Why You Spend 8x More Than You Have To On Inventory

Your CFO opens the bank account and sees red. The money that once lingered in this account has now been spent on inventory.

His stress level is high.

He screams and yells because of the pressure.

If you're not the one he's yelling at, he's yelling at someone.

At first inventory might sound like a good idea.

You stock rotables and consumables to avoid AOG situations.

Nobody likes AOGs. In fact, just writing "AOG" gives me goose bumps.

As an airline, stock is used as a safety net. If you're not in the air, you're not making money.

I should become a professor with that insight. Am I the first?

I get it. Stock eases your mind.

But what about your poor CFO?

Inventory poses a huge financial burden with upfront costs and pesky holding costs.

It’s a burden on your available cash.

Over-utilized capital for inventory

Let's say you need 100 A320 aircraft components to support your No-Go safety stock. You'll easily spend $1,000,000 to stock up.

And that's not $1,000,000 spread out over several years. That's $1,000,000 upfront, cold hard cash due now.

And don't forget the cost of inventory. The dreaded holding costs.

It's estimated that it costs airlines 20-30% of the cost of the unit per year in holding costs. So if you have a million dollars worth of inventory on your shelves you spend how much on holding costs? That's right, $200,000 per year.

It's madness I know.

Spend $0 on inventory

Wait.

What did I just say?

Okay, you're right, I did say that. Spend $0 on inventory.

Before you yell and scream at me, hear me out.

What would you do with the money if you didn't have to invest and re-invest in inventory? Would you spend it on marketing initiatives to attract new passengers? Would you hire more people for your maintenance team for quicker turn arounds? So what is it?

Whatever it is, the money you save would be used on core activities. No, inventory isn't a core activity silly.

Just think, $1,000,000 to spend on something else, something that drives revenue.

It represents an opportunity cost. When aircraft components are on the shelf they're not being sold, and that money could be deployed elsewhere.

Holding costs are the blood sucking bats of inventory

Just because a part is sitting on a shelf doesn't mean it’s not costing you money.

I know, I know, it's just a shelf.

But stocking is much more than buying something, putting it on the shelf, and watching it get dusty.

It's a money pit.

I don't need to re-state what has already been said, so I'm going to let my good friend Wikipedia tell us why inventory is like a blood sucking bat:

"The most obvious holding costs include rent for the required space; equipment, materials, and labor to operate the space; insurance; security; interest on money invested in the inventory and space, and other direct expenses. Some stored goods become obsolete before they are sold, reducing their contribution to revenue while having no effect on their holding cost. Some goods are damaged by handling, weather, or other mechanisms. Some goods are lost through mishandling, poor record keeping, or theft, a category euphemistically called shrinkage.

Holding cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes.

While it is possible to measure the components of holding cost, it is common to estimate them as at least one-third the value of the stored goods per year. If opportunity cost is included, it is reasonable to use one-half the value of stored goods as their holding cost.

The effect of reducing the value of inventory by $1,000,000 reveals the effect holding cost has on its owner. If holding cost is set at one-third of the inventory's value, $333,333 becomes available for other purposes. At the higher rate, $500,000 becomes available. Whether that money is added to net income and profitability or used for other purposes, it is a noticeable amount."

I couldn't have said it better myself.

Spend less, make more

So by now you're wondering how to spend less on inventory, am I right?

Well, it's rather simple.

Become the best outsourcer you possibly can.

There are companies (no shocker here but Skylink is one of them) that invest in inventories.

You make money in the air, they make money selling from their shelves.

It's simple as that.

Partner with someone that makes sense. Do you trust them? Are they transparent? Do they get the "job" done?

An even better strategy would be to adopt a component pooling partnership with this person. It ensures you have the right part, at the right time, in the right place, without you having to invest for your own shelves.

Leave that to someone else.

There are amazing resources (like this one) that can help you eliminate having to invest hefty amounts of money in inventory and paying it for years to come in holding costs.

P.S. I have the perfect pooling program for you. Just click hereto help you save time and money.

