Commercial airlines in US are holding some of the most expensive MRO items in their balance sheet. From high-speed turbines to impellers, high-speed bearings, landing gears and other mechanical devices, the total inventory by some estimate was more than $250b in US alone in year 2000. Since there are very few OEM's who manufacturer these aircraft components, the inventories are mostly the same items. For example engines are mostly built by GE, Pratt-Whitney, Rolce-Royce or sometimes Bombardier. Moreover these spares are often located in same cities like Chicago, New York etc. which happens to be the hubs of the major airlines. One of the most obvious approach to reduce the inventory of these common parts in co-located hubs is to collaborate and pool these items. The benefits of reduced working capital and higher service level is rather obvious. The question is why it is not happening! Several attempts in the past, particularly in Europe to pool the inventory even among airlines-alliance partners did not materialize! If the investment in working capital is so huge and benefits are a no-brainer, than why airlines are struggling to make this happen?
This problem has been studied extensively in the past, both by academics and by practitioners. One of the most common causes was the poor relationship between the competing airlines due to fierce competition among the large players such as American and United in Chicago or United and Delta in Denver. Consequently they are reluctant to share their operational data, particularly in the absence of any third party MRO service provider which can potentially stock and distribute these items from a central warehouse.
Here I want to bring two other operational issues which I think are very important and must be addressed in order for the collaboration to see the day-light. I would illustrate my point here using a very simple example.
Let us consider we have only 3 airlines United, American and Delta operating in Chicago's O'hare and they are planning to collaborate on a Honeywell made 'landing gear'. Suppose the existing number of spares for the 3 airlines are 100, 60 and 40 respectively. When these 3 parties approached a consultant, he studied the demand variability and came up with a pooled inventory of 150 (Present inventory is 100+60+40 = 200) at a single warehouse to support the combined demand while ensuring the minimum prescribed service level. Now the question is how do we allocate this 150 among the 3 players. The simplest approach is to go for a proportional allocation. The existing numbers are in the ratio of 100:60:40 (i.e. 5:3:2); hence the new numbers can also be split in the same ratio. Hence each airlines would now pay for 75, 45 and 30 units respectively. However this does not make any sense! The smallest airlines (in this case the one with 40 units originally) is going to have 150 units potentiall available for use, a significantly large number to boost it's service level really high. However for the largest airlines, the benefits in service level (when inventory jumps from 100 earlier to 150 now) is not that high. Hence this allocation mechanism does not make sense and provides very little incentive for the largest incumbent to participate.
Another challenge would arise when the inventory for some reason drops to say only 1 unit and right at that time 2 different airlines have the demand for that item. Now how to determine who should get the access to this last unit!
I strongly believe that unless these seemingly simple but fundamental challenges in designing a fair and equitable allocation are addressed, inventory collaboration would be rather difficult. I would propose a possible solution to this issue in my next posting.
