- Your present 500,000 square foot distribution centre is very impressive. What was the set up prior to this? Did you have multiple distribution depots based around, say, part types?
Aviall moved into the current facility in November 2001 from two smaller warehouses about ten miles away. The move was made to increase Aviall’s warehouse capacity and modernize warehouse operations to better service the aviation sector. The current facility was originally built with about 200,000 square feet of warehouse space, but was eventually expanded to about 500,000 square feet in 2007 to accommodate Aviall’s rapidly growing business. Aviall operates 40 sites globally to enable forward stocking of products for customers in various geographic regions. To date, we have not established separate distribution locations for different product categories, although that is a possibility in the future as our business continues to diversify.
- How did you build up such a large scale business providing parts from such a wide range of suppliers? Is the range itself key to your success, in that an MRO can view you as a one-stop source for a large percentage of their parts requirements?
Many OEM suppliers have their own distribution capabilities, particularly to support the military and commercial airline aftermarket segments. To an extent, the existence of in-house distribution is a legacy of many years of simply having to support the aftermarket with spare parts. Most OEMs primarily invest their capital and efforts into winning positions on production aircraft. Some OEMs find it challenging to deploy a large sales and service infrastructure for aftermarket support, particularly on legacy product lines, leaving portions of the aftermarket open to competition. Competition in the aftermarket can be fierce from other parts manufacturer approval (PMA) holders, surplus and serviceable material and repairs not supported by the OEM, among other things, resulting in lower market share.
Aviall’s business is aftermarket distribution. Aviall has the technology, infrastructure, proven processes and skilled personnel, not to mention scale and presence, to consistently provide a very high service level to aftermarket customers around the world. Many OEMs recognize that Aviall offers a low-cost channel to world-class distribution support that will enable them to recapture lost market share and retain or expand existing market share. In addition, Aviall offers the important benefits of scheduled demand and working capital relief, two critical goals of most manufacturers. Many manufacturers using Aviall are able to quickly redeploy working capital and personnel to more productive purposes.
- In many ways Aviall’s business strikes me as a typical depot type challenge rather than a specific aviation related challenge. The key to your being “needed” by the industry, doubtless, is that having an aircraft on the ground (AOG) waiting for repairs/maintenance etc to complete is bad news for everyone, so speed is an essential supply quality, as is accuracy (wrong part = more delay); also I imagine that some jobs will require parts from multiple suppliers (kits being made up, etc) so there is scope for plenty of value add from your side.
While many of the challenges and opportunities faced by Aviall are common to other industries, there are many factors unique to aerospace. Speed is critical if, for no other reason, because a single aircraft is a massively expensive asset and must be in service as much as possible. Compared to other industries, aerospace parts are relatively expensive while the demand for any particular part is relatively small, thus component manufacturing often has long lead times and small production lots. Basically, it’s difficult to attain a high level of production efficiency for most aerospace products.
Aircraft operators and MROs are usually unable to commit large amounts of working capital on spares inventory, nor do they always have access to sophisticated demand forecasting tools. It is challenging for OEMs to predict aftermarket demand with sufficient accuracy to ensure they have the right product available when it is needed. Most needs are urgent and if the part is not available, production lead time can result in a painful delay.
Aviall’s proven ability to forecast demand and fulfil orders on a timely basis, typically the same day the order is placed, is of enormous value to customers. Our company name Aviall implies it—availability of parts is critical and is a major differentiator for us.
- Coming back to the depot challenge, one of the biggest problems for a distributor is slow-to-no moving goods, sitting on the shelf consuming space and tying up working capital. A retailer like Wal-Mart has direct feedback from its stores as to which lines are selling and which are not ,and is free to dump lines and change lines. However, if you are supporting a large network of MROs servicing a wide variety of aircraft, part of your appeal – as your advertising makes clear – then you have to keep a massively wide range of parts, some of which may move only very occasionally. How do you solve that problem? Or is it in fact not a problem because there are a sufficient number of fast moving, high value parts to carry the weight of a range of slower moving parts?
Managing slow-moving inventory is an ongoing challenge. It is the nature of distribution that you should have both fast- and slow-moving products in order to provide complete support of a product line. Customers do not necessarily distinguish parts into fast- and slow-moving categories, particularly if the need is urgent. They don’t have visibility to the demand to make such a distinction—they just need what they need. If a supplier only stocks the fast-moving parts, customers will be routinely disappointed when they do need slower-moving parts and will become less loyal as a result.
