be disposed of, while it was also under-stocked in parts that could prevent maintenance deferrals, delays, and cancellations.

Limitations of fill rate and service level approaches

The cost of delays and cancellations to airlines is enormous. Unavailability of parts can drive a significant percentage of delays and cancellations, and it is critical that frontline managers understand exactly how to apply airline service levels and fill rates.

Traditional methods (e.g., closed-form, Poisson-based calculations) use fill rate to optimize inventory, which is often conflated with service level. Fill rate measures whether demand is met immediately with local, on-hand inventory and disregards whether demand can be deferred or filled through an Aircraft On Ground (AOG) expedited delivery process.

In contrast, service level measures whether demand is met before a part can no longer be deferredFor example, a 95% service level would suggest that out of 100 part requests, 80 were immediately filled, 15 were deferred and fulfilled before their “drop dead date”, and 5 were not filled before this date (potentially causing a delay or cancellation). If not applied correctly, traditional methods can lead to overinvestment, as they ignore the airlines’ ability to defer demand and AOG recovery mechanisms.

Best practice in assigning inventory controls  

Not every part is created equal when it comes to inventory management. While parts with high usage can be forecasted with adequate accuracy, analytical methods are ineffective for parts with very low usage, which are better served by rule-based optimization controls.

  • Optimized controls: Optimized controls should be focused on parts with high usage. Demand forecasting requires sufficient historical data to enable accurate prediction of when and where parts will be consumed. While traditional closed form methods can be used, simulation based methods produce more accurate results and take greater account of the operational impact of inventory. Although parts subject to optimized controls might constitute only 30-50% of total inventory value, they can account for 80-90% of total inventory usage.
  • Calculated controls: For parts with low historical usage (e.g., a few units a year) an algorithmic rule-based approach should be followed. While a closed-form (e.g., Poisson) calculation can be used to determine the total inventory required, rules are needed to establish where each part should be held. Although these parts provide little day-to-day value to the airline, they act as an “insurance” for maintaining high inventory availability. Overinvested airlines can find such parts constitute over half of total inventory value.
  • Managed controls: Certain parts, such as oxygen bottles, have unique or complex demand patterns that require a bespoke approach. Others require significant manual intervention on a daily or weekly basis. These parts cannot be modelled accurately using optimized or calculated controls approaches and should be classified separately.
  • No controls: Parts with a very low risk profile and those not managed by the material planning group usually need no controls. The inventory analysts can provision some initial inventory as insurance, or provision the inventory once usage occurs. Nonetheless, it is important for the airline to think through provisioning for these parts.

Segmenting inventory into part groups and setting targets

Within each controls category, segmenting inventory into part groups allows for efficient inventory management and application of targets. In aviation, this segmentation is often based on the inventory type (typically, rotables, repairables, expendables, consumables), unit price, criticality (e.g., go, no-go, go-if), usage, and station classification (e.g., hub, line, or maintenance station).

We recommend the following be considered when setting parts group parameters and targets:

  • Limit the number of part groups to 15-20, more will prove cumbersome
  • Divide part groups so that each group holds roughly similar inventory value
  • Assign service levels that range from 75% for low-criticality high-value parts, to 99% for high-criticality low-value parts
  • Use advanced simulation-based algorithms to align inventory investment with operational performance, utilizing direct operational metrics, such as delays, cancelations, and aircraft out-of-service (AOS)
  • Refresh inventory parameters and segmentation on an annual basis to ensure parts groups continue to adhere to these considerations

Benefits of implementing controls and part groups

Airline parts strategies need to incorporate segmented inventory controls. Doing so helps guarantee that the airline has a “plan for every part”. In addition, guidelines should be provided to frontline managers to ensure that the various inventory management approaches are applied appropriately. These steps will result in significant improvements to inventory investment and performance.

The following table outlines how to use inventory controls categories: