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,