Photo credit:  Hloom via Flickr.com  / CC BY-SA, 401(K) 2013 401(K) 2013 via Foter.com / CC BY-SA,

How Aircraft Component Pooling Can Save You Millions

Why do you spend millions on unnecessary inventory? This questions riddles you with turmoil.

You dance with excess inventory to support your fleet, or gamble with an AOG because your component source dropped the ball.

Yelling and screaming gives you some relief, but you're still dancing.

And let’s be honest, is dancing something you’re good at?

If you're anything like me, dancing is not a pretty sight.

Millions of dollars are put into inventory to sit and gather dust just for “piece of mind.”[CLICK TO TWEET]

It’s either that or subject yourself to mediocre service levels.

So what are you supposed to do?

Aircraft component pooling

Don’t worry, I’m not going to be your Wikipedia for pooling.

It’s rather simple.

You need a part, you have immediate access to inventory that you didn't have to invest in, and you install the component on your aircraft.

That’s a reduced definition, but you get the point.

Aircraft component pooling allows you to have access to an agreed upon inventory that you can tap in to at any given moment. Gone are the days of you having to invents millions in inventory.

Playing with inventory is not your strong suite and it’s definitely not where you make money.

Aircraft component pooling has many benefits and since the average airlines spends 8x more than they have to to support their fleet, there's some serious strategies to reduce the inventory burden.

Time is money, and money is…money

How much is your departments time worth?

I'm sure once you get into the cost of time, the number is shocking.

Now add on the cost of inefficiencies and you'll get a real time picture of where the money is bleeding out due to operational inefficiencies.

Maybe it's chasing a supplier for shipment confirmation on a PO, babysitting an MRO for the OH of your units, or trying to resolve an AOG.

Whatever it is, everything has an opportunity cost.

If your department is spending to much time on processing orders there's something else they're missing out on.

What’s their opportunity cost?

Aircraft component pooling helps you to focus on core activities, while making it easy to access mission critical components.

Reduced administrative costs

When you focus less time on processing orders and fixing problems, you drastically reduce your administrative costs.

Just imagine the costs you could save if you didn't have to process POs.

You would save time and money on:

• Data entry
• Order follow-up
• Expediting
• Working with freight forwarders
• Managing vendor issues
• Getting approval from finance
• Determining if the quality meets your QA standards

The list goes on and on, and all of these activities have a cost.

A cost that is controlled through a pooling strategy.

Less money lost to holding costs

According to Jetblue, they spend 20% on holding costs per unit, per year.

Yes, 20%!

That's crazy.

So if they held a $10,000 actuator in stock it would cost them $2,000 per year to hold that actuator in stock.

I'm sure your holding costs aren't much different.

By utilizing a pooled inventory you no longer carry this stock burden.

You'll save $2,000 a year just on this one component. Now imagine if you had 52 similar parts.

That's $104,000 in savings on holding costs alone.

Now doesn't that sound like a no-brainer?

More cash and less financial burden for inventory investments

Who wouldn't want more cash?

Let's say you have a new aircraft being added to your fleet. There's 52 no-go components that could leave your poor bird stranded if something happened.

Those 52 components would cost you $500,000 to acquire and put in to inventory.

And don't forget your holding cost.

If you're like Jetblue this inventory would cost you an additional $100,000 per year in holding costs.

By utilizing a component pooling program you would avoid the upfront capital expense and holding costs, giving you an additional $600,000 for year one.

You could use this additional cash for anything, but I'm guessing it would be best spent on expanding or fine tuning your operation.

Increase in productivity

Similar to saving time, a pooling strategy will increase your departments productivity.

Gone are the days having to chase a supplier for an AOG component, worrying if a freight forwarder picked up, and checking your email every 5 minutes for a status update.

When you have the right components, at the right place, at the right time, your productivity skyrockets.

You'll be able to focus your attention on other things that matter most.

Whether you think this is a dream or not, streamlining your operation has the potential to save you millions of dollars every year.

Of course, every airline is different, but think hard about the possibilities.

Spending less money on inventory, and having more time for mission critical activities is a good place to be.

P.S. We offer an aircraft component strategy based on your unique operation. Click here and tell us what issues you need to resolve.