We work to achieve an acceptable balance in our stock levels through a number of systematic and tactical activities. First of all, we work hard to constantly improve our forecasting processes. Our scale, both in the number of customers and variety of products, mitigates the issue to a degree because we have excellent visibility to upcoming changes that could impact the viability of inventory, which allows us to adjust our forecasts up or down as needed. What might be a slow-moving part to a small regional supplier, could be a pretty fast-moving item for Aviall. We also have a laser focus on our at-risk inventory and constantly look for opportunities to reduce our exposure. Ultimately, we recognize that inventory is at the core of our business, so we focus on ensuring it is as accurately forecasted as possible.
- There is an enormous knowledge base that is required to understand what is required to support each aircraft type, how do you go about a) obtaining that knowledge for new models, ie the G7000 and Lear 85 that are as yet not in service but coming down the track, and b) keeping it fresh and relevant.
It is not as difficult as you might imagine. As a distributor, we tend to be more oriented towards supporting each range of products than simply focusing on specific airplane models. We work closely with our suppliers to anticipate initial and eventual ramp-up of demand for new aircraft fleets, but that process is usually spread out over a long period of time, allowing us to stay ahead of it. The bigger challenge is anticipating and preparing for service bulletins on in-service aircraft. Similarly, as aircraft are taken out of service, we have to be very conscientious to gradually wind down our forecasts. That requires a high level of coordination and trust between Aviall and its suppliers.
- What is the approach to containing the limit of possible parts that you will hold within a manageable range
As noted above, our forecasting methodology is critical to our success. The forecast is a living, constantly changing thing and we adjust our orders with our suppliers (typically only beyond normal leadtime) to cope with expected changes in demand for each part. Beyond that, there really is not a limit to the number of parts or inventory investment we will make to support our forecast.
- Do you use asset based lending as a way of freeing up working capital tied up in your huge inventory? After all $1.2 billion worth of inventory is a lot of capital to tie up and would generate some severe cost of capital penalties if you did not free up some of it…
Our working capital is ultimately backed and supported by our parent company, Boeing. We work with Boeing and our suppliers to support various financial mechanisms in some cases, but generally speaking, we pay for inventory as we receive it.
- Tell us something about the high tech approach you take to running the distribution system. After all, a part misplaced is a part lost in a warehouse of that size. Also you clearly have your 1,400 staff extremely well organised and motivated. Let’s hear something of that as well…
Our primary capital investment for the past dozen years or more has been in technology, which goes well beyond computer hardware and software. We invest heavily in process design, continuous improvement, training and collaboration to make our “system” work effectively. Naturally, errors do occur. We have a variety of metrics and programs in place to identify the root cause of errors so that changes can be made. In the example of a lost part, we have good procedures in place to minimize the potential of a part being misplaced, along with checks and balances (such as cycle counts) to locate it when it happens.
Our employee base is a great asset. None of our systems or facilities would be productive without our dedicated team. We work diligently to hire good people, to train and manage them well, to compensate them fairly and develop them in the business. We work hard to sustain our collaborative, can-do culture across a growing global organization. Currently, we are increasing our use of technology to improve internal communication and information sharing.
- Finally, to what extent are Aviall’s fortunes bound up with the fortunes of the aviation market generally? Are you relatively protected from peaks and troughs in the industry (since maintenance is a regulated activity and goes on regardless), or do you have to keep a careful eye on statistics like numbers of aircraft sold and hours flown…
Our business is entirely aerospace-related, with the possible exception of some future military opportunities. We have to cope with the factors that affect the industry, although some of the factors affect Aviall differently than other industry leaders. For example, the downturn in new business jet sales a few years ago did not significantly affect Aviall’s sales because our sales are linked to maintenance of operating aircraft. New aircraft don’t require much maintenance initially, so the impact of increases or decreases in aircraft deliveries is muted. Over time, the composition, size and activity level of the fleet have a great impact on our business.
We do monitor fleets, operating metrics, and other economic factors such as jet fuel prices, GDP and others. When combined, these data serve as leading indicators that help us predict opportunities and challenges that might be on the horizon.